The Unemployment Trust Fund (UTF):
State Insolvency and Federal Loans to States
Julie M. Whittaker
Specialist in Income Security
January 10, 2012
Congressional Research Service
7-5700
www.crs.gov
RS22954
CRS Report for Congress
Pr
epared for Members and Committees of Congress
The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
Summary
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) to meet UC benefit obligations. The 2009 stimulus package (the American Recovery
and Reinvestment Act of 2009, P.L. 111-5 §2004) temporarily waives interest payments and the
accrual of interest on these loans to states from the FUA.
This report summarizes how insolvent states may borrow funds from the federal account within
the UTF to meet their UC benefit obligations. Outstanding loans listed by state may be found at
the Department of Labor’s website: http://www.workforcesecurity.doleta.gov/unemploy/
budget.asp#tfloans.
In 2011, 20 states and the Virgin Islands had a state tax credit reduction applied to the calculation
of the federal unemployment tax (FUTA): Michigan (0.9), Indiana (0.6), Arkansas (0.3),
California (0.3), Connecticut (0.3), Florida (0.3), Georgia (0.3), Illinois (0.3), Kentucky (0.3),
Minnesota (0.3), Missouri (0.3), North Carolina (0.3), New Jersey (0.3), Nevada (0.3), New York
(0.3), Ohio (0.3), Pennsylvania (0.3), Rhode Island (0.3), Virginia (0.3), Virgin Islands (0.3), and
Wisconsin (0.3). As a result, in Michigan, a credit reduction of 0.9 was applied retroactively to
tax year 2011 earnings and the net FUTA tax during 2011 for Michigan employers was 1.5% on
the first $7,000 of each employee’s earnings. In Indiana (with a credit reduction of 0.6), the net
FUTA tax during 2011 for Indiana employers was 1.2% on the first $7,000 of each employee’s
earnings. In the other 19 states (with a 0.3% credit reduction), the net FUTA tax for 2011 was
0.9%. For all other states, the net FUTA tax was 0.6%.
H.R. 650 would extend the suspension of interest accrual on federal loans to states through 2012.
H.R. 3346 and S. 1804 would also allow states to enter into an agreement with the U.S.
Department of Labor (DOL) to temporarily suspend the accrual of interest for FY2012. In
addition, states that otherwise have employers facing a decreased state tax credit on federal
unemployment taxes would be able to opt to suspend the reduction in credit for tax year 2012. To
have these options available to the state, the state would be required to continue to calculate
regular unemployment benefit entitlements (both in weekly amount and total weeks available) as
required by state law on the date of enactment of this proposal. States with no outstanding
unemployment loans within the unemployment trust fund would earn an additional two
percentage points in interest on the (positive) average daily balance in the state’s unemployment
trust fund account.
This report will be updated to reflect major changes in state UTF account solvency.
Congressional Research Service
The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
Contents
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.............................................................................. 7
Insolvent States Required to Pay UC Benefits .......................................................................... 7
Mechanism for Receiving a Loan.............................................................................................. 7
Interest Charges on Loans ......................................................................................................... 7
Expired Provision: Temporary Waiver of Interest in 2009 Stimulus Package .................... 8
Loan Repayment.............................................................................................................................. 9
Federal Tax Increases on Outstanding Loans Through Credit Reductions................................ 9
Credit Reduction ............................................................................................................... 10
How the Credit Reduction May be Mitigated: Avoidance or Cap..................................... 11
Current Status of Outstanding Loans, Accrued Interest Owed, and State Tax Credit
Reductions............................................................................................................................ 12
Tables
Table 1. State Unemployment Trust Fund Accounts: Financial Information by State, 3rd
Quarter 2011 ................................................................................................................................. 4
Table 2. Schedule of State Tax Credit Reduction and Net Federal Unemployment Tax Act
(FUTA) Tax for July 2011 Onwards ........................................................................................... 11
Table 3. Outstanding Loan Balances, Interest Owed,
and Potential State Tax Credit Reduction ................................................................................... 13
Contacts
Author Contact Information........................................................................................................... 14
Congressional Research Service
The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
Unemployment Compensation and the
Unemployment Trust Fund
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.
Unemployment Taxes
UC benefits are financed through employer taxes.2 The federal taxes on employers are under the
authority of FUTA, and the state taxes are under the authority given by SUTA. These taxes are
deposited in the appropriate accounts within the UTF.
