Order Code RS22077
March 9, 2005Updated November 2, 2006
CRS Report for Congress
Received through the CRS Web
Unemployment Compensation (UC) and
the Unemployment Trust Fund (UTF):
Funding UC Benefits
Christine Scott and Julie M. Whittaker
Domestic Social Policy Division
Summary
This report provides a summary of how the unemployment compensation (UC)/
unemployment insurance (UI) system funds UC benefits through the Unemployment
Trust Fund (UTF). The federal UTF in the U.S. Treasury includes among its 59
UTF in the U.S. Treasury is designated as a trust fund for
federal accounting purposes. While the UTF is a single trust fund, it includes among its
59 accounts: the Employment Security Administration Account (ESAA), the Extended
Unemployment Compensation Account (EUCA), and the Federal Unemployment
Account (FUA), 53 state accounts, the Federal Employees Compensation Account
(FECA), and two accounts related to the Railroad Retirement Board. Federal
unemployment taxes are placed incredited to the ESAA; each state’s unemployment taxes are
placedcredited to in the state’s unemployment account. Federal taxes are dedicated to pay for
pay for administration grants
to the states and half of extended UC benefits. State
unemployment taxes are dedicated to pay for pay for
regular UC benefits and half of extended
UC benefits. This report will be updated as
legislative activities warrant.
The Unemployment Compensation (UC) Program
Unemployment Compensation (UC) is a joint federal-state program financed by
federal taxes under the Federal Unemployment Tax Act (FUTA) and by state payroll taxes
under the State Unemployment Tax Acts (SUTA). The underlying framework of the UC
system is contained in the Social Security Act (SSA). Title III of the SSA authorizes
grants to states for the administration of state UC laws; Title IVIX authorizes the various
components of the federal Unemployment Trust Fund (UTF); and, Title XII authorizes
advances or loans to insolvent state UC programs.
The Unemployment Trust Fund
Among its 59 accounts, the federal UTF in the U.S. Treasury includes the
Employment The UTF is designated, by law, as a trust fund in the U.S. Treasury. The designation
as a trust fund is a federal accounting mechanism to directly link revenues and
distributions connected to the UC programs. The UTF accounts include the Employment
Security Administration Account (ESAA), the Extended Unemployment
Compensation
Congressional Research Service ˜ The Library of Congress
CRS-2
Compensation Account (EUCA), and the Federal Unemployment Account1 (FUA), 53
state accounts,2
the Federal Employees Compensation Account (FECA), and two accounts
related to the
Railroad Retirement Board.3 Federal unemployment taxes are placed in the
credited to the ESAA; each
state’s unemployment taxes are placedcredited to in the state’s unemployment account.
Federal taxes Federal
taxes are dedicated to pay for UC administration grants to the states and half of extended UC
UC benefits. State taxes are dedicated to pay for regular UC benefits and half of extended
UC benefits.
WhileAlthough the UTF contains 59 separate accounts (often referred to as book accounts)
in order to attribute and distribute the monies appropriately, the UTF is maintained and
invested as a single fund. Thus, revenues to the fund and distributions from the fund are
linked to the book accounts and the source of the revenues. The UTF maintains a balance
to carry over surplus based on program purpose, the UTF
is a single trust fund. The use of separate accounts means that revenues and distributions
are directly linked to the book accounts based on UC program purpose. The use of a
single trust fund (the UTF) for all UC programs permits a balance to carry over surplus
spending authority to subsequent years. The balance represents
reserve spending authority
available in addition to the spending authority provided by the
automatic appropriation
of current tax receipts. This reserve spending authority is used
during recessions when
UC outlays exceed UTF tax receiptsrevenues; that is, when current
spending exceeds current
receipts. Like many of the UTF’s other transactions, the
balance is effectively a
bookkeeping entry.
