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Wednesday, December 1, 2010

The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States

Julie M. Whittaker
Specialist in Income Security

During some recessions, current taxes and reserve balances were insufficient to cover state expenditures for unemployment compensation (UC) benefits. UC benefits are an entitlement, and states are legally required to pay benefits even if the state account is insolvent. Some states may borrow funds from the Federal Unemployment Account (FUA) within the Unemployment Trust Fund (UTF) to meet UC benefit obligations. The 2009 stimulus package (The American Recovery and Reinvestment Act of 2009, P.L. 111-5 § 2004) temporarily waives interest payments and the accrual of interest on these loans to states from the FUA.

This report summarizes how insolvent states may borrow funds from the federal account within the UTF to meet their UC benefit obligations. Outstanding loans listed by state may be found at the Department of Labor’s website: budget.asp#tfloans.

As of this writing, three states have an active credit reduction: Michigan (0.6), Indiana (0.3), and South Carolina (0.3). As a result, the credit reduction was applied retroactively to tax year 2010 earnings, and the net FUTA tax during 2010 for Michigan employers is 1.4% on the first $7,000 of each employee’s earnings. In Indiana and South Carolina (with a credit reduction of 0.3) the net FUTA tax during 2010 for Indiana and South Carolina employers is 1.1% on the first $7,000 of each employee’s earnings. In all other states the net FUTA 2010 tax is 0.8%.

This report will be updated to reflect major changes in state UTF account solvency.

Date of Report: November 24, 2010
Number of Pages: 15
Order Number: RS22954
Price: $29.95

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