
                  SECTION 4. UNEMPLOYMENT COMPENSATION

                                CONTENTS

Overview
Benefits
  Coverage
  Number of Covered Workers
  Eligibility
  Amount and Duration of Weekly Benefits
Extended Benefits
Benefit Exhaustion
Supplemental Benefits
Hypothetical Weekly Benefit Amounts for Various Workers in the
        Regular State Programs
The Unemployment Trust Fund
  Financial Condition of the Unemployment Trust Fund
  The Federal Unemployment Tax
  State Unemployment Taxes
Administrative Financing and Allocation
Legislative History
References

                                OVERVIEW

     The Social Security Act of 1935 (Public Law 74-271)
created the Federal-State Unemployment Compensation (UC)
Program. The program has two main objectives: (1) to provide
temporary and partial wage replacement to involuntarily
unemployed workers who were recently employed; and (2) to help
stabilize the economy during recessions. The U.S. Department of
Labor oversees the system, but each State administers its own
program. Because Federal law defines the District of Columbia,
Puerto Rico, and the Virgin Islands as States for the purposes
of UC, there are 53 State programs.
     The Federal Unemployment Tax Act of 1939 (Public Law 76-
379) and titles III, IX, and XII of the Social Security Act
form the framework of the system. The Federal Unemployment Tax
Act (FUTA) imposes a 6.2 percent gross tax rate on the first
$7,000 paid annually by covered employers to each employee.
Employers in States with programs approved by the Federal
Government and with no delinquent Federal loans may credit 5.4
percentage points against the 6.2 percent tax rate, making the
minimum net Federal unemployment tax rate 0.8 percent. Since
all States have approved programs, 0.8 percent is the effective
Federal tax rate. This Federal revenue finances administration
of the system, half of the Federal-State Extended Benefits (EB)
Program, and a Federal account for State loans. The individual
States finance their own programs, as well as their half of the
Federal-State Extended Benefits Program.
    In 1976, Congress passed a surtax of 0.2 percent of taxable
wages to be added to the permanent FUTA tax rate (Public Law
94-566). Thus, the current effective 0.8 percent FUTA tax rate
has two components: a permanent tax rate of 0.6 percent, and a
surtax rate of 0.2 percent. The surtax has been extended five
times, most recently by the Taxpayer Relief Act of 1997 (Public
Law 105-34) through December 31, 2007.
    FUTA generally determines covered employment. FUTA also
imposes certain requirements on the State programs, but the
States generally determine individual qualification
requirements, disqualification provisions, eligibility, weekly
benefit amounts, potential weeks of benefits, and the State tax
structure used to finance all of the regular State benefits and
half of the extended benefits.
     The Social Security Act provides for the administrative
framework: title III authorizes Federal grants to the States
for administration of the State UC laws; title IX authorizes
the various components of the Federal Unemployment Trust Fund;
title XII authorizes advances or loans to insolvent State UC
Programs.
    Table 4-1 provides a statistical overview of the UC
Program.

                                BENEFITS

                                Coverage

     In order to qualify for benefits, an unemployed person
usually must have worked recently for a covered employer for a
specified period of time and earned a certain amount of wages.
About 125 million individuals were covered by all UC Programs
in 2000, representing 97 percent of all wage and salary workers
and 89 percent of the civilian labor force.
    FUTA covers certain employers that State laws also must
cover for employers in the States to qualify for the 5.4
percent Federal credit. Since employers in the States would
lose this credit and their employees would not be covered if
the States did not have this coverage, all States cover the
required groups: (1) except for nonprofit organizations, State-
local governments, certain agricultural labor, and certain
domestic service, FUTA covers employers who paid wages of at
least $1,500 during any calendar quarter or who employed at
least one worker in at least 1 day of each of 20 weeks in the
current or prior year; (2) FUTA covers agricultural labor for
employers who paid cash wages of at least $20,000 for
agricultural labor in any calendar quarter or who employed 10
or more workers in at least 1 day in each of 20 different weeks
in the current or prior year; and (3) FUTA covers domestic
service employers who paid cash wages of $1,000 or more for
domestic service during any calendar quarter in the current or
prior year.
     FUTA requires coverage of nonprofit organization employers
of at least four workers for 1 day in each of 20 different
weeks in the current or prior year and State-local governments
without regard to the number of employees. Nonprofit and State-
local government organizations are not required to pay Federal
unemployment taxes; they may choose instead to reimburse the
system for benefits paid to their laid-off employees.

                                       TABLE 4-1.--UNEMPLOYMENT COMPENSATION PROGRAM DATA, FISCAL YEARS 1989-2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Fiscal years
                                    --------------------------------------------------------------------------------------------------------------------
             Statistic                                                                                                                         2000
                                       1989     1990     1991     1992     1993     1994     1995     1996      1997     1988     1999   (estimated) \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total civilian unemployment rate         5.3      5.4      6.5      7.3      7.0      6.3      5.6       5.5      5.1      4.6      4.3          4.2
 (percent).........................
Insured unemployment rate (percent)      2.1      2.3      3.1      3.1      2.7      2.6      2.3       2.3      2.1      1.9      1.8          1.8
 \2\...............................
Coverage (millions)................    104.3    106.1    105.1    104.9    106.6    109.7    112.9     115.4    118.2    121.6    124.2        125.1
Average weekly benefit amount:
     Current dollars...............      145      154      163      167      172      175      179       182      185      190      202          213
     In 1999 dollars \3\...........      196      198      200      198      198      197      196       193      192      194      202          208
State unemployment compensation:
     Beneficiaries (millions)......      7.0      8.1     10.2      9.6      7.8      8.2      7.9       8.1      7.5      7.3      7.1          7.2
     Regular benefit exhaustions         1.9      2.2      3.2      3.9      3.3      3.1      2.7       2.7      2.6      2.3      2.3          2.3
     (millions)....................
     Regular benefits paid              13.5     16.8     24.4     25.6     21.9     21.7     20.9      22.0     20.3     19.4     20.7         21.3
     (billions of dollars).........
     Extended benefits (State          (\6\)     0.03     0.01     0.02     0.00     0.15     0.04      0.01    (\6\)    (\6\)     0.01         0.01
     share: billions of dollars)...
     State tax collections              17.3     16.0     15.3     17.6     21.0     22.5     23.2      22.7     22.1     21.0     20.0         21.5
     (billions of dollars).........
     State trust fund impact           +3.80    -0.88    -9.13    -8.03    -0.93    +0.66    +2.24     +0.75    +1.80     +1.6    -0.71        +0.19
     (income-outlays: billions of
     dollars) \4\..................
Federal Unemployment Accounts:
     Federal tax collections            4.45     5.36     5.33     5.41  \7\ 4.2     5.46     5.70      5.85     6.10     6.37     6.48         6.67
     (billions of dollars) \5\.....                                            3
     Outlays: Federal EB share plus    (\6\)     0.03     0.01    11.15    13.17     4.37     0.05  \8\ -0.0    (\6\)     0.01     0.01         0.01
     Federal supplemental benefits                                                                         1
     (billions of dollars).........
State administrative costs
 (billions of dollars):
     Unemployment Insurance Service     1.71     1.74     1.95     2.49     2.52     2.43     2.38      2.31     2.34     2.55     2.50         2.50
     Employment Service............     1.00     1.01     1.05     1.02     0.90     0.90     1.05      1.06     1.02     1.01     1.05         1.11
                                    --------------------------------------------------------------------------------------------------------------------
         Total administrative costs     2.71     2.75     3.00     3.51     3.42     3.33     3.43      3.36     3.36     3.56     3.55        3.61
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Based on the President's fiscal year 2001 budget.
\2\ The average number of workers claiming State unemployment compensation benefits as a percent of all workers covered.
\3\ Adjusted using the Consumer Price Index for All Urban Consumers.
\4\ Excludes interest earned.
\5\ Net of reduced credits.
\6\ Less than $5 million.
\7\ Reflects a book adjustment of minus $967 million.
\8\ Reflects reclaimed benefits in excess of benefits paid.

 Source: U.S. Department of Labor, 2000.

     States may cover certain employment not covered by FUTA,
but most States have chosen not to expand FUTA coverage
significantly. The following employment is therefore generally
not covered: (1) self-employment; (2) certain agricultural
labor and domestic service; (3) service for relatives; (4)
service of patients in hospitals; (5) certain student interns;
(6) certain alien farmworkers; (7) certain seasonal camp
workers; and (8) railroad workers (who have their own
unemployment program).

                        Number of Covered Workers

     Although the UC system covers 97 percent of all wage and
salary workers, table 4-2 shows that on average only 38 percent
of unemployed persons were receiving UC benefits in 1999. This
compares with a peak of 81 percent of the unemployed receiving
UC benefits in April 1975 and a low point of 26 percent in June
1968 and in October 1987. Despite high unemployment during the
early 1980s, there was a downward trend in the proportion of
unemployed persons receiving regular State benefits until the
mid-1980s. The proportion receiving UC rose sharply in December
1991 due to the temporary Emergency Unemployment Compensation
(EUC) Program.
    In May 1988, Mathematica Policy Research, Inc., under
contract to the U.S. Department of Labor, released a study on
the decline in the proportion of the unemployed receiving
benefits during the 1980s. This analysis did not find a single
predominant cause for the decline but instead found statistical
evidence that several factors contributed to the decline (the
figures in parentheses show the share of the decline attributed
to each factor):
 1. The decline in the proportion of the unemployed from
        manufacturing industries (4-18 percent);
 2. Geographic shifts in composition of the unemployed among
        regions of the country (16 percent);
 3. Changes in State program characteristics (22-39 percent):
    --Increase in the base period earnings requirements (8-15
            percent);
    --Increase in income denials for UC receipt (10 percent);
            and
    --Tightening up other nonmonetary eligibility requirements
            (3-11 percent);
 4. Changes in Federal policy such as partial taxation of UC
        benefits (11-16 percent); and
 5. Changes in unemployment as measured by the Current
        Population Survey (CPS) (1-12 percent).
     The group of unemployed most likely to be insured are job
losers. Chart 4-1 shows the number of unemployment compensation
claimants measured as a percentage of the number of job losers.
This coverage ratio remained fairly stable from 1968 through
1979. Over that 12-year span, there were from 90 to 110
recipients of regular State UC for every 100 job losers. This
ratio fluctuated somewhat over the business cycle, but it was
otherwise quite stable.