Federal Unemployment Taxes
FUTA imposes a 6.0% 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 6.0% tax rate, making the
minimum net federal unemployment tax rate 0.6%.
Because all states currently have approved programs, 0.6% is the effective federal tax rate.3 The
0.6% FUTA tax funds both federal and state administrative costs as well as the federal share of
the Extended Benefit (EB) program, loans to insolvent state UC accounts, and state employment
services In 2011, 20 states and the Virgin Islands were subject to a credit reduction: Michigan
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 Julie M. Whittaker.
3 The net FUTA tax through June 2011 was 0.8%. Thus, the average net FUTA tax for most employers 2011 will be
more than 0.6% but less than 0.8%.
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The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
(0.9), Indiana (0.6), Arkansas (0.3), California (0.3), Connecticut (0.3), Florida (0.3), Georgia
(0.3), Illinois (0.3), Kentucky (0.3), Minnesota (0.3), Missouri (0.3), North Carolina (0.3), New
Jersey (0.3), Nevada (0.3), New York (0.3), Ohio (0.3), Pennsylvania (0.3), Rhode Island (0.3),
Virginia (0.3), Virgin Islands (0.3), and Wisconsin (0.3). As a result, in Michigan, the credit
reduction (0.9) was applied retroactively to tax year 2011 earnings and the net FUTA tax during
2011 for Michigan employers was 1.6% on the first $7,000 of each employee’s earnings. In
Indiana (with a credit reduction of 0.6), the net FUTA tax during 2011 for Indiana employers was
1.2% on the first $7,000 of each employee’s earnings. In the other 19 states with a 0.3% credit
reduction, the net FUTA tax for 2011 was 0.9%. For all other states, the net FUTA tax was 0.6%.4
Broad Guidelines for State Unemployment Taxes
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 2011 ranged from $7,000 (Arizona, California, Florida, and Puerto
Rico) to $38,800 (Hawaii). The minimum rates ranged from 0% (Iowa, Missouri, Nebraska,
South Dakota) to 2.98% (Pennsylvania). The maximum rates ranged from 5.4% (Arkansas,
California, Florida, Georgia, Hawaii, Mississippi, Nevada, Oregon, and Puerto Rico) to 13.5%
(Maryland). A projected $47.8 billion in SUTA taxes will be collected in FY2012. In comparison,
states are projected to spend $51.7 billion on regular UC benefits and $0.02 billion on extended
benefit payments in FY2012.
Adequate Trust Fund Balances
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.5
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 past 20 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.
4 Employers would have paid an additional 0.2% to any earnings paid to employees before July 2011. This temporary
surtax was most recently authorized by P.L. 111-92 and expired on June 30, 2011.
5 Recently funding goals for the states’ accounts were approved in federal regulations. On September 17, 2010, DOL
issued a final rule to implement federal requirements conditioning a state’s receipt of interest-free loans upon the state
meeting funding goals, established under regulations issued by the Secretary of Labor. This rule will begin to be phased
in beginning in 2014 with the full effect of the rule beginning in 2019.These goals determine whether short-term loans
to the states are interest-free loans or if they immediately begin to accrue interest. These requirements are discussed in
this report in the “Interest Charges on Loans” requirements.
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The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
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 recent financial information for the unemployment trust fund accounts. The first
data column lists the amount of state taxes collected in the previous 12 months. The second
column lists the balance of 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 fourth column lists the AHCM where a
number less than 1.0 does not meet DOL’s definition of minimally solvent. The fifth column
reports the outstanding trust fund loan (if any). The sixth column lists the per employee loan
amount (total loans divided by total covered employees). This statistic gives a sense of how much
in state taxes per employee would have to be raised if a state were to have repaid the entire loan
amount in the third quarter of 2010. The final column lists the ratio of total loans to total covered
wages. This ratio aids in the comparison of the size of the loan to the general wage profile in the
state.
