Unemployment Insurance Trust Funds: Long-standing State Financing Policies Have Increased Risk of Insolvency

U.S. Government Accountability Office

Unemployment Insurance Trust Funds:

Long-standing State Financing Policies Have Increased Risk of Insolvency

GAO-10-692T: Published: May 6, 2010. Publicly Released: May 6, 2010.

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This testimony discusses issues related to the financial condition of state unemployment insurance (UI) programs. This has been a topic of concern for the last 3 decades and has generated multiple studies, including several by GAO. The severity and length of the recent recession have resulted in the worst labor market conditions in the United States since at least the early 1980s, if not since the Great Depression of the 1930s, and placed a heavy demand on state UI trust funds. While preliminary data showed that the economy added the most jobs in any month in 3 years during March 2010, unemployment remains very high and has continued to increase in most states, suggesting that state UI programs will continue to face serious financial challenges for at least the near future. This testimony is based on our report, "Unemployment Insurance Trust Funds: Long-standing State Financing Policies Have Increased Risk of Insolvency".

State UI trust funds are in historically poor financial condition. As of April 1, 2010, 34 of the 53 state trust funds have outstanding loans totaling $38.9 billion from the federal government to pay benefits. Long-standing UI tax policies and practices in many states over 3 decades have eroded trust fund reserves, leaving states in a weak position prior to the recent recession. Further, average U.S. pre-recession funding levels of state trust funds were lower prior to the recent recession than for the previous three recessions. While benefits over the last 3 decades have remained largely flat relative to wages, employer tax rates have declined. First, most state taxable wage bases have not kept up with increases in wages. As of 2010, only 17 of the 53 state trust funds have taxable wage bases that are indexed to average wages. Second, many employers pay very low tax rates on state taxable wage bases. From 1978 to 2008, average minimum tax rates levied on employers by states dropped from 1.14 percent to 0.37 percent of taxable wages. Options to improve state UI trust fund financial conditions include raising and indexing the FUTA taxable wage base, which has remained at $7,000 per worker per year since 1983. This could induce many states to raise and index their own taxable wage bases. In addition, state UI tax reform could reduce the number of employers paying very low rates and those that pay less in UI taxes than benefits paid to their former workers. Other options include adjusting state tax rates more frequently; raising solvency targets before lowering rates; setting additional conditions to receive interest-free federal loans; and raising interest credits for well funded trust funds. Options to improve state UI trust fund financial conditions include raising and indexing the FUTA taxable wage base, which has remained at $7,000 per worker per year since 1983. This could induce many states to raise and index their own taxable wage bases. In addition, state UI tax reform could reduce the number of employers paying very low rates and those that pay less in UI taxes than benefits paid to their former workers. Other options include adjusting state tax rates more frequently; raising solvency targets before lowering rates; setting additional conditions to receive interest-free federal loans; and raising interest credits for well funded trust funds.