Unemployment Insurance Funding Overview

Tatiana Follett, Zach Herman 10/8/2020

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Originally developed as a response to massive job losses during the Great Depression, unemployment insurance (UI) has since been implemented in all 50 states and U.S. territories to provide financial relief during bouts of high joblessness. During the COVID-19 pandemic, the nature of and requirements for receiving unemployment benefits have changed due to the sudden shutdown of many businesses, resulting in record claims for benefits in a short time.

Unemployment Insurance Funding Measures Specific to COVID-19

In response to the economic downturn associated with the coronavirus pandemic, there have been several federal measures to aid workers and to help states fund unemployment benefits. Information on the current unemployment rate can be found on the NCSL State Unemployment Rates page. It is estimated that 20.6 million or more people have lost their jobs due to COVID-19. According to the Center on Budget and Policy Priorities, monthly unemployment claims rose from 6.4 million in January and February to 21 million in May. High unemployment is expected to continue into 2021.

Since the start of the pandemic, there have been two major pieces of federal legislation surrounding unemployment benefits and funding. The CARES Act, enacted on March 27, 2020, expands the reach of unemployment benefits. Under the CARES Act, the Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC) programs provide direct assistance to workers.

PUA provides unemployment benefits to those who would not normally be eligible for unemployment, such as “gig” and self-employed workers. PUA provides 39 weeks of unemployment benefits starting on Feb. 2, 2020. Recently, another seven weeks was added to the PUA program, bringing the total to 46 weeks of benefits. It is also designed to aid workers who have exhausted their regular benefits. The length of time workers receive benefits will be determined by subtracting from the number of weeks workers have received benefits through regular compensation programs. The program, including administration costs, is completely federally funded. The funding for PUA expires Dec. 31.

PEUC is designed for workers who have exhausted regular compensation. The program also provides for more leniency in work-search requirements. PEUC provides another 13 weeks of benefits on top of the regular UI program. It is also completely federally funded, including administration costs. Funding for PEUC also expires Dec. 31.

The Families First Coronavirus Response Act (FFCRA) provides flexibility to state unemployment insurance agencies and helps states with the administrative costs of providing benefits. The act establishes the Emergency UI Stabilization and Access Act (EISAA), which gives states some leniency in temporarily modifying their UI laws in response to the pandemic and ensures extended benefits are federally funded. FFCRA also includes emergency administrative grants to states up to $1 billion in the following areas:

  • Emergency Flexibility (UIPL) Change Program.
  • Federal funding for extended benefits.
  • Temporary assistance with state trust fund advances.
  • Technical assistance for short-time compensation (STC).

States qualify for these administrative grants as follows:

  • To receive the first 50% of the grant, states must:
    • Require employers to notify employees of the availability of unemployment compensation.
    • Allow UI claims to be processed in at least two of three ways: in-person, phone or online.
  • States receive the second 50% of the grant if:
    • Initial claims from unemployment increase by 10% over the “rolling quarter.”
    • States show a commitment to maintain and increase access to the UI system.
    • States ease eligibility requirements.

General Unemployment Insurance Overview

General unemployment provides benefits for workers between 12 and 26 weeks, depending on the state. It is intended to provide workers with about half of their normal monthly wages, with a maximum benefit cap. The cap indicates that workers with higher salaries may receive benefits that make up a lower percentage of their normal wages than workers with lower salaries. The benefit cap varies by state, meaning that in some states with a low benefit cap, the maximum unemployment benefits are less than 50% of many employees’ normal salaries. This chart indicates the minimum and maximum benefits by state in January 2020:

State

Minimum Weekly Benefit ($)

Maximum Weekly Benefit ($)

Arizona

45

275

Alaska

56-128

370-442

Arizona

187

240

Arkansas

81

451

California

40

450

Colorado

25

561 or 618

Connecticut

15-30

649-724

Delaware

20

400

Washington, D.C.

50

444

Florida

32

275

Georgia

55

365

Hawaii

5

648

Idaho

72

448

Illinois

51-77

484-667

Indiana

37

390

Iowa

72-87

481-591

Kansas

122

488

Kentucky

39

552

Louisiana

10

247

Maine

77-115

445-667

Maryland

50-90

430

Michigan

150-180

362

Minnesota

28

462 or 740

Mississippi

30

235

Missouri

35

320

Montana

163

552

Nebraska

70

440

Nevada

16

469

New Jersey

120-138

713

New Mexico

86-129

461-511

New York

104

504

North Carolina

15

350

North Dakota

43

618

Ohio

135

480-647

Oklahoma

16

539

Oregon

151

648

Pennsylvania

68-76

572-580

Puerto Rico

33

190

Rhode Island

53-103

586-732

South Carolina

42

326

South Dakota

28

414

Tennessee

30

275

Texas

69

521

Utah

32

580

Vermont

72

513

Virginia

60

378

Virgin Islands

33

602

Washington

188

790

West Virginia

24

424

Wisconsin

54

370

Wyoming

36

508

Additionally, states may be eligible to provide additional extended benefits (EB) if economic and unemployment conditions remain poor. Extended benefits are funded by a combination of state and federal mechanisms. States can qualify for EB by measuring unemployment conditions using the equation below:

