l ’ United States General Accounting Office GAO Report to the Acting Chairman, Subcommittee on Human Resources, . Committee on Ways and Means, House of Representatives May 1990 UNEMPLOYMENT INSURANCE Trust l?und Reserves Inadequate to Meet RecessionNeeds GAO/HRD-90-124 c United States GAO General Accounting Office Washington, D.C. 20548 Human Resources Division B-239714 May 31, 1990 The Honorable Thomas J. Downey Acting Chairman, Subcommittee on Human Resources Committee on Ways and Means House of Representatives Dear Mr. Chairman: This report responds to your request that we examine proposals con- tained in H.R.3896, the Unemployment Compensation Reform Act of 1990. Specifically, you requested that we assess l the likely effect that a future recession would have on (1)reserve bal- ances in the state trust funds and (2) state borrowing, l the ability of the federal Unemployment Insurance (c’I) accounts to meet the needs of states in a future recession, and . the likely effect that a proposed increase to the taxable wage base and modifications to the extended benefits program would have on the financial status of the UI system.l We used projections, from the Department of Labor’s Unemployment Insurance Service state loan model,z to assess the impact of a severe recession, similar to the 1981-82 recession, on the financial status of the UI system. Labor developed the projections at our request. Our analysis assesses the system under three policy conditions-( 1) the current pro- gram funding structure, (2) this structure with an increase in the tax- able wage base starting in 1991, and (3) this structure with an increase in the taxable wage base together with changes to the Extended Benefits Program as called for in the bill. To determine the effect of an increase in the taxable wage base under an actual recession, we also used Labor’s model to assess the outcome had this change been implemented in 1978. before the recessions of the early 1980s. The principal purposes of the UI program are to (1) provide a cash ben- Background efit to those who are temporarily unemployed and (2) help stabihze the economy during a recession by providing the unemployed with a portion I The Extended Benefits Program provides up to an addmoral 13 weeks of UI benefits 111<iwii\ (I! high unemployment. These modificatmns would, m part, lower the level of unemploymrnr rwd~~l ior states to begin paying extended benefits. ’ This model produces fiscal year estimates of wegate trust fund balances. loans and ~~~~,~~TwIIL~ loan balances, reduced federal UI tax credits, interest earning.... and Lnterest pad. Page 1 GAO/lfiUX#124 Unemployment Insurance TNS t’nnds B-239714 still owe the federal UI loan account $10.7 billion 5 years after the start of the recession. The federal UI loan account would be exhausted by the state loans, and general fund advances of $6.6 billion would be required. This situation could result in state actions similar to those taken in the 1980s to become solvent, that is, making it more difficult for people to qualify for benefits, reducing the duration of such benefits, and increasing employer taxes. But these actions, in our opinion, jeopardized the program’s principal purposes of providing cash benefits to the unemployed and helping to stabilize the economy during a recession. An increase in the taxable wage base would be a step toward returning to a forward-funded CI program, but by no means would it result in this feature being fully restored immediately. On the basis of our analysis using Labor’s model, states would need to borrow $3 billion less from the federal loan account and would owe $4.2 billion less after 5 years. In addition, the federal loan account would need $2.2 billion less in advances from the general fund. To further illustrate the impact that an increase in the taxable wage base would have on UI trust fund reserves, we simulated what would have occurred had such a change been introduced in 1978. To do this. we used the actual economic circumstances that existed from the start of 1978 through the end of 1983, as well as the balances of the federal and state accounts at the beginning of that period. The overall effect would have been a $21 billion change in the financial status of the 1.1 system by 1983-from minus $25 billion to minus $4 billion. Thus. the UI system would have been better off financially following the severe recessions of the 1980s. Labor’s model indicates that an increase in the taxable