                          TABLE 4-2.--INSURED UNEMPLOYMENT AS A PERCENT OF TOTAL UNEMPLOYMENT, BY MONTH, SELECTED YEARS 1967-99
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Year                         Jan.    Feb.    Mar.    Apr.     May    June    July    Aug.    Sept.   Oct.    Nov.    Dec.    Avg.
--------------------------------------------------------------------------------------------------------------------------------------------------------
1967............................................      52      52      54      54      50      30      39      41      33      33      35      47      43
1968............................................      57      50      52      50      45      26      34      38      33      34      38      48      42
1969............................................      54      54      52      48      43      27      35      36      31      33      40      51      41
1970............................................      57      54      52      53      53      36      42      45      42      44      48      53      48
1971............................................      58      58      61      59      56      42      45      48      44      46      47      55      52
1972............................................      56      58      56      52      49      36      41      38      33      34      38      47      45
1973............................................      51      46      46      44      43      31      36      37      34      38      38      48      41
1974............................................      53      54      57      60      54      40      43      44      39      42      48      60      50
1975............................................      66      73      77      81      79      72      77      79      73      74      76      80      75
1976............................................      78      75      76      73      72      58      66      66      60      59      60      63      67
1977............................................      67      66      66      66      59      45      52      49      47      48      49      57      56
1978............................................      54      54      50      47      44      36      39      42      35      37      34      43      43
1979............................................      48      48      47      47      42      33      39      38      36      38      40      49      42
1980............................................      51      51      53      52      49      45      49      49      54      49      49      54      50
1981............................................      54      50      49      46      40      35      37      37      36      34      37      41      41
1982............................................      47      44      48      49      45      40      42      42      43      48      49      47      45
1983............................................      50      52      50      53      52      40      39      36      34      33      39      41      44
1984............................................      40      38      38      36      34      30      31      30      30      31      31      38      34
1985............................................      40      41      41      39      32      28      30      30      28      27      32      37      34
1986............................................      38      36      37      35      32      29      32      32      29      30      32      37      33
1987............................................      37      37      38      35      31      28      30      29      28      26      29      34      32
1988............................................      37      37      37      35      31      28      30      29      27      27      30      34      32
1989............................................      35      35      40      37      30      29      33      33      29      31      29      38      33
1990............................................      40      42      44      41      37      33      36      34      32      34      34      40      37
1991............................................      47      46      48      49      41      37      39      37      35      34      38      51      42
1992............................................      56      54      59      59      54      46      48      48      49      50      50      51      52
1993............................................      50      48      51      52      48      43      47      48      47      44      46      49      48
1994............................................      43      48      43      38      36      31      33      33      30      32      34      39      37
1995............................................      39      41      40      37      35      32      35      34      32      34      31      40      36
1996............................................      41      43      42      40      34      33      34      34      32      31      33      39      36
1997............................................      39      39      38      38      33      30      34      33      30      32      35      37      35
1998............................................      40      41      40      41      35      31      36      34      31      32      36      39      36
1999............................................      44      43      44      41      38      33      36      35      32      33      35      41     38
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: U.S. Department of Labor, Division of Actuarial Services.

    CHART 4-1. RATIO OF INSURED UNEMPLOYMENT TO JOB LOSERS (YEARLY
                          AVERAGES), 1967-99
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>

    Note._Insured unemployment data include the Virgin Islands
and Puerto Rico, but the data for job losers do not include
these territories.

    Source: Chart prepared by the Congressional Research
Service based on data from Office of the President (various
years).

     Beginning in 1980, the ratio of UC recipients to job
losers fell sharply, reaching an all-time low in 1983 when
there were fewer than 60 regular UC recipients for every 100
job losers. After 1983, the coverage ratio increased somewhat,
so that there were about 75 regular UC claimants for every 100
job losers in 1990. However, the ratio declined again with the
1990-91 recession. It has since returned to the prerecession
level.

                              Eligibility

     States have developed diverse and complex methods for
determining UC eligibility. In general there are three major
factors used by States: (1) the amount of recent employment and
earnings; (2) demonstrated ability and willingness to seek and
accept suitable employment; and (3) certain disqualifications
related to a claimant's most recent job separation or job offer
refusal.
Monetary qualifications
    Table 4-3 shows the State monetary qualification
requirements in the base year for the minimum and maximum
weekly benefit amounts, and for the maximum total potential
benefits. The base year is a recent 1-year period that most
States (48) define as the first 4 of the last 5 completed
calendar quarters before the unemployed person claims benefits.
On average, workers must have worked in two quarters and earned
$1,734 to qualify for a minimum monthly benefit. Qualifying
annual wages for the minimum weekly benefit amount vary from
$130 in Hawaii to $3,400 in Florida. For the maximum weekly
benefit amount, the range is $5,450 in Nebraska to $29,432 in
Colorado. The range of qualifying wages for the maximum total
potential benefit, which is the product of the maximum weekly
benefit amount and the maximum potential weeks of benefits, is
from $6,080 in Puerto Rico to $32,850 in Washington.

TABLE 4-3.--MONETARY QUALIFICATION REQUIREMENTS FOR MINIMUM AND MAXIMUM WEEKLY BENEFIT AMOUNTS AND MAXIMUM TOTAL
                                          POTENTIAL BENEFITS, 1999 \1\
----------------------------------------------------------------------------------------------------------------
                                                           Required total earnings in base year
                                                         ----------------------------------------  Minimum work
                          State                           For minimum  For maximum   For maximum   in base year
                                                             weekly       weekly      potential   (quarters) \3\
                                                            benefit      benefit    benefits \2\
----------------------------------------------------------------------------------------------------------------
 Alabama................................................       $2,136       $9,096       $14,819             2Q
Alaska..................................................        1,000       26,750        26,750             2Q
Arizona.................................................        1,500        7,293        15,209             2Q
Arkansas................................................        1,350       14,612        21,918             2Q
California..............................................        1,125        9,542        11,958
Colorado................................................        1,000       30,888        30,888
Connecticut.............................................          600       14,480        14,480             2Q
Delaware................................................          966       13,800        13,800
District of Columbia....................................        1,950       12,051        16,068             2Q
Florida.................................................        3,400       10,725        28,598             2Q
Georgia.................................................        1,872       10,752        23,294             2Q
Hawaii..................................................          130        9,256         9,256             2Q
Idaho...................................................        1,657        8,613        23,039             2Q
Illinois................................................        1,600       14,079        14,079             2Q
Indiana.................................................        2,750        6,750        21,914             2Q
Iowa....................................................        1,230        6,871        18,642             2Q
Kansas..................................................        2,100        8,430        22,039             2Q
Kentucky................................................        1,500       20,561        21,561             2Q
Louisiana...............................................        1,200        8,063        20,704             2Q
Maine...................................................        3,120       17,082        17,082             2Q
Maryland................................................          900        9,000         9,000             2Q
Massachusetts...........................................        2,000       11,460        31,833
Michigan................................................        3,084       11,840        20,720             2Q
Minnesota...............................................        1,250       10,758        25,818             2Q
Mississippi.............................................        1,200        7,600        14,820             2Q
Missouri................................................        1,500        8,250        17,160             2Q
Montana.................................................        1,440       23,700        23,700             2Q
Nebraska................................................        1,600        5,850        16,068             2Q
Nevada..................................................          600        9,675        19,350             2Q
New Hampshire...........................................        2,800       28,500        28,500             2Q
New Jersey..............................................        2,020       12,067        21,117             2Q
New Mexico..............................................        1,430        7,085         9,707             2Q
New York................................................        1,600       14,580        14,580             2Q
North Carolina..........................................        2,904       12,090        25,116             2Q
North Dakota............................................        2,795       16,900        21,632             2Q
Ohio....................................................        2,640       10,680        13,884             2Q
Oklahoma................................................        4,280        9,450        16,575             2Q
Oregon..................................................        1,000       26,320        26,320             2Q
Pennsylvania............................................        1,320       14,920        14,920             2Q
Puerto Rico.............................................          280        5,320         5,320             2Q
Rhode Island............................................        2,060       11,266        25,061             2Q
South Carolina..........................................          900        8,931        17,862             2Q
South Dakota............................................        1,288        8,924        15,132             2Q
Tennessee...............................................        1,560       11,440        22,880             2Q
Texas...................................................        1,702       10,360        26,959             2Q
Utah....................................................        1,800       11,076        27,348             2Q
Vermont.................................................        1,723       12,375        12,375
Virginia................................................        3,000       11,300        22,600             2Q
Virgin Islands..........................................        1,287        8,931        17,862             2Q
Washington..............................................        2,200       10,250        36,900
West Virginia...........................................        2,200       28,600        28,600             2Q
Wisconsin...............................................        1,590        8,460        18,330             2Q
Wyoming.................................................        1,750        7,563        20,082            2Q
----------------------------------------------------------------------------------------------------------------
\1\ Based on benefits for total unemployment. Amounts payable can be stretched out over a longer period in the
  case of partial unemployment.
\2\ Based on maximum weekly benefit amount paid for maximum number of weeks. Total potential benefits equal a
  worker's weekly benefit amount times this potential duration.
\3\ Number of quarters of work in base year required to qualify for minimum benefits. ``2Q'' denotes that State
  directly or indirectly requires work in at least two quarters of the base year. States without an entry have
  the minimum work requirement specified as a wage amount.

 Source: U.S. Department of Labor.