The Unemployment Trust Fund and the Federal Budget. All UC tax
receipts and outlays for benefits and administration flow through the Treasury, and thus
affect federal revenue, outlays, and the overall financial position (deficit or surplus) of the
federal government. The UTF accounts for all UC financial transactions. This accounting
device
accounting device (designation as a trust fund) is used to accumulate legal spending
authority that is available automatically when
needed. However, like other federal trust funds, the UTF does not
contain financial
resources. The required cash the federal government needs to pay
benefits or
administrative costs must be drawn from either current current resources through either
taxation or borrowing. The
revenue and the expenditures of the UC system are counted
in the federal budget.
Federal laws require that excess UC funds be “invested” in federal government
securities. However, because the UTF is a federal account, its holdings of federal
securities are simply obligations from the federal government to itself. These obligations
represent a budgetary resource to the UC program, not a financial resource to the federal
government. This is because, while no cash has been raised, the interest earned on the
investments is credited to the UTF. Because the federal government is holding its own
securities, no cash is
raised when these securities are liquidated. The UTF’s federal
securities must be backed
by cash raised through taxation or additional public borrowing.
1
The FUA is an account from which advances are made to depleted state trust fund accounts to
ensure that UC benefit obligations are met.
2
The District of Columbia, Puerto Rico, and the Virgin Islands are considered to be states in UC
matters.
3
For the purposes of this report, the Railroad funds will be ignored.
CRS-3
Other things being equal, a UTF surplus reduces the federal deficit, lowering the
amount the federal government must borrow from the public. Conversely, a UTF deficit
increases the overall federal budget deficit and increases federal borrowing needs.
Unemployment Trust Fund Revenues and Distributions. The UTF
receives revenues from three primary sources: (1) state unemployment taxes on
1
The FUA is an account from which advances are made to depleted state trust fund accounts to
ensure that UC benefit obligations are met.
2
The District of Columbia, Puerto Rico, and the Virgin Islands are considered to be states in UC
matters.
3
For the purposes of this report, the Railroad funds will be ignored.
CRS-3
employers; (2) federal unemployment taxes on employers; and (3) U.S. government
agency transfers. While is
credited4 with revenues from three primary sources:
!
!
!
state unemployment taxes on employers (determined by the state within
broad federal guidelines),
federal unemployment taxes on employers (for most employers, the
effective federal unemployment tax for each employee is 0.8% on the
first $7,000 of earnings), and
U.S. government agency transfers (to pay for UC benefits to former
employees).
Although UC benefits are taxable and are fully subject to the federal
income tax, those
revenues do not support the UC system.45 These three types of revenues
are depicted at
the top of Figure 1.
State Unemployment Tax Revenues Are Placed intoCredited to the State
Unemployment Accounts Within the Unemployment Trust Fund. States are
authorized to usedesignate that these funds be used to pay UC benefits. State unemployment
account funds that
are attributable to state unemployment taxes may only be used for
unemployment benefits
and the state’s portion of extended unemployment benefits.
Administrative costs are
funded through distributions from the ESAA to the state
unemployment accounts.
. At the end of FY2004FY2005, states were
estimated to have collected $32.73
$35.08 billion
while expending $36.8531.22 billion in regular
UC benefits and $0.08 billionless than $5
million for their
share of extended benefits. State UTF
revenue exceeded expenditure from
FY1995 to FY2000, but expenditures
significantly exceeded trust fund revenue in
FY2001-FY2004 share of extended benefits.
Federal Unemployment Taxes
Are Placed into Are Credited to the ESAA. Each fiscal
year,
funds are appropriated through the
federal budget process to make
distributions from the
ESAA for the states’
costs of administering their unemployment
compensation programs,
and for the federal
costs of administration. The Secretary of
Labor determines (certifies)
the amount of
the administrative payments, and permits
the Secretary of the Treasury to
make the
payments to the states. The Secretary of
Labor in certifying a state for payment
takes into account that (1) the state’s UC
programs contain specific provisions
related to
the payment of monies from the
state unemployment system, (2) the state
agency’s
specific responsibilities in
administering the UC program and UC
benefits, and (3) the
rights and
responsibilities of the UC benefit
recipients.
4 recipients.