Equation 1: EB Measurement

Based on the number calculated above using equation 1, states receive the following extended benefits:

Table 1: EB Qualification

EB Measurement

EB Amount

Less than 6.5%

No extension

6.5%-8%

13 weeks

More than 8%

20 weeks

Other formulas are also used to determine the condition of unemployment. These measures are the insured unemployment rate (IUR) and total unemployment rate (TUR). Their equations are as follows:

Equation 2: IUR

The IUR indicates the unemployment rate among workers who are eligible to receive unemployment. Gig and self-employed workers are generally not eligible for unemployment benefits.

Equation 3: TUR

The TUR indicates the unemployment rate within the entire workforce. This value includes those who are typically not eligible for unemployment benefits.

Funding, Solvency and Solvency Measures

The UI system was designed to be forward-funded. This means that, ideally, states will tax employers at a higher rate during strong economic times to build up reserve funds in the event of an economic downturn. However, most states have kept tax rates low in strong economic times, which left many UI trust funds underfunded at the start of the Great Recession. This caused many states to borrow from the federal government to pay out unemployment benefits during and after the recession. States must repay the loans, with interest, within two years. If the loans are not repaid on time, the federal tax rate on employers in that state is raised each year until the loans have been repaid.

Federal Unemployment Tax Act

The Federal Unemployment Tax Act (FUTA) provides a federal tax structure to fund states’ unemployment insurance systems. The tax is placed on employers within the state. The basic formula for calculating the tax is as follows:

Equation 4: Basic FUTA

The basic FUTA is calculated by multiplying the first $7,000 an employee earns each quarter by a tax rate of 6%. However, employers who pay the state unemployment tax receive an FUTA tax credit of 5.4%, reducing the FUTA tax rate to 0.6%. Thus, many employers are taxed as follows:

Equation 5: FUTA with tax credit

thus, 

Equation 6: FUTA with tax credit

It should be noted, however, that while there are ongoing funding and solvency issues with the unemployment insurance system, the Center on Budget Policy and Priorities estimates that every dollar spent on UI results in a subsequent $1.55 in economic activity.

Solvency Measures

The U.S. Department of Labor (DOL) has established a series of measures to gauge the relative health and solvency of UI systems. A 2020 DOL report evaluated the trust fund solvency for all 50 states’ unemployment systems. The report uses a combination of formulas, including the reserve ratio (RR), benefit cost rate (BCR) and the average of the three highest BCRs in the last 20 years to establish a minimum solvency rate. The formulas are calculated and evaluated as follows:

Equation 7: Reserve Ratio

The DOL declares that the RR is the simplest solvency measure. It can be used on its own or as part of a system of equations used to more accurately determine fund solvency. The RR can then be compared to the benefit cost rate:

Equation 8: Benefit Cost Rate

More commonly, the BCR is used by taking the average of the three highest BCRs in the last 20 years. Because benefits paid increases relative to wages paid during periods of high unemployment, which generally occur during economic downturns, the highest BCRs usually occur during downturns. This value is then compared to the RR to determine minimum solvency. This is called the average cost multiple.

Equation 9: Average Cost Multiple

As a general rule, if a state’s average cost multiple is greater than 1, the state has achieved minimum solvency. As of February 2020, average-cost-multiple values range from 0.21 to 2.53 among the 50 states.

Employer Tax Rate

A recent article from the Bureau of Labor Statistics discusses different methods to calculate the marginal cost of unemployment insurance tax to employers when they lay off workers.

A key factor in calculating marginal cost is determining a company’s experience rate. Experience rate is calculated as follows:

Equation 10: Employer Experience Rate

In this equation, average payroll is typically averaged over the previous three years. As benefits increase with each employee the company lays off, the difference between taxes paid and benefits assigned decreases, thereby decreasing an employer’s experience rating. If benefits assigned exceeds taxes paid, the company’s reserve balance decreases, increasing the UI tax rate. Each state maintains its own tax schedule, with varying tax rates based on experience-rating intervals. The number of tax rate intervals ranges from 10 to 40.

Tatiana Follett is an intern and Zach Herman is a policy associate in NCSL’s Employment, Labor and Retirement Program.

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