Unemployment Insurance Trust Fund Loans
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By Jennifer Burnett | Wednesday, January 18, 2012 at 11:51 am
2 NOTE: The federal component of unemployment is funded by a 6 percent tax rate on the first $7,000 paid annually by employers to each employee. Employers in states that have unemployment programs approved by the Department of Labor and no outstanding loan balances may credit 5.4 percentage points against the 6 percent tax rate, so that the net effective federal tax rate becomes 0.6 percent. The “effective” tax increase indicated here is actually a decrease to the 5.4 percentage point credit applied to the tax rate.
Unemployment rates remain high and many people have been without work for extremely long periods of time, exhausting state unemployment trust funds— the funds from which states pay benefits. More than half of the states are borrowing from the federal government to cover costs, which may have an impact on future fiscal stability.
Download the Excel version of the chart: "Unemployment Insurance Trust Fund Solvency"
Sustained high unemployment rates, long-term unemployment and unsustainable funding models have exhausted state unemployment trust funds.
- In 2010, the national unemployment rate was 9.6 percent. Throughout 2011, the rate hovered around 9 percent, dropping to 8.6 percent late in the year.
- Sustained high unemployment affects unemployment insurance trust funds in two primary ways: decreased supply and increased demand. More people need unemployment benefits longer, increasing the money going out, while fewer people are paying into the reserves through payroll tax collections, draining the supply of incoming funds.
- The number of long-term unemployed, defined as those unemployed for 27 weeks or more, has skyrocketed throughout the economic downturn. This has contributed significantly to trust fund insolvency.
- In 2011, the percentage of unemployed workers considered long-term unemployed increased significantly, hitting a high of 44.6 percent in September; that’s the highest percentage since the Labor Department began calculating the rate in 1948.
- Based on U.S. Department of Labor reports, the average (mean) amount of time individuals received unemployment benefits was 40.9 weeks in November 2011—more than double the average duration of unemployment when the recession began in December 2007.
States continued to borrow significant sums in 2011.
- By Dec. 29, 2011, 26 states plus the Virgin Islands were borrowing money from the Federal Unemployment Account to help pay growing claims for unemployment insurance benefits, with outstanding loans then totaling more than $36.4 billion.
- New York and California are among the top borrowers of federal funds, with a combined total of more than $13.2 billion in loans. Pennsylvania is close behind, having borrowed $3.2 billion.
- On a per-capita basis, state borrowing ranges from a low of $6.79 in Alabama and $21.99 in Kansas to a high of $303.27 in Indiana and $283.08 in Nevada.
Interest payments on long-term debt come due: $1.1 billion.
- Until the end of 2010, a provision in the American Recovery and Reinvestment Act delayed interest from accruing on state loans and automatic tax increases from being triggered. Now that provision has expired and states that haven’t paid off their debts—and employers in those states—are paying a price.
- In September 2011, interest payments on outstanding loans came due at a rate of nearly 4.1 percent. States with loans struggled to find the $1.1 billion in total interest due in an already tough fiscal climate. Projected budget shortfalls for the 2012 fiscal year total $103 billion, according to the Center on Budget and Policy Priorities.
Employers in states with outstanding long-term debt will see a tax hike in 2012.
- In addition to interest payments, states that have been borrowing from the federal fund since 2009 were required to pay off the outstanding balances on those loans in November 2011. Employers in states that did not make this payment or did not qualify for exemption faced an increase in their 2012 federal unemployment tax rates as a result.
- This year, 19 states were unable to pay off their 2009 balances by the November deadline.1 Employers in 18 of those states will see an effective 0.3 percentage point increase in their tax rate2 in 2012.
- Indiana failed to pay off its balance from 2008, making its loans two years past the repayment deadline, which means an effective tax hike of 0.6 percentage points.
Strategies to reach solvency are varied.
- Michigan, which has been borrowing since September 2006, paid off its $3 billion in debt in late December after selling bonds to cover those costs. Although Michigan employers will be paying back the bond, paying off the debt eliminated some of the significant penalties and interest. Idaho also issued bonds to pay off its debt before an interest payment was due.
- According to the National Employment Law Project, some states are taking steps to reduce unemployment costs by limiting benefits. Ten states enacted cuts and eligibility restrictions to benefits in 2011, ranging from reductions in the minimum and maximum amount of benefits that can be received weekly to narrowing definitions or classifications of who qualifies for benefits.
- Six states—Arkansas, Florida, Illinois, Michigan, Missouri and South Carolina—have reduced the number of weeks one can receive state benefits below the historical standard of 26 weeks, something that hasn’t been done in more than 50 years.3
- Thirty-five states increased taxes on employers in 2010, and seven states enacted legislation to raise the taxable wage base on employers for unemployment taxes, according to a survey by the National Association of State Workforce Agencies.
RESOURCES:
1 Three additional states--Alabama, Idaho and South Carolina--took out federal loans in 2009. However, both Alabama and Idaho repaid their outstanding balances by the deadline and thus avoided the tax increase. South Carolina qualified for an exemption from the increase (called credit reduction avoidance) per DOL’s regulations.
2 NOTE: The federal component of unemployment is funded by a 6 percent tax rate on the first $7,000 paid annually by employers to each employee. Employers in states that have unemployment programs approved by the Department of Labor and no outstanding loan balances may credit 5.4 percentage points against the 6 percent tax rate, so that the net effective federal tax rate becomes 0.6 percent. The “effective” tax increase indicated here is actually a decrease to the 5.4 percentage point credit applied to the tax rate.
| Attachment | Size | Hits | Last download |
|---|---|---|---|
| ui_trust_fund_solvency_january_2012.xls | 28 KB | 218 | 1 week 5 days ago |
| unemployment_trust_funds_loans.pdf | 394.89 KB | 223 | 14 hours 57 min ago |
