Another Raid on the Federal Unemployment Trust Funds:
A Bad Deal for Jobless Workers and for Unemployment Programs
(July 2004)
By National Employment Law Project

After receiving an unprecedented $8 billion in federal funds less than three years ago, business groups and state agency officials are actively lobbying to raid the federal unemployment trust funds for another $9 billion “special Reed Act distribution.” If successful, the nation’s jobless workers, who are still suffering from record rates of long-term unemployment, will be major losers. By further reducing the reserves in the federal unemployment trust funds – since the recession, the reserves have decreased from $34 billion to $19 billion today – the stability of the federal-state unemployment system will also be compromised. Contrary to the proponents' arguments, a major federal bailout is not needed at this time to lower unemployment taxes or protect insolvent state unemployment funds.

Basics of Unemployment Financing and the “Reed Act”

• A federal unemployment insurance payroll tax of $56 per worker is deposited into federal trust funds that pay for benefit extensions, loans to insolvent state unemployment funds, and state and federal administration of the unemployment program. When these funds reach caps established by federal law, then the state unemployment trust funds that pay regular unemployment benefits receive a “Reed Act” distribution of the supplemental federal funds.
  
• In March 2002, Congress authorized an unprecedented $8 billion Reed Act distribution to the states, which was almost three times the amount established by the federal caps in place at that time. Before then, $100 million was the largest Reed Act distribution received by the states.  Also for the first time, the 2002 Reed Act distribution was not specifically limited to spending on improvements in the program’s administration.
  
• Officials who operate the state unemployment programs (represented by NASWA, the National Association of State Workforce Agencies) and the business community (represented by UWC, the Strategic Services on Unemployment & Workers’ Compensation) are actively lobbying Congress to authorize the release of another $9 billion in federal reserves to the states. The proposed 2004 special Reed Act distribution would take place at a time when the federal trust funds are not projected to reach statutory caps for the foreseeable future. The proposal has yet to be introduced as legislation.

Another Major Reed Act Distribution Will Hurt the Long-Term Jobless

• Despite record long-term joblessness, Congress has failed to reauthorize the 13-week extension of unemployment benefits which expired in December 2003. As a result, two million workers have now run out of state benefits without qualifying for additional federal relief. Recognizing the on-going impact of the recession on the long-term unemployed, Federal Reserve Chairman Alan Greenspan recently expressed continued support for another extension of federal jobless benefits before the Senate Banking Committee.
  
• A $9 billion distribution of federal unemployment funds to the states would undermine Congressional efforts to reactivate the extension by severely limiting the federal funding available to pay for the program (which costs about $1 billion a month). Indeed, a $9 billion Reed Act distribution would leave roughly $5 billion in reserves in the federal loan and extended benefits accounts, which is not enough to fund another six-month extension of jobless benefits plus loans to states (there is also $4 billion in the trust fund that pays for state UI administration, bringing the total federal trust funds up to $19 billion).
  
• With the U.S. economy vulnerable to unpredictable forces that could push the nation back into a jobs slump, these federal reserves are crucial.  By comparison, of the $34 billion in federal reserves available before the 2001 recession began, $23 billion was spent on the 2002-2003 federal benefits extension.  The extension program in place during the recession of the early 1990s exceeded $30 billion.
  
• While the economy has started to create jobs in recent months, long-term joblessness has never been this high for this long – for each of the past 21 months, more than 20% of the unemployed have been without work for over six months.  That exceeds the 18-month record set during the 1983 recession, when the nation experienced double-digit unemployment rates.
  
• Based on surveys by NASWA and the U.S. General Accounting Office, the lion’s share of another special Reed Act distribution will likely remain in state trust funds in order to lower unemployment taxes, not to help unemployed workers.  Indeed, only $58 million of the $8 billion Reed Act distribution was used by the states to expand worker benefits in 2002.

Near Record-Low Unemployment Taxes
Fail to Justify a Major Reed Act Distribution

• According to UWC, a $9 billion Reed Act distribution is necessary because “state unemployment payroll taxes have increased significantly in most states between 2003 and 2004, and similar increases will occur next year.” (UWC Press Release, “Congress Urged to Reduce Unemployment Payroll Taxes, Spur Hiring,” dated June 2, 2004).  The UWC’s position ignores the fact that employers have been paying record low unemployment taxes in recent years, and that unemployment taxes are designed to increase during a recession in order to build up reserves for the next economic downturn.
  
• A recent NASWA survey found that state unemployment payroll taxes were reduced by an average of 9% in 2003 as result of the last Reed Act distribution. Thus, employers saved $2.6 billion in state payroll taxes in 2003, plus $1.5 billion more in projected savings to take place in 2004 (or more than $4 billion in just two years). These state tax cuts took place because the Reed Act transfer of 2002 substantially raised state trust fund balances (the last distribution increased the state fund balances by 20%), thus preventing otherwise scheduled tax increases from triggering to replenish the state trust fund accounts.
  
• In recent years, employers have been paying especially low unemployment taxes. In 2002, employers paid only 0.54% of total wages in state unemployment taxes, up slightly from an all-time historic low set in 2001 of 0.51%. In 2003, they paid an average of just 0.6% of their total payroll in state unemployment taxes.  That is substantially lower compared to the 1990s recession, when state unemployment taxes accounted for 0.8% of total wages at the same point during the last recovery.
  
• Federal payroll taxes are also at all-time lows. Since 1983, employers have been paying unemployment taxes on only the first $7,000 of each worker’s wages.  Adjusted for inflation, federal unemployment taxes per employee have fallen from a peak over $90 in the 1980s to their current level of $56.

Another Federal Bailout, Available to Every State
Regardless of Their Funding Situation, Will Do More Harm than Good

• According to the recent resolution passed by NASWA’s Board of Directors, another Reed Act distribution is necessary because the state “trust fund accounts were decimated by increased benefit payments as a result of the 2001 recession.”
  
• In fact, only a minority of states are insolvent or close to insolvency today—about 15 states are insolvent or facing severe funding problems. Indeed, the U.S. Department of Labor does not project more than $2 billion of outstanding federal loans to the states in the next three fiscal years.
  
• A significant number of states have unemployment fund balances that exceed the recommended level of reserves needed heading into a major recession.  Others are relatively well off considering that the last three years have seen higher benefits payments. Thus, many states have engaged in prudent financing practices and built sufficient reserves to ride through the economic downturn, which is how the unemployment financing system is supposed to work.
  
• All of the major states facing borrowing this year (including California, Illinois, Missouri, North Carolina, New York and Texas) were below recommended levels of solvency prior to the 2001 recession. Many gave employers major tax cuts in the 1990s instead of building their trust fund reserves to prepare for the next recession. Giving these states a second Reed Act distribution is rewarding their imprudent unemployment financing while producing no long-term improvement in the solvency of their unemployment funds.
  
• Another Reed Act distribution will send a message to all states that they need not build their trust fund balances in anticipation of the next economic downturn. States that kept state payroll taxes higher in order to ensure adequate reserves will be encouraged to engage in more risky financing practices, since their employers can once more turn to the federal government for a bailout in the next recession.
  
• In fact, trust funds will be worse off in some states, not better, as a result of another Reed Act distribution. According to the recent NASWA survey, in ten states the 2002 Reed Act distribution had the effect of reducing payroll tax revenue by more than the total amount of federal funds they received.  In Ohio’s case, for example, state unemployment taxes were reduced by $520 million as a result of the 2002 Reed Act distribution, which is $173 million more than the state received in federal Reed Act funds.