4
All revenues associated with UC are deposited to the U.S. Treasury, and all UC distributions
(payments) are made by the U.S. Treasury. The revenues and distributions made by the U.S.
Treasury are linked to the different UC programs and purposes through the federal accounting
mechanism of the UTF and its separate accounts.
5
This differs from funds from the taxation of Social Security benefits which help support the
Social Security and Medicare programs.
CRS-4
At the End of Each Month, the
ESAA Distributes to the EUCA an
Amount Equal to 20% of the Net
Monthly Activity. Net monthly activity is
revenues credited to the ESAA less
distributions for refunds of federal
unemployment taxes and additional federal
unemployment taxes attributable to a
reduced credit for state taxes. By the end of
FY2005, the federal accounts had collected
$6.69 billion; the ESAA held $5.18 billion
while $1.51 billion was transferred to the
EUCA. Thus, at the end of FY2005, the
ESSA balance was $3.06 billion. Since the
ceiling for the ESSA was $1.54 billion, the
excess $1.52 billion in the ESSA was
transferred to the EUCA.
At the end of FY2005, the ESAA had
distributions of $3.82 billion to the states for
administrative costs and less than $5 million
for the Temporary Extended Unemployment
Compensation (TEUC) program.6
Unemployment Trust Fund
Revenues
State Unemployment Taxes.
Employers required to pay state unemployment
taxes may remit their state unemployment taxes
to states on a monthly, quarterly, annual or
another basis as determined by state laws and
regulations. States in turn, then remit the
collected taxes to the UTF, where the funds are
placed in the appropriate state unemployment
accountTreasury, where the funds
are credited to the appropriate state
unemployment account in the UTF.
Federal Unemployment Taxes.
Employers may also be required to pay federal
employment taxes on a quarterly basis. If
however, the estimated quarterly federal tax is
less than $500, an employer may roll the liability
over to the next quarter until the liability is $500
or more. When the liability is $500 or more, the
employer must pay the federal unemployment
taxes through an electronic funds transfer to the
Treasury, or by or by
depositing the tax payment with
an approved
financial institution. An annual tax return
return reconciles the quarterly deposits to the
actual tax
liability.
The Employment Security
Administration Account (ESAA) receives the
federal unemployment taxes.is credited with
the federal unemployment taxes.
If states have an ongoing extended
U.S. Government Agency Transfers.
unem pl oyment benefits program,
Each federal agency is responsible for
unemployment benefits paid on the agency’sdistributions are made from the EUCA to
unemployment benefits paid on the agency’s
cover the federal portion (50%) of extended
behalf. Each agency must budget for the
unemployment benefits paid and reimburse the
unemployment benefits. At the end of the
UTF for unemployment compensation paid on its
behalf by states. The funds are placed in the
Federal Employees’ Compensation Accountfiscal year, and after any distribution from
behalf by states. The funds are credited to the
the ESAA, the balance in the EUCA is
Federal Employees’ Compensation Account
determined. The EUCA balance has a
(FECA), which is a budgeted program within the
Department of Labor.
This differs from funds from the taxation of Social Security benefits which help support the
Social Security and Medicare programs.
CRS-4
At the End of Each Month, the ESAA Distributes to the EUCA an
Amount Equal to 20% of the Net Monthly Activity. Net monthly activity is
revenues into the ESAA less distributions for refunds of federal unemployment taxes and
additional federal unemployment taxes attributable to a reduced credit for state taxes. By
the end of FY2004, the federal accounts had collected $6.59 billion; the ESAA held $5.40
billion while $1.19 billion was transferred to the EUCA. Thus, at the end of FY2004, the
ESSA balance was $3.34 billion. Since the ceiling for the ESSA was $1.53 billion, the
excess $1.81 billion in the ESSA was transferred to the EUCA.
