Unemployment Compensation: Most States Insolvent, Federal Loans Accrue Interest
As a fundamental component of unemployment insurance (UI) programs, state-operated unemployment compensation (UC) offers benefits to unemployed workers across the country. The state portion of UC is financed through state payroll taxes deposited in the state’s Unemployment Trust Fund (UTF) account. As an entitlement program, states are required to pay UC benefits even if revenue from state payroll taxes does not cover benefit payments. As a result, many states are forced to borrow funds from the Federal Unemployment Account (FUA) to cover the difference between UC benefit payments and state payroll tax revenues.
As of January 18, 2011, 30 states have outstanding balances on loans from the FUA. Moreover, these loans are now accruing interest as of January 1, 2011, and states must make interest payments by September 30, 2011. Employers in states that fail to make interest payments or pay off the outstanding balance of their loans within the designated timeframe will face an effective federal tax increase.
This Issue Brief outlines the provisions associated with loans to states from the FUA and their effect on states and employer tax rates.