The
Social Security Act of 1935 (Public Law 74-271) created the Federal-State
Unemployment Compensation (UC) Program. The program has two main
objectives: (1) to provide temporary and partial wage replacement to
involuntarily unemployed workers who were recently employed; and (2) to
help stabilize the economy during recessions. The U.S. Department of Labor
oversees the system, but each State administers its own program. Because
Federal law defines the District of Columbia, Puerto Rico, and the Virgin
Islands as States for the purposes of UC, there are 53 State programs.
The
Federal Unemployment Tax Act of 1939 (Public Law 76- 379) and titles III,
IX, and XII of the Social Security Act form the framework of the system.
The Federal Unemployment Tax Act (FUTA) imposes a 6.2 percent gross tax
rate on the first $7,000 paid annually by covered employers to each
employee. Employers in States with programs approved by the Federal
Government and with no delinquent Federal loans may credit 5.4 percentage
points against the 6.2 percent tax rate, making the minimum net Federal
unemployment tax rate 0.8 percent. Since all States have approved
programs, 0.8 percent is the effective Federal tax rate. This Federal
revenue finances administration of the system, half of the Federal-State
Extended Benefits (EB) Program, and a Federal account for State loans. The
individual States finance their own programs, as well as their half of the
Federal-State Extended Benefits Program.
In
1976, Congress passed a surtax of 0.2 percent of taxable wages to be added
to the permanent FUTA tax rate (Public Law 94-566). Thus, the current
effective 0.8 percent FUTA tax rate has two components: a permanent tax
rate of 0.6 percent, and a surtax rate of 0.2 percent. The surtax has been
extended five times, most recently by the Taxpayer Relief Act of 1997
(Public Law 105-34) through December 31, 2007.
FUTA
generally determines covered employment. FUTA also imposes certain
requirements on the State programs, but the States generally determine
individual qualification requirements, disqualification provisions,
eligibility, weekly benefit amounts, potential weeks of benefits, and the
State tax structure used to finance all of the regular State benefits and
half of the extended benefits.
The
Social Security Act provides for the administrative framework: title III
authorizes Federal grants to the States for administration of the State UC
laws; title IX authorizes the various components of the Federal
Unemployment Trust Fund; title XII authorizes advances or loans to
insolvent State UC Programs.
BENEFITS
Coverage
In
order to qualify for benefits, an unemployed person usually must have
worked recently for a covered employer for a specified period of time and
earned a certain amount of wages. About 125 million individuals were
covered by all UC Programs in 2000, representing 97 percent of all wage
and salary workers and 89 percent of the civilian labor force.
FUTA
covers certain employers that State laws also must cover for employers in
the States to qualify for the 5.4 percent Federal credit. Since employers
in the States would lose this credit and their employees would not be
covered if the States did not have this coverage, all States cover the
required groups: (1) except for nonprofit organizations, State-local
governments, certain agricultural labor, and certain domestic service,
FUTA covers employers who paid wages of at least $1,500 during any
calendar quarter or who employed at least one worker in at least 1 day of
each of 20 weeks in the current or prior year; (2) FUTA covers
agricultural labor for employers who paid cash wages of at least $20,000
for agricultural labor in any calendar quarter or who employed 10 or more
workers in at least 1 day in each of 20 different weeks in the current or
prior year; and (3) FUTA covers domestic service employers who paid cash
wages of $1,000 or more for domestic service during any calendar quarter
in the current or prior year.
FUTA
requires coverage of nonprofit organization employers of at least four
workers for 1 day in each of 20 different weeks in the current or prior
year and State-local governments without regard to the number of
employees. Nonprofit and State-local government organizations are not
required to pay Federal unemployment taxes; they may choose instead to
reimburse the system for benefits paid to their laid-off employees.
States
may cover certain employment not covered by FUTA, but most States have
chosen not to expand FUTA coverage significantly. The following employment
is therefore generally not covered: (1) self-employment; (2) certain
agricultural labor and domestic service; (3) service for relatives; (4)
service of patients in hospitals; (5) certain student interns; (6) certain
alien farmworkers; (7) certain seasonal camp workers; and (8) railroad
workers (who have their own unemployment program).
Number
of Covered Workers
Although
the UC system covers 97 percent of all wage and salary workers, on average
only 38 percent of unemployed persons were receiving UC benefits in 1999.
This compares with a peak of 81 percent of the unemployed receiving UC
benefits in April 1975 and a low point of 26 percent in June 1968 and in
October 1987. Despite high unemployment during the early 1980s, there was
a downward trend in the proportion of unemployed persons receiving regular
State benefits until the mid-1980s. The proportion receiving UC rose
sharply in December 1991 due to the temporary Emergency Unemployment
Compensation (EUC) Program.
In
May 1988, Mathematica Policy Research, Inc., under contract to the U.S.