At the end of FY2004, the ESAA had distributed $3.88 billion to the states for
administrative costs and $4.12 billion for the Temporary Extended Unemployment
Compensation (TEUC) program.5
If states have an ongoing extended unemployment benefits program, distributions
are made from the EUCA to cover the federal portion (50%) of extended unemployment
benefits. At the end of the fiscal year, and after any distribution from the ESAA, the
balance in the EUCA is determined. The EUCA balance has a limitation — the
maximum of $750 million or 0.5% of wages covered by state unemployment
compensation laws.6 If the balance in the EUCA exceeds the limitation, the excess is
distributed to the Federal Unemployment Account (FUA). At the end of FY2004 $0.05
billion was expended to pay for the federal share of extended UC benefits. At the end of
FY2004, the EUCA balance was $5.83 billion. (The ceiling for the EUCA was $18.98
billion; thus, there was no transfer of funds to the FUA.)
In addition to any distribution from the EUCA, the FUA receives the additional taxes
paid by employers when a reduced credit against federal taxes exists because the state
has an outstanding unpaid loan from FUA. Funds are distributed from the FUA as loans
to states, through the state unemployment accounts, to pay unemployment benefits. (See
the discussion below on loans to insolvent accounts for a more detailed explanation of
how these loans operate.) The FUA also has a balance limitation — the maximum of
$550 million or 0.5% of the covered wages. At the end of FY2004, the balance of FUA
was $11.91 billion which was lower than the $18.98limitation — the maximum of $750 million
Department of Labor.
or 0.5% of wages covered by state
unemployment compensation laws.7 If the
balance in the EUCA exceeds the limitation, the excess is distributed to the Federal
Unemployment Account (FUA). At the end of FY2005 less than $5 million was
expended to pay for the federal share of extended UC benefits. At the end of FY2005, the
EUCA balance was $9.13 billion. (The ceiling for the EUCA was $20.06 billion; thus,
there was no transfer of funds to the FUA.)
6
For a description of the TEUC program see CRS Report RL33362, Unemployment Insurance:
Available Unemployment Benefits and Legislative Activity, by Julie M. Whittaker.
7
The Balanced Budget Act of 1997, P.L. 105-33, increased the statutory ceiling on the FUA from
0.25% to 0.5% of covered wages, effective Oct. 1, 2001. Previously, the Unemployment
Compensation Amendments of 1992, P.L. 102-318, had lowered the FUA from 0.625% to 0.25%
and increased the ceiling for EUCA from 0.375% to 0.5%. The Omnibus Budget Reconciliation
Act of 1987, P.L. 100-203, had raised the EUCA ceiling from 0.125% to .375% and increased
the FUA ceiling from 0.125% to 0.625%.
CRS-5
In addition to any distribution from the EUCA, the FUA is credited with the
additional taxes paid by employers when a reduced credit against federal taxes exists
because the state has an outstanding unpaid loan from FUA. Funds are distributed from
the FUA as loans to states, through the state unemployment accounts, to pay
unemployment benefits. (See the discussion below on loans to insolvent accounts for a
more detailed explanation of how these loans operate.) The FUA has a balance limitation
— the maximum of $550 million or 0.5% of the covered wages. At the end of FY2005,
the FUA balance was $13.06 billion, which was lower than the $20.06 billion ceiling.
Distributions are made to the state unemployment accounts from the FECA to
reimburse the states for employment compensation paid to former federal employees.
Each federal agency must reimbursereimburses the UTF for its share of federal workers’ UC
benefits.
Other Unemployment Trust Fund Expenditures (Reed Act
Distributions). At the end of the fiscal year, there is a limitation on the balance in the
5
For a description of the TEUC program see CRS Report 95-742, Unemployment Benefits:
Legislative Issues in the 108th Congress, by Julie M. Whittaker.
6
The Balanced Budget Act of 1997, P.L. 105-33, increased the statutory ceiling on the FUA from
0.25% to 0.5% of covered wages, effective Oct. 1, 2001. Previously, the Unemployment
Compensation Amendments of 1992, P.L. 102-318, had lowered the FUA from 0.625% to 0.25%
and increased the ceiling for EUCA from 0.375% to 0.5%. The Omnibus Budget Reconciliation
Act of 1987, P.L. 100-203, had raised the EUCA ceiling from 0.125% to .375% and increased
the FUA ceiling from 0.125% to 0.625%.