     In February 1996, a Federal court in Pennington v. Doherty
overturned the base year definition in use by most States. The
court agreed with the plaintiff's contention that Illinois
could have used an alternative base period (the last four
completed quarters) and that this alternative would better
carry out Federal law, which requires States to use
administrative methods that ensure full payment of UC ``when
due.'' This alternative method would impose greater costs on
the States affected. The Balanced Budget Act of 1997 (Public
Law 105-33) revised the Federal law that was central to the
court's decision so that States have full authority to set base
periods for determining eligibility.
     From 1996 to 1999, 16 States increased the required
earnings in the base year to qualify for the minimum weekly
benefit amount, and 1 State decreased it. Thirty-nine States
increased and six decreased the qualification requirement for
the maximum weekly benefit amount. Forty-two States increased
(and five decreased) their qualification requirements for
maximum potential benefits.
Ability to work and availability for work
    All State laws provide that a claimant must be both able to
work and available for work. A claimant must meet these
conditions continually to receive benefits.
     Only minor variations exist in State laws setting forth
the requirements concerning ``ability to work.'' A few States
specify that a claimant must be mentally and physically able to
work.
    ``Available for work'' is translated to mean being ready,
willing, and able to work. In addition to registration for work
at a local employment office, most State laws require that a
claimant seek work actively or make a reasonable effort to
obtain work. Generally, a person may not refuse an offer of, or
referral to, ``suitable work'' without good cause.
    Most State laws list certain criteria by which the
``suitability'' of a work offer is to be tested. The usual
criteria include the degree of risk to a claimant's health,
safety, and morals; the physical fitness and prior training,
experience, and earnings of the person; the length of
unemployment and prospects for securing local work in a
customary occupation; and the distance of the available work
from the claimant's residence. Generally, as the length of
unemployment increases, the claimant is required to accept a
wider range of jobs.
    In addition, Federal law requires States to deny benefits
provided under the Extended Benefits Program (see below) to any
individual who fails to accept work that is offered in writing
or is listed with the State Employment Service, or who fails to
apply for any work to which he is referred by the State agency,
if the work: (1) is within the person's capabilities; (2) pays
wages equal to the highest of the Federal or any State or local
minimum wage; (3) pays a gross weekly wage that exceeds the
person's average weekly unemployment compensation benefits plus
any supplemental unemployment compensation (usually private)
payable to the individual; and (4) is consistent with the State
definition of ``suitable'' work in other respects. Public Law
102-318 suspended these provisions from March 7, 1993, until
January 1, 1995.
     States must refer extended benefits claimants to any job
meeting these requirements. If the State, based on information
provided by the individual, determines that the individual's
prospects for obtaining work in her customary occupation within
a reasonably short period are good, the determination of
whether any work is ``suitable work'' is made in accordance
with State law rather than the criteria outlined above.
    There are certain circumstances under which Federal law
provides that State and extended benefits may not be denied. A
State may not deny benefits to an otherwise eligible individual
for refusing to accept new work under any of the following
conditions: (1) if the position offered is vacant directly due
to a strike, lockout, or other labor dispute; (2) if the wages,
hours, or other conditions of the work offered are
substantially less favorable to the individual than those
prevailing for similar work in the locality; or (3) if, as a
condition of being employed, the individual would be required
to join a union or to resign from or refrain from joining any
bona fide labor organization. Benefits may not be denied solely
on the grounds of pregnancy. The State is prohibited from
canceling wage credits or totally denying benefits except in
cases of misconduct, fraud, or receipt of disqualifying income.
    There are also certain conditions under which Federal law
requires that benefits be denied. For example, benefits must be
denied to professional and administrative employees of
educational institutions during summer (and other vacation
periods) if they have a reasonable assurance of reemployment;
to professional athletes between sport seasons; and to aliens
not permitted to work in the United States.
Disqualifications
     The major causes for disqualification from benefits are
not being able to work or available for work, voluntary
separation from work without good cause, discharge for
misconduct connected with the work, refusal of suitable work
without good cause, and unemployment resulting from a labor
dispute. Disqualification for one of these reasons may result
in a postponement of benefits for some prescribed period, a
cancellation of benefit rights, or a reduction of benefits
otherwise payable.
    Of the 14.8 million ``monetarily eligible'' initial UC
claims in 1999, 27.4 percent were disqualified. This figure
subdivides into 4.9 percent not being able to work or available
for work, 7.3 percent voluntarily leaving a job without good
cause, 4.9 percent being fired for misconduct on the job, 0.3
percent refusing suitable work, and 10.1 percent committing
other disqualifying acts. The total disqualification rate
ranged from a low of 11.0 percent in Kentucky to a high of 94.9
percent in Nebraska, with Colorado the next highest at 86.8
percent. (Note that a claimant can be disqualified for any week
claimed, so it is possible for a claimant to be disqualified
more times than the total number of that claimant's initial
claims in the benefit year.)
     Federal law requires that benefits provided under the
Extended Benefits Program be denied to an individual for the
entire spell of his unemployment if he was disqualified from
receiving State benefits because of voluntarily leaving
employment, discharge for misconduct, or refusal of suitable
work. These benefits will be denied even if the
disqualification were subsequently lifted with respect to the
State benefits prior to reemployment. The person could receive
extended benefits, however, if the disqualification were lifted
because he became reemployed and met the work or wage
requirement of State law. Public Law 102-318 suspended the
restrictions on extended benefits under Federal law, however,
from March 7, 1993, until January 1, 1995. The Advisory Council
on Unemployment Compensation was required to study these
provisions, and it recommended that the Federal rules be
eliminated. However, Congress has taken no action on this
recommendation.
U.S. Department of Labor proposal to use unemployment compensation
        benefits for family leave
    On December 3, 1999, the U.S. Department of Labor (DOL)
issued a Notice of Proposed Rulemaking to create, by
regulation, a voluntary experimental program that would give
States the option of extending UC eligibility to parents who
take time off from employment after the birth or placement for
adoption of a child under the Family Medical Leave Act of 1993
(Public Law 103-3). The program is referred to as the birth and
adoption UC experiment, also known colloquially as ``baby UI.''
The proposal immediately drew criticism from opponents who
argued that the proposal creates a benefit that the Congress
did not intend when it created the Family and Medical Leave Act
and such benefits would be contrary to the purpose of UC
benefits as stated in the law. Some opponents argued that the
proposal could not be implemented without a new law being
enacted by the Congress. DOL disagreed with this assessment and
cited the fact that much of the basic structure of the UC
system, including the requirement that individuals be able and
available for work, was established by regulatory guidance,
rather than statute. DOL also suggested the change was needed
to allow the UC system to keep pace with the changing nature of
the work force, particularly the dramatic increase in the
number of working mothers. The final rule was published in the
Federal Register on June 13, 2000.
Ex-service members
    The Emergency Unemployment Compensation Act of 1991 (Public
Law 102-164) provided that ex-members of the military be
treated the same as other unemployed workers with respect to
the waiting period for benefits and benefit duration. Before
this 1991 action, Congress had placed restrictions on benefits
for ex-service members, so that the maximum number of weeks of
benefits an ex-service member could receive based on employment
in the military was 13 (as compared with 26 weeks under the
regular UC Program for civilian workers). In addition to a
number of restrictive eligibility requirements, ex-service
members had to wait 4 weeks from the date of their separation
from the service before they could receive benefits.
Pension offset
    The Unemployment Compensation Amendments of 1976 (Public
Law 94-566) required all States to reduce an individual's UC by
the amount of any government or private pension or retirement
pay received by the individual.
     Public Law 96-364, enacted in 1980, modified this offset
requirement. Under the modified provision, States are required
to make the offset only in those cases in which the work-
related pension was maintained or contributed to by a ``base
period'' or ``chargeable'' employer. Entitlement to and the
amount and duration of unemployment benefits are based on work
performed during this State-specified base period. A
``chargeable'' employer is one whose account will be charged
for UC received by the individual. However, the offset must be
applied for Social Security benefits without regard to whether
base period employment contributed to the Social Security
entitlement.
    States are allowed to reduce the amount of these offsets by
amounts consistent with any contributions the employee made
toward the pension. This policy allows States to limit the
offset to one-half of the amount of a Social Security benefit
received by an individual who qualifies for unemployment
benefits.
Taxation of unemployment compensation benefits
    The Tax Reform Act of 1986 (Public Law 99-514) made all UC
taxable after December 31, 1986. The Revenue Act of 1978 first
made a portion of UC benefits taxable beginning January 1,
1979.
     Table 4-4 illustrates the projected effect of taxing all
UC benefits for calendar year 2000. This table understates the
impact of taxation because this analysis uses data collected
from a sample of households for the Current Population Survey
(CPS), which is known to have a problem with respondents
underestimating their annual income from various sources. In
particular, total UC benefits reported in the CPS are equal to
about two-thirds of benefits actually paid out. Because of this
underreporting of UC benefits in the CPS and, consequently,
underestimates of benefits paid in 2000, taxes collected on
benefits probably will be about twice as high as the $2.9
billion shown in table 4-4.

  TABLE 4-4.--PROJECTED EFFECT OF TAXING UNEMPLOYMENT COMPENSATION BENEFITS BY INCOME LEVEL, CALENDAR YEAR 2000
----------------------------------------------------------------------------------------------------------------
                                                                                               Total
                                            Number (in   Number (in            Total amount  amount of
                                            thousands)   thousands)   Percent       of        taxes on  Taxes as
                                                of        affected   affected  unemployment  benefits,      a
Level of individual or couple  income \1\   recipients       by         by     compensation      in      percent
                                                of        taxation   taxation  benefits, in   millions  of total
                                           unemployment      of                 millions of      of     benefits
                                           compensation   benefits                dollars     dollars
----------------------------------------------------------------------------------------------------------------
Less than $10,000........................          687          210      30.6       $1,553         $36       2.3
$10,000-$15,000..........................          634          441      69.6        1,884         161       8.6
$15,000-$20,000..........................          494          432      87.5        1,607         182      11.3
$20,000-$25,000..........................          382          343      89.8        1,195         183      15.3
$25,000-$30,000..........................          363          340      93.5        1,153         198      17.2
$30,000-$40,000..........................          600          597      99.5        1,823         317      17.4
$40,000-$50,000..........................          534          534     100.0        1,778         315      17.7
$50,000-$100,000.........................        1,291        1,291     100.0        4,290         927      21.6
At least $100,000........................          281          281     100.0        1,999         621      31.1
                                          ----------------------------------------------------------------------
    Total................................        5,265        4,468      84.9       17,282       2,941     17.0
----------------------------------------------------------------------------------------------------------------
\1\ Cash income (based on income tax filing unit) plus capital gains realizations.

 Source: Congressional Budget Office (CBO) tax simulation model.

                 Amount and Duration of Weekly Benefits

     In general, the States set weekly benefit amounts as a
fraction of the individual's average weekly wage up to some
State-determined maximum. The total maximum duration available
nationwide under permanent law is 39 weeks. The regular State
programs usually provide up to 26 weeks. The permanent Federal-
State Extended Benefits Program provides up to 13 additional
weeks in States where unemployment rates are relatively high.
An additional 7 weeks is available under a new optional trigger
enacted in 1992, but only 7 States have adopted this trigger as
of July 31, 1997. The temporary Emergency Unemployment
Compensation (EUC) Program, which operated from November 1991
through April 1994, provided either 7 or 13 additional weeks of
benefits during its final months of operation. A State offering
this temporary program could not have offered the extended
benefits simultaneously, however.
    The State-determined weekly benefit amounts generally
replace between 50 and 70 percent of the individual's average
weekly pretax wage up to some State-determined maximum. The
average weekly wage is often calculated only from the calendar
quarter in the base year in which the claimant's wages were
highest. Individual wage replacement rates tend to vary
inversely with the claimant's average weekly pretax wage, with
high wage earners receiving lower wage replacement rates. Thus,
the national average weekly benefit amount as a percent of the
average weekly covered wage was only 35 percent in the quarter
ending December 31, 1999.
     Table 4-5 shows the minimum and maximum weekly benefit
amounts and potential duration for each State program. In 1999,
the national average weekly benefit amount was $215 and the
average duration was 14.5 weeks, making the average total
benefits $3,118. The minimum weekly benefit amounts for 2000
vary from $0 in New Jersey to $102 in Rhode Island. The maximum
weekly benefit amounts range from $133 in Puerto Rico to $646
in Massachusetts.

