(CNN) -- The demand for unemployment benefits across the country has put a strain on state unemployment funds, with such funds in at least 10 states facing insolvency in 2009, according to a policy group.
Lines form at a job fair in Fort Lauderdale, Florida, in August.
Nationwide, unemployment reached 6.1 percent, or roughly 9.1 million people, in August, up from 4.7 percent in 2007, and is expected to continue rising. The U.S. Department of Labor said that in August, claims for unemployment benefits reached their highest levels since 2001, in large part because of hurricane activity on the Gulf Coast.
With a weekly average of 474,000 new applicants in August, in a system already looking after about 3.5 million people each week, the growing rate of recipients has nearly depleted unemployment funds in several states.
"There are some real serious problems with unemployment funding that need to be addressed," said Andrew Stettner, deputy director of the National Employment Law Project, a policy group that advocates on behalf of unemployed and low-wage workers.
The group, which tracks legislation and activity related to state and federal unemployment benefits, says that California, Michigan, Missouri, New York, Ohio, South Carolina, Wisconsin, Indiana, Kentucky and Arkansas have less than six months' worth of unemployment trust fund reserves, putting the funds at high risk of insolvency.
On Tuesday, California state officials told lawmakers in a hearing that their unemployment reserve fund was on track to run dry by March based on the state's forecast unemployment rate, which hit 7.7 percent in August.
Last month, South Carolina Employment Security Commission chief Ted Halley said his state's fund was also projected to run out by January. As of August, the state's unemployment rate was 7.6 percent.
Eight more are on the cusp, based on a formula that projects the amount of money the state would need in a recession.
"These states are not ready for a recession, and they're going to see a big hit if we have a protracted job slump," Stettner said. "We're going to see them seriously in the red, but they can take some action and not be swimming in red ink."
Trust fund revenue comes from payroll taxes on employers, based on a tax system set at the state level. But, as the amount paid out in unemployment claims has risen, the terms set to generate revenue largely have remained static, combining with the current economic downturn to create a climate that economists say many states are ill-equipped to bear.
Economists blame the situation on the failure of states to beef up their reserves when the economy was in better shape.
"When times were good, instead of putting money into a trust fund, lawmakers gave in to anti-tax fervor and refused to raise taxes to build up a healthy trust fund," said Ross Eisenbrey, vice president of the Economic Policy Institute. "Now, as payrolls decline and tax revenue declines, there is less money going into funds that were already running low."
Eisenbrey said he expects the health of state trust funds to worsen before it improves.
"The economy has been hit hard the past year. Housing deflation, oil price shocks and flat wages have been reducing consumer demand, and now the credit crisis is causing businesses to lay off more workers, so it's kind of a negative loop that feeds back into the economy," said Eisenbrey, pointing out that median household income has declined since 2000, a first since the World War II era.
When reserves run dry, states can borrow from the federal government's unemployment trust fund. Typically, states have a year to repay the loan without accruing interest.
Michigan, which has the country's highest unemployment rate, at 8.1 percent, is already borrowing from the federal government, even though it is not in the red just yet, according to a spokesman.
"We've been attempting to borrow money and pay it back as soon as we can," said Norm Isotalo, a spokesman for the Michigan Department of Labor and Economic Growth. He attributed rising unemployment claims to the embattled automotive industry and its ripple effect across the state.
"We want to be able to have enough money to cover our forecasts," said Isotalo, adding that the state borrowed from the federal government in the mid-1990s for similar reasons.
But the forecast is not all doom and gloom, provided the states shore up their reserves, with the help of the federal government and through initiatives of their own, Stettner said.
Historically, first and fourth quarters are low periods for generating revenue that state trust funds so desperately need. But Stettner's group advocates an increase in the tax base that contributes to state trust funds, a move that could be a hard sell considering the timing.
The group has also pushed for legislation that would allow the federal government to transfer funds from its reserve to the states, provided they put programs into place that would loosen the requirements for unemployment benefits eligibility among low-wage workers and part-time workers.
"Many of the states facing solvency challenges could be going into red as early as 2009, but it's still early enough for them to get out of it," he said. "The trick is to make a system that's self-financing."
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