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Table 1. State Unemployment Trust Fund Accounts:
Financial Information by State, 3rd Quarter 2011
Percentage of Loans
Revenues Past
Trust Fund Ratio
Average High
Outstanding
to Yearly Total
12 Months
Trust Fund Balance
to Total Covered
Cost Multiple
Trust Fund Loan
Loan per Covered
Wages in Covered
State
($ in thousands)
($ in thousands)
Wages
(AHCM)
($ in thousands)
Employee
Employment
Alabama
547,360
6,955 0.01 N.A. 44,122
$25 0.08
Alaska 154,945
235,229
2.08
1.00
0
—
—
Arizona 405,523
10,944
0.01
N.A.
326,883
$141
0.41
Arkansas 396,700
119,470
0.36
N.A.
330,853
$300
1.03
California 6,209,637
95,846
0.02
N.A.
9,034,656
$640
1.49
Colorado 734,334
8,094
0.01
N.A.
300,107
$142
0.35
Connecticut 804,286
313,854
0.40
N.A.
809,876
$517
1.08
Delaware 107,006
22,548
0.14
N.A.
62,523
$161
0.41
District of Columbia
162,622
313,232
1.05
1.05
0
—
—
Florida 1,741,664
50,801
0.02
N.A.
1,649,800
$234
0.70
Georgia 797,129
217,250
0.16
N.A.
721,080
$198
0.54
Hawaii 272,273
11,529
0.07
N.A.
0
—
—
Idaho 280,722
138,139
0.83
N.A.
0
—
—
Illinois 2,697,199
6
0.00
N.A.
2,006,604
$375
0.92
Indiana 743,988
17,226
0.02
N.A.
1,894,608
$714
2.23
Iowa 629,553
463,141
1.07
0.51
0
—
—
Kansas 400,571
159,744
0.35
N.A.
170,821
$136
0.38
Kentucky 475,765
120,177
0.23
N.A.
948,700
$571
1.88
Louisiana 245,419
836,961
1.37
1.56 0
—
—
Maine 170,126
274,034
1.79
0.98
0
—
—
Maryland 1,009,432
465,599
0.51
0.19 0
—
—
Massachusetts 1,886,789
297,960 0.20 0.01
0
—
—
Michigan 1,748,101
123,598
0.09
N.A.
3,181,760
$864
2.46
CRS-4
Percentage of Loans
Revenues Past
Trust Fund Ratio
Average High
Outstanding
to Yearly Total
12 Months
Trust Fund Balance
to Total Covered
Cost Multiple
Trust Fund Loan
Loan per Covered
Wages in Covered
State
($ in thousands)
($ in thousands)
Wages
(AHCM)
($ in thousands)
Employee
Employment
Minnesota 1,202,041
8,945
0.01
N.A.
268,954
$108
0.30
Mississippi 244,437
379,597
1.35
1.17 0
—
—
Missouri 672,579
51,430
0.06
N.A.
725,447
$293
0.90
Montana 142,802
117,407
1.01
0.70 0
—
—
Nebraska 226,445
276,140
1.09
1.17 0
—
—
Nevada 393,036
37,925
0.10
N.A.
742,161
$686
1.92
New Hampshire
203,395
74,939
0.35
0.02
0
—
—
New Jersey
2,781,827
32,837
0.02
N.A.
1,424,570
$393
0.85
New Mexico
310,201
147,873
0.66
0.78
0
—
—
New York
3,190,697
30,006
0.01
N.A.
3,102,380
$380
0.80
North Carolina
894,546
225,781
0.18
N.A.
2,530,461
$682
2.08
North Dakota
84,499
106,422
0.96
1.01
0
—
—
Ohio 1,510,506
355,730
0.22
N.A.
2,313,387
$485
1.48
Oklahoma 401,718
413,930
0.87
0.61 0
—
—
Oregon 970,213
1,052,004
2.05
0.75
0
—
—
Pennsylvania 2,858,931
51,672 0.03 N.A.
2,960,113
$555 1.57
Puerto Rico
235,043
375,010
2.35
0.69
0
—
—
Rhode Island
245,314
25,465
0.18
N.A.
240,425
$564
1.71
South Carolina
553,252
124,496
0.24
N.A.
851,316
$497
1.66
South Dakota
49,779
35,356
0.36
0.50
0
—
—
Tennessee 748,239
353,854
0.40
0.19 0
—
—
Texas 2,556,652
741,237
0.18
N.A.
0
—
—
Utah 274,178
345,499
0.95
0.79
0
—
—
Vermont 116,026
54,804
0.68
N.A.
