Massive job losses are threatening the state's ability to pay unemployment benefits, which is expected to lead to higher taxes on employers, benefit cuts for workers and possibly borrowing money from the federal government.
And the problem could become even worse if Congress allows programs funded with federal stimulus money to expire at the end of the month, said state Labor Secretary Jim Garner.
"The first quarter of 2010 is not going to be very pretty," Garner said. "The trust fund (that pays unemployment benefits) already is in not-good shape."
To pay for unemployment, the state taxes employers on the first $8,000 of each employee's salary.
The money goes to the trust fund, which is held by the federal treasury on behalf of the state, to pay unemployment claims.
The fund peaked in May 2007 at $671 million and stayed more or less stable until May 2008, when mass layoffs spawned by the nation's recession sent the fund's balance spiraling down.
The only bubble came in July, when the federal government pumped an extra $69 million into the system after the Legislature tweaked some state laws on benefits eligibility.
Today, the trust fund is at $136 million and dropping.
Labor Department economists estimate the fund will be depleted by early next year, Garner said.
If that happens, the state will have to borrow from the federal government to keep unemployment checks from bouncing.
Twenty-five states are already in that position and the number is expected to grow to 35 or more in 2010.
"It's a national situation," Garner said.
Tax cuts in 2007
The current dilemma marks a sharp contrast to 2007, when things looked so rosy that then-Gov. Kathleen Sebelius and the Legislature worked together to cut the taxes that employers pay to support the unemployment fund.
"We thought we were in such good shape, it seemed like a natural thing to do," recalled state Sen. Dick Kelsey, R-Goddard. "It was not controversial at all."
The fund balance bounced up and down around the $600 million level until May 2008.
But then, housing bubbles burst, financial markets melted down and stock markets tanked.
The state unemployment rate jumped from the low 4 percent range to the current 6.4 percent — about a 50 percent increase.
The legislation that cut the employer tax contained a safety-net provision to automatically raise the tax back to the 2007 level if the trust fund got in trouble.
Next year, the employer tax is expected to more than double, from the current average of 2.02 percent to an average of 4.37 percent.
Stimulus funds dry up
Compounding concern over the unemployment trust fund is the coming expiration of federal stimulus programs that have pumped money into the Kansas system, Garner said.
The programs, which are set to expire Dec. 31, include:
* Emergency Unemployment Compensation — This allows jobless people who use up their regular 26 weeks of eligibility to receive as much as 47 weeks of extended benefits in some circumstances.
* Federal-State Extended Benefits — The federal government currently pays 100 percent of the cost of extended benefits, instead of the regular 50-50 split between federal and state funds.
* Payment increases — This year, the federal government added $25 a week to unemployment benefits overall.
"Twenty-five dollars doesn't sound like a lot of money, but it's a tank of gas or a bag of groceries," Garner said.
The state Labor Department has appointed a task force to look for potential solutions.
That group, the Employment Security Advisory Council, is scheduled to meet Dec. 17.
But the chairman of the House Commerce and Labor Committee, Rep. Steve Brunk, R-Bel Aire, said he's concerned the council might focus too much on tax increases on employers.
"If they (businesses) had money to pay higher employment taxes, they'd just keep the employee," Brunk said.
He said he will introduce a bill to cut some benefits that are now part of the system.
Brunk said he wants to eliminate "first week" benefits that lawmakers approved to compensate displaced workers for the period while their application is reviewed.
He also wants to end unemployment benefits for "trailing spouses," who voluntarily leave a job to move with a spouse who takes a job in another city.
Brunk said he has sent the bill to the Legislative Research Department to calculate how many dollars each action could save.
"I'm trying to adjust some of the peripheral things" in the unemployment system, Brunk said. "My goal is to get us through the next year making sure we take care of that core (displaced) employee."
Garner said he's hoping the federal government renews its stimulus unemployment programs "until we get into a changed situation where recovery is well under way."
While some economic measures such as stock market averages are beginning to swing back upward, employment is "usually one of the lagging indicators of recovery," he said. "That job market is going to be one of the last things to come back."
But, he added, "I'm hopeful, I'm optimistic; maybe the middle of 2010."