[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)] [Program Descriptions] [Section 4. Unemployment Compensation] [From the U.S. Government Printing Office, www.gpo.gov] SECTION 4 - UNEMPLOYMENT COMPENSATION CONTENTS Overview Benefits Coverage Number of Covered Workers Eligibility Amount and Duration of Weekly Benefits Extended Benefits Benefit Exhaustion Supplemental Benefits Hypothetical Weekly Benefit Amounts for Various Workers in the Regular State Programs The Unemployment Trust Fund Financial Condition of the Unemployment Trust Fund The Federal Unemployment Tax State Unemployment Taxes Administrative Financing and Allocation Legislative History References OVERVIEW The Social Security Act of 1935 (Public Law 74-271) created the Federal-State Unemployment Compensation (UC) Program. The program has two main objectives: (1) to provide temporary and partial wage replacement to involuntarily unemployed workers who were recently employed; and (2) to help stabilize the economy during recessions. The U.S. Department of Labor oversees the system, but each State administers its own program. Because Federal law defines the District of Columbia, Puerto Rico, and the Virgin Islands as States for the purposes of UC, there are 53 State programs. The Federal Unemployment Tax Act of 1939 (Public Law 76-379) and titles III, IX, and XII of the Social Security Act form the framework of the system. The Federal Unemployment Tax Act (FUTA) imposes a 6.2 percent gross tax rate on the first $7,000 paid annually by covered 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 percent tax rate, making the minimum net Federal unemployment tax rate 0.8 percent. Since all States have approved programs, 0.8 percent is the effective Federal tax rate. This Federal revenue finances administration of the system, half of the Federal-State Extended Benefits (EB) Program, and a Federal account for State loans. The individual States finance their own programs, as well as their half of the Federal-State Extended Benefits Program. In 1976, Congress passed a surtax of 0.2 percent of taxable wages to be added to the permanent FUTA tax rate (Public Law 94-566). Thus, the current effective 0.8 percent FUTA tax rate has two components: a permanent tax rate of 0.6 percent, and a surtax rate of 0.2 percent. The surtax has been extended five times, most recently by the Taxpayer Relief Act of 1997 (Public Law 105-34) through December 31, 2007. FUTA generally determines covered employment. FUTA also imposes certain requirements on the State programs, but the States generally determine individual qualification requirements, disqualification provisions, eligibility, weekly benefit amounts, potential weeks of benefits, and the State tax structure used to finance all of the regular State benefits and half of the extended benefits. The Social Security Act provides for the administrative framework: title III authorizes Federal grants to the States for administration of the State UC laws; title IX authorizes the various components of the Federal Unemployment Trust Fund; title XII authorizes advances or loans to insolvent State UC Programs. Table 4-1 provides a statistical overview of the UC Program. BENEFITS COVERAGE In order to qualify for benefits, an unemployed person usually must have worked recently for a covered employer for a specified period of time and earned a certain amount of wages. About 128 million individuals were covered by all UC Programs in 2001, representing 99.7 percent of all wage and salary workers and 89 percent of the civilian labor force. FUTA covers certain employers that State laws also must cover for employers in the States to qualify for the 5.4 percent Federal credit. Since employers in the States would lose this credit and their employees would not be covered if the States did not have this coverage, all States cover the required groups: (1) except for nonprofit organizations, State-local governments, certain agricultural labor, and certain domestic service, FUTA covers employers who paid wages of at least $1,500 during any calendar quarter or who employed at least one worker in at least 1 day of each of 20 weeks in the current or prior year; (2) FUTA covers agricultural labor for employers who paid cash wages of at least $20,000 for agricultural labor in any calendar quarter or who employed 10 or more workers in at least 1 day in each of 20 different weeks in the current or prior year; and (3) FUTA covers domestic service employers who paid cash wages of $1,000 or more for domestic service during any calendar quarter in the current or prior year. FUTA requires coverage of nonprofit organization employers of at least four workers for 1 day in each of 20 different weeks in the current or prior year and State-local governments without regard to the number of employees. Nonprofit and TABLE 4-1--UNEMPLOYMENT COMPENSATION PROGRAM DATA, FISCAL YEARS 1990-2003 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] State-local government organizations are not required to pay Federal unemployment taxes; they may choose instead to reimburse the system for benefits paid to their laid-off employees. States may cover certain employment not covered by FUTA, but most States have chosen not to expand FUTA coverage significantly. The following employment is therefore generally not covered: (1) self- employment; (2) certain agricultural labor and domestic service; (3) service for relatives; (4) service of patients in hospitals; (5) certain student interns; (6) certain alien farmworkers; (7) certain seasonal camp workers; and (8) railroad workers (who have their own unemployment program). NUMBER OF COVERED WORKERS Although the UC system covers 99.7 percent of all wage and salary workers, Table 4-2 shows that on average only 44 percent of unemployed persons were receiving UC benefits in 2002. This compares with a peak of 81 percent of the unemployed receiving UC benefits in April 1975 and a low point of 26 percent in June 1968 and in October 1987. Despite high unemployment during the early 1980s, there was a downward trend in the proportion of unemployed persons receiving regular State benefits until the mid-1980s. The proportion receiving UC rose sharply in December 1991 due to the temporary Emergency Unemployment Compensation (EUC) Program. In May 1988, Mathematica Policy Research, Inc., under contract to the U.S. Department of Labor, released a study on the decline in the proportion of the unemployed receiving benefits during the 1980s. This analysis did not find a single predominant cause for the decline but instead found statistical evidence that several factors contributed to the decline (the figures in parentheses show the share of the decline attributed to each factor): 1. The decline in the proportion of the unemployed from manufacturing industries (4-18 percent); 2. Geographic shifts in composition of the unemployed among regions of the country (16 percent); 3. Changes in State program characteristics (22-39 percent): ? Increase in the base period earnings requirements (8-15 