Department of Labor, released a study on the decline in the proportion of
the unemployed receiving benefits during the 1980s. This analysis did not
find a single predominant cause for the decline but instead found
statistical evidence that several factors contributed to the decline (the
figures in parentheses show the share of the decline attributed to each
factor):
- The
decline in the proportion of the unemployed from manufacturing
industries (4-18 percent);
- Geographic
shifts in composition of the unemployed among regions of the country
(16 percent);
- Changes
in State program characteristics (22-39 percent):Increase in the base
period earnings requirements (8-15 percent); Increase in income
denials for UC receipt (10 percent); and tightening up other
nonmonetary eligibility requirements (3-11 percent);
- Changes
in Federal policy such as partial taxation of UC benefits (11-16
percent); and 5. Changes in unemployment as measured by the Current
Population Survey (CPS) (1-12 percent).
The
group of unemployed most likely to be insured are job losers. The number
of unemployment compensation claimants measured as a percentage of the
number of job losers remained fairly stable from 1968 through 1979. Over
that 12-year span, there were from 90 to 110 recipients of regular State
UC for every 100 job losers. This ratio fluctuated somewhat over the
business cycle, but it was otherwise quite stable.
Beginning
in 1980, the ratio of UC recipients to job losers fell sharply, reaching
an all-time low in 1983 when there were fewer than 60 regular UC
recipients for every 100 job losers. After 1983, the coverage ratio
increased somewhat, so that there were about 75 regular UC claimants for
every 100 job losers in 1990. However, the ratio declined again with the
1990-91 recession. It has since returned to the prerecession level.
Eligibility
States
have developed diverse and complex methods for determining UC eligibility.
In general there are three major factors used by States: (1) the amount of
recent employment and earnings; (2) demonstrated ability and willingness
to seek and accept suitable employment; and (3) certain disqualifications
related to a claimant's most recent job separation or job offer
refusal.Monetary qualifications
The
State monetary qualification requirements in the base year for the minimum
and maximum weekly benefit amounts, and for the maximum total potential
benefits. The base year is a recent 1-year period that most States (48)
define as the first 4 of the last 5 completed calendar quarters before the
unemployed person claims benefits. On average, workers must have worked in
two quarters and earned $1,734 to qualify for a minimum monthly benefit.
Qualifying annual wages for the minimum weekly benefit amount vary from
$130 in Hawaii to $3,400 in Florida. For the maximum weekly benefit
amount, the range is $5,450 in Nebraska to $29,432 in Colorado. The range
of qualifying wages for the maximum total potential benefit, which is the
product of the maximum weekly benefit amount and the maximum potential
weeks of benefits, is from $6,080 in Puerto Rico to $32,850 in Washington.
In
February 1996, a Federal court in Pennington v. Doherty overturned the
base year definition in use by most States. The court agreed with the
plaintiff's contention that Illinois could have used an alternative base
period (the last four completed quarters) and that this alternative would
better carry out Federal law, which requires States to use administrative
methods that ensure full payment of UC ``when due.'' This alternative
method would impose greater costs on the States affected. The Balanced
Budget Act of 1997 (Public Law 105-33) revised the Federal law that was
central to the court's decision so that States have full authority to set
base periods for determining eligibility.
All
State laws provide that a claimant must be both able to work and available
for work. A claimant must meet these conditions continually to receive
benefits.
Only
minor variations exist in State laws setting forth the requirements
concerning ``ability to work.'' A few States specify that a claimant must
be mentally and physically able to work.
`Available
for work'' is translated to mean being ready, willing, and able to work.
In addition to registration for work at a local employment office, most
State laws require that a claimant seek work actively or make a reasonable
effort to obtain work. Generally, a person may not refuse an offer of, or
referral to, ``suitable work'' without good cause.
Most
State laws list certain criteria by which the ``suitability'' of a work
offer is to be tested. The usual criteria include the degree of risk to a
claimant's health, safety, and morals; the physical fitness and prior
training, experience, and earnings of the person; the length of
unemployment and prospects for securing local work in a customary
occupation; and the distance of the available work from the claimant's
residence. Generally, as the length of unemployment increases, the
claimant is required to accept a wider range of jobs.
In
addition, Federal law requires States to deny benefits provided under the
Extended Benefits Program (see below) to any individual who fails to
accept work that is offered in writing or is listed with the State
Employment Service, or who fails to apply for any work to which he is
referred by the State agency, if the work: (1) is within the person's
capabilities; (2) pays wages equal to the highest of the Federal or any
State or local minimum wage; (3) pays a gross weekly wage that exceeds the
person's average weekly unemployment compensation benefits plus any
supplemental unemployment compensation (usually private) payable to the
individual; and (4) is consistent with the State definition of
``suitable'' work in other respects. Public Law 102-318 suspended these
provisions from March 7, 1993, until January 1, 1995.
States
must refer extended benefits claimants to any job meeting these
requirements. If the State, based on information provided by the
individual, determines that the individual's prospects for obtaining work
in her customary occupation within a reasonably short period are good, the
determination of whether any work is ``suitable work'' is made in
accordance with State law rather than the criteria outlined above.
