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During some recessions, current taxes and reserve balances were insufficient to cover state
expenditures for unemployment compensation (UC) benefits. UC benefits are an entitlement, and
states are legally required to pay benefits even if the state account is insolvent. Some states may
borrow funds from the Federal Unemployment Account (FUA) within the Unemployment Trust
Fund (UTF) in order to meet UC benefit obligations. This report summarizes how insolvent states
may borrow funds from the federal account within the UTF in order to meet its UC benefit
obligations. Outstanding loans listed by state may be found at the Department of Labor’s website:
http://atlas.doleta.gov/unemploy/content/tfloans.asp. This report will be updated to reflect major
changes in state UTF account solvency.
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Unemployment Compensation and the Unemployment Trust Fund .............................................. 1
Unemployment Taxes ...................................................................................................................... 1
Federal Unemployment Taxes................................................................................................... 1
Broad Guidelines for State Unemployment Taxes .................................................................... 2
Adequate Trust Fund Balances........................................................................................................ 2
Insolvency: Insufficient UTF Reserve Balances ............................................................................. 4
Insolvent States Required to Pay UC Benefits.......................................................................... 4
Mechanism for Receiving a Loan ............................................................................................. 5
Interest Charges on Loans ......................................................................................................... 5
Federal Tax Increases on Outstanding Loans Through Credit Reductions .............................. 5
Credit Reduction ................................................................................................................. 6
Reducing the Credit Reduction........................................................................................... 6

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Table 1. Unemployment Trust Fund Accounts: Financial Information by State, 3rd
Quarter 2008................................................................................................................................. 3

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Author Contact Information ............................................................................................................ 6

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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.
Originally, the intent of the UC program, among other things, was to help counter economic
fluctuations such as recessions.1 This intent is reflected in the current UC program’s funding and
benefit structure. When the economy grows, UC program revenue rises through increased tax
revenues, whereas UC program spending falls as fewer workers are unemployed. The effect of
collecting more taxes while decreasing spending on benefits dampens demand in the economy.
This also creates a surplus of funds or a “cushion” of available funds for the UC program to draw
upon during a recession. In a recession, UC tax revenue falls and UC program spending rises as
more workers lose their jobs and receive UC benefits. The increased amount of UC payments to
unemployed workers dampens the economic effect of lost earnings by injecting additional funds
into the economy.
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UC benefits are financed through employer taxes.2 The federal taxes on employers are under the
authority of the Federal Unemployment Tax Act (FUTA), and the state taxes are under the
authority given by the State Unemployment Tax Acts (SUTA). These taxes are deposited in the
appropriate accounts within the Unemployment Trust Fund (UTF).
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FUTA imposes a 6.2% gross tax rate on the first $7,000 paid annually by employers to each
employee. Employers in states with programs approved by the federal government and with no
delinquent federal loans may credit 5.4 percentage points against the 6.2% tax rate, making the
minimum net federal unemployment tax rate 0.8%. (Most recently, because New York had unpaid
loan balances, the New York employers’ rate was higher for 2004 and 2005.)
Because all states currently have approved programs, 0.8% is the effective federal tax rate. The
0.8% FUTA tax funds both federal and state administrative costs as well as the federal share of

