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 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 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. CRS-3 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 estimated to have collected $32.73 billion while expending $36.85 billion in regular UC benefits and $0.08 billion 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 Federal Unemployment Taxes Are Placed into 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 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 account. 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 or by depositing the tax payment with an approved financial institution. An annual tax return reconciles the quarterly deposits to the actual tax liability. The Employment Security Administration Account (ESAA) receives the federal unemployment taxes. U.S. Government Agency Transfers. Each federal agency is responsible for unemployment benefits paid on the agency’s behalf. Each agency must budget for the unemployment benefits paid and reimburse the UTF for unemployment compensation paid on its behalf by states. The funds are placed in the Federal Employees’ Compensation Account (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 $18.98 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%. 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.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. 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 ts en ve i t m y tra Pa nis mi ad Pa y Lo a eral r fed ts s fo tate benefi s o t t ’ UC s men Pay ployee em m en tt ns & o sta te (fe s fo de r e ra xt l s en ha de re d U ) C re pa ym en 20% of net monthly ESAA activity Unemployment Trust Fund Federal Unemployment Taxes be ne fit s 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