TABLE 4-5.--AMOUNT AND DURATION OF WEEKLY BENEFITS FOR TOTAL UNEMPLOYMENT UNDER THE REGULAR STATE PROGRAMS, 1999
                                                    AND 2000
----------------------------------------------------------------------------------------------------------------
                                                          1999   2000 weekly benefit    1999     2000 potential
                                                        average       amount \1\       average  duration (weeks)
                         State                           weekly --------------------- duration -----------------
                                                        benefit   Minimum   Maximum    (weeks)  Minimum  Maximum
----------------------------------------------------------------------------------------------------------------
Alabama...............................................     $158       $45       $190       10        15       26
Alaska................................................      194     44-68    248-320       15        16       26
Arizona...............................................      164        40        205       14        12       26
Arkansas..............................................      206        55        309       13         9       26
California............................................      158        40        230       16        14       26
Colorado..............................................      252        25        337       12        13       26
Connecticut...........................................      233     15-30    382-457       15        26       26
Delaware..............................................      233        20        315       13        24       26
District of Columbia..................................      239        50        309       20        20       26
Florida...............................................      214        32        275       14        26       26
Georgia...............................................      206        39        264        9         9       26
Hawaii................................................      280         5        371       16        26       26
Idaho.................................................      201        51        273       12        10       26
Illinois..............................................      242        51    284-376       16        26       26
Indiana...............................................      214        50        252       11         8       26
Iowa..................................................      234     39-47    263-323       11         7       26
Kansas................................................      247        76        306       13        10       26
Kentucky..............................................      214        39        316       12        15       26
Louisiana.............................................      161        10        258       15        26       26
Maine.................................................      198     41-60    254-381       13        26       26
Maryland..............................................      206     25-33        250       14        26       26
Massachusetts.........................................      288     27-40    431-646       17        10       30
Michigan..............................................      237        87        300       12        15       26
Minnesota.............................................      279        38    331-410       14        10       26
Mississippi...........................................      156        30        190       14        13       26
Missouri..............................................      180        45        220       13        11       26
Montana...............................................      180        63        254       14         8       26
Nebraska..............................................      183        36        206       12        20       26
Nevada................................................      221        16        282       14        12       26
New Hampshire.........................................      221        32        301       10        26       26
New Jersey............................................      285         0        429       17        15       26
New Mexico............................................      184        48        254       16        19       26
New York..............................................      245        40        365       18        26       26
North Carolina........................................      225        30        356       10        13       26
North Dakota..........................................      202        43        283       15        12       26
Ohio..................................................      228        77    279-375       13        20       26
Oklahoma..............................................      211        16        283       14        20       26
Oregon................................................      230        84        360       15         4       26
Pennsylvania..........................................      258     35-40    408-416       16        16       26
Puerto Rico...........................................      104         7        133       19        26       26
Rhode Island..........................................      253    52-102    383-478       13        15       26
South Carolina........................................      188        20        248       11        15       26
South Dakota..........................................      172        28        214       11        15       26
Tennessee.............................................      188        30        255       12        12       26
Texas.................................................      225        48        294       16         9       26
Utah..................................................      205        20        309       12        10       26
Vermont...............................................      208        40        287       13        26       26
Virginia..............................................      192        50        230       10        12       26
Virgin Islands........................................      168        32        233       15        13       26
Washington............................................      279        94        441       18        16       30
West Virginia.........................................      194        24        318       14        26       26
Wisconsin.............................................      228        44        297       12        12       26
Wyoming...............................................      200        19        261       13        12       26
                                                       ---------------------------------------------------------
     U.S. average.....................................      215        NA         NA       15        NA      NA
----------------------------------------------------------------------------------------------------------------
\1\ A range of amounts is shown for those States that provide dependents' allowances.

 NA--Not applicable.

 Source: U.S. Department of Labor.

     Most States vary the duration of benefits with the amount
of earnings the claimant has in the base year. Twelve States
provide the same duration for all claimants. The minimum
durations range from 4 weeks in Oregon to 26 weeks in 12
States. The maximum duration is 26 weeks in 51 States
(including the District of Columbia, Puerto Rico, and the
Virgin Islands). Two States have longer maximum durations.
Massachusetts and Washington both provide up to 30 weeks.
     From 1999 to 2000, 16 States increased and 3 decreased
their minimum weekly benefit amounts. Thirty-six States raised
their maximum weekly benefit amounts, while no State decreased
them. Five States lowered their minimum potential durations,
and 13 States raised their minimum duration.

                            EXTENDED BENEFITS

     The Federal-State Extended Benefits Program is available
in every State and provides one-half of a claimant's total
State benefits up to 13 weeks in States with an activated
program, for a combined maximum of 39 weeks of regular and
extended benefits. Weekly benefit amounts are identical to the
regular State UC benefits for each claimant, and Federal funds
pay half the cost. The program activates in a State under one
of two conditions: (1) if the State's 13-week average insured
unemployment rate (IUR) in the most recent 13 weeks is at least
5.0 percent and at least 120 percent of the average of its 13-
week IURs in the last 2 years for the same 13-week calendar
period; or (2) at State option, if its current 13-week average
IUR is at least 6.0 percent. All but 12 State programs have
adopted the second, optional condition. The 13-week average IUR
is calculated from the ratio of the average number of insured
unemployed persons under the regular State programs in the last
13 weeks to the average covered employment in the first four of
the last five completed calendar quarters.
    In addition to the two automatic triggers, States have the
option of electing an alternative trigger authorized by the
Unemployment Compensation Amendments of 1992 (Public Law 102-
318). This trigger is based on a 3-month average total
unemployment rate (TUR) using seasonally adjusted data. If this
TUR average exceeds 6.5 percent and is at least 110 percent of
the same measure in either of the prior 2 years, a State can
offer 13 weeks of EB. If the average TUR exceeds 8 percent and
meets the same 110-percent test, 20 weeks of EB can be offered.
Analysis of historical data shows that this TUR trigger would
have made EB more widely available in the past than did the IUR
trigger. As of July 31, 1997, the TUR trigger had been
authorized by seven States (Alaska, Connecticut, Kansas,
Oregon, Rhode Island, Vermont, and Washington). As of May 2000,
EB is not active in any State.

                           BENEFIT EXHAUSTION

     Due to the limited duration of UC benefits, some
individuals exhaust their benefits. For the regular State
programs, 2.3 million individuals exhausted their benefits in
fiscal year 1999, or 32 percent of claimants who began
receiving UC during the 12 months ending March 1999.
    A study of exhaustees was completed in September 1990 by
Corson and Dynarski, under contract to the U.S. Department of
Labor. The purpose of this study was to examine the
characteristics and behavior of exhaustees and nonexhaustees
and to explore the implications of this information. The
samples were chosen from individuals who began collecting
benefits during the period October 1987 through September 1988.
Overall, 1,920 exhaustees and 1,009 nonexhaustees were
interviewed.
    The study's authors reached three general conclusions:
 1. A large proportion of UC recipients expected to be recalled
        to their previous jobs. The unemployment spells of
        these job-attached workers were considerably shorter
        than those of workers who suffered permanent job
        losses, and few job-attached workers exhausted their UC
        benefits. Workers who were not job-attached--in
        particular, workers who were dislocated from their
        previous jobs or who had low skill levels--were likely
        to experience long unemployment spells, and a
        significant proportion of these workers exhausted their
        UC benefits.
 2. Most workers who exhausted their benefits were still
        unemployed more than a month after receiving their
        final payment, and a majority were still unemployed 2
        months after receiving their final payment. Moreover,
        workers who found jobs after exhausting their UC
        benefits were generally receiving lower wages than on
        their prior jobs.
 3. State exhaustion rate trigger mechanisms would not be
        clearly superior to the State IUR triggers in targeting
        extended benefits to areas with high cyclical
        unemployment. Substate trigger mechanisms for extended
        benefits would do a poor job of targeting extended
        benefits to local areas with high structural
        unemployment.

                          SUPPLEMENTAL BENEFITS

     The Extended Benefits (EB) Program was enacted to provide
unemployment compensation benefits to workers who had exhausted
their regular benefits during periods of high unemployment.
Before enactment of a permanent EB Program, Congress authorized
two temporary programs, during 1958 and 1959 and again in 1961
and 1962. The Federal-State Extended Unemployment Compensation
Act of 1970 authorized a permanent mechanism for providing
extended benefits. Extended benefits rules were amended by the
Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35)
and the Unemployment Compensation Amendments of 1992 (Public
Law 102-318).
    During the 1970s and 1980s, temporary programs provided
supplemental benefits to UC recipients who had exhausted both
their regular and extended benefits during three periods of
high unemployment: (1) the Emergency Unemployment Compensation
Act of 1971, which provided benefits until March 31, 1973; (2)
the Federal Supplemental Benefits Program, first authorized by
the Emergency Unemployment Compensation Act of 1974, and
subsequently extended in 1975 (twice) and in 1977; and (3) the
Federal Supplemental Compensation Program, created by the Tax
Equity and Fiscal Responsibility Act of 1982, which was
subsequently extended and modified six times and finally
expired on June 30, 1985.
     More recently, Congress passed the Emergency Unemployment
Compensation Act of 1991 (Public Law 102-164) authorizing a
temporary Emergency Unemployment Compensation (EUC) Program.
The EUC Program, which was extended four times, effectively
superseded the EB Program and entitled individuals whose
regular unemployment compensation benefits had run out to
additional weeks of assistance. At its peak in 1992, the EUC
Program provided benefits for 26 or 33 weeks, depending on the
level of unemployment in the respective States. The EUC Program
ended on April 30, 1994.
    Benefits under the EUC Program were originally financed
from spending authority in the Extended Unemployment
Compensation Account (EUCA) of the Unemployment Trust Fund.
However, depletion of EUCA led Congress to fund EUC from
general revenues from July 1992 to October 1993. States that
qualified for extended benefits while EUC was in effect could
elect to trigger off extended benefits. This reduced the State
funding burden because 50 percent of extended benefit costs are
financed from State UC accounts while EUC was entirely
federally funded.
    Table 4-6 shows several estimates of the cost of the EUC
Program at different points in time. A comparison of cost
estimates at the time of enactment with later reviews shows
that actual costs far exceeded anticipated costs due to three
factors: exhaustions from the regular State program were
unexpectedly near record levels; claimants were staying on EUC
longer than expected; and large numbers of claimants eligible
for both regular benefits and

    TABLE 4-6.--CHANGES IN EMERGENCY UNEMPLOYMENT COMPENSATION OUTLAY
                     ESTIMATES, FISCAL YEARS 1992-94
                        [In billions of dollars]
------------------------------------------------------------------------
                                                 Fiscal years
        Source and time of estimate         ---------------------  Total
                                             1992    1993   1994
------------------------------------------------------------------------
Estimates at time of enactment
  By OMB:
    Public Law 102-164, Public Law 102-182.  $3.0    -$0.1   0      $2.9
    Public Law 102-244.....................   2.5      0.3   0       2.8
    Public Law 102-318.....................   0.6      2.0   0       2.6
    Public Law 103-6.......................   0        3.1  $2.3     5.4
    Public Law 103-152.....................   0        0     1.1     1.1
                                            ----------------------------
      Total................................   6.1      5.3   3.4    14.8
                                            ============================
  By CBO:
    Public Law 102-164, Public Law 102-182.   4.3  (\1\)     0       4.3
    Public Law 102-244.....................   2.7      0.6   0       3.3
    Public Law 102-318.....................   1.0      3.4   0       4.4
    Public Law 103-6.......................   0        3.2   2.3     5.5
    Public Law 103-152.....................   0        0     1.1     1.1
                                            ----------------------------
      Total................................   8.0      7.2   3.4    18.6
                                            ============================
OMB fiscal year 1993 Midsession review,       9.7      3.1   0      12.8
 July 1992.................................
OMB fiscal year 1994 baseline, January 1993  11.1      7.1   0      18.2
OMB fiscal year 1994 Clinton budget, April   11.1     12.3   2.1    25.5
 1993......................................
OMB fiscal year 1994 Midsession review,      11.1     12.7   1.8    25.6
 July 1993.................................
OMB fiscal year 1995 baseline, January 1994  11.1     13.2   3.7    28.0
OMB fiscal year 1995 Midsession review,      11.1     13.2   4.2   28.5
 July 1994.................................
------------------------------------------------------------------------
\1\ Less than $50,000,000.

