President’s Deficit Reduction Plan Addresses Unemployment Trust Fund Solvency

The president’s recently released deficit reduction plan includes a strategy to increase the solvency of state’s unemployment trust funds and to provide some fiscal relief for those states that have borrowed from the federal government to cover their unemployment insurance costs.

As the national unemployment rate hovers around 9.1% and with state unemployment rates as high as 13.4 percent, states are struggling to pay out unemployment benefits. Sustained high unemployment affects unemployment insurance trust funds – the accounts used to pay out unemployment benefits – in two primary ways: decreased supply and increased demand. More people need unemployment benefits for longer, increasing the money going out, while fewer people are paying into the reserves through payroll tax collections, draining the supply of funds coming in.

This mismatch in supply and demand, along with unsustainable and potentially careless state management of trust funds when the economy was actually performing well, means that state trust funds have been drained quickly during this prolonged downturn.

In September 2006, Michigan became the first state in recent history to borrow money from the federal government so that it could continue to send out unemployment checks. Twenty-seven states are currently borrowing money from the federal government, with outstanding loans totaling more than $37.4 billion. Pennsylvania ($2.9 billion), New York ($3 billion), Michigan ($3.2 billion) and California ($8.7 billion) are the top borrowers of federal funds.

Unemployment Insurance Trust Fund Loan Balances as of September 21, 2011         (in millions of dollars)

Author's calculations of data from the U.S. Department of Labor, Employment and Training Administration.

The number of states borrowing and how much those states are borrowing is actually on a downward trend – down from 32 states borrowing $45.7 billion in March 2011. That’s likely because this month states will have to begin making interest payments on their loans, something that was stalled until now by a provision in the American Recovery and Reinvestment Act. New York, for example, will have to pay out $95 million in interest alone this month.

The president’s plan calls for two primary ways to alleviate some of the pressure that states with loans are currently facing:

1.      A delay in the application of the Federal Unemployment Tax Act (FUTA) credit reduction schedule until 2014.

2.      A two-year suspension of state interest accrual and debt payments on their loans.

In addition, the proposal would address trust fund solvency, primarily by making significant changes to the federal wage base (the amount of wages on which employers pay taxes).  Under the proposal, the wage base would increase from $7,000 to $15,000 in 2014. The FUTA tax rate would be lowered when the higher federal wage base goes into effect to ensure that the federal UI taxes employers pay are roughly constant, according to FFIS (Federal Funds Information for States).

Although states would have to set their wage bases to at least $15,000 by 2014 (they can set their base above this level, just not below it), they can offset some of that increase by reducing the tax rate that would apply to the new base. Several states have already or are considering adjusting their taxable wage bases independently. Seven states enacted legislation to raise their taxable wage bases in 2010 according to a survey by the National Association of State Workforce Agencies.