There
are certain circumstances under which Federal law provides that State and
extended benefits may not be denied. A State may not deny benefits to an
otherwise eligible individual for refusing to accept new work under any of
the following conditions: (1) if the position offered is vacant directly
due to a strike, lockout, or other labor dispute; (2) if the wages, hours,
or other conditions of the work offered are substantially less favorable
to the individual than those prevailing for similar work in the locality;
or (3) if, as a condition of being employed, the individual would be
required to join a union or to resign from or refrain from joining any
bona fide labor organization. Benefits may not be denied solely on the
grounds of pregnancy. The State is prohibited from canceling wage credits
or totally denying benefits except in cases of misconduct, fraud, or
receipt of disqualifying income.
There
are also certain conditions under which Federal law requires that benefits
be denied. For example, benefits must be denied to professional and
administrative employees of educational institutions during summer (and
other vacation periods) if they have a reasonable assurance of
reemployment; to professional athletes between sport seasons; and to
aliens not permitted to work in the United States.
Disqualifications
The
major causes for disqualification from benefits are not being able to work
or available for work, voluntary separation from work without good cause,
discharge for misconduct connected with the work, refusal of suitable work
without good cause, and unemployment resulting from a labor dispute.
Disqualification for one of these reasons may result in a postponement of
benefits for some prescribed period, a cancellation of benefit rights, or
a reduction of benefits otherwise payable.
Of
the 14.8 million ``monetarily eligible'' initial UC claims in 1999, 27.4
percent were disqualified. This figure subdivides into 4.9 percent not
being able to work or available for work, 7.3 percent voluntarily leaving
a job without good cause, 4.9 percent being fired for misconduct on the
job, 0.3 percent refusing suitable work, and 10.1 percent committing other
disqualifying acts. The total disqualification rate ranged from a low of
11.0 percent in Kentucky to a high of 94.9 percent in Nebraska, with
Colorado the next highest at 86.8 percent. (Note that a claimant can be
disqualified for any week claimed, so it is possible for a claimant to be
disqualified more times than the total number of that claimant's initial
claims in the benefit year.)
Federal
law requires that benefits provided under the Extended Benefits Program be
denied to an individual for the entire spell of his unemployment if he was
disqualified from receiving State benefits because of voluntarily leaving
employment, discharge for misconduct, or refusal of suitable work. These
benefits will be denied even if the disqualification were subsequently
lifted with respect to the State benefits prior to reemployment. The
person could receive extended benefits, however, if the disqualification
were lifted because he became reemployed and met the work or wage
requirement of State law. Public Law 102-318 suspended the restrictions on
extended benefits under Federal law, however, from March 7, 1993, until
January 1, 1995. The Advisory Council on Unemployment Compensation was
required to study these provisions, and it recommended that the Federal
rules be eliminated. However, Congress has taken no action on this
recommendation.
U.S.
Department of Labor proposal to use unemployment compensation benefits for
family leave
On
December 3, 1999, the U.S. Department of Labor (DOL) issued a Notice of
Proposed Rulemaking to create, by regulation, a voluntary experimental
program that would give States the option of extending UC eligibility to
parents who take time off from employment after the birth or placement for
adoption of a child under the Family Medical Leave Act of 1993 (Public Law
103-3). The program is referred to as the birth and adoption UC
experiment, also known colloquially as ``baby UI.'' The proposal
immediately drew criticism from opponents who argued that the proposal
creates a benefit that the Congress did not intend when it created the
Family and Medical Leave Act and such benefits would be contrary to the
purpose of UC benefits as stated in the law. Some opponents argued that
the proposal could not be implemented without a new law being enacted by
the Congress. DOL disagreed with this assessment and cited the fact that
much of the basic structure of the UC system, including the requirement
that individuals be able and available for work, was established by
regulatory guidance, rather than statute. DOL also suggested the change
was needed to allow the UC system to keep pace with the changing nature of
the work force, particularly the dramatic increase in the number of
working mothers. The final rule was published in the Federal Register on
June 13, 2000.
Ex-service
members
The
Emergency Unemployment Compensation Act of 1991 (Public Law 102-164)
provided that ex-members of the military be treated the same as other
unemployed workers with respect to the waiting period for benefits and
benefit duration. Before this 1991 action, Congress had placed
restrictions on benefits for ex-service members, so that the maximum
number of weeks of benefits an ex-service member could receive based on
employment in the military was 13 (as compared with 26 weeks under the
regular UC Program for civilian workers). In addition to a number of
restrictive eligibility requirements, ex-service members had to wait 4
weeks from the date of their separation from the service before they could
receive benefits.
Pension
offset
The
Unemployment Compensation Amendments of 1976 (Public Law 94-566) required
all States to reduce an individual's UC by the amount of any government or
private pension or retirement pay received by the individual.