 Source: Office of Management and Budget and Congressional Budget
  Office.

EUC were choosing EUC. As a result, for the periods fiscal year
1992 and fiscal year 1993 alone, the Office of Management and
Budget (OMB) cost estimates rose from $11.4 billion on the
dates of enactment to $12.8 billion in July 1992, $18.2 billion
in January 1993, $23.4 billion in April 1993, $23.8 billion in
July 1993, and finally $24.3 billion in January 1994--113
percent higher than originally estimated. Including fiscal year
1994 costs, the Clinton administration's budget released in
July 1994 estimated the final 3-year cost of EUC benefits to be
$28.5 billion, $13.7 billion more than OMB and $9.9 billion
more than CBO had estimated on the date of enactment.

HYPOTHETICAL WEEKLY BENEFIT AMOUNTS FOR VARIOUS WORKERS IN THE REGULAR
                             STATE PROGRAMS

     Table 4-7 illustrates benefit amounts for various full-
year workers in regular State programs for January 1999. These
benefit amounts are set by the legislatures of the respective
States. Column A of the table is for a full-time worker earning
the minimum wage of $5.15 per hour; column B is for a worker
earning $6 per hour; column C shows benefit amounts for a
worker earning $9 per hour; and column D shows a part-time
worker earning the minimum wage and working 20 hours per week.
All four cases are assumed to have a nonworking spouse and
column C assumes the worker has two children. The weekly
benefit amount for the full-time minimum wage worker (column A)
varies from $82 in North Dakota to $216 in Connecticut. The
maximum amount a worker earning $9 per hour can receive (column
C) varies considerably, from $142 per week in California to
$390 in Connecticut.

              TABLE 4-7.--WEEKLY STATE BENEFIT AMOUNTS FOR VARIOUS FULL-YEAR WORKERS, JANUARY 1999
----------------------------------------------------------------------------------------------------------------
                                                                         Hypothetical workers \1\
                          State                          -------------------------------------------------------
                                                                 A             B             C             D
----------------------------------------------------------------------------------------------------------------
Alabama.................................................        $112          $130          $190           $56
Alaska..................................................         144           158           256           102
Arizona.................................................         107           125           187            54
Arkansas................................................         103           120           180            55
California..............................................          81            95           142            41
Colorado................................................         124           144           216            62
Connecticut.............................................         216           250           390           113
Delaware................................................         116           136           203            58
District of Columbia....................................         103           120           180            52
Florida.................................................         103           120           180            52
Georgia.................................................         112           130           195            56
Hawaii..................................................         128           149           223            64
Idaho...................................................         103           120           180            52
Illinois................................................         102           119           178            51
Indiana.................................................         125           142           205            71
Iowa....................................................         116           136           203            58
Kansas..................................................         114           133           199            73
Kentucky................................................         132           154           231            66
Louisiana...............................................         107           125           187            54
Maine...................................................         132           152           243            71
Maryland................................................         120           138           219            64
Massachusetts...........................................         128           145           255            77
Michigan................................................          NA            NA            NA            NA
Minnesota...............................................         103           120           180            52
Mississippi.............................................         103           120           180            52
Missouri................................................         107           125           187            54
Montana.................................................         107           125           187            63
Nebraska................................................         112           130           195            56
Nevada..................................................         107           125           187            54
New Hampshire...........................................         118           137           206            59
New Jersey..............................................         124           144           216            62
New Mexico..............................................         103           120           180            52
New York................................................         107           125           180            54
North Carolina..........................................         103           120           180            52
North Dakota............................................          82            96           144            43
Ohio....................................................         103           120           180             0
Oklahoma................................................         116           136           203            58
Oregon..................................................         134           156           234            84
Pennsylvania............................................         112           130           202            59
Puerto Rico.............................................         103           120           173            52
Rhode Island............................................         124           144           216            62
South Carolina..........................................         103           120           180            52
South Dakota............................................         103           120           180            52
Tennessee...............................................         103           120           180            52
Texas...................................................         107           125           187            54
Utah....................................................         103           120           180            52
Vermont.................................................         119           139           208            60
Virginia................................................         107           125           187            54
Virgin Islands..........................................         103           120           180            52
Washington..............................................         107           125           187            94
West Virginia...........................................         107           125           187            54
Wisconsin...............................................         107           125           187            54
Wyoming.................................................         107           125           187           54
----------------------------------------------------------------------------------------------------------------
\1\ Hypothetical workers:
A. $5.15/hour wage; 40 hours/week; 52 weeks/year; nonworking spouse; no children.
B. $6.00/hour wage; 40 hours/week; 52 weeks/year; nonworking spouse; no children.
C. $9.00/hour wage; 40 hours/week; 52 weeks/year; nonworking spouse; two children.
D. $5.15/hour wage; 20 hours/week; 52 weeks/year; nonworking spouse; no children.

 NA--Not available. Michigan computes benefits based on aftertax wages.

 Source: U.S. Department of Labor.

                       THE UNEMPLOYMENT TRUST FUND

     The Unemployment Trust Fund has 59 accounts. The accounts
consist of 53 State UC benefit accounts, the Railroad
Unemployment Insurance Account, the Railroad Administration
Account, and four Federal accounts. (The railroad accounts are
discussed in section 5 of this volume.) The Federal unified
budget accounts for all Federal-State UC outlays and taxes in
the Federal Unemployment Trust Fund.
     The four Federal accounts in the trust fund are: (1) the
Employment Security Administration Account (ESAA), which funds
administration; (2) the Extended Unemployment Compensation
Account (EUCA), which funds the Federal half of the Federal-
State Extended Benefits Program; (3) the Federal Unemployment
Account (FUA), which funds loans to insolvent State UC
Programs; and (4) the Federal Employees' Compensation Account
(FECA), which funds benefits for Federal civilian and military
personnel authorized under 5 U.S.C. 85. The 0.8 percent Federal
share of the unemployment tax finances the ESAA, EUCA, and FUA,
but general revenues finance the FECA. Present law authorizes
interest-bearing loans to ESAA, EUCA, and FUA from the general
fund. The three accounts may receive noninterest-bearing
advances from one another to avoid insufficiencies.

           Financial Condition of the Unemployment Trust Fund

Federal accounts
    At the end of fiscal year 1999, the Employment Security
Administration Account (ESAA) exceeded its fiscal year 1999
ceiling of $1.4 billion. The 1997 budget bill provided for the
distribution of up to $100 million of excess funds at the end
of each of the fiscal years 1999-2001. The funds will be made
available to each State in the same proportion as the State's
share of funds appropriated for administration for that fiscal
year. This action effectively limits transfers (known as ``Reed
Act'' transfers) to State accounts that will occur if trust
fund surpluses continue to mount in future years.
     The Extended Unemployment Compensation Account (EUCA)
balance was below its ceiling of $15.9 billion by $0.3 billion
at the end of fiscal year 1999; the FUA balance was slightly
below its $8.0 billion ceiling. Under the administration's
fiscal year 2000 budget assumptions, the EUCA balance will fall
short of its ceiling in fiscal year 2000, then begin to have
end-of-year balances which slightly exceed its ceiling. The
1997 legislation raised the ceiling on FUA assets from 0.25 to
0.5 percent of wages in covered employment for fiscal year 2002
and subsequent years. Like the capping of annual distributions
at $100 million as described above, that change is designed to
limit Reed Act transfers to State accounts in coming years. The
reason Congress has taken these actions to increase ceilings
and limit outflows from the Federal funds is that excess funds
in the Unemployment Trust Fund are included in the unified
Federal budget and offset deficits or increase surpluses.
State accounts
    The State accounts had recovered substantially from the
financial problems that began in the 1970s and continued
through the early 1980s, but the 1990-91 recession reversed
that trend. Table 4-8 shows that the State accounts at the
beginning of 2000 held $50.3 billion, which represents a marked
improvement over the balances of $28.8 billion in 1992 and
$38.6 billion in 1997.