77,732
$272
0.99
Virgin Islands
2,163
144
0.01
N.A.
26,621
$605
2.44
CRS-5
Percentage of Loans
Revenues Past
Trust Fund Ratio
Average High
Outstanding
to Yearly Total
12 Months
Trust Fund Balance
to Total Covered
Cost Multiple
Trust Fund Loan
Loan per Covered
Wages in Covered
State
($ in thousands)
($ in thousands)
Wages
(AHCM)
($ in thousands)
Employee
Employment
Virginia 687,187
57,869
0.04
N.A.
210,751
$63
0.15
Washington 1,508,670
2,647,114 2.49 1.09
0
— —
West Virginia
222,182
111,047
0.57
0.26
0
—
—
Wisconsin 1,147,231
15,171
0.02
N.A.
1,200,719
$467
1.50
Wyoming 119,035
150,973
1.71
1.03 0
—
—
Source: Employment and Training Administration, U.S. Department of Labor, Unemployment Insurance Data Summary, 4th Quarter 2011 Report, Washington, DC, 2011,
Table: Financial Information by State for CYQ 2011.1 and individual state reports, http://www.ows.doleta.gov/unemploy/content/data_stats/datasum10/
DataSum_2011_3.pdf.
Notes: Total covered wages are based on extrapolated wages for the most recent 12 months. Trust Fund Balance does not include outstanding debt. States may have
obligated some portion of their UTF funds and may be borrowing to fund unemployment benefits even if the state’s UTF balance appears to be positive.
N.A. = Not Applicable: these states have outstanding debt that exceed their fund balances. Conversely, “—“ = no outstanding loan.
CRS-6
The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
Insolvency: Insufficient UTF Reserve Balances
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
UC benefits.
Insolvent States Required to Pay UC Benefits
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
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 6.0% with no allowable state tax rate rather than 0.6% if
the state UC program paid benefits and had no outstanding loans.
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 either from the
dedicated loan account, the FUA, within the 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 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.
Mechanism for Receiving a Loan
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 DOL,
the funds are placed into the state account in monthly increments.
Interest Charges on Loans
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. If states do not repay the interest, or pay the interest with funds from SUTA taxes,
the Department of Labor is required by federal law to refuse to certify the state program in
compliance with federal law.6 Not being in compliance with federal unemployment law would
mean that the state would not be eligible to receive administrative grants and its state employers
6 42 C.F.R. §503(c)(3) and 26 U.S.C. §3304(a)(17).
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The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
would not receive the state unemployment tax credit in the calculation of their federal
unemployment taxes.
States may borrow funds without interest from the FUA during the year. To receive these interest-
free loans, the states must meet three conditions:
1. The states must repay the loans by September 30.
2. For those loans to maintain their interest-free status, there cannot be any loans
made to that state in October, November, or December of the calendar year of
such an interest-free loan. If loans are made in the last quarter of the calendar
year, the “interest-free” loans made in the previous fiscal year will retroactively
accrue interest charges.
3. The states must meet funding goals relating to their account in the UTF,
established under regulations issued by DOL.
Until recently, there were no funding goals for state accounts within the UTF. On September 17,
2010, DOL issued a final rule to implement federal requirements conditioning a state’s receipt of
interest-free loans upon the state meeting funding goals, established under regulations issued by
the Secretary of Labor.7 This rule will begin to be phased in beginning in 2014 with the full effect
of the rule beginning in 2019.
By 2019, states must have had at least one year in the past five calendar years before the year in
which advances are taken where its AHCM was greater than or equal to 1.0. Additionally, states
must meet two criteria for maintenance of tax effort in every year from most recent year the
AHCM was at least 1.0 and the year in which advances are taken:
• The average state unemployment tax rate (the ratio of total state tax amount
collected over the total taxable wages) was at least 80% of the prior year’s rate;
and,
• The average state unemployment tax rate is at least 75% of the average benefit-
cost ratio over the preceding five calendar years, where the benefit-cost ratio for
a year is defined as the amount of benefits and interest paid in the year divided by
the total covered wages paid in the year.
Expired Provision: Temporary Waiver of Interest in 2009 Stimulus Package
The 2009 stimulus package (the American Recovery and Reinvestment Act of 2009, P.L. 111-5
Section 2004) temporarily waived interest payments and the accrual of interest on advances to
state unemployment funds by amending Section 1202(b) of the Social Security Act. The interest
payments that were due from the time of enactment of the proposal until December 31, 2010,
were deemed to have been made by the state. No interest on advances accrued during the period.