Public
Law 96-364, enacted in 1980, modified this offset requirement. Under the
modified provision, States are required to make the offset only in those
cases in which the work-related pension was maintained or contributed to
by a ``base period'' or ``chargeable'' employer. Entitlement to and the
amount and duration of unemployment benefits are based on work performed
during this State-specified base period. A ``chargeable'' employer is one
whose account will be charged for UC received by the individual. However,
the offset must be applied for Social Security benefits without regard to
whether base period employment contributed to the Social Security
entitlement.
States
are allowed to reduce the amount of these offsets by amounts consistent
with any contributions the employee made toward the pension. This policy
allows States to limit the offset to one-half of the amount of a Social
Security benefit received by an individual who qualifies for unemployment
benefits.Taxation of unemployment compensation benefits
The
Tax Reform Act of 1986 (Public Law 99-514) made all UC taxable after
December 31, 1986. The Revenue Act of 1978 first made a portion of UC
benefits taxable beginning January 1, 1979.
Amount
and Duration of Weekly Benefits
In
general, the States set weekly benefit amounts as a fraction of the
individual's average weekly wage up to some State-determined maximum. The
total maximum duration available nationwide under permanent law is 39
weeks. The regular State programs usually provide up to 26 weeks. The
permanent Federal-State Extended Benefits Program provides up to 13
additional weeks in States where unemployment rates are relatively high.
An additional 7 weeks is available under a new optional trigger enacted in
1992, but only 7 States have adopted this trigger as of July 31, 1997. The
temporary Emergency Unemployment Compensation (EUC) Program, which
operated from November 1991 through April 1994, provided either 7 or 13
additional weeks of benefits during its final months of operation. A State
offering this temporary program could not have offered the extended
benefits simultaneously, however.
The
State-determined weekly benefit amounts generally replace between 50 and
70 percent of the individual's average weekly pretax wage up to some
State-determined maximum. The average weekly wage is often calculated only
from the calendar quarter in the base year in which the claimant's wages
were highest. Individual wage replacement rates tend to vary inversely
with the claimant's average weekly pretax wage, with high wage earners
receiving lower wage replacement rates. Thus, the national average weekly
benefit amount as a percent of the average weekly covered wage was only 35
percent in the quarter ending December 31, 1999.
In
1999, the national average weekly benefit amount was $215 and the average
duration was 14.5 weeks, making the average total benefits $3,118. The
minimum weekly benefit amounts for 2000 vary from $0 in New Jersey to $102
in Rhode Island. The maximum weekly benefit amounts range from $133 in
Puerto Rico to $646 in Massachusetts.
Most
States vary the duration of benefits with the amount of earnings the
claimant has in the base year. Twelve States provide the same duration for
all claimants. The minimum durations range from 4 weeks in Oregon to 26
weeks in 12 States. The maximum duration is 26 weeks in 51 States
(including the District of Columbia, Puerto Rico, and the Virgin Islands).
Two States have longer maximum durations. Massachusetts and Washington
both provide up to 30 weeks.
From
1999 to 2000, 16 States increased and 3 decreased their minimum weekly
benefit amounts. Thirty-six States raised their maximum weekly benefit
amounts, while no State decreased them. Five States lowered their minimum
potential durations, and 13 States raised their minimum duration.
EXTENDED
BENEFITS
The
Federal-State Extended Benefits Program is available in every State and
provides one-half of a claimant's total State benefits up to 13 weeks in
States with an activated program, for a combined maximum of 39 weeks of
regular and extended benefits. Weekly benefit amounts are identical to the
regular State UC benefits for each claimant, and Federal funds pay half
the cost. The program activates in a State under one of two conditions:
(1) if the State's 13-week average insured unemployment rate (IUR) in the
most recent 13 weeks is at least 5.0 percent and at least 120 percent of
the average of its 13-week IURs in the last 2 years for the same 13-week
calendar period; or (2) at State option, if its current 13-week average
IUR is at least 6.0 percent. All but 12 State programs have adopted the
second, optional condition. The 13-week average IUR is calculated from the
ratio of the average number of insured unemployed persons under the
regular State programs in the last 13 weeks to the average covered
employment in the first four of the last five completed calendar quarters.
In
addition to the two automatic triggers, States have the option of electing
an alternative trigger authorized by the Unemployment Compensation
Amendments of 1992 (Public Law 102-318). This trigger is based on a
3-month average total unemployment rate (TUR) using seasonally adjusted
data. If this TUR average exceeds 6.5 percent and is at least 110 percent
of the same measure in either of the prior 2 years, a State can offer 13
weeks of EB. If the average TUR exceeds 8 percent and meets the same
110-percent test, 20 weeks of EB can be offered. Analysis of historical
data shows that this TUR trigger would have made EB more widely available
in the past than did the IUR trigger. As of July 31, 1997, the TUR trigger
had been authorized by seven States (Alaska, Connecticut, Kansas, Oregon,
Rhode Island, Vermont, and Washington). As of May 2000, EB is not active
in any State.