percent); ? Increase in income denials for UC receipt (10 percent); and ? Tightening up other non-monetary eligibility requirements (3-11 percent); 4. Changes in Federal policy such as partial taxation of UC benefits (11-16 percent); and 5. Changes in unemployment as measured by the Current Population Survey (CPS) (1-12 percent). The group of unemployed most likely to be insured are job losers. Chart 4-1 shows the number of unemployment compensation claimants measured as a percentage of the number of job losers. This coverage ratio remained fairly stable from 1968 through 1979. Over that 12-year span, there were from 90 to 110 recipients of regular State UC for every 100 job losers. This ratio fluctuated somewhat over the business cycle, but it was otherwise quite stable. TABLE 4-2--INSURED UNEMPLOYMENT AS A PERCENT OF TOTAL UNEMPLOYMENT, BY MONTH, 1967-2002 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] CHART 4-1--RATIO OF INSURED UNEMPLOYMENT TO JOB LOSERS, 1967-2002 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] Beginning in 1980, the ratio of UC recipients to job losers fell sharply, reaching an all-time low in 1983 when there were fewer than 60 regular UC recipients for every 100 job losers. After 1983, the coverage ratio increased somewhat, so that there were about 75 regular UC claimants for every 100 job losers in 1990. However, the ratio declined again with the 1990-91 recession before rising throughout the remainder of the 1990s. The current ratio is higher than it has been since the late 1970s. ELIGIBILITY States have developed diverse and complex methods for determining UC eligibility. In general there are three major factors used by States: (1) the amount of recent employment and earnings; (2) demonstrated ability and willingness to seek and accept suitable employment; and (3) certain disqualifications related to a claimant's most recent job separation or job offer refusal. Monetary Qualifications Table 4-3 shows the State monetary qualification requirements in the base year for the minimum and maximum weekly benefit amounts, and for the maximum total potential benefits. The base year is a recent 1-year period that most States define as the first 4 of the last 5 completed calendar quarters before the unemployed person claims benefits. On average, workers must have worked in two quarters and earned $1,770 to qualify for a minimum monthly benefit. Qualifying annual wages for the minimum weekly benefit amount vary from $130 in Hawaii to $3,586 in North Carolina. For the maximum weekly benefit amount, the range is $5,320 in Puerto Rico to $30,888 in Colorado. The range of qualifying wages for the maximum total potential benefit, which is the product of the maximum weekly benefit amount and the maximum potential weeks of benefits, is from $5,320 in Puerto Rico to $44,408 in Minnesota. TABLE 4-3--MONETARY QUALIFICATION REQUIREMENTS FOR MINIMUM AND MAXIMUM WEEKLY BENEFIT AMOUNTS AND MAXIMUM TOTAL POTENTIAL BENEFITS, 2003 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] In February 1996, a Federal court in Pennington v. Doherty overturned the base year definition in use by most States. The court agreed with the plaintiff's contention that Illinois could have used an alternative base period (the last four completed quarters) and that this alternative would better carry out Federal law, which requires States to use administrative methods that ensure full payment of UC "when due." This alternative method would impose greater costs on the States affected. The Balanced Budget Act of 1997 (Public Law 105-33) revised the Federal law that was central to the court's decision so that States have full authority to set base periods for determining eligibility. In 2003, 24 States used an alternative or extended base period to determine benefit eligibility. From 1999 to 2003, 12 States increased the required earnings in the base year to qualify for the minimum weekly benefit amount, and 7 States decreased it. Thirty States increased, 16 remained the same, and 7 decreased the qualification requirement for the maximum weekly benefit amount. Forty-two States increased and one decreased their qualification requirements for maximum potential benefits. Ability to Work and Availability for Work All State laws provide that a claimant must be both able to work and available for work. A claimant must meet these conditions continually to receive benefits. Only minor variations exist in State laws setting forth the requirements concerning "ability to work." A few States specify that a claimant must be mentally and physically able to work. "Available for work" is translated to mean being ready, willing, and able to work. In addition to registration for work at a local employment office, most State laws require that a claimant seek work actively or make a reasonable effort to obtain work. Generally, a person may not refuse an offer of, or referral to, "suitable work" without good cause. Most State laws list certain criteria by which the "suitability" of a work offer is to be tested. The usual criteria include the degree of risk to a claimant's health, safety, and morals; the physical fitness and prior training, experience, and earnings of the person; the length of unemployment and prospects for securing local work in a customary occupation; and the distance of the available work from the claimant's residence. Generally, as the length of unemployment increases, the claimant is required to accept a wider range of jobs. In addition, Federal law requires States to deny benefits provided under the Extended Benefits Program (see below) to any individual who fails to accept work that is offered in writing or is listed with the State Employment Service, or who fails to apply for any work to which he is referred by the State agency, if the work: (1) is within the person's capabilities; (2) pays wages equal to the highest of the Federal or any State or local minimum wage; (3) pays a gross weekly wage that exceeds the person's average weekly unemployment compensation benefits plus any supplemental unemployment compensation (usually private) payable to the individual; and (4) is consistent with the State definition of "suitable" work in other respects. Public Law 102-318 suspended these provisions from March 7, 1993, until January 1, 1995. States must refer extended benefits claimants to any job meeting these requirements. If the State, based on information provided by the individual, determines that the individual's prospects for obtaining work in their customary occupation within a reasonably short period are good, the determination of whether any work is "suitable work" is made in accordance with State law rather than the criteria outlined above. There are certain circumstances under which Federal law provides that State and extended benefits may not be denied. A State may not deny benefits to an otherwise eligible individual for refusing to accept new work under any of the following conditions: (1) if the position offered is vacant directly due to a