wage base. cou- pled with the lowering of the statewide level of unemployment needed to qualify for extended benefits, would produce similar but less dra- matic results. These projections indicate that there would be $1.1 billion less in state borrowing during a recession than under current law and $3.3 billion less in outstanding loans at the end of 1995. Yet, 18 states would become insolvent. At the same time, the UI program would have paid out about three times as much in extended benefits as under cur- rent law-$17 billion compared with $6.2 billion. The effects of a severe recession on the UI system under each of the three policy conditions are summarized in table 1. Page 3 GAO/HUD9&134 Unemployment Insurance Trwt Funds B-239714 Our work was carried out between October 1989 and April 1990. We testified on the preliminary results before your Subcommittee in Feb- ruary 1990.5 As agreed with your office, we did not obtain written com- ments from the Department of Labor but consulted with agency officials to ensure that our use of data from Labor’s model was technically correct. Copies of this report will be sent to the Secretary of Labor and other interested parties. Please call me on (202) 275-1793 if you or your staff have any questions about this report. Major contributors are listed in appendix V. Sincerely yours, Franklin Frazier Director, Education and Employment Issues ’ Unemployment Insurance: Comments on H. R. 3896, The Unemployment timpensatwn Hd~rm .-\ct of 1990 (GAO/T-HRDSO - 15 Feb. 22, 1990). Page 5 GAO/HRD90124 Unemployment Insurance Trust Funds Table 111.3:Increased Taxable Wage Base and Changes to 17 Extended Benefits Page 7 GAO/HltD9iSl24 Unemployment Insurance Trust Funds declining activity. This approach was followed consistently during the first three decades after the program’s inception in 1935. Increasingly. however, many states have not accumulated reserves sufficient to cover benefits during recessions and, instead, have relied on federal loans to sustain their programs during these periods. The federal loan account was established in 1954 to provide advances to state programs that otherwise would become insolvent and be unable to make benefit payments. The expectation was that the states would repay these loans from future payroll tax revenue when the economy recovered. Initially, these loans were interest free, essentially providing (1) a subsidy to debtor states and (2) little incentive for states to repay loans or to build trust fund reserves to meet future needs. Beginning in 1982, however, the federal government haa charged interest on these loans. A number of state trust funds became insolvent in the past, and this number has increased over the years-from 1 in 1972, 13 in 1975. and 23 in both 1982 and 1983. Loans to state trust funds have been quite large, necessitating general fund advances from time to time. State UI trust funds have borrowed about $29.6 billion to pay benefits- $11.8 billion in loans were needed during 1982-83 alone. Overall, this has resulted in negative balances in the UI system, evidence that the pro- gram was not forward funded. As shown in table 1.1, during the 9 con- secutive years from 1976 to 1984, the total balance of the three federal accounts and 53 state accounts was negative. The total balance for the three federal accounts was negative for 12 consecutive years, from 1975 to 1986. Page 9 GAO/HIlBW124 Unemployment Insurance Trust Funds Appendix I Detailed Background actions have included an increase in employer LI taxes while unemploy- ment rates were still high, tightening the requirements for 1.1benefits, and reducing the length of such benefits. Page 11 GAO/HRL%9@124 Unemployment lnswancr Tru~bl Funds Overall, the system had a high-cost multiple of .89 as of December 1989, meaning about 11 months of recession benefits were in reserve. This is a considerable improvement over the .07 high-cost multiple in 1984. The results of a simulated severe recession, using Labor’s model and the equivalent of the 1981-82 recession, are shown in table 11.1.The model indicates that if such a recession was to begin in 1991, the states would need to borrow about $17.4 billion from the federal loan account for 1991 to 1996. Moreover, 17 state programs would become insolvent, with negative balances in their trust funds at the end of 1 or more years during this period. Of these 17 insolvent states, 15 had a high-cost mul- tiple below 1.0 before the simulated recession. At