BENEFIT
EXHAUSTION
Due
to the limited duration of UC benefits, some individuals exhaust their
benefits. For the regular State programs, 2.3 million individuals
exhausted their benefits in fiscal year 1999, or 32 percent of claimants
who began receiving UC during the 12 months ending March 1999.
A
study of exhaustees was completed in September 1990 by Corson and Dynarski,
under contract to the U.S. Department of Labor. The purpose of this study
was to examine the characteristics and behavior of exhaustees and
nonexhaustees and to explore the implications of this information. The
samples were chosen from individuals who began collecting benefits during
the period October 1987 through September 1988. Overall, 1,920 exhaustees
and 1,009 nonexhaustees were interviewed.
The
study's authors reached three general conclusions:
- A
large proportion of UC recipients expected to be recalled to their
previous jobs. The unemployment spells of these job-attached workers
were considerably shorter than those of workers who suffered permanent
job losses, and few job-attached workers exhausted their UC benefits.
Workers who were not job-attached—in particular, workers who were
dislocated from their previous jobs or who had low skill levels--were
likely to experience long unemployment spells, and a significant
proportion of these workers exhausted their UC benefits.
- 2.
Most workers who exhausted their benefits were still unemployed more
than a month after receiving their final payment, and a majority were
still unemployed 2 months after receiving their final payment.
Moreover, workers who found jobs after exhausting their UC benefits
were generally receiving lower wages than on their prior jobs.
- 3.
State exhaustion rate trigger mechanisms would not be clearly superior
to the State IUR triggers in targeting extended benefits to areas with
high cyclical unemployment. Substate trigger mechanisms for extended
benefits would do a poor job of targeting extended benefits to local
areas with high structural unemployment.
SUPPLEMENTAL
BENEFITS
The
Extended Benefits (EB) Program was enacted to provide unemployment
compensation benefits to workers who had exhausted their regular benefits
during periods of high unemployment. Before enactment of a permanent EB
Program, Congress authorized two temporary programs, during 1958 and 1959
and again in 1961 and 1962. The Federal-State Extended Unemployment
Compensation Act of 1970 authorized a permanent mechanism for providing
extended benefits. Extended benefits rules were amended by the Omnibus
Budget Reconciliation Act of 1981 (Public Law 97-35) and the Unemployment
Compensation Amendments of 1992 (Public Law 102-318).
During
the 1970s and 1980s, temporary programs provided supplemental benefits to
UC recipients who had exhausted both their regular and extended benefits
during three periods of high unemployment: (1) the Emergency Unemployment
Compensation Act of 1971, which provided benefits until March 31, 1973;
(2) the Federal Supplemental Benefits Program, first authorized by the
Emergency Unemployment Compensation Act of 1974, and subsequently extended
in 1975 (twice) and in 1977; and (3) the Federal Supplemental Compensation
Program, created by the Tax Equity and Fiscal Responsibility Act of 1982,
which was subsequently extended and modified six times and finally expired
on June 30, 1985.
More
recently, Congress passed the Emergency Unemployment Compensation Act of
1991 (Public Law 102-164) authorizing a temporary Emergency Unemployment
Compensation (EUC) Program. The EUC Program, which was extended four
times, effectively superseded the EB Program and entitled individuals
whose regular unemployment compensation benefits had run out to additional
weeks of assistance. At its peak in 1992, the EUC Program provided
benefits for 26 or 33 weeks, depending on the level of unemployment in the
respective States. The EUC Program ended on April 30, 1994.
Benefits
under the EUC Program were originally financed from spending authority in
the Extended Unemployment Compensation Account (EUCA) of the Unemployment
Trust Fund. However, depletion of EUCA led Congress to fund EUC from
general revenues from July 1992 to October 1993. States that qualified for
extended benefits while EUC was in effect could elect to trigger off
extended benefits. This reduced the State funding burden because 50
percent of extended benefit costs are financed from State UC accounts
while EUC was entirely federally funded.
A
comparison of cost estimates at the time of enactment with later reviews
shows that actual costs far exceeded anticipated costs due to three
factors: exhaustions from the regular State program were unexpectedly near
record levels; claimants were staying on EUC longer than expected; and
large numbers of claimants eligible for both regular benefits andEUC were
choosing EUC. As a result, for the periods fiscal year 1992 and fiscal
year 1993 alone, the Office of Management and Budget (OMB) cost estimates
rose from $11.4 billion on the dates of enactment to $12.8 billion in July
1992, $18.2 billion in January 1993, $23.4 billion in April 1993, $23.8
billion in July 1993, and finally $24.3 billion in January 1994--113
percent higher than originally estimated. Including fiscal year 1994
costs, the Clinton administration's budget released in July 1994 estimated
the final 3-year cost of EUC benefits to be $28.5 billion, $13.7 billion
more than OMB and $9.9 billion more than CBO had estimated on the date of
enactment.