1 See, for example, President Franklin Roosevelt’s remarks at the signing of the Social Security Act at
http://www.ssa.gov/history/fdrstmts.html#signing.
2 For a detailed description of UC financing, see CRS Report RS22077, Unemployment Compensation (UC) and the
Unemployment Trust Fund (UTF): Funding UC Benefits, by Christine Scott and Julie M. Whittaker.
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the Extended Benefit (EB) program, loans to insolvent state UC accounts, and state employment
services.
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Federal laws and regulations provide broad guidelines on state unemployment taxes. States levy
their own payroll taxes on employers to fund regular UC benefits and the state share of the EB
program. These state UC tax rates are “experience-rated,” in which employers generating the
fewest claimants have the lowest rates. The state unemployment tax rate of an employer is, in
most states, based on the amount of UC paid to former employees. Generally, in most states, the
more UC benefits paid to its former employees, the higher the tax rate of the employer, up to a
maximum established by state law. The experience rating is intended to ensure an equitable
distribution of UC program taxes among employers and to encourage a stable workforce. State
ceilings on taxable wages in 2008 range from $7,000 (eight states) to $34,000 (Washington). The
minimum rates range from 0% (eight states) to 1.69% (Rhode Island). The maximum rates range
from 5.4% (17 states) to 10.96% (Massachusetts). Approximately $32.2 billion in SUTA taxes
were collected in FY2008. In comparison, states spent an estimated $38.1 billion on regular UC
benefits and $4.1 million on extended benefit payments in FY2008.
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Whether a state trust fund balance is adequate is ultimately a matter up to each state as there is no
statutory requirement of an adequately funded state UC program. However, the U.S. Department
of Labor (DOL) suggests that, to be minimally solvent, a state’s reserve balance should provide
for one year’s projected benefit payment needs on the basis of the highest levels of benefit
payments experienced by the state over the last twenty years. This is called the average high-cost
multiple (AHCM). A ratio of 1.0 or greater prior to a recession indicates a state is minimally
solvent. States below this level are vulnerable to exhausting their funds in a recession. DOL
provides the AHCM in its Quarterly Program and Financial Data report in the summary of
financial data. These reports are available online at http://www.workforcesecurity.doleta.gov/
unemploy/finance.asp.
Table 1 provides financial information for the third quarter of calendar year 2008. The first data
column lists the amount of state taxes collected in the previous 12 months. The second column
lists the balance each state’s account in the UTF at the end of the 12-month period. The third
column calculates the ratio of the trust fund balance to the estimated sum of wages earned by
employees in jobs covered by the UC system. The final column lists the AHCM where a number
less than 1 does not meet DOL’s definition of minimally solvent.
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Table 1. Unemployment Trust Fund Accounts:
Financial Information by State, 3rd Quarter 2008
Revenues Last
Trust Fund
Trust Fund
Average High
State
12 Months
Balance
Ratio to Total
Cost Multiple
(thousands of $) (thousands of $)
Covered Wages
(AHCM)
Alabama
231,358
395,511
0.67
0.52
Alaska
136,779
346,883
3.35
1.07
Arizona
290,273
964,520
1.08
1.12
Arkansas
263,264
151,276
0.46
0.32
California
4,869,746
1,785,177
0.28
0.27
Colorado
415,479
699,891
0.78
0.67
Connecticut
565,401
566,678
0.72
0.54
Delaware
84,202
153,778
0.96
0.90
District of Columbia
110,751
423,003
1.48
1.10
Florida
849,082
1,767,806
0.69
1.05
Georgia
519,012
1,151,446
0.81
0.98
Hawaii
83,245
485,523
2.68
1.88
Idaho
110,741
128,142
0.72
0.47
Illinois
1,977,454
1,849,318
0.79
0.35
Indiana
549,337
90,735
0.10
0.29
Iowa
363,127
756,589
1.77
0.88
Kansas
223,343
635,593
1.37
0.97
Kentucky
392,982
194,414
0.37
0.21
Louisiana
170,236
1,483,865
2.51
0.94
Maine
99,943
466,735
3.00
1.64
Maryland
388,071
896,734
0.99
0.79
Massachusetts
1,519,733
1,403,903
0.95
0.50
Michigan
1,590,532
35,773
0.03
N.A.
Minnesota
832,356
574,137
0.60
0.38
Mississippi
105,600
717,381
2.50
1.70
Missouri
605,678
221,588
0.26
0.12
Montana
82,866
282,048
2.37
1.45
Nebraska
109,979
296,858
1.17
1.19
Nevada
358,686
714,598
1.50
1.02
New Hampshire
51,776
196,300
0.90
1.19
New Jersey
1,957,272
792,885
0.45
0.21
New Mexico
87,426
543,833
2.38
1.88
New York
2,316,834
809,721
0.20
0.09
North Carolina
924,136
439,808
0.34
0.23
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Revenues Last
Trust Fund
Trust Fund
Average High
State
12 Months
Balance
Ratio to Total
Cost Multiple
(thousands of $) (thousands of $)
Covered Wages
(AHCM)
North Dakota
49,706
137,638
1.57
0.79
Ohio
1,099,404
333,956
0.20
0.12
Oklahoma
166,021
856,198
1.84
1.51
Oregon
804,084
2,121,559
3.92
1.46
Pennsylvania
2,214,250
1,483,767
0.78
0.30
Puerto Rico
180,930
539,026
3.24
1.00
Rhode Island
187,785
114,033
0.79
0.38
South Carolina
284,134
102,549
0.19
0.26
South Dakota
26,620
28,245
0.29
0.33
Tennessee
412,978
558,644
0.62
0.48
Texas
1,035,946
1,671,383
0.42
0.45
Utah
148,286
851,275
2.29
1.47
Vermont
63,146
153,975
1.91
1.20
Virgin Islands
1,505
15,162
1.30
0.80
Virginia
342,558
731,008
0.54
0.71
Washington
1,125,909
4,117,673
3.88
1.53
West Virginia
140,521
249,994
1.38
0.45
Wisconsin
668,123
413,611
0.49
0.29
Wyoming
55,677
258,691
2.87
1.15
Source: U.S. Department of Labor.
Notes: Total covered wages are based on extrapolated wages for the most recent 12 months.
N.A.= Not Applicable; Michigan has an outstanding debt exceeding its fund balances after obligations from the Reed
Act distribution of 2002 are considered.
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During economic slowdowns or recession, some states have found that current state
unemployment taxes and UTF reserve balances were insufficient to cover state expenditures for