Although interest did not accrue during this period, this did not absolve states from repaying the
underlying loans. If a state does not pay back funds within the prescribed amount of time or make
7 Employment and Training Administration, Labor, “Federal-State Unemployment Compensation Program Funding
Goals for Interest-Free Loans,” 75 Federal Register 57146, September 17, 2010.
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good progress as determined by the Labor Secretary, the state tax credit will be reduced, as
described below.
Since January 1, 2011, the calculation of interest has reverted to permanent law on interest
charges as described in the previous paragraphs.
Representative Peter Welch introduced H.R. 650 on February 10, 2011. The bill would extend the
interest accrual on federal loans to states through 2012. Senator Durbin introduced S. 386, the
Unemployment Insurance Solvency Act of 2011, on February 17, 2011. Among many other items,
S. 386 would extend the suspension of interest accrual on federal loans to states through 2012.
Loan Repayment
States with outstanding loans from the FUA 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 an effective federal tax increase. Thus, a state may
have approximately 22 to 34 months to repay the loan without a federal tax increase, depending
on when it obtained the outstanding loan.
As of December 28, 2011, just over $36.3 billion in federal UTF loans to the states were
outstanding. A current list of states with outstanding loans may be found at DOL’s website,
http://www.workforcesecurity.doleta.gov/unemploy/budget.asp#tfloans.
Federal Tax Increases on Outstanding Loans Through
Credit Reductions
If the state does not repay a loan fully by November 10 of that second year, 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.8 The provisions of the 2009 stimulus package did not change the timetable for
federal tax increases resulting from a state’s outstanding loans.
In 2010, three states had a credit reduction: Michigan (0.6), Indiana (0.3), and South Carolina
(0.3). As a result, the credit reduction was applied retroactively to tax year 2010 earnings, and the
net FUTA tax during 2010 for Michigan employers was 1.4% on the first $7,000 of each
employee’s earnings. In Indiana and South Carolina the net FUTA tax during 2010 for their
employers was 1.1% on the first $7,000 of each employee’s earnings. In all other states the net
FUTA 2010 tax was 0.8%.
8 Interest payments can be delayed up to nine months (and no interest on the unpaid interest would accrue) if the most
recent 12-month average unemployment rate (from September of the previous year to August of that year) is 13.5% or
higher (42 U.S.C. §1322(b)(9)). If the state’s January through June average insured unemployment rate in the previous
year is 6.5% or higher, the state would be required to pay 25% of that current year’s interest that is due. The state the
would pay the remaining 25% in each of the next three years. The (75%) remainder of the interest payment would be
not be subject to additional interest calculations (42 U.S.C. §1322(b)(3)(C)).
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In 2011, 20 states and the Virgin Islands had a state tax credit reduction: Michigan (0.9), Indiana
(0.6), Arkansas (0.3), California (0.3), Connecticut (0.3), Florida (0.3), Georgia (0.3), Illinois
(0.3), Kentucky (0.3), Minnesota (0.3), Missouri (0.3), North Carolina (0.3), New Jersey (0.3),
Nevada (0.3), New York (0.3), Ohio (0.3), Pennsylvania (0.3), Rhode Island (0.3), Virginia (0.3),
Virgin Islands (0.3), and Wisconsin (0.3). As a result, in Michigan, a credit reduction of 0.9 was
applied retroactively to tax year 2011 earnings and the net FUTA tax during 2011 for Michigan
employers was 1.5% on the first $7,000 of each employee’s earnings. In Indiana (with a credit
reduction of 0.6) the net FUTA tax during 2011 for Indiana employers was 1.2% on the first
$7,000 of each employee’s earnings. In the other 19 states with a credit reduction, the net FUTA
tax for 2011 was 0.9%. For all states not subject to the credit reduction, the net FUTA tax was
0.6%.
The additional federal taxes attributable to the credit reduction 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.
If any January 1 passes without an outstanding balance, the year count starts over with the next
loan.