the end of 1995, the states would owe about $10.7 billion and the net balance of the state trust funds (balances of state trust fund minus outstanding loans) would be $16.5 billion. The federal loan account would have an estimated bal- ance of $2.3 billion at the start of 1991, but this amount would be insuf- ficient to meet state loan requirements. The federal loan account would need advances of $6.6 billion from the general fund. Table 11.1:Effocta of Swore Recession Under Current L~irlation (Fiscal Years Dollars in billions 1991 Through 1995) State borrowma $17 4 General fund advances to loan account 66 State loan balances. end of 1995 107 Net state UI balances, end of 1995 165 Note: The number of insolvent states IS 17 The original act establishing the UI system imposed a federal UI payroll Effect of a Taxable tax on the total annual wages paid employees. A legislative change in WageBase Increase 1939, however, imposed the federal tax on the first $3,000 of annual wages; this tax has been limited to a portion of annual wages ever since. The wage base has not kept pace with the growth in wages. Had the 1939 ceiling been continually indexed to wage inflation, the current ceiling would be over $42,000. The gap between the wage base and wage growth has been allowed to exist because revenues based on a lower wage base were more than ample to cover benefit payments to the unemployed through the 1960s. The taxable wage base was subsequently increased three times-to $4,200 in 1970, $6,000 in 1976, and $7,000 in 1982. Page 13 GAO/HIUbSlW24 Unemployment In&nuance Trust hnds Appendix II Itesulta of GAO Analysis Table 11.2:Effects of Severe Aeces8ion Under Current and Proposed Legislation Dollars m billions (Fiscal Years 1991 Through 1995) increased Current law wage base State borrowmg $174 $143 General fund advances to loan account $66 $44 State loan balances, end of 1995 $10 7 $65 Net state UI balances. end of 1995 $16 5 $291 Insolvent states 17 16 Had the taxable wage base increase been implemented starting in Jan- uary 1978 (before the recessions of the early 198Os), the system would have been better able to handle the subsequent severe recessions. Using the Labor model, we estimate that with an increase in the taxable wage base, the net balance of state trust fund reserves at the end of 1983 would have changed from minus $5.8 billion to a positive $4.9 billion, a difference of $10.7 billion. Equally dramatic changes would have occurred in the federal accounts, with their net balances increasing by a total of %10.3 billion. The simulation results show that the overall effect of the wage base increase, had it been introduced in 1978, would have been a $21 billion change in the financial status of the UI system by 1983-from minus $24.5 billion to minus $3.5 billion (see table 11.3). Table 11.3:Effect of Increased Taxable Wage Base (1978-M) Dollars in bllllons Balances With 1983 increased actual waae base Difference Federal accounts -$187 - -.$a4 $103 State accounts -50 49 107 Total UI system -524.5 -53.5 $21.0 In addition to increasing the taxable wage base, the proposed legislation Effect of Increased would, among other things, change the circumstances under which fed- Taxable Wage Base eral-state extended benefits would be paid. UI beneficiaries are normally and Revised Extended eligible for a maximum of 26 weeks of benefits and the Extended Bene- fits Program prolongs worker eligibility for UI benefits for up to an addi- Benefits tional 13 weeks in areas of high unemployment. Extended benefits are paid after state unemployment rates reach specific levels. At present, mandatory benefits are paid to eligible recipients when a state’s Insured unemployment rate (1) equals or exceeds 5 percent for 13 conswutl~e Page 16 GAO/HRD90-124 Unemployment Insurancr Trust Funds Appendix III Simulation Results Table 111.1:Current Funding Structure Dollars In blhons _____ 1991 1992 1993 1994 1995 Total State borrowing from federal loan account 14 59 40 32 29 17.4 General fund advances to federal loan account 0 34 26 6 0 6.6 State loan balances. end of year 17 73 10.1 10 9 10 7 a Net state UI balances. end of year 227 77 6.8 106 165 . aNot applicable. Table 111.2:Increased Taxable Wage Base Dollars In blllions 1991 1992 1993 1994 1995 __- Total State borrowing from federal loan account 14 5.3 35 21 19 14.3 General fund advances to federal loan account 0 2.9 15 0 0 4.4 State loan balances, end of vear 1.7 68 8.3 8.1 65 a Net state UI