strike, lockout, or other labor dispute; (2) if the wages, hours, or other conditions of the work offered are substantially less favorable to the individual than those prevailing for similar work in the locality; or (3) if, as a condition of being employed, the individual would be required to join a union or to resign from or refrain from joining any bona fide labor organization. Benefits may not be denied solely on the grounds of pregnancy. The State is prohibited from canceling wage credits or totally denying benefits except in cases of misconduct, fraud, or receipt of disqualifying income. There are also certain conditions under which Federal law requires that benefits be denied. For example, benefits must be denied to professional and administrative employees of educational institutions during summer (and other vacation periods) if they have a reasonable assurance of reemployment; to professional athletes between sport seasons; and to aliens not permitted to work in the United States. Disqualifications The major causes for disqualification from benefits are not being able to work or available for work, voluntary separation from work without good cause, discharge for misconduct connected with the work, refusal of suitable work without good cause, and unemployment resulting from a labor dispute. Disqualification for one of these reasons may result in a postponement of benefits for some prescribed period, a cancellation of benefit rights, or a reduction of benefits otherwise payable. Of the 20.5 million "monetarily eligible" initial UC claims in 2002, 24.1 percent were disqualified. This figure subdivides into 4.0 percent not being able to work or available for work, 6.4 percent voluntarily leaving a job without good cause, 4.8 percent being fired for misconduct on the job, 0.2 percent refusing suitable work, and 8.7 percent committing other disqualifying acts. The total disqualification rate ranged from a low of 12.0 percent in Tennessee to a high of 102.0 percent in Nebraska, with Colorado the next highest at 94.1 percent. (Note - that a claimant can be disqualified for any week claimed, so it is possible for a claimant to be disqualified more times than the total number of that claimant's initial claims in the benefit year.) Federal law requires that benefits provided under the Extended Benefits Program be denied to an individual for the entire spell of his unemployment if he was disqualified from receiving State benefits because of voluntarily leaving employment, discharge for misconduct, or refusal of suitable work. These benefits will be denied even if the disqualification were subsequently lifted with respect to the State benefits prior to reemployment. The person could receive extended benefits, however, if the disqualification were lifted because he became reemployed and met the work or wage requirement of State law. Public Law 102-318 suspended the restrictions on extended benefits under Federal law, however, from March 7, 1993, until January 1, 1995. The Advisory Council on Unemployment Compensation was required to study these provisions, and it recommended that the Federal rules be eliminated. However, Congress has taken no action on this recommendation. U.S. Department of Labor Proposal to Use Unemployment Compensation Benefits for Family Leave On December 3, 1999, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking to create, by regulation, a voluntary experimental program that would give States the option of extending UC eligibility to parents who take time off from employment after the birth or placement for adoption of a child under the Family Medical Leave Act of 1993 (Public Law 103-3). The program is referred to as the birth and adoption UC experiment, also known colloquially as "baby UI." The proposal immediately drew criticism from opponents who argued that the proposal creates a benefit that the Congress did not intend when it created the Family and Medical Leave Act and such benefits would be contrary to the purpose of UC benefits as stated in the law. Some opponents argued that the proposal could not be implemented without a new law being enacted by the Congress. DOL disagreed with this assessment and cited the fact that much of the basic structure of the UC system, including the requirement that individuals be able and available for work, was established by regulatory guidance, rather than statute. DOL also suggested the change was needed to allow the UC system to keep pace with the changing nature of the work force, particularly the dramatic increase in the number of working mothers. The final rule was published in the Federal Register on June 13, 2000. On December 4, 2002, the Bush Administration reviewed the rule. As a result of the review, DOL concluded that the BAA-UC experiment was "poor policy and a misapplication of federal UC law relating to" the requirements that beneficiaries be able and available for work. Since no State had enacted a BAA-UC program, DOL determined that terminating the experiment would not result in any State withdrawing benefits it had previously granted. According to DOL, the only effect of the removal of the regulations would be that would reduce State flexibility since a State could no longer elect to use its unemployment fund to pay BAA-UC. A final decision by DOL repealing this rule was issued on October 9, 2003, and goes into effect November 10, 2003. Ex-Service Members The Emergency Unemployment Compensation Act of 1991 (Public Law 102-164) provided that ex-members of the military be treated the same as other unemployed workers with respect to the waiting period for benefits and benefit duration. Before this 1991 action, Congress had placed restrictions on benefits for ex-service members, so that the maximum number of weeks of benefits an ex-service member could receive based on employment in the military was 13 (as compared with 26 weeks under the regular UC Program for civilian workers). In addition to a number of restrictive eligibility requirements, ex-service members had to wait 4 weeks from the date of their separation from the service before they could receive benefits. Pension Offset The Unemployment Compensation Amendments of 1976 (Public Law 94-566) required all States to reduce an individual's UC by the amount of any government or private pension or retirement pay received by the individual. Public Law 96-364, enacted in 1980, modified this offset requirement. Under the modified provision, States are required to make the offset only in those cases in which the work-related pension was maintained or contributed to by a "base period" or "chargeable" employer. Entitlement to and the amount and duration of unemployment benefits are based on work performed during this State-specified base period. A "chargeable" employer is one whose account will be charged for UC received by the individual. However, the offset must be applied for Social Security benefits without regard to whether base period employment contributed to the Social Security entitlement. States are allowed to reduce the