Credit Reduction
The credit reduction is initially 0.3 percentage points for the year beginning with the calendar
year in which the second consecutive January 1 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 0.6% to 0.9%—an
additional $21 for each employee; in the second year, it would increase to 1.2%—a cumulative
additional $42 for each employee.9
There are two potential additional credit reductions (in addition to 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 1s pass and (2) in the
calendar years after which the fifth or more consecutive January 1s pass. The first additional
credit reduction (referred to as the “2.7 add-on”) uses a statutory formula that takes into
consideration the average annual wages and average employment contribution rate. The second
additional credit reduction (referred to as the Benefit Cost Ratio, or BCR, add-on) replaces the 2.7
add-on and uses the five-year benefit cost rate as well as average wages in its calculation.10 Table
2 presents these reductions and the subsequent net FUTA tax faced by state employers as a result
of these unpaid loans.
9 For 2011 this calculation will be slightly different. For the first $7,000 on wages earned through June 2011, the net
FUTA tax is 0.8%; for any remaining portion of the first $7,000 of wages earned in 2011 after June, the FUTA tax is
0.6%. Any state tax credit reduction (for example, in the first year) would follow the same pattern of an increase net
FUTA tax of 0.3%.
10 The 2.7 add-on formula is: [(2.7% x 7000/ U.S. Annual Average Wage)-Average Annual State Tax Rate on Total
Wages] x State Annual Average Wage/7000. The BCR add-on formula is: Max [five-year State Average Cost/Taxable
Wages, 2.7] - Average Annual State Tax Rate on Total Wages.
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The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
Table 2. Schedule of State Tax Credit Reduction and Net Federal Unemployment
Tax Act (FUTA) Tax for July 2011 Onwards
Loan Year
Credit Reduction
Additional Reductions
Net FUTA Tax
Year 1 of outstanding loan
0.0%
None
0.6%
Year 2 (applied retroactively
0.3% None
0.9%
at end of calendar year)
Year 3
0.6%
2.7 Add-on
1.2% or more
Year 4
0.9%
2.7 Add-on
1.5% or more
Year 5
1.2%
BCR Add-on
1.8% or more
Year 6
1.5%
BCR Add-on
2.1% or more
Year 7
1.8%
BCR Add-on
2.4% or more
Year 8
2.1%
BCR Add-on
2.7% or more
Year 9
2.4%
BCR Add-on
3.0% or more
Year 10
2.7%
BCR Add-on
3.3% or more
Year 11
3.0%
BCR Add-on
3.6% or more
Year 12
3.3%
BCR Add-on
3.9% or more
Year 13
3.6%
BCR Add-on
4.2% or more
Year 14
3.9%
BCR Add-on
4.5% or more
Year 15
4.2%
BCR Add-on
4.8% or more
Year 16
4.5%
BCR Add-on
5.1% or more
Year 17
4.8%
BCR Add-on
5.4% or more
Year 18
5.1%
BCR Add-on
5.7% or more
Year 19
5.4%
BCR Add-on
6.0%
Source: U.S. Department of Labor, Employment and Training Administration.
Notes: 2.7 Add-on = [(2.7% x 7000/ U.S. Annual Average Wage) - Average Annual State Tax Rate on Total
Wages] x State Annual Average Wage/7000.
Benefit Cost Ratio (BCR) Add-on = Max [five-year State Average Cost/Taxable Wages, 2.7] - Average Annual
State Tax Rate on Total Wages.
How the Credit Reduction May be Mitigated: Avoidance or Cap
Section 272 of P.L. 97-248 allows a delinquent state 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. If the state complies with all the requirements listed
below, the potential credit reduction is avoided (there is no reduction). 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 tax year based upon a state tax credit reduction.
• 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.
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The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
• Finally, the state must also have altered its state law to increase the net solvency
of its account with the UTF.
In FY2011, South Carolina was the only state with outstanding advances to meet these
requirements. As a result, employers in South Carolina were not subject to a state tax credit
reduction in the calculation of their FUTA taxes. (Employers in South Carolina would have
generally paid more in state unemployment taxes to meet these requirements.)
Cap
Once a state begins to have a credit reduction, the state may apply to have the reductions capped
if the state meets four criteria:
• No legislative or other action in 12 months ending September 30 has been taken
to decrease state unemployment tax effort.
• No legislative or other action has been taken to decrease the state trust account’s
net solvency.