balances, end of vear 22.7 9.2 11 6 19 1 29 1 I “Not appkable Table 111.3:Increased Taxable Wage Base and Changes to Extended Benefits - - -. - m -hdlinnc OnHare - - -__ 1991 1992 1993 1994 1995 Total State borrowing from federal loan account 14 6.0 4.5 2.4 20 6.3 General fund advances to federal loan account 0 42 16 0 0 5.8 State loan balances, end of I year 1.7 74 9.2 89 74 Net state UI balances, end of year 213 63 77 144 23 6 a “Not apphcable Page 17 GAO/HlUWX%l24 Unemployment Insurance Trust Funds Major Chributors to This Report Sigurd R. Nilsen, Assistant Director, Employment and Training Issues, Human Resources (202) 523-8’701 Division, Thomas N. Medvetz, Assignment Manager Washington, D.C. Anders T. Anderson, Evaluator-in-Charge Boston Regional Office Requests for copies of GAO reports should be sent to: U.S. General Accounting Office Post Office Box 6015 Gaithersburg, Maryland 20877 Telephone 202-275-6241 The first five copies of each report are free. Additional copies are $2.00 each. There is a 25% discount on orders for 100 or more copies mailed to a single address. United States First-Class Mail General Accounting Office Postage & Fees Paid Washington, D.C. 20548 GAO Permit No. GlOO Official Business Penalty for Private Use $300 RelatedGAO Products Unemployment Insurance: Comments on H.R. 3896, The Unemployment Compensation Reform Act of 1990 (GAO/T-HRDSO-15, Feb. 22. 1999). Unemployment Insurance: Administrative Funding Is a Growing Problem for State Programs (GAO/HRD-89-72BR, May 24, 1989). Unemployment Insurance: Administrative Funding Likely a Growing Problem (GAO/T-HRD-8921, May 24, 1989). Unemployment Insurance: Trust Fund Reserves Inadequate (GAO/ HRD&%55,Sept. 26, 1988). Unemployment Insurance: Issues Related to Reserve Adequacy and Trust Fund Solvency (GAO/T-HRDBS~, July 7, 1988). Unemployment Insurance: Issues Related to Reserve Adequacy and Trust Fund Solvency (GAO/T-~~~-886, Dec. 14, 1987). Appendix IV EconomicAssumptions Used in Recession Simulation 1990 1991 1992 1993 1994 1995 Total unemployment rate (percent) 57 90 102 76 73 7c Ciwllan labor force growth (percent) 6 15 14 12 14 12 Waae arowth (oercent) -1 56 61 59 53 47 ~45 Clwllan employment (mdllons) 1173 1149 1150--- 1196 ‘21 9 ~~ 6 123 - 1 . Appendix ll RemIts of GAO Analysis weeks and (2) is at least 20 percent higher than the average rate for the same 13-week period in the preceding 2 years.’ At the state’s option, benefits can also be paid when the insured unemployment rate reaches 6 percent, regardless of previous unemployment rates. The proposed legislation would reduce the current insured unemployment rates by 1 percentage point, to 4 percent for the man- datory benefits and to 5 percent for the optional payments. The pro- posed legislation would also allow extended benefits to be paid when a state’s total unemployment rate equals or exceeds 8 percent during the previous 12month period. Again using Labor’s model, we simulated the effect the above changes in the Extended Benefits Program, coupled with an increase in the taxable wage base, would have on the financial condition of the federal accounts and the state trust fund accounts. This simulation showed that under a severe recession, beginning in January 1991, a total of about $17.0 bil- lion in extended benefits would be paid to UI claimants for 199 1 through 1995, compared with about $6.2 billion under existing law. Under this simulation, states would have to borrow about $16.3 billion from the federal loan account and 18 state programs would become insolvent during this period. At the end of fiscal year 1995, the states would still owe about $7.4 billion. The net balance of the state trust funds would be $23.6 billion. As in the other two simulations, the balance in the loan account would be insufficient to meet loan requirements-$5.8 billion in advances would be needed from the general fund. These results, along with those from simulations using the current funding structure and an increase in the taxable wage base, are summarized in table 1.1 (see p. 4). ? The mured unemployment rate 1sthe number of regular UI benefit clmams dir ldt,d t)? ‘hi average number of people in IT covered employment for the first 4 of the last 6 nrmplt~r~~d.hndar quarten. Page 16 GAO/HUBS@124 Unemployment lnsurancr TNIL Funds Appendix U Results of GAO Analysis H.R. 3896 would increase the taxable wage base from its current JT’.OOU to $10,000, with $l,OOU increments over 3 years. Thereafter. the