                          TABLE 4-8.--FINANCIAL CONDITION OF STATE UNEMPLOYMENT COMPENSATION PROGRAMS, SELECTED YEARS 1970-2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          Net reserves in millions of dollars at end of          Reserve ratios by year            2000     Average high-
                                                          calendar year                 ---------------------------------------  reserves       cost
                                         -----------------------------------------------                                            as        multiple
                  State                                                                                                         percentage -------------
                                            1970     1979      1982      1996     2000    1970    1979     1982    1996   2000    of 1970
                                                                                                                                 reserves    2000   Rank
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama.................................     $130      $118        $9     $483     $444   2.96     0.98     0.06   1.42   1.09         37    0.73     43
Alaska..................................       35        65       134      194      205   5.51     2.78     2.94   3.42   3.23         59    1.03     32
Arizona.................................      119       226       215      627      927   4.25     2.36     1.66   1.64   1.73         41    1.73      9
Arkansas................................       49        24       -77      203      242   2.26     0.37    -1.00   1.11   1.08         48    0.66     45
California..............................    1,219     2,738     2,708    2,877    4,930   2.91     2.51     1.83   0.90   1.14         39    0.77     41
Colorado................................       91       137        -4      511      719   2.54     1.11    -0.02   1.24   1.22         48    1.11     23
Connecticut.............................      252      -267      -252      278      850   0.08    -1.70    -1.21   0.62   1.47        838    1.04     30
Delaware................................       22       -30       -35      258      320   1.72    -1.06    -0.96   2.96   2.76        160    2.09      5
District of Columbia....................       74       -44       -57       99      213   3.22    -1.05    -1.03   0.80   1.36         42    1.02     33
Florida.................................      268       665       865    1,948    2,114   2.60     2.13     1.89   1.59   1.32         51    1.61     12
Georgia.................................      340       447       397    1,634    1,964   4.74     2.28     1.49   2.19   1.90         40    1.98      6
Hawaii..................................       44        79       108      211      251   2.90     2.24     2.43   2.04   2.27         78    1.34     18
Idaho...................................       46        93        29      266      267   5.16     3.20     0.85   3.06   2.46         48    1.03     32
Illinois................................      401      -460    -2,069    1,639    2,042   1.55    -0.80    -3.18   1.19   1.17         75    0.50     49
Indiana.................................      326       418        63    1,273    1,519   3.13     1.69     0.23   2.19   2.12         68    1.56     13
Iowa....................................      125       155       -63      719      775   3.19     1.45    -0.55   3.00   2.57         81    1.22     21
Kansas..................................       84       238       142      651      468   3.00     2.75     1.29   2.58   1.45         48    0.95     37
Kentucky................................      175       159      -121      501      678   4.21     1.36    -0.90   1.67   1.79         43    0.79     40
Louisiana...............................      146       238      -102    1,131    1,479   2.91     1.51    -0.47   3.45   3.77        130    1.38     17
Maine...................................       39         0        -4      112      252   2.86        0    -0.09   1.22   2.20         77    1.13     22
Maryland................................      213       273       220      691      815   3.26     1.83     1.11   1.52   1.38         42    0.95     37
Massachusetts...........................      378       132       436      915    1,921   3.04     0.51     1.23   1.17   1.85         61    1.06     29
Michigan................................      491       112    -2,186    1,831    2,742   2.49     0.25    -4.64   1.74   2.14         86    0.73     43
Minnesota...............................      119        70      -288      513      701   1.76     0.41    -1.36   0.99   1.03         59    0.62     48
Mississippi.............................       85       231       257      553      653   3.87     3.47     3.12   3.13   3.00         78    1.91      7
Missouri................................      264       296       -64      308      525   3.03     1.47    -0.27   0.61   0.83         27    0.64     47
Montana.................................       26        16         9      126      169   3.33     0.65     0.27   2.10   2.40         72    1.41     15
Nebraska................................       55        81        72      195      185   2.87     1.58     1.14   1.40   1.04         36    1.08     26
Nevada..................................       39        95       122      348      472   3.20     2.31     2.02   1.87   1.80         56    1.07     27
New Hampshire...........................       55        82        75      268      307   4.62     2.42     1.60   2.32   1.98         43    2.11      4
New Jersey..............................      448      -507      -423    2,029    2,709   2.76    -1.50    -0.97   2.06   2.10         76    1.09     25
New Mexico..............................       40        80       101      386      511   3.45     2.14     1.98   3.46   3.88        112    2.77      2
New York................................    1,693       403       819      470      863   3.76     0.51     0.78   0.23   0.33          9    0.25     53
North Carolina..........................      414       564       400    1,336    1,276   5.22     2.71     1.52   1.92   1.40         27    1.06     29
North Dakota............................       13        21        11       50       31   2.53     1.13     0.46   1.20   0.61         24    0.29     51
Ohio....................................      693       513    -1,658    1,751    2,152   3.01     1.02    -3.04   1.56   1.57         52    0.65     46
Oklahoma................................       55       177       108      564      586   1.69     1.56     0.62   2.43   2.04        121    1.62     11
Oregon..................................      122       320       161      941    1,364   3.39     3.00     1.37   3.19   3.62        107    1.44     14
Pennsylvania............................      852    -1,091    -2,145    2,032    2,663   3.53    -2.18    -3.75   1.85   1.94         55    0.68     44
Puerto Rico.............................       85       -33       -47      596      532   4.90    -0.88    -1.11   5.91   4.24         87    1.32     19
Rhode Island............................       75       -96       -76      116      264   4.34    -2.75    -1.81   1.38   2.56         59    0.87     39
South Carolina..........................      166       195        50      603      754   4.61     1.96     0.40   1.95   1.92         42    1.31     20
South Dakota............................        8        16         9       50       50   3.81     0.95     0.43   1.01   0.79         21    0.88     38
Tennessee...............................      212       264        15      827      888   3.57     1.63     0.08   1.63   1.40         39    0.96     35
Texas...................................      337       396       142      642      652   1.90     0.65    -0.16   0.36   0.27         14    0.26     52
Utah....................................       51        67        10      524      626   3.55     1.43     0.16   3.12   2.82         79    1.75      8
Vermont.................................       26       -21       -27      218      278   3.72    -1.30    -1.29   4.63   4.82        130    2.55      3
Virginia................................      218       103        14      897    1,038   3.41     0.56     0.06   1.40   1.18         35    0.90     16
Virgin Islands..........................       NA        -7        -3       42       52     NA    -2.96    -0.55   7.42   7.96         NA    3.25      1
Washington..............................      226       297       150    1,333    1,753   3.73     1.66     0.70   2.66   2.38         64    1.00     34
West Virginia...........................      108        39      -145      157      188   4.07     0.56    -1.85   1.36   1.47         36    0.46     50
Wisconsin...............................      322       465      -413    1,557    1,764   4.29     2.37    -1.53   3.10   2.80         65    1.10     24
Wyoming.................................       19        69        46      147      176   4.29     3.15     1.51   4.32   4.25         99    1.67     10
                                         ---------------------------------------------------------------------------------------------------------------
    Total...............................   11,903     8,583    -2,645   38,632   50,320   3.11     0.91    -0.24   1.48   1.49         48    0.93  .....
--------------------------------------------------------------------------------------------------------------------------------------------------------
NA--Not available.

 Source: U.S. Department of Labor (2000, March). Fourth quarter CY1999 UI Data Summary. Washington, DC.

     The balances in the State accounts are well below the
balances in the early 1970s (after adjusting for inflation)
before serious financial problems began for most States. State
reserve ratios (trust fund balances divided by total wages paid
in the respective States during the year) show that a number of
State accounts are at risk of financial problems in major
recessions. The third column from the right margin of table 4-8
shows that these State ratios are only 48 percent of their
levels in 1970. However, no State presently has outstanding
Federal loans to its account.
    The second-to-last column of table 4-8 shows for each State
the 1999 average ``high-cost multiple,'' the ratio of the
State's reserve ratio to its highest cost rate. The highest
cost rate is determined by choosing the highest ratio of costs
to total covered wages paid in a prior year. States with
average high-cost multiples of at least 1.0 have reserves that
could withstand a recession as bad as the worst one they have
experienced previously. States with average high-cost multiples
below 1.0 may face greater risk of insolvency during
recessions.
    Twenty States had average high-cost multiples below 1.0; 13
had average high-cost multiples below 0.8; and 5 had average
high-cost multiples at or below 0.5. Based on this stringent
measure, States with the highest risk factor were Illinois, New
York, North Dakota, Texas, and West Virginia.
    Table 4-9 summarizes the beginning balances in the various
Unemployment Trust Fund accounts for selected fiscal years. At
the start of fiscal year 2000, the 4 Federal accounts and the
53 State benefit accounts had a total balance of $72.0 billion.
In real terms this represents a level 28 percent higher than
that of 1971. This increase in real dollars does not allow for
the erosion implied by the large increase in the labor force
over this time period (although table 4-2 shows that an average
of 38 percent of unemployed workers was covered, compared with
48 percent in 1970). Overall, a better measure of readiness for
a recession is the ratio of the 2000 : 1970 reserve ratios in
table 4-8, which shows that aggregate reserves in 2000 relative
to wages were a little less than half the 1970 level.
     Whether the State trust fund balances are adequate is
ultimately a matter about which each State must decide. States
have a great deal of autonomy in how they establish and run
their unemployment system. However, the framework established
by the Federal Government requires States to actually pay the
level of benefits they determine to be appropriate; in budget
terms, unemployment benefits are an entitlement (although the
program is financed by a dedicated tax imposed on employers and
employees and not by general revenues). Thus, if a recession
hits a given State and results in a depletion of that State's
trust account, the State is legally required to continue paying
benefits. To do so, the State will be forced to borrow money
from the Federal Unemployment Account. As a result, not only
will the State be required to continue paying benefits, it will
also be required to repay the funds plus interest it has
borrowed from the Federal loan account. Such States will
probably be forced to raise taxes on their employers, an action
that dampens economic growth and job creation. In short, States
have strong incentives to keep adequate funds in their trust
fund accounts.

   TABLE 4-9.--BEGINNING-OF-YEAR BALANCES IN UNEMPLOYMENT TRUST FUND ACCOUNTS, SELECTED FISCAL YEARS 1971-2000
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                    Year
                          Account                          -----------------------------------------------------
                                                              1971     1976     1980     1983     1997     2000
----------------------------------------------------------------------------------------------------------------
Employment Security Administration........................      $65     $365     $572     $545   $2,899   $3,066
Extended Unemployment Compensation........................        0      116      764      483    9,466   13,147
Federal Unemployment (reserve for State loans)............      575        9      567      599    6,747    7,216
Federal Employees' Compensation...........................    (\1\)    (\1\)    (\1\)       24      262      297
State Unemployment Compensation \2\.......................   12,409    6,145    8,272      720   43,657   48,290
                                                           -----------------------------------------------------
    Total: Nominal dollars................................   13,049    6,635   10,175    2,371   63,031   72,013
                                                           -----------------------------------------------------
    Total: Real dollars \3\...............................   56,278   20,591   22,758    4,061   66,973  72,013
----------------------------------------------------------------------------------------------------------------
\1\ There was no separate account for Federal Employees' Compensation for this year.
\2\ Figures are net of loans from Federal funds.
\3\ Real dollars are obtained using the Consumer Price Index for All Urban Consumers for the preceding fiscal
  years.

 Source: U.S. Department of the Treasury, Bureau of Public Debt.

                      The Federal Unemployment Tax

     FUTA imposes a minimum, net Federal payroll tax on
employers of 0.8 percent on the first $7,000 paid annually to
each employee. The current gross FUTA tax rate is 6.2 percent,
but employers in States meeting certain Federal requirements
and having no delinquent Federal loans are eligible for a 5.4
percent credit, making the current minimum, net Federal tax
rate 0.8 percent. Since most employees earn more than the
$7,000 taxable wage ceiling, the FUTA tax typically is $56 per
worker ($7,000 <greek-e> 0.8 percent), or 3 cents per hour for
a full-time worker. The 1997 budget bill extended the 0.2
percent surtax through 2007.
     The wage base for the Federal tax was held constant at
$3,000 until 1971, and then was increased on three occasions,
most recently in 1983.
    Chart 4-2 depicts the historical trends in the statutory
and effective Federal unemployment tax rates. The effective tax
rate equals FUTA revenue as a percent of total covered wages.
Although the statutory tax rate doubled from 0.4 percent in the
late 1960s to 0.8 percent in the late 1980s, the effective tax
rate has fluctuated between 0.2 and 0.3 percent in most of
those years.