THE
UNEMPLOYMENT TRUST FUND
The
Unemployment Trust Fund has 59 accounts. The accounts consist of 53 State
UC benefit accounts, the Railroad Unemployment Insurance Account, the
Railroad Administration Account, and four Federal accounts. (The railroad
accounts are discussed in section 5 of this volume.) The Federal unified
budget accounts for all Federal-State UC outlays and taxes in the Federal
Unemployment Trust Fund.
The
four Federal accounts in the trust fund are: (1) the Employment Security
Administration Account (ESAA), which funds administration; (2) the
Extended Unemployment Compensation Account (EUCA), which funds the Federal
half of the Federal-State Extended Benefits Program; (3) the Federal
Unemployment Account (FUA), which funds loans to insolvent State UC
Programs; and (4) the Federal Employees' Compensation Account (FECA),
which funds benefits for Federal civilian and military personnel
authorized under 5 U.S.C. 85. The 0.8 percent Federal share of the
unemployment tax finances the ESAA, EUCA, and FUA, but general revenues
finance the FECA. Present law authorizes interest-bearing loans to ESAA,
EUCA, and FUA from the general fund. The three accounts may receive
noninterest-bearing advances from one another to avoid insufficiencies.
Financial
Condition of the Unemployment Trust Fund Federal accounts
At
the end of fiscal year 1999, the Employment Security Administration
Account (ESAA) exceeded its fiscal year 1999 ceiling of $1.4 billion. The
1997 budget bill provided for the distribution of up to $100 million of
excess funds at the end of each of the fiscal years 1999-2001. The funds
will be made available to each State in the same proportion as the State's
share of funds appropriated for administration for that fiscal year. This
action effectively limits transfers (known as ``Reed Act'' transfers) to
State accounts that will occur if trust fund surpluses continue to mount
in future years.
The
Extended Unemployment Compensation Account (EUCA) balance was below its
ceiling of $15.9 billion by $0.3 billion at the end of fiscal year 1999;
the FUA balance was slightly below its $8.0 billion ceiling. Under the
administration's fiscal year 2000 budget assumptions, the EUCA balance
will fall short of its ceiling in fiscal year 2000, then begin to have
end-of-year balances which slightly exceed its ceiling. The 1997
legislation raised the ceiling on FUA assets from 0.25 to 0.5 percent of
wages in covered employment for fiscal year 2002 and subsequent years.
Like the capping of annual distributions at $100 million as described
above, that change is designed to limit Reed Act transfers to State
accounts in coming years. The reason Congress has taken these actions to
increase ceilings and limit outflows from the Federal funds is that excess
funds in the Unemployment Trust Fund are included in the unified Federal
budget and offset deficits or increase surpluses.State accounts
The
State accounts had recovered substantially from the financial problems
that began in the 1970s and continued through the early 1980s, but the
1990-91 recession reversed that trend. The State accounts at the beginning
of 2000 held $50.3 billion, which represents a marked improvement over the
balances of $28.8 billion in 1992 and $38.6 billion in 1997.
The
balances in the State accounts are well below the balances in the early
1970s (after adjusting for inflation) before serious financial problems
began for most States. State reserve ratios (trust fund balances divided
by total wages paid in the respective States during the year) show that a
number of State accounts are at risk of financial problems in major
recessions. These State ratios are only 48 percent of their levels in
1970. However, no State presently has outstanding Federal loans to its
account.
For
each State the 1999 average ``high-cost multiple,'' the ratio of the
State's reserve ratio to its highest cost rate. The highest cost rate is
determined by choosing the highest ratio of costs to total covered wages
paid in a prior year. States with average high-cost multiples of at least
1.0 have reserves that could withstand a recession as bad as the worst one
they have experienced previously. States with average high-cost multiples
below 1.0 may face greater risk of insolvency during recessions.
Twenty
States had average high-cost multiples below 1.0; 13 had average high-cost
multiples below 0.8; and 5 had average high-cost multiples at or below
0.5. Based on this stringent measure, States with the highest risk factor
were Illinois, New York, North Dakota, Texas, and West Virginia.
At
the start of fiscal year 2000, the 4 Federal accounts and the 53 State
benefit accounts had a total balance of $72.0 billion. In real terms this
represents a level 28 percent higher than that of 1971. This increase in
real dollars does not allow for the erosion implied by the large increase
in the labor force over this time period.
Whether
the State trust fund balances are adequate is ultimately a matter about
which each State must decide. States have a great deal of autonomy in how
they establish and run their unemployment system. However, the framework
established by the Federal Government requires States to actually pay the
level of benefits they determine to be appropriate; in budget terms,
unemployment benefits are an entitlement (although the program is financed
by a dedicated tax imposed on employers and employees and not by general
revenues). Thus, if a recession hits a given State and results in a
depletion of that State's trust account, the State is legally required to
continue paying benefits. To do so, the State will be forced to borrow
money from the Federal Unemployment Account. As a result, not only will
the State be required to continue paying benefits, it will also be
required to repay the funds plus interest it has borrowed from the Federal
loan account. Such States will probably be forced to raise taxes on their
employers, an action that dampens economic growth and job creation. In
short, States have strong incentives to keep adequate funds in their trust
fund accounts.