amount of these offsets by amounts consistent with any contributions the employee made toward the pension. This policy allows States to limit the offset to one-half of the amount of a Social Security benefit received by an individual who qualifies for unemployment benefits. Taxation of Unemployment Compensation Benefits The Tax Reform Act of 1986 (Public Law 99-514) made all UC taxable after December 31, 1986. The Revenue Act of 1978 first made a portion of UC benefits taxable beginning January 1, 1979. Table 4-4 illustrates the projected effect of taxing all UC benefits for the 2003 tax law using 2000 population and incomes. This table understates the impact of taxation because this analysis uses data collected from a sample of households for the Current Population Survey (CPS), which is known to have a problem with respondents underestimating their annual income from various sources. In particular, total UC benefits reported in the CPS are equal to about two-thirds of benefits actually paid out. Because of this underreporting of UC benefits in the CPS and, consequently, underestimates of benefits paid in 2003, taxes collected on benefits probably will be about twice as high as the $2.0 billion shown in Table 4-4. AMOUNT AND DURATION OF WEEKLY BENEFITS In general, the States set weekly benefit amounts as a fraction of the individual's average weekly wage up to some State- determined maximum. The total maximum duration available nationwide under permanent law is 39 weeks. The regular State programs usually provide up to 26 weeks. The permanent Federal-State Extended Benefits Program provides up to 13 additional weeks in States where unemployment rates are relatively high. An additional seven weeks is available under a new optional trigger enacted in 1992, but only nine States have adopted this trigger as of July 31, 1997. The Temporary Emergency Unemployment Compensation (EUC) Program, which operated from November 1991 through April 1994, initially provided 26 to 33 weeks of Federal extended benefits and then provided 7 to 13 additional weeks of benefits during its final months of operation. A State offering this temporary program could not have offered the extended benefits simultaneously, however. TABLE 4-4--ESTIMATED EFFECT OF TAXING UNEMPLOYMENT COMPENSATION BENEFITS BY INCOME CLASS, 2003 LAW (2000 POPULATION AND INCOMES) [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Temporary Extended Unemployment Compensation Act of 2002 (TEUC) was signed into law March 9, 2003, as a part of P.L. 107-147. TEUC provides up to 13 weeks of additional federally funded UC benefits to individuals in all states who exhaust their regular UC benefits. TEUC also provides a second tier of up to an additional 13 weeks of benefits to individuals who exhaust their benefits in a high-unemployment State (TEUC-X). The TEUC program has been extended through March 31, 2004, by P.L. 108-1 and P.L. 108-26, with a phasing-out of benefits after December 31, 2003. On April 16, 2003, P.L. 108-11 was signed into law, creating a parallel TEUC program called TEUC-A, which provides up to 39 weeks of benefits for displaced airline workers, and provides a second tier (TEUC-AX) of benefits to individuals exhausting their TEUC-A benefits in a high-unemployment State. The State-determined weekly benefit amounts generally replace between 50 and 70 percent of the individual's average weekly pretax wage up to some State-determined maximum. The average weekly wage is often calculated only from the calendar quarter in the base year in which the claimant's wages were highest. Individual wage replacement rates tend to vary inversely with the claimant's average weekly pretax wage, with high wage earners receiving lower wage replacement rates. Thus, the national average weekly benefit amount as a percent of the average weekly covered wage was only 37.5 percent in the quarter ending December 31, 2002. Table 4-5 shows the minimum and maximum weekly benefit amounts and potential duration for each State program. In 2002, the national average weekly benefit amount was $257 and the average duration was 17 weeks, making the average total benefits $4,369. The minimum weekly benefit amounts for 2003 vary from $1 in Vermont to $107 in Washington. The maximum weekly benefit amounts range from $133 in Puerto Rico to $760 in Massachusetts. Most States vary the duration of benefits with the amount of earnings the claimant has in the base year. Nine States provide the same duration for all claimants. The minimum durations range from 3 weeks in Oregon to 26 weeks in 9 States. The maximum duration is 26 weeks in 51 States (including the District of Columbia, Puerto Rico, and the Virgin Islands). Two States have longer maximum durations. Massachusetts and Washington both provide up to 30 weeks. TABLE 4-5--AMOUNT AND DURATION OF WEEKLY BENEFITS FOR TOTAL UNEMPLOYMENT UNDER THE REGULAR STATE PROGRAMS [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] From 2000 to 2003, 23 States increased and 2 decreased their minimum weekly benefit amounts. Forty-seven States raised their maximum weekly benefit amounts, while no State decreased them. Seven States lowered their minimum potential durations, and 3 States raised their minimum duration. EXTENDED BENEFITS The Federal-State Extended Benefits Program is available in every State and provides one-half of a claimant's total State benefits up to 13 weeks in States with an activated program, for a combined maximum of 39 weeks of regular and extended benefits. Weekly benefit amounts are identical to the regular State UC benefits for each claimant, and Federal funds pay half the cost. The program activates in a State under one of two conditions: (1) if the State's 13-week average insured unemployment rate (IUR) in the most recent 13 weeks is at least 5.0 percent and at least 120 percent of the average of its 13-week IURs in the last 2 years for the same 13-week calendar period; or (2) at State option, if its current 13-week average IUR is at least 6.0 percent. All but 12 State programs have adopted the second, optional condition. The 13-week average IUR is calculated from the ratio of the average number of insured unemployed persons under the regular State programs in the last 13 weeks to the average covered employment in the first four of the last five completed calendar quarters. In addition to the two automatic triggers, States have the option of electing an alternative trigger authorized by the Unemployment Compensation Amendments of 1992 (Public Law 102-318). This trigger is based on a 3-month average total unemployment rate (TUR) using seasonally adjusted data. If this TUR average exceeds 6.5 percent and is at least 110 percent of the same measure in either of the prior 2 years, a State can offer 13 weeks of EB. If the average TUR exceeds 8 percent and meets the same 110-percent test, 20 weeks of EB can be offered. Analysis of historical data shows that this TUR trigger would have made EB more widely available in the past than did the IUR trigger. As of July 5, 2003, the