• Average state unemployment tax rate on total wages must exceed the five-year
average benefit cost rate on total wages.
• Balance of outstanding loans as of September 30 must not be greater than the
balance three years before.
Waiving the BCR Add-on
The BCR add-on may be waived if the Secretary of Labor determines that the state did not take
legislative or other actions to decrease the state trust account’s net solvency. The 2.7 add-on
would then replace the BCR add-on.
Current Status of Outstanding Loans, Accrued Interest Owed, and
State Tax Credit Reductions
Table 3 lists all states that have outstanding loans. The table also includes information on accrued
interest payments for FY2012. The third column provides information on whether a state was
subject to a credit reduction for 2011. The last column provides the net FUTA tax faced by
employers in each state that had an outstanding loan. This table was created on December 30,
2011, and may change based upon state actions in the following weeks. If a state is not listed on
this table, the state did not have outstanding loans on December 28, 2011, did not have
outstanding interest accruals, and was not subject to a state tax credit reduction on the calculation
of the net FUTA tax.
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The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
Table 3. Outstanding Loan Balances, Interest Owed,
and Potential State Tax Credit Reduction
Outstanding Balance
Accrued FY2012
2011 State Tax
2011 Net
State
January 9, 2012
Interest
Credit Reduction
FUTA Taxa
Alabama $41,171,959.18
$301,264.18
N.A.b 0.6
Arizona 375,494,654.70
3,762,253.61
N.A. 0.6
Arkansas 330,853,382.53
3,647,631.74
0.3 0.9
California 9,989,135,462.02
103,208,378.26 0.3
0.9
Colorado 353,527,081.05
4,107,288.26c N.A.
0.6
Connecticut 709,875,582.98 8,811,655.92 0.3
0.9
Delaware 62,523,367.88
689,315.07
N.A. 0.6
Florida 1,792,100,000.00
18,956,417.80
0.3 0.9
Georgia 721,080,472.00
7,949,853.80
0.3 0.9
Illinois 2,185,410,158.28
22,095,629.00
0.3 0.9
Indiana 1,994,007,775.40
21,164,706.91
0.6 1.2
Kansas 70,976,936.12
541,659.71
N.A.
0.6
Kentucky 948,700,000.00
6,048,353.63
0.3 0.9
Michigan 26,124,483.61
31,634,097.32
0.9 1.5
Minnesota 202,787,883.60
1,909,248.21
0.3
0.9
Missouri 739,476,912.89
8,002,565.35
0.3 0.9
Nevada 780,799,054.49
30,711,423.52c 0.3
0.9
New Jersey
1,513,819,882.72
15,288,754.70
0.3
0.9
New York
3,516,408,575.89
35,264,826.86
0.3
0.9
North Carolina
2,702,990,739.25
16,302,399.67
0.3
0.9
Ohio 2,095,695,131.00
10,529,287.30
0.3 0.9
Pennsylvania 3,347,251,595.03 34,396,333.98 0.3
0.9
Rhode Island
237,983,447.28
2,400,748.62
0.3
0.9
South Carolina
782,456,436.93
8,920,201.67
N.A.
0.6
Vermont 77,731,860.63
856,987.47
N.A. 0.6
Virginia 288,253,000.00
2,687,021.89
0.3 0.9
Virgin Islands
30,799,690.81
317,112.57
0.3
0.9
Wisconsin 1,268,412,281.85
13,092,878.76 0.3
0.9
Totals $37,185,847,808.12
$413,598,295.78c 21
—
Source: Congressional Research Service table prepared using data from the U.S. Bureau of Public Debt,
http://www.treasurydirect.gov/govt/reports/tfmp/tfmp_advactivitiessched.htm, and the U.S. Department of Labor
http://ows.doleta.gov/unemploy/content/reduced_credit_states_2011.xls.
a. These net rates uses a net FUTA rate of 0.6% that was effective beginning in July 2011 for states that did
not have outstanding loans on two consecutive January 1s. For earnings before July 2011, the underlying net
FUTA rate was 0.8%.
b. N.A. = not applicable because the state has not had outstanding balance on two consecutive January 1s.
c. Includes differed interest from FY2011.
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The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States
Author Contact Information
Julie M. Whittaker
Specialist in Income Security
jwhittaker@crs.loc.gov, 7-2587
Congressional Research Service
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