Unemployment Insurance: Adequacy of State Trust Fund Reserves

GAO discussed the issues facing the Unemployment Insurance (UI) system, which provides income maintenance assistance to the unemployed and acts as an economic stimulus during periods of economic decline. GAO noted that: (1) states' fund management actions have led to a gradual erosion of the forward-funding principle, causing many states to rely on federal loans to continue paying benefits during economic downturns; (2) the UI high-cost multiple for projecting how long benefits would last during a recession has declined along with states' maintenance of adequate trust fund reserves; and (3) even when states paid off federal loans and the economy expanded, states still did not accumulate adequate reserves. GAO believes that: (1) high unemployment rates, increases in benefit expenditures, and competition for new investment and jobs have caused the decline in reserve adequacy and the growth in trust fund insolvency; (2) UI trust fund reserves continue to be inadequate to handle a recession; and (3) even though the UI loan account has a $2.2-billion balance, it will need a $1.3-billion advance from the general fund to cover state loans for 1991.