TUR trigger had been authorized by nine States (Alaska, Connecticut, Kansas, New Hampshire, North Carolina, Oregon, Rhode Island, Vermont, and Washington). As of July 2003, EB is active in three States. BENEFIT EXHAUSTION Due to the limited duration of UC benefits, some individuals exhaust their benefits. For the regular State programs, 4.4 million individuals exhausted their benefits during 12 months ending June 30, 2003, or 43.6 percent of claimants who began receiving UC during the 12 months ending December 2002. A study of exhaustees was completed in September 1990 by Corson and Dynarski, under contract to the U.S. Department of Labor. The purpose of this study was to examine the characteristics and behavior of exhaustees and nonexhaustees and to explore the implications of this information. The samples were chosen from individuals who began collecting benefits during the period October 1987 through September 1988. Overall, 1,920 exhaustees and 1,009 nonexhaustees were interviewed. The study's authors reached three general conclusions: 1. A large proportion of UC recipients expected to be recalled to their previous jobs. The unemployment spells of these job-attached workers were considerably shorter than those of workers who suffered permanent job losses, and few job-attached workers exhausted their UC benefits. Workers who were not job-attached-in particular, workers who were dislocated from their previous jobs or who had low skill levels-were likely to experience long unemployment spells, and a significant proportion of these workers exhausted their UC benefits. 2. Most workers who exhausted their benefits were still unemployed more than a month after receiving their final payment, and a majority were still unemployed 2 months after receiving their final payment. Moreover, workers who found jobs after exhausting their UC benefits were generally receiving lower wages than on their prior jobs. 3. State exhaustion rate trigger mechanisms would not be clearly superior to the State IUR triggers in targeting extended benefits to areas with high cyclical unemployment. Substate trigger mechanisms for extended benefits would do a poor job of targeting extended benefits to local areas with high structural unemployment. SUPPLEMENTAL BENEFITS The Extended Benefits (EB) Program was enacted to provide unemployment compensation benefits to workers who had exhausted their regular benefits during periods of high unemployment. Before enactment of a permanent EB Program, Congress authorized two temporary programs, during 1958 and 1959 and again in 1961 and 1962. The Federal-State Extended Unemployment Compensation Act of 1970 authorized a permanent mechanism for providing extended benefits. Extended benefits rules were amended by the Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35) and the Unemployment Compensation Amendments of 1992 (Public Law 102-318). During the 1970s and 1980s, temporary programs provided supplemental benefits to UC recipients who had exhausted both their regular and extended benefits during three periods of high unemployment: (1) the Emergency Unemployment Compensation Act of 1971, which provided benefits until March 31, 1973; (2) the Federal Supplemental Benefits Program, first authorized by the Emergency Unemployment Compensation Act of 1974, and subsequently extended in 1975 (twice) and in 1977; and (3) the Federal Supplemental Compensation Program, created by the Tax Equity and Fiscal Responsibility Act of 1982, which was subsequently extended and modified six times and finally expired on June 30, 1985. In the 1990s, Congress passed the Emergency Unemployment Compensation Act of 1991 (Public Law 102-164) authorizing a temporary Emergency Unemployment Compensation (EUC) Program. The EUC Program, which was extended four times, effectively superseded the EB Program and entitled individuals whose regular unemployment compensation benefits had run out to additional weeks of assistance. At its peak in 1992, the EUC Program provided benefits for 26 or 33 weeks, depending on the level of unemployment in the respective States. The EUC Program ended on April 30, 1994. Benefits under the EUC Program were originally financed from spending authority in the Extended Unemployment Compensation Account (EUCA) of the Unemployment Trust Fund. However, depletion of EUCA led Congress to fund EUC from general revenues from July 1992 to October 1993. States that qualified for extended benefits while EUC was in effect could elect to trigger off extended benefits. This reduced the State funding burden because 50 percent of extended benefit costs are financed from State UC accounts while EUC was entirely federally funded. Table 4-6 shows several estimates of the cost of the EUC Program at different points in time. A comparison of cost estimates at the time of enactment with later reviews shows that actual costs far exceeded anticipated costs due to three factors: exhaustions from the regular State program were unexpectedly near record levels; claimants were staying on EUC longer than expected; and large numbers of claimants eligible for both regular benefits and EUC were choosing EUC. As a result, for the periods fiscal year 1992 and fiscal year 1993 alone, the Office of Management and Budget (OMB) cost estimates rose from $11.4 billion on the dates of enactment to $12.8 billion in July 1992, $18.2 billion in January 1993, $23.4 billion in April 1993, $23.8 billion in July 1993, and finally $24.3 billion in January 1994-113 percent higher than originally estimated. Including fiscal year 1994 costs, the Clinton administration's budget released in July 1994 estimated the final 3-year cost of EUC benefits to be $28.5 billion, $13.7 billion more than OMB and $9.9 billion more than CBO had estimated on the date of enactment. Most recently, Congress enacted the Temporary Extended Unemployment Compensation Act of 2002 (TEUC), signed into law March 9, 2002, as part of P.L. 107-147. TEUC provides up to 13 weeks of additional federally funded benefits to individuals in all States who exhaust their regular UC benefits. TEUC also provides a second tier of 13 weeks of benefits to individuals who exhaust their benefits in a high-unemployment state (TEUC-X). On January 8, 2003, Congress passed S. 23 (P.L. 108-1) extending the TEUC program through August 30, 2003, and phasing-out benefits after May 31, 2003. On April 16, 2003, P.L. 108-11 was signed into law, creating a parallel TEUC program called TEUC-A. TEUC-A provides up to 39 weeks of benefits for displaced airline and related workers, and provides a second tier (TEUC-AX) of benefits to individuals exhausting their TEUC-A benefits in a high- unemployment state. The Congress passed H.R. 2185, extending the TEUC program through March 31, 2004, and the President signed the bill into law on May 28, 2003 (P.L. 108-26). TABLE 4-6--CHANGES IN EMERGENCY UNEMPLOYMENT COMPENSATION OUTLAY ESTIMATES, FISCAL YEARS, 1992-1994 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] HYPOTHETICAL WEEKLY BENEFIT AMOUNTS FOR VARIOUS