unemployment compensation (UC) benefits.
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States have a great deal of autonomy in how they establish and run their unemployment system.
However, the framework established by the federal government requires states to actually pay the
UC benefits as provided under state law. If the state does not pay the UC benefits, federal law is
quite explicit. The state will not have a UC program meeting federal requirements and thus the
federal tax on employers would be a net tax of 6.2% (with no credit for state unemployment
taxes) rather than 0.8% if the state UC program paid benefits and had no outstanding loans.
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In budget terms, UC benefits are an entitlement (although the program is financed by a dedicated
tax imposed on employers and not by general revenues). Thus, even if a recession hits a given
state and as a result that state’s trust account is depleted, the state remains legally required to
continue paying benefits. To do so, the state will be forced to borrow money from the dedicated
loan account, the Federal Unemployment Account (FUA), within the Unemployment Trust Fund
(UTF) or from outside sources. If the state chooses to borrow funds from the FUA, not only will
the state be required to continue paying benefits, it will also be required to repay the funds (plus
any interest due) it has borrowed from the federal loan account. Such states will probably be
forced to raise taxes on their employers and/or reduce UC benefit levels, actions that dampen
economic growth, job creation, and consumer demand. In short, states have strong incentives to
keep adequate funds in their trust fund accounts.
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In order for a loan to be made to a state account, the governor of the state (or the governor’s
designee) must apply to the Secretary of Labor for a three-month loan. Once the loan is approved
by the Department of Labor, the funds are placed into the state account in monthly increments.
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Since 1982 (P.L. 97-35), states are charged interest on new loans that are not repaid by the end of
the fiscal year in which they were obtained. Under previous law, states could receive these loans
interest-free. The interest is the same rate as that paid by the federal government on state reserves
in the UTF for the quarter ending December 31 of the preceding year, but not higher than 10%
per annum. States may not pay the interest directly or indirectly from funds in their state account
with the UTF.
States still may borrow funds without interest from the FUA during the year. To receive these
interest-free loans, the states must repay the loans by September 30. No loans may be made in
October, November, or December of the calendar year of such an interest-free loan. Otherwise,
the “interest-free” loan will accrue interest charges.
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States with outstanding loans must repay them fully by November 10 following the second
consecutive January 1 on which the state has an outstanding loan. If the outstanding loan is not
repaid by that time, the state will face federal tax increases. This means that a state may have
from approximately 22 to 34 months to repay the loan without a federal tax increase, depending
on when it obtained the outstanding loan. If the state does not repay fully by November 10, it
becomes subject to a reduction in the amount of credit applied against the federal unemployment
tax beginning with the preceding January 1 until the state repays the loan fully. That state’s
employers must pay the additional federal taxes resulting from the credit reduction no later than
January 31 of the next calendar year.
The additional federal taxes are then deposited into the appropriate state account. Thus the
amount of the loan (or the funds the state must continue to borrow) is reduced by the additional
federal taxes paid by the state employers.
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The credit reduction is initially 0.3 percentage points for the year beginning with the calendar
year in which the second consecutive January first passes during which the loan is outstanding
and increases by 0.3 percentage points for each year there is an outstanding loan. (For example, in
the first year, the credit reduction results in the net federal tax rate increasing from 0.8% to 1.1%;
in the second year, it would increase to 1.4%.) There are two potential additional credit reductions
(on top of the cumulative 0.3 percentage point increases) during the ensuing calendar years in
which a state has an outstanding loan: (1) in the calendar years after which the third and fourth
consecutive January 1 pass and (2) in the calendar years after which the fifth or more consecutive
January 1 pass.
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There are also ways in which the state may reduce the amount of credit reduction applied in a
year by meeting certain statutory criteria. For example, in Section 272 of P.L. 97-248, a
delinquent state may have the option of repaying on or before November 9 a portion of its
outstanding loans each year through transfer of a specified amount from its account in the UTF to
the FUA. The state also must repay all loans for the most recent one-year period ending on
November 9, plus the potential additional taxes that would have been imposed for the taxable
year. In addition, the state must have sufficient amounts in the state account of the UTF to pay all
compensation for the last quarter of that calendar year without receiving a loan. Finally, the state
must also have altered its state law to increase the net solvency of its account with the UTF. If the
state complies with all these requirements, the credit reduction is reduced by a statutory formula.

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Kathleen Romig
Julie M. Whittaker
Analyst in Income Security
Specialist in Income Security
kromig@crs.loc.gov, 7-3742
jwhittaker@crs.loc.gov, 7-2587

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