Order Code RS22077
Updated 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 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 credited to the ESAA; each state’s unemployment taxes are
credited to in the state’s unemployment account. Federal taxes are dedicated to pay for
administration grants to the states and half of extended UC benefits. State
unemployment taxes are dedicated to 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 IX 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
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

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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 credited to the ESAA; each
state’s unemployment taxes are credited to in the state’s unemployment account. Federal
taxes are dedicated to pay for UC administration grants to the states and half of extended
UC benefits. State taxes are dedicated to pay for regular UC benefits and half of extended
UC benefits.
Although the UTF contains 59 separate accounts (often referred to as book accounts)
to attribute and distribute the monies appropriately 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 revenues; 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 (designation as a trust fund) is used to accumulate legal spending
authority that is available automatically when needed. However, the UTF does not
contain financial resources. The required cash the federal government needs to pay
benefits or administrative costs must be drawn from 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.

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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 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.5 These three types of revenues are depicted at
the top of Figure 1.
State Unemployment Tax Revenues Are Credited to the State
Unemployment Accounts Within the Unemployment Trust Fund. States are
authorized to designate 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 FY2005, states were estimated to have collected
$35.08 billion while expending $31.22 billion in regular UC benefits and less than $5
million for their share of extended benefits.
Federal Unemployment Taxes 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 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.

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At the End of Each Month, the
Unemployment Trust Fund
ESAA Distributes to the EUCA an
Revenues
Amount Equal to 20% of the Net
Monthly Activity. Net monthly activity is
State Unemployment Taxes.
revenues credited to the ESAA less
Employers required to pay state unemployment
distributions for refunds of federal
taxes may remit their state unemployment taxes
to states on a monthly, quarterly, annual or
unemployment taxes and additional federal
another basis as determined by state laws and
unemployment taxes attributable to a
regulations. States in turn, then remit the
reduced credit for state taxes. By the end of
collected taxes to the Treasury, where the funds
FY2005, the federal accounts had collected
are credited to the appropriate state
unemployment account in the UTF.
$6.69 billion; the ESAA held $5.18 billion
while $1.51 billion was transferred to the
Federal Unemployment Taxes.
EUCA. Thus, at the end of FY2005, the
Employers may also be required to pay federal
ESSA balance was $3.06 billion. Since the
employment taxes on a quarterly basis. If
ceiling for the ESSA was $1.54 billion, the
however, the estimated quarterly federal tax is
less than $500, an employer may roll the liability
excess $1.52 billion in the ESSA was
over to the next quarter until the liability is $500
transferred to the EUCA.
or more. When the liability is $500 or more, the
employer must pay the federal unemployment
At the end of FY2005, the ESAA had
taxes through an electronic funds transfer to the
Treasury, or by depositing the tax payment with
distributions of $3.82 billion to the states for
an approved financial institution. An annual tax
administrative costs and less than $5 million
return reconciles the quarterly deposits to the
for the Temporary Extended Unemployment
actual tax liability. The Employment Security
Compensation (TEUC) program.6
Administration Account (ESAA) is credited with
the federal unemployment taxes.
If states have an ongoing extended
U.S. Government Agency Transfers.
une m p l o ym ent benefits program,
Each federal agency is responsible for
distributions 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. At the end of the
unemployment benefits paid and reimburse the
UTF for unemployment compensation paid on its
fiscal 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
limitation — 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%.

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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 reimburses 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
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.8
At the end of FY2005, the ESSA balance was $3.06 billion. Because the ESSA
ceiling was $1.54 billion, the excess of $1.52 billion was transferred to the EUCA. After
this distribution, the EUCA balance was $9.13 billion. The EUCA ceiling was $20.06
billion: there was no transfer of funds to the FUA. The FUA balance 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. 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 crediting
those increased revenues to 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.
8 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
20
%

Trust Fund
of
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Payment to states for federal
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employees’ UC benefits
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Extended Unemployment Compensation
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Funds in excess of 0.5% of
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covered wages in EUCA at the
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Benefits
Federal Unemployment Account
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).
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