WORKERS IN THE REGULAR STATE PROGRAMS Table 4-7 illustrates benefit amounts for various full-year workers in regular State programs for January 2003. These benefit amounts are set by the legislatures of the respective States. Column A of the table is for a full-time worker earning the minimum wage of $5.15 per hour; column B is for a worker earning $6 per hour; column C shows benefit amounts for a worker earning $9 per hour; and column D shows a part-time worker earning the minimum wage and working 20 hours per week. All four cases are assumed to have a nonworking spouse and column C assumes the worker has two children. The weekly benefit amount for the full-time minimum wage worker (column A) varies from $82 in North Dakota to $140 in Kentucky. The maximum amount a worker earning $9 per hour (column C) can receive varies considerably, from $133 per week in Puerto Rico to $256 in Alaska. TABLE 4-7--WEEKLY STATE BENEFIT AMOUNTS FOR VARIOUS FULL-YEAR WORKERS, JANUARY 2003 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] THE UNEMPLOYMENT TRUST FUND The Unemployment Trust Fund has 59 accounts. The accounts consist of 53 State UC benefit accounts, the Railroad Unemployment Insurance Account, the Railroad Administration Account, and four Federal accounts. (The railroad accounts are discussed in section 5 of this volume.) The Federal unified budget accounts for all Federal-State UC outlays and taxes in the Federal Unemployment Trust Fund. The four Federal accounts in the trust fund are: (1) the Employment Security Administration Account (ESAA), which funds administration; (2) the Extended Unemployment Compensation Account (EUCA), which funds the Federal half of the Federal-State Extended Benefits Program; (3) the Federal Unemployment Account (FUA), which funds loans to insolvent State UC Programs; and (4) the Federal Employees' Compensation Account (FECA), which funds benefits for Federal civilian and military personnel authorized under 5 U.S.C. 85. The 0.8 percent Federal share of the unemployment tax finances the ESAA, EUCA, and FUA, but general revenues finance the FECA. Present law authorizes interest-bearing loans to ESAA, EUCA, and FUA from the general fund. The three accounts may receive noninterest-bearing advances from one another to avoid insufficiencies. FINANCIAL CONDITION OF THE UNEMPLOYMENT TRUST FUND Federal Accounts At the end of fiscal year 2003, the Employment Security Administration Account (ESAA) exceeded its fiscal year 2003 ceiling of $1.6 billion. The Extended Unemployment Compensation Account (EUCA) balance was below its ceiling of $19.2 billion by $11.0 billion at the end of fiscal year 2003; the FUA balance was slightly below its $19.2 billion ceiling by $7.8 billion. Under the administration's fiscal year 2004 budget assumptions, the EUCA balance will not exceed its ceiling until fiscal year 2007, then begin to have end-of-year balances which slightly exceed its ceiling. The Balanced Budget Act (BBA) of 1997 (P.L. 105-33) raised the ceiling on FUA assets from 0.25 to 0.5 percent of wages in covered employment for fiscal year 2002 and subsequent years. Like the capping of annual distributions at $100 million in the same law, that change was designed to limit Reed Act transfers to State accounts in coming years. The reason Congress took these actions to increase ceilings and limit outflows from the Federal funds is that excess funds in the Unemployment Trust Fund are included in the unified Federal budget and offset deficits or increase surpluses. However, in an effort to provide States additional resources to assist unemployed workers, P.L. 107-147 included a record $8 billion Reed Act transfer of funds from the Federal trust fund accounts into the State accounts. In March 2003 the General Accounting Office reported that this flexible funding source prevented State unemployment taxes from rising in 30 States. The FUA balance is not projected to exceed its statutorily set ceiling through fiscal year 2008. State Accounts The State accounts had recovered substantially from the financial problems that began in the 1970s and continued through the early 1980s, but the 1990-91 and 2001 recessions reversed that trend. Table 4-8 shows that the State accounts at the end of 2002 held $36.0 billion, which represents a modest decrease from the balances of $38.6 billion at the end of 1996. The balances in the State accounts are well below the balances in the early 1970s (after adjusting for inflation) before serious financial problems began for most States. State reserve ratios (trust fund balances divided by total wages paid in the respective States during the year) show that a number of State accounts are at risk of financial problems in major recessions. The third column from the right margin of Table 4-8 shows that these State ratios in 2002 are only 32 percent of their levels in 1970. The second-to-last column of Table 4-8 shows for each State the 2002 average "high-cost multiple, the ratio of the State's reserve ratio to its highest cost rate. The highest cost rate is determined by choosing the highest ratio of costs to total covered wages paid in a prior year. States with average high-cost multiples of at least 1.0 have reserves that could withstand a recession as bad as the worst one they have experienced previously. States with average high-cost multiples below 1.0 may face greater risk of insolvency during recessions. Thirty-one States had average high-cost multiples below 1.0; 26 had average high-cost multiples below 0.8; and 11 had average high-cost multiples at or below 0.5. Based on this measure, States with the highest risk factor were Alabama, Arkansas, Illinois, Massachusetts, Minnesota, Missouri, New York, North Carolina, North Dakota, Oregon and Texas. Table 4-9 summarizes the beginning balances in the various Unemployment Trust Fund accounts for selected fiscal years. At the start of fiscal year 2003,the 4 Federal accounts and the 53 State benefit accounts had a total balance of $69.3 billion. In real terms this represents a level 20 percent higher than that of 1971. This increase in real dollars does not allow for the erosion implied by the large increase in the labor force over this time period. Overall, a better measure of readiness for a recession is the ratio of the 2002:1970 reserve ratios in Table 4-8, which shows that aggregate reserves in 2002 relative to wages were a significantly less than one third the 1970 level. Whether the State trust fund balances are adequate is ultimately a matter about which each State must decide. 