     CHART 4-2. HISTORY OF FEDERAL UNEMPLOYMENT TAX RATE, 1954-98
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>

    Source: Chart prepared by the Congressional Research
Service based on data from the U.S. Department of Labor.

                        State Unemployment Taxes

     The States finance their programs and half of the
permanent Extended Benefits Program with employer payroll taxes
imposed on at least the first $7,000 paid annually to each
employee.\1\ States have adopted taxable wage bases at least as
high as the Federal level because they otherwise would lose the
5.4 percent credit to employers on the difference between the
Federal and State taxable wage bases. Table 4-10 shows that, as
of January 2000, 42 States had taxable wage bases higher than
the Federal taxable wage base, ranging up to $27,500 in Hawaii.
---------------------------------------------------------------------------
    \1\ Alaska, New Jersey, and Pennsylvania also tax employees
directly.
---------------------------------------------------------------------------
     Although the standard State tax rate is 5.4 percent, State
tax rates based on unemployment experience can range from zero
on some employers in 16 States up to a maximum as high as 10
percent in 2 States.
     Estimated national average State tax rates on taxable
wages and total wages for 1999 were 1.8 and 0.6 percent,
respectively. Estimated average State tax rates on taxable
wages ranged from 0.3 percent in North Carolina to 4.4 percent
in Michigan and New York. Estimated average State tax rates on
total wages varied from 0.1 percent in North Carolina to 2.1
percent in Rhode Island.
    Table 4-11 shows recent State data on unemployment
compensation covered employment, wages, taxable wages, the
ratio of taxable to total wages, and average weekly wages. The
ratio of taxable wages to total wages varied from 0.17 in New
York to 0.59 in Montana.

                         TABLE 4-10.--STATE UNEMPLOYMENT TAX BASES AND RATES, 1999-2000
----------------------------------------------------------------------------------------------------------------
                                                               Estimated 1999                  1999 experience
                                                             average tax rates                    rates \1\
                                                             as a percent of--    2000 tax ---------------------
                           State                           ---------------------    base
                                                             Taxable      All                Minimum    Maximum
                                                              wages      wages
----------------------------------------------------------------------------------------------------------------
Alabama...................................................        1.0       0.4     $8,000      0.20        5.40
Alaska....................................................        2.1       1.3     24,800      1.00        5.40
Arizona...................................................        1.1       0.3      7,000      0.50        5.40
Arkansas..................................................        2.0       0.8      9,000      0.10        6.40
California................................................        2.7       0.7      7,000      0.10        5.40
Colorado..................................................        1.1       0.4     10,000      0.00        5.40
Connecticut...............................................        1.8       0.6     15,000      0.50        5.40
Delaware..................................................        2.2       0.6      8,500      0.10        8.30
District of Columbia......................................        2.2       0.5      9,000      0.10        7.00
Florida...................................................        1.3       0.2      7,000      0.00        5.40
Georgia...................................................        0.3       0.1      8,500      0.02        5.40
Hawaii....................................................        1.7       1.2     27,500      0.00        5.40
Idaho.....................................................        1.2       0.8     24,500      0.10        5.40
Illinois..................................................        2.5       0.7      9,000      0.20        6.40
Indiana...................................................        1.3       0.4      7,000      0.20        5.50
Iowa......................................................        0.9       0.5     17,300      0.00        7.50
Kansas....................................................        1.6       0.5      8,000      0.02        7.40
Kentucky..................................................        2.1       0.7      8,000      0.16        9.0
Louisiana.................................................        1.5       0.5      7,000      0.20        5.40
Maine.....................................................        3.6       1.1     12,000      1.00        5.81
Maryland..................................................        1.8       0.5      8,500      0.30        7.50
Massachusetts.............................................        2.4       0.8     10,800      0.60        7.23
Michigan..................................................        2.7       0.8      9,500      0.10        8.10
Minnesota.................................................        1.1       0.5     19,000      0.10        9.10
Mississippi...............................................        1.7       0.6      7,000      0.40        5.40
Missouri..................................................        1.4       0.3      7,500      0.00        5.58
Montana...................................................        1.3       0.9     17,700      0.00        6.50
Nebraska..................................................        0.6       0.2      7,000      0.00        5.40
Nevada....................................................        1.4       0.8     18,600      0.25        5.40
New Hampshire.............................................        0.7       0.2      8,000      0.01        6.50
New Jersey................................................        1.7       0.8     20,200      0.30        5.40
New Mexico................................................        1.3       0.7     14,800      0.10        5.40
New York..................................................        2.7       0.6      8,500      0.00        7.70
North Carolina............................................        0.8       0.4     13,900      0.00        5.40
North Dakota..............................................        1.1       0.6     16,100      0.10       10.09
Ohio......................................................        1.6       0.5      9,000      0.10        6.40
Oklahoma..................................................        0.5       0.2      9,800      0.00        5.50
Oregon....................................................        2.1       1.2     23,000      0.50        5.40
Pennsylvania..............................................        3.7       1.0      8,000      0.30        9.20
Puerto Rico...............................................        3.0       0.7      7,000      1.00        5.40
Rhode Island..............................................        3.4       1.4     12,000      0.60        9.81
South Carolina............................................        1.4       0.4      7,000      0.54        5.40
South Dakota..............................................        0.6       0.2      7,000      0.00        7.00
Tennessee.................................................        1.5       0.4      7,000      0.00       10.00
Texas.....................................................        1.3       0.4      9,000      0.00        6.30
Utah......................................................        0.6       0.4     20,200      0.10        8.10
Vermont...................................................        2.5       0.8      8,000      0.40        5.90
Virginia..................................................        0.5       0.2      8,000      0.00        5.58
Virgin Islands............................................        2.0       1.1     14,600      0.10        5.40
Washington................................................        2.1       1.2     26,500      0.47        5.40
West Virginia.............................................        2.8       1.0      8,000      0.00        7.50
Wisconsin.................................................        1.9       0.7     10,500      0.02        9.75
Wyoming...................................................        1.4       0.7     13,600      0.00        8.78
                                                           -----------------------------------------------------
    U.S. average..........................................        1.8       0.6         NA     NA         NA
----------------------------------------------------------------------------------------------------------------
\1\ Actual rates could be higher if State has an additional tax.

 NA--Not applicable.

 Note.--This table shows State unemployment tax levels. It does not include the Federal unemployment tax.

 Source: U.S. Department of Labor.

 TABLE 4-11.--TWELVE-MONTH AVERAGE EMPLOYMENT AND WAGES COVERED BY STATE UNEMPLOYMENT TAXATION FOR PERIOD ENDING
                                                  DECEMBER 1999
----------------------------------------------------------------------------------------------------------------
                                                                                              Ratio of
                                                         Covered                   Taxable     taxable   Average
                        State                           employment  Total wages     wages     wages to   weekly
                                                       (thousands)   (millions)   (millions)    total     total
                                                                                                wages     wages
----------------------------------------------------------------------------------------------------------------
 Alabama.............................................        1,808      $48,746      $13,349      0.27      $518
 Alaska..............................................          251        8,297        4,039      0.49       636
 Arizona.............................................        2,067       61,195       15,086      0.25       569
 Arkansas............................................        1,082       26,533        8,748      0.33       472
 California..........................................       13,926      501,849       90,965      0.18       693
 Colorado............................................        2,015       65,816       19,825      0.30       628
 Connecticut.........................................        1,618       67,279       18,792      0.28       800
 Delaware............................................          391       13,425        3,087      0.23       660
 District of Columbia................................          413       19,187        3,492      0.18       893
 Florida.............................................        6,628      186,411       46,847      0.25       541
 Georgia.............................................        3,656      114,540       30,562      0.27       602
 Hawaii..............................................          503       14,326        7,626      0.53       547
 Idaho...............................................          521       13,003        7,108      0.55       480
 Illinois............................................        5,725      202,070       46,728      0.23       679
 Indiana.............................................        2,839       83,335       19,121      0.23       565
 Iowa................................................        1,402       36,704       15,658      0.43       504
 Kansas..............................................        1,266       34,094       12,406      0.36       518
 Kentucky............................................        1,675       45,148       12,280      0.27       518
 Louisiana...........................................        1,808       48,335       11,694      0.24       514
 Maine...............................................          552       14,258        3,477      0.24       496
 Maryland............................................        2,199       71,590       16,742      0.23       626
 Massachusetts.......................................        3,093      119,554       32,406      0.27       743
 Michigan............................................        4,357      151,481       35,832      0.24       669
 Minnesota...........................................        2,487       80,904       31,530      0.39       626
 Mississippi.........................................        1,103       26,096        7,366      0.28       455
 Missouri............................................        2,567       74,813       18,723      0.25       561
 Montana.............................................          356        7,937        4,660      0.59       492
 Nebraska............................................          842       21,647        5,295      0.24       494
 Nevada..............................................          936       28,629       14,640      0.51       588
 New Hampshire.......................................          576       18,025        4,238      0.24       602
 New Jersey..........................................        3,651      148,206       55,511      0.37       781
 New Mexico..........................................          666       16,792        6,911      0.41       485
 New York............................................        8,056      331,197       56,720      0.17       791
 North Carolina......................................        3,705      105,751       39,559      0.37       549
 North Dakota........................................          294        6,749        2,800      0.41       441
 Ohio................................................        5,328      163,063       42,221      0.26       589
 Oklahoma............................................        1,370       33,963       13,120      0.39       477
 Oregon..............................................        1,530       45,638       22,282      0.49       573
 Pennsylvania........................................        5,296      168,503       37,077      0.22       612
 Puerto Rico.........................................          973       17,530        5,356      0.31       347
 Rhode Island........................................          441       13,345        5,030      0.38       582
 South Carolina......................................        1,744       46,059       11,828      0.26       508
 South Dakota........................................          340        7,717        2,077      0.27       437
 Tennessee...........................................        2,548       72,735       17,767      0.24       549
 Texas...............................................        8,742      278,003       73,613      0.26       612
 Utah................................................          975       26,177       12,504      0.48       516
 Vermont.............................................          278        7,427        1,880      0.25       513
 Virginia............................................        3,131       98,617       23,947      0.24       606
 Virgin Islands......................................           41        1,059          370      0.35       500
 Washington..........................................        2,550       86,200       39,044      0.45       650
 West Virginia.......................................          658       16,470        4,449      0.27       481
 Wisconsin...........................................        2,634       75,865       22,518      0.30       554
 Wyoming.............................................          215        5,293        1,964      0.37       473
                                                      ----------------------------------------------------------
    Total............................................      123,830    3,977,587    1,060,871      0.27      618
----------------------------------------------------------------------------------------------------------------
Source: U.S. Department of Labor (2000, March). Fourth quarter CY1999 UI Data Summary. Washington, DC.

