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Monday, September 24, 2012

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.

In 2011, 20 states and the Virgin Islands had a state tax credit reduction applied to the calculation of the federal unemployment tax (FUTA): Michigan (0.9), Indiana (0.6), Arkansas (0.3), California (0.3), Connecticut (0.3), Florida (0.3), Georgia (0.3), Illinois (0.3), Kentucky (0.3), Minnesota (0.3), Missouri (0.3), North Carolina (0.3), New Jersey (0.3), Nevada (0.3), New York (0.3), Ohio (0.3), Pennsylvania (0.3), Rhode Island (0.3), Virginia (0.3), Virgin Islands (0.3), and Wisconsin (0.3). As a result, in Michigan, a credit reduction of 0.9 was applied retroactively to tax year 2011 earnings and the net FUTA tax during 2011 for Michigan employers was 1.5% on the first $7,000 of each employee’s earnings. In Indiana (with a credit reduction of 0.6), the net FUTA tax during 2011 for Indiana employers was 1.2% on the first $7,000 of each employee’s earnings. In the other 19 states (with a 0.3% credit reduction), the net FUTA tax for 2011 was 0.9%. For all other states, the net FUTA tax was 0.6%.

H.R. 650 would extend the suspension of interest accrual on federal loans to states through 2012. H.R. 3346 and S. 1804 would also allow states to enter into an agreement with the U.S. Department of Labor (DOL) to temporarily suspend the accrual of interest for FY2012. In addition, states that otherwise have employers facing a decreased state tax credit on federal unemployment taxes would be able to opt to suspend the reduction in credit for tax year 2012. To have these options available to the state, the state would be required to continue to calculate regular unemployment benefit entitlements (both in weekly amount and total weeks available) as required by state law on the date of enactment of this proposal. States with no outstanding unemployment loans within the UTF would earn an additional two percentage points in interest on the (positive) average daily balance in the state’s UTF account.

Date of Report: September 20, 2012
Number of Pages: 17
Order Number: RS22954
Price: $29.95

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