CRS-5
ESAA — the account balance cannot exceed 40% of the prior fiscal year’s appropriation
by Congress. If the balance in the ESAA exceeds this limitation, the excess is distributed
to EUCA. After the distribution, if the balance in the EUCA exceeds the limitation, the
excess is distributed to the FUA. If after the distribution from the EUCA, the FUA
balance exceeds the limitation, the excess is distributed, as a Reed Act distribution, to the
states.78
At the end of FY2004FY2005, the ESSA balance was $3.3406 billion. Because the ceiling for
the ESSAESSA
ceiling was $1.5354 billion, the excess of $1.8152 billion was transferred to the EUCA.
After After
this distribution, the EUCA balance was $5.83 billion. Because the ceiling for the
EUCA was $18.98 billion,9.13 billion. The EUCA ceiling was $20.06
billion: there was no transfer of funds to the FUA. The FUA balance
was $11.91 billion; since the ceiling for the FUA was $18.98 billion, was $13.06 billion
while the FUA ceiling was $20.06 billion; there was no Reed
Act distribution.
Loans to Insolvent Accounts. The Treasury can write checks for a state
unemployment account provided that legal spending authority exists for such spending.
That is, the state unemployment account has a positive balance. During some recessions,
current taxes and reserve balances were insufficient to cover expenditures for UC
benefits. Therefore, someSome state unemployment accounts required “loans.” Like all other
transactions transactions
of the UTF, these are book account transactions that involve no exchange of
cash. The
loans are additional credits to a state unemployment account. Subsequent
repayment of
these loans reduces the credits in the state unemployment accounts.
The state unemployment accounts can borrow from the FUA. The principal of the
loan is repaid by reducing federal tax credits for state unemployment taxes and placingcrediting
those increased revenues intoto the FUA. The state cannot pay the interest on such loans
using the state unemployment account but must pay the interest through state general
revenues or other measures.
Federal law also authorizes appropriations if balances in the
federal accounts are
insufficient to cover their expenditures. For example, if the states’
borrowing needs
exceed the available FUA balance, Congress is authorized to appropriate additional
additional spending authority to cover the amount needed. Such appropriations require discretionary
discretionary action by Congress and the President.
78
For more information on Reed Act distributions from the Unemployment Trust Fund, see CRS
Report RS22006, The Unemployment Trust Fund and Reed Act Distributions, by Julie Whittaker.
CRS-6
Figure 1. The Unemployment Trust Fund
State Unemployment Taxes
State Unemployment
Accounts
Federal Agency Reimbursements
Employment Security
Federal Employees’
Administration Account
Compensation Account
’
tes
sta
or
sts
f
co
tss
or
f
ost
s
c
t
en
ve
i
t
m
y
tra
Pa
nis
mi
ad
Pa
y
Lo
a
eral
r fed tss
s fo
it
tate benef
s
o
C
tt
men yees’ U
y
a
P
lo
emptate benefi
s
o
t t ’ UC
s
men
Pay ployee
em
m
en
tt
ns
&
o
stas ta
te
(fe s fo
de r e
ra xt
l s en
ha de
re d
U
)
C
re
pa
ym
enbe
ne
f
20% of net monthly ESAA activity
Unemployment
Trust Fund
Federal Unemployment Taxes
be
ne
fit
s
its
ym
en
ts
Extended Unemployment Compensation
Account
Funds in excess of 0.5% of
covered wages in EUCA at the
end of FY
State Unemployment
Compensation
Benefits
Reed Act
Distributions
ges
wa
red
e
v
co Y
of of F
.5% nd
f 0 the e
o
it)
ess at
im
exc FUA
at l
s in in
lso
d
a
n
s
i
Fu
CA
EU
(If
Source: Figures prepared by The Congressional Research Service (CRS).
Federal Unemployment Account
cr
s
p
h
p
g
w