                 ADMINISTRATIVE FINANCING AND ALLOCATION

     State unemployment compensation administrative expenses
are federally financed. A portion of revenue raised by FUTA is
designated for administration and for maintaining a system of
public employment offices. As explained above, FUTA revenue
flows into three Federal accounts in the Unemployment Trust
Fund. One of these accounts, the Employment Security
Administration Account (ESAA), finances administrative costs
associated with Federal and State unemployment compensation and
employment services.
     Under current law, 80 percent of FUTA revenue is allocated
to ESAA and 20 percent to another Federal account (chart 4-3).
Funds for administration are limited to 95 percent of the
estimated annual revenue that is expected to flow to ESAA from
the FUTA tax. However, funds for administration may be
augmented by three-eighths of the amount in ESAA at the
beginning of the fiscal year, or $150 million, whichever is
less, if the rate of insured unemployment is at least 15
percent higher than it was over the corresponding calendar
quarter in the immediately preceding year.
     Title III of the Social Security Act authorizes payment to
each State with an approved unemployment compensation law of
such amounts as are deemed necessary for the proper and
efficient administration of the UC Program during the fiscal
year. Allocations are based on: (1) the population of the
State; (2) an estimate of the number of persons covered by the
State unemployment insurance law; (3) an estimate of the cost
of proper and efficient administration of such law; and (4)
such other factors as the Secretary of the U.S. Department of
Labor (DOL) finds relevant.
    Subject to the limit of available resources, the allocation
of State grants for administration is the sum of resources made
available for two major areas, the Unemployment Insurance
Service (UI) and the Employment Service (ES). Each area has its
own allocation methodology subject to general constraints set
forth in the Social Security Act and the Wagner-Peyser Act.
    Each year, as part of the development of the President's
budget, the DOL, in conjunction with the Department of
Treasury, estimates revenue expected from FUTA and the
appropriate amount to be available for administration. The
estimate of FUTA revenues is based on several factors: (1) a
wage base of $7,000 per employee; (2) a tax rate of 0.8 percent
(0.64 percentage points for administration and 0.16 percentage
points for extended benefits); (3) the administration's
projection of the level of unemployment and the growth in
wages; and (4) the level of covered employment subject to FUTA.
In addition, a determination is made based on the
administration's forecast for unemployment as to whether the
rate will increase by at least 15 percent.
     Each year the President's budget sets forth an estimate of
national unemployment in terms of the volume of unemployment
claims per week. This is characterized as average weekly
insured unemployment (AWIU). A portion of AWIU is expressed as
``base'' and the remainder as ``contingency.'' At the present
time, the base is set at the level of resources required to
process an average weekly volume of 2.0 million weeks of
unemployment.
    Resources available to each State to administer its UC
Program (i.e., process claims and pay benefits) are provided
from either ``base'' funds or ``contingency'' funds. At the
beginning of the fiscal year, only the base funds are
allocated, while contingency funds are allocated on a needs
basis as workload materializes. Base funds are distributed to
the State for use throughout the fiscal year and are available
regardless of the level of unemployment (workload) realized. If
a State processes workloads in excess of the base level, it

     CHART 4-3. FLOW OF FUTA FUNDS UNDER EXISTING FEDERAL STATUTES

                       0.8% Employer Tax \1\......

                       <d-arrow>..................

                       Monthly Transfer of All Net
                        Collections.

                       <d-arrow>..................

                 ---------------------------------------
                  @ EMPLOYMENT SECURITY ADMINISTRATION
                   ACCOUNT (ESAA)--for financing
                   administrative costs of the
                   employment security program. Monthly
                   0.64% of the 0.8% employer tax is to
                   be retained in the ESAA account
                   while 0.16% is to be transferred to
                   A. Up to 95% after transfers to A
                   may be appropriated to finance State
                   administrative costs; balance
                   available to meet Federal
                   administrative costs.

                 ---------------------------------------

<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>
<rm-bond>                                               <rm-bond>

               .............  <rm-bond>
                              <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>

                ---------------------------------------------------------------------------------

Monthly        Excess if A    Excess if @    Excess if B    Excess if @
 transfers =    is over        is over        is over        and A are
 20% of net     statutory      statutory      statutory      over
 collections    limit on       limit on       limit on       statutory
 unless         September 30   October 1 of   September 30   limit and B
 statutory      of any year    any year and   of any year    is not, on
 limit is                      A is not                      October 1
 reached                       over its                      of any year
                               statutory
                               limit \2\

<d-arrow>      .............  <d-arrow>      .............  <d-arrow>
               <rm-bond>      .............  <rm-bond>
               <rm-bond>      .............  <rm-bond>
               <rm-bond>      .............  <rm-bond>

              ---------------               ---------------
               A EXTENDED     .............  B FEDERAL
                UNEMPLOYMENT                  UNEMPLOYMENT
                COMPENSATION                  ACCOUNT
                ACCOUNT                       (FUA)--for
                (EUCA)--for                   repayable
                financing                     advances to
                Federal-                      States with
                State EB and                  depleted
                EUC Programs                  reserves
               -------------                 -------------
                ------------                  ------------
                ---                           ---
               Statutory                     Statutory
                limit: 0.5%                   limit: 0.25%
                of total                      of total
                wages in                      wages in
                covered                       covered
                employment                    employment
                in preceding                  in preceding
                calendar                      calendar
                year                          year. Limit
                                              will rise to
                                              0.5%
                                              starting in
                                              fiscal year
                                              2002
              ---------------               ---------------

<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>
<rm-bond>      <rm-bond>      <rm-bond>      <rm-bond>

                      If @A and B are over
                       statutory limit on October 1
                       of any year, excess funds
                       are distributed to State
                       trust fund accounts if there
                       are no outstanding advances
                       from General Revenue to
                       either FUA or EUCA

    \1\ Effective tax, after 5.4 is offset against 6.2 percent
Federal unemployment tax. Effective rate will drop to 0.6
percent on January 1, 2008.
    \2\ $100 million of funds that would otherwise be
transferred from @ to A or distributed to the States in the
same proportion as each State's share of current appropriation
for administration; this distribution rule applies only to
fiscal years 2000-2002.

    Source: Chart prepared by the National Foundation for
Unemployment Compensation & Workers' Compensation.
receives contingency funds determined by the extent of the
resources required to process the additional workload.
    The allocation of the base UC grant funds to each State is
made by:
 1. Projecting the workloads that each State is expected to
        process;
 2. Determining the staff required to process each State's
        projected workload;
 3. Multiplying the final staff-year allocations for each State
        by the cost per staff year (i.e., State salary and
        benefit level) to determine dollar funding levels; and
 4. Allocating overhead resources (administrative and
        management staff and nonpersonal services).
     Each DOL regional office may redistribute resources among
the States in its area with national office approval. The 1997
budget bill authorized funds over 5 years specifically for
program integrity activities such as claims review and employer
tax audits to assist the States in strengthening their efforts
to reduce administrative error and fraud.
    In Public Law 102-164, Congress required the DOL to study
the allocation process and recommend improvements. Public Law
102-318 extended the study deadline to December 31, 1994. The
Department has not yet submitted the report to Congress.
    Total grants to States for administrative costs represent
about 55 percent of total FUTA tax collections in fiscal year
1999. There has been considerable interest among State
Employment Security Agencies in recent years in having more of
the FUTA revenue returned to the States for administrative
expenses. In the 106th Congress, legislation has been
introduced which would change the administrative financing of
the UC Program.

                           LEGISLATIVE HISTORY

     Major Federal laws passed by Congress since 1990 and their
key provisions are as follows:
    The Omnibus Budget Reconciliation Act of 1990 (Public Law
101-508) extended the 0.2 percent FUTA surtax for 5 years
through 1995.
     The Emergency Unemployment Compensation Act of 1991
(Public Law 102-164) established temporary emergency
unemployment compensation (EUC) benefits through July 4, 1992.
It returned to States the option of covering nonprofessional
school employees between school terms and restored benefits for
ex-military members to the same duration and waiting period
applicable to other unemployed workers. It extended the 0.2
percent FUTA surtax for 1 year through 1996.
    The Unemployment Compensation Amendments of 1992 (Public
Law 102-318) extended EUC for claims filed through March 6,
1993, and reduced the benefit periods to 20 and 26 weeks. The
law also gave claimants eligible for both EUC and regular
benefits the right to choose the more favorable of the two.
States were authorized, effective March 7, 1993, to adopt an
alternative trigger for the Federal-State EB Program. This
trigger is based on a 3-month average total unemployment rate
and can activate either a 13- or a 20-week benefit period
depending on the rate.
    The Emergency Unemployment Compensation Amendments of 1993
(Public Law 103-6) extended EUC for claims filed through
October 2, 1993. The law also authorized funds for automated
State systems to identify permanently displaced workers for
early intervention with reemployment services.
     The Omnibus Budget Reconciliation Act of 1993 (Public Law
103-66) extended the 0.2 percent FUTA surtax for 2 years
through 1998.
    The Unemployment Compensation Amendments of 1993 (Public
Law 103-152) extended EUC for claims filed through February 5,
1994, and set the benefit periods at 7 and 13 weeks. It
repealed a provision passed in 1992 that allowed claimants to
choose between EUC and regular State benefits. It required
States to implement a ``profiling'' system to identify UI
claimants most likely to need job search assistance to avoid
long-term unemployment.
     The North American Free Trade Agreement Implementation Act
(Public Law 103-182) gave States the option of continuing UC
benefits for claimants who elect to start their own businesses.
    The Balanced Budget Act of 1997 (Public Law 105-33) gave
States complete authority in setting base periods for
determining eligibility for benefits, authorized appropriations
for program integrity activities, limited trust fund
distributions to States in fiscal years 1999-2001, and raised
the ceiling on FUA assets from 0.25 percent to 0.5 percent of
wages in covered employment starting in fiscal year 2002. The
Taxpayer Relief Act of 1997 (Public Law 105-34) extended the
0.2 percent FUTA surtax through 2007.

                               REFERENCES

 Corson, W. & Dynarski, M. (1990, September). A study of
        unemployment insurance recipients and exhaustees:
        Findings from a national survey. (Occasional Paper 90-
        3). Washington, DC: U.S. Department of Labor.
Office of the President. (1997, February). Economic Report of
        the President. Washington, DC: U.S. Government Printing
        Office.
Pennington v. Doherty. Unemployment Insurance Reporter
        (para.22,184). Chicago, IL: Commerce Clearing House.
U.S. Department of Labor. (2000, February). UI Outlook: Fiscal
        Year 2001 President's Budget. Washington, DC: Author.
U.S. Department of Labor, Employment and Training
        Administration. (2000, March). UI Data Summary (Fourth
        quarter, calendar year 1999). Washington, DC: Author.