The
Federal Unemployment Tax
FUTA
imposes a minimum, net Federal payroll tax on employers of 0.8 percent on
the first $7,000 paid annually to each employee. The current gross FUTA
tax rate is 6.2 percent, but employers in States meeting certain Federal
requirements and having no delinquent Federal loans are eligible for a 5.4
percent credit, making the current minimum, net Federal tax rate 0.8
percent. Since most employees earn more than the $7,000 taxable wage
ceiling, the FUTA tax typically is $56 per worker ($7,000 <greek-e>
0.8 percent), or 3 cents per hour for a full-time worker. The 1997 budget
bill extended the 0.2 percent surtax through 2007.
The
wage base for the Federal tax was held constant at $3,000 until 1971, and
then was increased on three occasions, most recently in 1983.
The
effective Federal unemployment tax rate equals FUTA revenue as a percent
of total covered wages. Although the statutory tax rate doubled from 0.4
percent in the late 1960s to 0.8 percent in the late 1980s, the effective
tax rate has fluctuated between 0.2 and 0.3 percent in most of those
years.
State
Unemployment Taxes
The
States finance their programs and half of the permanent Extended Benefits
Program with employer payroll taxes imposed on at least the first $7,000
paid annually to each employee.\1\ States have adopted taxable wage bases
at least as high as the Federal level because they otherwise would lose
the 5.4 percent credit to employers on the difference between the Federal
and State taxable wage bases. As of January 2000, 42 States had taxable
wage bases higher than the Federal taxable wage base, ranging up to
$27,500 in Hawaii.
Although
the standard State tax rate is 5.4 percent, State tax rates based on
unemployment experience can range from zero on some employers in 16 States
up to a maximum as high as 10 percent in 2 States.
Estimated
national average State tax rates on taxable wages and total wages for 1999
were 1.8 and 0.6 percent, respectively. Estimated average State tax rates
on taxable wages ranged from 0.3 percent in North Carolina to 4.4 percent
in Michigan and New York. Estimated average State tax rates on total wages
varied from 0.1 percent in North Carolina to 2.1 percent in Rhode Island.
Recent
State data on unemployment compensation covered employment, wages, taxable
wages, the ratio of taxable to total wages, and average weekly wages. The
ratio of taxable wages to total wages varied from 0.17 in New York to 0.59
in Montana.
ADMINISTRATIVE
FINANCING AND ALLOCATION
State
unemployment compensation administrative expenses are federally financed.
A portion of revenue raised by FUTA is designated for administration and
for maintaining a system of public employment offices. As explained above,
FUTA revenue flows into three Federal accounts in the Unemployment Trust
Fund. One of these accounts, the Employment Security Administration
Account (ESAA), finances administrative costs associated with Federal and
State unemployment compensation and employment services.
Under
current law, 80 percent of FUTA revenue is allocated to ESAA and 20
percent to another Federal account. Funds for administration are limited
to 95 percent of the estimated annual revenue that is expected to flow to
ESAA from the FUTA tax. However, funds for administration may be augmented
by three-eighths of the amount in ESAA at the beginning of the fiscal
year, or $150 million, whichever is less, if the rate of insured
unemployment is at least 15 percent higher than it was over the
corresponding calendar quarter in the immediately preceding year.
Title
III of the Social Security Act authorizes payment to each State with an
approved unemployment compensation law of such amounts as are deemed
necessary for the proper and efficient administration of the UC Program
during the fiscal year. Allocations are based on: (1) the population of
the State; (2) an estimate of the number of persons covered by the State
unemployment insurance law; (3) an estimate of the cost of proper and
efficient administration of such law; and (4) such other factors as the
Secretary of the U.S. Department of Labor (DOL) finds relevant.
Subject
to the limit of available resources, the allocation of State grants for
administration is the sum of resources made available for two major areas,
the Unemployment Insurance Service (UI) and the Employment Service (ES).
Each area has its own allocation methodology subject to general
constraints set forth in the Social Security Act and the Wagner-Peyser
Act.
Each
year, as part of the development of the President's budget, the DOL, in
conjunction with the Department of Treasury, estimates revenue expected
from FUTA and the appropriate amount to be available for administration.
The estimate of FUTA revenues is based on several factors: (1) a wage base
of $7,000 per employee; (2) a tax rate of 0.8 percent (0.64 percentage
points for administration and 0.16 percentage points for extended
benefits); (3) the administration's projection of the level of
unemployment and the growth in wages; and (4) the level of covered
employment subject to FUTA. In addition, a determination is made based on
the administration's forecast for unemployment as to whether the rate will
increase by at least 15 percent.
Each
year the President's budget sets forth an estimate of national
unemployment in terms of the volume of unemployment claims per week. This
is characterized as average weekly insured unemployment (AWIU). A portion
of AWIU is expressed as ``base'' and the remainder as ``contingency.'' At
the present time, the base is set at the level of resources required to
process an average weekly volume of 2.0 million weeks of unemployment.
