Unemployment Insurance:

States' Use of the 2002 Reed Act Distribution

GAO-03-496: Published: Mar 6, 2003. Publicly Released: Mar 7, 2003.

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Sigurd R. Nilsen
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The Unemployment Insurance (UI) program, administered by the U.S. Department of Labor in partnership with states, plays a critical role in ensuring the financial security of America's workforce. In fiscal year 2002, state UI programs paid benefits totaling $50.8 billion to 10.6 million unemployed workers. In March 2002, in response to an increase in unemployment and the September 11, 2001, terrorist attacks, the federal government passed the Job Creation and Worker Assistance Act of 2002. This broad stimulus package included a distribution to states of $8 billion of the unemployment tax revenue it holds in reserve, referred to as a Reed Act distribution. Under the act, these funds may be used to pay UI benefits, and/or to enhance UI benefits, such as increasing weekly benefit payments, extending the period of time benefits are paid, or otherwise expanding eligibility to groups that currently do not qualify for benefits. The funds may also be used for the administration of UI and employment services (ES) programs, including one-stop service centers, if appropriated by state law. This report provides information on (1) the proportion of Reed Act dollars that states have spent, to date; (2) the proportion of total Reed Act dollars that remains in state UI trust funds and the effect this has had on employer UI taxes; (3) the proportion of those Reed Act dollars remaining in state UI trust funds that have been officially obligated to their trust funds or appropriated by state law for administering the UI, ES, or one-stop systems; and (4) the makeup of state UI advisory boards and any proposals they have made for using Reed Act dollars.

We found that about 17 percent ($1.34 billion) of the $8 billion CY2002 Reed Act distribution had been spent as of November 30, 2002, based on responses to our survey. Most was expended by three states to pay regular benefits--New York, North Carolina, and Texas. A small portion ($74 million) was expended on costs associated with administering UI, ES, or one-stop systems. One state spent Reed Act dollars to increase weekly UI benefit payments, and five other states said that the Reed Act dollars enabled their states to make enhancements to UI benefits during CY2002 using other funds. Three additional states reported that they plan to spend Reed Act dollars in 2003 to implement UI benefit enhancements. Eighty-three percent, or $6.66 billion of the Reed Act distribution had not been spent as of November 30, 2002, and state workforce officials in 30 states reported that adding these dollars to their UI trust funds enabled them to avoid automatic employer tax increases or surcharges in 2002. Five states said that they lowered employer tax rates in 2003. Twenty-six states also reported that their employer tax rates would likely have been higher than they actually were in 2003, had it not been for the Reed Act distribution. This includes two states whose tax rates were lower in 2003 than 2002. Nine states formally obligated $1.27 billion of the Reed Act distribution to remain in their UI trust funds, citing the desire to avoid increases in employer UI taxes as the most frequent reason for doing this. In addition, 27 states passed laws appropriating a total of 7 percent of the Reed Act distribution ($590 million) to be used for administrative costs of UI, ES, or one-stop systems. In general, states reported that few Reed Act dollars were being used to replace other state and federal funding sources to administer UI, ES, or one-stop systems. Twenty-five states have UI advisory boards, which are largely made up of representatives of worker and employer groups, state workforce agency officials, or members of the general public. Only five states reported that their UI advisory board had developed or endorsed a proposal for the use of the Reed Act dollars.

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