Order Code RS22077
March 9, 2005
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
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 in the ESAA; each state’s unemployment taxes are
placed in the state’s unemployment account. Federal taxes pay for administration grants
to the states and half of extended UC benefits. State unemployment taxes 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 IV 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 Security Administration Account (ESAA), the Extended Unemployment
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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
ESAA; each state’s unemployment taxes are placed in the state’s unemployment account.
Federal taxes pay for UC administration grants to the states and half of extended UC
benefits. State taxes pay for regular UC benefits and half of extended UC benefits.
While 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 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 receipts; 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 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 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. 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.
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.
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employers; (2) federal unemployment taxes on employers; and (3) U.S. government
agency transfers. While UC benefits are taxable and are fully subject to the federal
income tax, those revenues do not support the UC system.4 These three types of revenues
are depicted at the top of Figure 1.
State Unemployment Tax Revenues Are Placed into the State
Unemployment Accounts Within the Unemployment Trust Fund. States are
authorized to use these funds 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 FY2004, states were
Unemployment Trust Fund
estimated to have collected $32.73 billion
Revenues
while expending $36.85 billion in regular
UC benefits and $0.08 billion for their
State Unemployment Taxes.
share of extended benefits. State UTF
Employers required to pay state unemployment
revenue exceeded expenditure from
taxes may remit their state unemployment taxes
to states on a monthly, quarterly, annual or
FY1995 to FY2000, but expenditures
another basis as determined by state laws and
significantly exceeded trust fund revenue in
regulations. States in turn, then remit the
FY2001-FY2004
collected taxes to the UTF, where the funds are
placed in the appropriate state unemployment
Federal Unemployment Taxes
account.
Are Placed into the ESAA. Each fiscal
Federal Unemployment Taxes.
year, funds are appropriated through the
Employers may also be required to pay federal
federal budget process to make
employment taxes on a quarterly basis. If
distributions from the ESAA for the states’
however, the estimated quarterly federal tax is
costs of administering their unemployment
less than $500, an employer may roll the liability
over to the next quarter until the liability is $500
compensation programs, and for the federal
or more. When the liability is $500 or more, the
costs of administration. The Secretary of
employer must pay the federal unemployment
Labor determines (certifies) the amount of
taxes through an electronic funds transfer or by
the administrative payments, and permits
depositing the tax payment with an approved
financial institution. An annual tax return
the Secretary of the Treasury to make the
reconciles the quarterly deposits to the actual tax
payments to the states. The Secretary of
liability. The Employment Security
Labor in certifying a state for payment
Administration Account (ESAA) receives the
takes into account that (1) the state’s UC
federal unemployment taxes.
programs contain specific provisions
U.S. Government Agency Transfers.
related to the payment of monies from the
Each federal agency is responsible for
state unemployment system, (2) the state
unemployment benefits paid on the agency’s
agency’s specific responsibilities in
behalf. Each agency must budget for the
administering the UC program and UC
unemployment benefits paid and reimburse the
benefits, and (3) the rights and
UTF for unemployment compensation paid on its
behalf by states. The funds are placed in the
responsibilities of the UC benefit
Federal Employees’ Compensation Account
recipients.
(FECA), which is a budgeted program within the
Department of Labor.
4 This differs from funds from the taxation of Social Security benefits which help support the
Social Security and Medicare programs.
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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 $18.98 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 reimburse 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%.
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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.7
At the end of FY2004, the ESSA balance was $3.34 billion. Because the ceiling for
the ESSA was $1.53 billion, the excess of $1.81 billion was transferred to the EUCA.
After this distribution, the EUCA balance was $5.83 billion. Because the ceiling for the
EUCA was $18.98 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, 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, some state unemployment accounts required “loans.” Like all other
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 placing
those increased revenues into 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
spending authority to cover the amount needed. Such appropriations require discretionary
action by Congress and the President.
7 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.
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Figure 1. The Unemployment Trust Fund
State Unemployment Taxes
Federal Unemployment Taxes
Federal Agency Reimbursements
State Unemployment Employment Security
Federal Employees’
Accounts Administration Account Compensation Account
Unemployment
Payments for states’
administrative costs
2
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Trust Fund
of ne
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Extended Unemployment Compensation
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Funds in excess of 0.5% of
State Unempl
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covered wages in EUCA at the
end of FY
Comp
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Benefits
Federal Unemployment Account
Benefits
Funds in excess of 0.5% of covered wages
in FUA at the end of FY
Reed Act
(If EUCA is also at limit)
Distributions
Source: Figures prepared by The Congressional Research Service (CRS).