Resources
available to each State to administer its UC Program (i.e., process claims
and pay benefits) are provided from either ``base'' funds or
``contingency'' funds. At the beginning of the fiscal year, only the base
funds are allocated, while contingency funds are allocated on a needs
basis as workload materializes. Base funds are distributed to the State
for use throughout the fiscal year and are available regardless of the
level of unemployment (workload) realized. If a State processes workloads
in excess of the base level, it
The
allocation of the base UC grant funds to each State is made by:
- Projecting
the workloads that each State is expected to process;
- Determining
the staff required to process each State's projected workload;
- Multiplying
the final staff-year allocations for each State by the cost per staff
year (i.e., State salary and benefit level) to determine dollar
funding levels; and
- Allocating
overhead resources (administrative and management staff and
nonpersonal services).
Each DOL regional office may redistribute resources among the States in its area with national office approval. The 1997 budget bill authorized funds over 5 years specifically for program integrity activities such as claims review and employer tax audits to assist the States in strengthening their efforts to reduce administrative error and fraud.
In
Public Law 102-164, Congress required the DOL to study the allocation
process and recommend improvements. Public Law 102-318 extended the study
deadline to December 31, 1994. The Department has not yet submitted the
report to Congress.
Total
grants to States for administrative costs represent about 55 percent of
total FUTA tax collections in fiscal year 1999. There has been
considerable interest among State Employment Security Agencies in recent
years in having more of the FUTA revenue returned to the States for
administrative expenses. In the 106th Congress, legislation has been
introduced which would change the administrative financing of the UC
Program.
LEGISLATIVE
HISTORY
Major
Federal laws passed by Congress since 1990 and their key provisions are as
follows:
The
Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508) extended
the 0.2 percent FUTA surtax for 5 years through 1995.
The
Emergency Unemployment Compensation Act of 1991 (Public Law 102-164)
established temporary emergency unemployment compensation (EUC) benefits
through July 4, 1992. It returned to States the option of covering
nonprofessional school employees between school terms and restored
benefits for ex-military members to the same duration and waiting period
applicable to other unemployed workers. It extended the 0.2 percent FUTA
surtax for 1 year through 1996.
The
Unemployment Compensation Amendments of 1992 (Public Law 102-318) extended
EUC for claims filed through March 6, 1993, and reduced the benefit
periods to 20 and 26 weeks. The law also gave claimants eligible for both
EUC and regular benefits the right to choose the more favorable of the
two. States were authorized, effective March 7, 1993, to adopt an
alternative trigger for the Federal-State EB Program. This trigger is
based on a 3-month average total unemployment rate and can activate either
a 13- or a 20-week benefit period depending on the rate.
The
Emergency Unemployment Compensation Amendments of 1993 (Public Law 103-6)
extended EUC for claims filed through October 2, 1993. The law also
authorized funds for automated State systems to identify permanently
displaced workers for early intervention with reemployment services.
The
Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) extended the
0.2 percent FUTA surtax for 2 years through 1998.
The
Unemployment Compensation Amendments of 1993 (Public Law 103-152) extended
EUC for claims filed through February 5, 1994, and set the benefit periods
at 7 and 13 weeks. It repealed a provision passed in 1992 that allowed
claimants to choose between EUC and regular State benefits. It required
States to implement a ``profiling'' system to identify UI claimants most
likely to need job search assistance to avoid long-term unemployment.
The
North American Free Trade Agreement Implementation Act (Public Law
103-182) gave States the option of continuing UC benefits for claimants
who elect to start their own businesses.
The
Balanced Budget Act of 1997 (Public Law 105-33) gave States complete
authority in setting base periods for determining eligibility for
benefits, authorized appropriations for program integrity activities,
limited trust fund distributions to States in fiscal years 1999-2001, and
raised the ceiling on FUA assets from 0.25 percent to 0.5 percent of wages
in covered employment starting in fiscal year 2002. The Taxpayer Relief
Act of 1997 (Public Law 105-34) extended the 0.2 percent FUTA surtax
through 2007.
REFERENCES
Corson,
W. & Dynarski, M. (1990, September). A study of unemployment insurance
recipients and exhaustees: Findings from a national survey. (Occasional
Paper 90-3). Washington, DC: U.S. Department of Labor.Office of the
President. (1997, February).
Economic
Report of the President. Washington, DC: U.S. Government Printing Office.
Pennington
v. Doherty. Unemployment Insurance Reporter (para.22,184). Chicago, IL:
Commerce Clearing House.U.S. Department of Labor. (2000, February).
UI
Outlook: Fiscal Year 2001 President's Budget. Washington, DC: Author.U.S.
Department of Labor, Employment and Training Administration. (2000,
March).
UI
Data Summary (Fourth quarter, calendar year 1999). Washington, DC: Author.
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