NCSL Labor and Economic Development Committee - Policy

Employment Security System Funding

expires August 2013

State legislators recognize the many challenges facing the nation as the economy and labor market change. In the states, differing circumstances reflect a changing economic base, prolonged higher unemployment, unique demographic trends, and limitations on available resources. State employment security, unemployment and labor market information systems must figure prominently in efforts to serve the workers and businesses of a 21st century economy. The National Conference of State Legislatures (NCSL) believes that changes are needed in employment security financing to provide a stable system that will be able to address economic and competitive challenges. NCSL supports decisions aimed at reaching consensus among workers, employers, and state and federal entities to develop comprehensive recommendations for Congress to address the following priorities and inadequacies in the current system. 

Trust Fund Solvency

State governments collect payroll taxes from employers to pay for unemployment insurance benefits. These taxes are deposited into state unemployment insurance trust fund accounts in the federal Unemployment Trust Fund where each state, plus the District of Columbia, Puerto Rico and the U.S. Virgin Islands, has its own account. Each state may borrow from the federal account to cover benefits during economic downturn. During the current recession many states have borrowed to cover benefits. These loans must be repaid with interest unless repaid within a short period established in federal law. If states are unable to repay the loan with interest, an automatic gradual increase of the federal tax will be imposed on the state’s employers. More than half of the states have already borrowed and the U.S. Department of Labor projections show that up to 40 states are expected to be borrowing by the end of 2010. NCSL is encouraged by recent federal action that provided a waiver of interest payments to states with outstanding federal unemployment loans. However, the waiver expires on December 31, 2010. NCSL urges Congress to immediately extend the deadline on the waiver to states that borrow so that they may continue to pay benefits owed to unemployed workers. 

Extended Benefits

Extended benefits are paid by state unemployment insurance agencies from state unemployment accounts but reimbursed at 50 percent from the extended unemployment account. Congress provided extended benefits on a 100 percent federally funded basis several times as a result of the recent recession. NCSL supports an extension of benefits fully funded by the federal government during periods of economic downturn as a means of stabilizing the economy. NCSL further urges development of more effective triggers for the federal –state extended benefit programs to improve the program’s responsiveness during periods of high unemployment and decrease the need for separate and additional emergency extended benefit programs in periods of high unemployment. 

Federal Unemployment Tax Act

Under the framework of the system outlined in the Federal Unemployment Tax Act (FUTA), states collect a state payroll tax to finance unemployment benefits.  The federal treasury holds the collected taxes in 'trust' accounts, but these accounts are included in the federal unified budget.  NCSL urges the federal government to move the dedicated FUTA trust fund from the discretionary side to the mandatory side of the federal budget and not use the funds to offset the federal budget deficit.  

Administrative Funds

The IRS collects a federal payroll tax from employers to provide funds for administration of both the federal and state unemployment insurance systems. Rising unemployment has resulted in increased state administrative costs and workforce challenges in administering and monitoring the regular, and especially, the extended benefits programs, which have not been sufficiently funded by the federal government. In addition, state unemployment insurance programs have been chronically underfunded in staffing and technology. NCSL urges Congress to adequately fund state administrative functions, and continue the state legislative role in the appropriation of administrative funds. Recognizing that the unemployment insurance system is intended to be a partnership between the states and the federal government, NCSL encourages Congress to allow states, within existing federal law, greater flexibility in implementing innovative approaches to funding, administering, and delivering unemployment insurance benefits.

Labor and Economic Development Committee