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 level of benefits they determine to be appropriate; in budget terms, unemployment benefits are an entitlement (although the program is financed by a dedicated tax imposed on employers and employees and not by general revenues). Thus, if a recession hits a given State and results in a depletion of that State's trust account, the State is legally required to continue paying benefits. To do so, the State will be forced to borrow money from the Federal Unemployment Account. As a result, not only will the State be required to continue paying benefits, it will also be required to repay the funds plus interest it has borrowed from the Federal loan account. Such States will probably be forced to raise taxes on their employers, an action that dampens economic growth and job creation. In short, States have strong incentives to keep adequate funds in their trust fund accounts. THE FEDERAL UNEMPLOYMENT TAX FUTA imposes a minimum, net Federal payroll tax on employers of 0.8 percent on the first $7,000 paid annually to each employee. The current gross FUTA tax rate is 6.2 percent, but employers in States meeting certain Federal requirements and having no delinquent Federal loans are eligible for a 5.4 percent credit, making the current minimum, net Federal tax rate 0.8 percent. Since most employees earn more than the $7,000 taxable wage ceiling, the FUTA tax typically is $56 per worker ($7,000 X 0.8 percent), or three cents per hour for a full-time worker. The 1997 budget bill extended the 0.2 percent surtax through 2007. The wage base for the Federal tax was held constant at $3,000 until 1971, and then was increased on three occasions, most recently in 1983. Chart 4-2 depicts the historical trends in the statutory and effective Federal unemployment tax rates. The effective tax rate equals FUTA revenue as a percent of total covered wages. Although the statutory tax rate doubled from 0.4 percent in the late 1960s to 0.8 percent in the late 1980s, the effective tax rate has fluctuated between 0.2 and 0.3 percent in most of those years. TABLE 4-8--FINANCIAL CONDITION OF STATE UNEMPLOYMENT COMPENSATION PROGRAMS, SELECTED YEARS 1970-2002 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] TABLE 4-9--BEGINNING-OF-YEAR BALANCES IN UNEMPLOYMENT TRUST FUND ACCOUNTS, SELECTED FISCAL YEARS 1971-2003 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] CHART 4-2--HISTORY OF FEDERAL UNEMPLOYMENT TAX RATE, 1954-2002 STATE UNEMPLOYMENT TAXES [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The States finance their programs and half of the permanent Extended Benefits Program with employer payroll taxes imposed on at least the first $7,000 paid annually to each employee.1 States have adopted taxable wage bases at least as high as the Federal level because they otherwise would lose the 5.4 percent credit to employers on the difference between the Federal and State taxable wage bases. Table 4-10 shows that, as of January 2003, 42 States had taxable wage bases higher than the Federal taxable wage base, ranging up to $30,200 in Hawaii. In most States the standard tax rate for employers is 5.4 percent. However, State employer taxes are based on employers experience with the unemployment compensation system. This experience rated State tax can range from zero on some employers in 13 States up to a maximum as high as 10 percent in 4 States and over 10 percent in 3 States. Estimated national average State tax rates on taxable wages and total wages for 2003 were 2.1 and 0.6 percent, respectively. Estimated average State tax rates on taxable wages ranged from 0.3 percent in Virginia to 4.2 percent in New York and Pennsylvania. Estimated average State tax rates on total wages varied from 0.1 percent in Virginia to 1.5 percent in Washington. 1 Alaska, New Jersey, and Pennsylvania also tax employees directly. TABLE 4-10--STATE UNEMPLOYMENT TAX BASES AND RATES, 2003 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] Table 4-11 shows recent State data on unemployment compensation covered employment, wages, taxable wages, the ratio of taxable to total wages, and average weekly wages. The ratio of taxable wages to total wages varied from 0.16 in New York and the District of Columbia to 0.57 in Montana. TABLE 4-11--TWELVE-MONTH AVERAGE EMPLOYMENT AND WAGES COVERED BY STATE UNEMPLOYMENT TAXATION FOR PERIOD ENDING SEPTEMBER 30, 2002 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] ADMINISTRATIVE FINANCING AND ALLOCATION State unemployment compensation administrative expenses are federally financed. A portion of revenue raised by FUTA is designated for administration and for maintaining a system of public employment offices. As explained above, FUTA revenue flows into three Federal accounts in the Unemployment Trust Fund. One of these accounts, the Employment Security Administration Account (ESAA), finances administrative costs associated with Federal and State unemployment compensation and employment services. Under current law, 80 percent of FUTA revenue is allocated to ESAA and 20 percent to another Federal account (Chart 4-3). Funds for administration are limited to 95 percent of the estimated annual revenue that is expected to flow to ESAA from the FUTA tax. However, funds for administration may be augmented by three-eighths of the amount in ESAA at the beginning of the fiscal year, or $150 million, whichever is less, if the rate of insured unemployment is at least 15 percent higher than it was over the corresponding calendar quarter in the immediately preceding year. Title III of the Social Security Act authorizes payment to each State with an approved unemployment compensation law of such amounts as are deemed necessary for the proper and efficient administration of the UC Program during the fiscal year. Allocations are based on: (1) the population of the State; (2) an estimate of the number of persons covered by the State unemployment insurance law; (3) an estimate of the cost of proper and efficient administration of such law; and (4) such other factors as the Secretary of the U.S. Department of Labor (DOL) finds relevant. Subject to the limit of available resources, the allocation of State grants for administration is the sum of resources made available for two major areas, the CHART 4-3--FLOW OF FUTA FUNDS UNDER EXISTING FEDERAL STATUTES [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] Unemployment Insurance Service (UI) and the Employment Service (ES). Each area has its own allocation methodology subject to general constraints set forth in the Social Security Act and the Wagner-Peyser Act. Each year, as part of the development of the President's budget, the DOL, in conjunction with the Department of Treasury, estimates revenue expected from FUTA and the appropriate amount to be available for administration. The estimate of FUTA revenues is based on several factors: (1) a wage base of $7,000 per employee; (2) a tax rate of 0.8 percent (0.64 percentage points for administration and 0.16 percentage points for extended benefits); (3) the administration's projection of the level of unemployment and the growth in wages; and (4) the level of covered employment subject to FUTA. In addition, a determination is made based on the administration's forecast for unemployment as to whether the rate will increase by at least 15 percent. Each year the President's budget sets forth an estimate of national unemployment in terms of the volume of unemployment claims per week. This is characterized as average weekly insured unemployment (AWIU). A portion of AWIU is expressed as "base" and the remainder as "contingency." At the present time, the base is set at the level of resources required to process an average weekly volume of 2.0 million weeks of unemployment. Resources available to each State to administer its UC Program (i.e., process claims and pay benefits) are provided from either "base" funds or "contingency" funds. At the beginning of the fiscal year, only the base funds are allocated, while contingency funds are allocated on a needs basis as workload materializes. Base funds are distributed to the State for use throughout the fiscal year and are available regardless of the level of unemployment (workload) realized. If a State processes workloads in excess of the base level, it receives contingency funds determined by the extent of the resources required to process the additional workload. The allocation of the base UC grant funds to each State is made by: 1. Projecting the workloads that each State is expected to process; 2. Determining the staff required to process each State's projected workload; 3. Multiplying the final staff-year allocations for each State by the cost per staff year (i.e., State salary and benefit level) to determine dollar funding levels; and 4. Allocating overhead resources (administrative and management staff and nonpersonal services). Each DOL regional office may redistribute resources among the States in its area with national office approval. The 1997 budget bill authorized funds over 5 years specifically for program integrity activities such as claims review and employer tax audits to assist the States in strengthening their efforts to reduce administrative error and fraud. In Public Law 102-164, Congress required the DOL to study the allocation process and recommend improvements. Public Law 102-318 extended the study deadline to December 31, 1994. The Department has not yet submitted the report to Congress. Total grants to States for administrative costs represent about 53 percent of total FUTA tax collections in fiscal year 2002. In addition, the Reed Act transfer of $8 billion provided to states under P.L. 107-147 could be used by states for administrative purposes. There continues to be considerable interest among State Employment Security Agencies in recent years in having more of the FUTA revenue returned to the States for administrative expenses. In the 108th Congress, legislation has been introduced which would change the administrative financing of the UC Program. LEGISLATIVE HISTORY Major Federal laws passed by Congress since 1990 and their key provisions are as follows: The Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508) extended the 0.2 percent FUTA surtax for 5 years through 1995. The Emergency Unemployment Compensation Act of 1991 (Public Law 102-164) established temporary emergency unemployment compensation (EUC) benefits through July 4, 1992. It returned to States the option of covering nonprofessional school employees between school terms and restored benefits for ex-military members to the same duration and waiting period applicable to other unemployed workers. It extended the 0.2 percent FUTA surtax for 1 year through 1996. The Unemployment Compensation Amendments of 1992 (Public Law 102-318) extended EUC for claims filed through March 6, 1993, and reduced the benefit periods to 20 and 26 weeks. The law also gave claimants eligible for both EUC and regular benefits the right to choose the more favorable of the two. States were authorized, effective March 7, 1993, to adopt an alternative trigger for the Federal-State EB Program. This trigger is based on a 3-month average total unemployment rate and can activate either a 13- or a 20-week benefit period depending on the rate. The Emergency Unemployment Compensation Amendments of 1993 (Public Law 103-6) extended EUC for claims filed through October 2, 1993. The law also authorized funds for automated State systems to identify permanently displaced workers for early intervention with reemployment services. The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) extended the 0.2 percent FUTA surtax for 2 years through 1998. The Unemployment Compensation Amendments of 1993 (Public Law 103-152) extended EUC for claims filed through February 5, 1994, and set the benefit periods at 7 and 13 weeks. It repealed a provision passed in 1992 that allowed claimants to choose between EUC and regular State benefits. It required States to implement a "profiling" system to identify UI claimants most likely to need job search assistance to avoid long-term unemployment. The North American Free Trade Agreement Implementation Act (Public Law 103-182) gave States the option of continuing UC benefits for claimants who elect to start their own businesses. The Balanced Budget Act of 1997 (Public Law 105-33) gave States complete authority in setting base periods for determining eligibility for benefits, authorized appropriations for program integrity activities, limited trust fund distributions to States in fiscal years 1999-2001, and raised the ceiling on FUA assets from 0.25 percent to 0.5 percent of wages in covered employment starting in fiscal year 2002. The Taxpayer Relief Act of 1997 (Public Law 105-34) extended the 0.2 percent FUTA surtax through 2007. The Temporary Extended Unemployment Compensation Act of 2002 (P.L. 107-147) established a program to provide temporary extended unemployment compensation (TEUC) benefits of up to 13 weeks to individuals in all States who exhaust their regular UC benefits. TEUC benefits are fully federally funded and available in all States. TEUC also provides a second tier of up to 13 weeks of additional benefits to individuals in high-unemployment States (TEUC-X). The program has been extended twice (P.L. 108-1, P.L. 108-26) and is authorized through March 31, 2004, with benefits phasing-out after December 31, 2003. In addition, P.L. 108-11 created a parallel program for displaced airline workers called TEUC-A. TEUC-A provides up to 39 weeks of benefits and provides a second tier (TEUC-AX) of benefits to individuals exhausting their TEUC-A benefits in a high-unemployment State. REFERENCES Corson, W. & Dynarski, M. (1990, September). A study of unemployment insurance recipients and exhaustees: Findings from a national survey. (Occasional Paper 90-3). Washington, DC: U.S. Department of Labor. Office of the President. (2003, February). Economic Report of the President. Washington, DC: U.S. Government Printing Office. Pennington v. Doherty. Unemployment Insurance Reporter (&22,184). Chicago, IL: Commerce Clearing House. U.S. Department of Labor. (January 2003). UI Outlook: Fiscal Year 2004 President's Budget. Washington, DC: Author. U.S. Department of Labor, Employment and Training Administration. (April 2003). UI Data Summary (Fourth quarter, calendar year 2002). Washington, DC: Author. U.S. General Accounting Office. (2003) Unemployment Insurance: States' Use of the 2002 Reed Act Distribution (GAO-03-496). Washington, DC:Author.