wage base would be indexed to the growth in average annual covered >vages. This change, coupled with the expiration of the .2 percent temporary surtax at the end of 1990, would generate a federal employrr 1.1tax of $48 in the first year (compared with $56 under current lal, $54 in the second year, and $60 in the third year for each employee rung the base wage or more. Our analysis assumed that the .2 perct 1: surtax expired at the end of 1990. An increase in the taxable wage base will generate increased revenue for the federal trust fund accounts and increase reserves in some of the 53 state trust fund accounts. Only the 17 state trust funds with a taxable wage base at the current level of $7,000 will, however, receive the full amount of increased revenues generated by this proposal. Of the remaining states, 19 already have a wage base of $10,000 or more and 17 have a wage base of between $8,000 and $10,000. In an attempt to offset the effect of a taxable wage base increase, the states have. m the past, reduced the rate at which they tax employers following these increases. To the extent that this would again occur following the imple- mentation of the wage base proposal, the increase in state trust fund reserves would be reduced. Labor’s model includes, to some t ‘pnt, reductions in state tax rates that traditionally have accomp;’ d increases in the taxable wage base. Simulation results, based on Labor’s model and assuming a st- w reces- sion, coupled with an increase in the taxable wage base beginnmg in January 1991, are shown in table 11.2.According to Labor’s model, this condition would result in states’ needing to borrow $14.3 billion from the federal loan account for 1991 to 1995. This would amount to $3 bil- lion less than under current law. At the end of 1995, the states would owe about $6.5 billion ($4.2 billion less) and the net balance of the state trust funds would be $29.1 billion-$12.6 billion more than under existing law. The federal loan account would need advances of S-l 1 bil- lion from the general fund-$2.2 billion less than under the curr~~nt funding structure. Sixteen states would become insolvent berwvetn 199 1 and 1995 under this condition, compared with 17 under the eslstmg condition. Page 14 Appendix II Resultsof GAO Analysis Our analysis indicates that (1) many states may not have reserves suffi- cient to pay recession benefits and (2) the current financial condition of the UI system, overall, appears to be inadequate to handle a severe recession. This is so despite 7 years of economic expansion and reserves of $8.1 billion in the federal accounts and $36.2 billion in the state trust fund accounts as of January 1990. Our analysis also indicates a severe recession in the near future would most likely result in states’ borrowing from the federal loan account in order to pay benefits to the unem- ployed. In addition, financing these federal loans would probably again require general fund advances. Our analysis compared the UI system’s ability to handle a severe reces- sion under the current funding structure with its ability under an increase in the taxable wage base. In general, our analysis showed that this increase would be a step in the right direction, toward restoring the forward-funding basis of the UI system. But by no means would this increase result in the full restoration of forward funding in the imme- diate future. The most commonly used measure of the adequacy of financial reserves Current UI System is known ‘s the high-cost multiple. This measure compares current ReservesAre reserves .1peak benefit payouts in the past. It is essentially an indi- Inadequate cator of kt. long recession benefits could be paid from current reserve balances. An association of state employment security agency adminis- trators has endorsed a target high-cost multiple of 1.5 as being indica- tive of reserve adequacy; this means there should be 18 months worth of benefits in the state trust fund in order for a state to go through a recession without needing loans. Judged by this measure, resemes today are inadequate. As of December 1989, only 7 of the 53 state programs had a high-cost multiple at or above the 1.5 standard. In contrast, 39 states had a high-cost multiple above 1.5 in 1969. A 1986 study undertaken for the Department of Labor concluded that state reserves would usually be adequate at high-cost multiples as low as 1.0.’ Using this less stringent standard adds an additional 17 states to the list of 7 with sufficient reserves; however, 29 states would still have inadequate reserves according to this standard. In 1969, 51 of the 53 state trust funds surpassed the 1.0 standard. I An Analysts of UI Trust Fund Adequacy, Vroman. Wayne and Bamow. Burt. Lnemplii~mrvt !mur- mce Service Occas~onaIPaper 87-I (Dec. 1986) Page 12 GAO/HBD6@124 Unemployment lnsuranreTruerFunds Appendix I Detailed Back@wund Table I: Financial Status of UI Accountr (1970-89) Dollars in bflllons Total UI federal system Year liSAAn EUCAb FUAC accounts State total 1970 06 $0 $6 7 $1’ 9 $126 1971 2 - 04 6 8 97 -10: 1972 3 -6 5 2 94 96 1973 5 -7 5 3 lC5 10 8 1974 7 -04 5 8 105 113 1975 4 -13 01 -9 31 22 1976 5 -62 -24 -81 9 72 1977 2 -84 -38 -120 9 -11 1 1978 3 -81 -47 -125 46 -7 9 1979 6 -71 -44 -109 86 23 1980 8 -65 -39 -96 66 -3 0 1981 8 -64 -55 -11 1 5a 53 1982 5 -63 -79 -137 -26 -16 3 1983 3 -61 -129 -187 -58 24 5 1984 9 -41 -91 -123 22 101 1985 IO -22 -57 -69 101 32 1986 11 -7 -41 -37 154 11 7 1987 --1 6 13 -23 6 22 9 235 1988 19 3.6 1 56 31 1 367 1989 --I 1 58 1.7 82 36 7 44 9 YSAA Employment Security Adminstratlon Account(prowdes funds for adm~nlstrat:ve CCSIS, QEUCA Extended Unemployment Compensation Account(prwdes funds for extended be@ ‘91 ‘FUA Federal Unemployment Account (prowdes loans to states) Note The balances of EUCA and FUA conslstof the end of-the-year balance mrws generai ‘~vd advances The slate account balance conststs of end-of-the-year balance nxnus all outstanding federal loans The Congress enacted several policy changes in the late 1970s and early 1980s that were designed to move the system toward a positive total reserve balance and restore the forward-funding basis of the program. These included the 0.2 percent federal surtax on employers and the charging of interest on federal loans to state trust funds. The larrer change had the intended effect of expediting state repayment of ftderal loans. In an attempt to reduce funds spent on UI benefits, howcl,er. many states took actions that ran counter to the principal purp)st’s of (1) providing the unemployed with a cash benefit while out of L\or-k and (2) stabilizing the economy during periods of recession. In the pa.\t. rhe Appendix I Detailed Background The Unemployment Insurance (61) program is the federal gov,ernment‘s major means of providing income maintenance assistance to the unem- ployed. The program’s principal purposes are to provide (I) individuals with temporary and partial wage replacement when they have lost their jobs and (2) countercyclical stabilization of the national economy during an economic decline by maintaining the purchasing power of the unemployed. The CTIsystem includes 3 federal accounts and 53 state accounts. The federal accounts are financed through a payroll tax on employers; they provide funds for state and federal UI program administration. one-half of an Extended Benefits Program (this program lengthens the period over which VI benefits are paid in areas of high unemployment), and loans to states with insolvent UI accounts. The state accounts are also funded through a payroll tax and are used to finance regular GI benefits and one-half of an Extended Benefits Program. Each state operates its own UI program, levying and collecting its own payroll tax and, within certain limits, determining the amount of benefits and the conditions for benefit eligibility. As a result, tax rates, benefit amounts, and trust fund balances vary across states, reflecting variations in program decisions and economic conditions. The gross federal tax rate is 6.2 percent on the first $7,000 paid in wages annually to each employee. If a state meets certain federal requirements and has no delinquent federal loans, however, its employers are eligible for up to a 5.4 percent credit, making the net fed- eral tax rate 0.8 percent. In order for employers to receive the maximum federal tax credit of 5.4 percent, states must establish a taxable wage base for state UI taxes at least equal to the federal taxable wage base- currently $7,000. All states have done this, and 36 states have adopted wage bases above the federally mandated base, ranging from $7.100 in Connecticut to $20,900 in Alaska. Currently, the net federal tax rate of 0.8 percent is made up of a perma- nent tax rate of 0.6 percent and a temporary surtax of 0.2 percent The surtax was added in 1976 to help the system repay loans from the fed- eral general fund. The surtax was extended in 1987 and is due to expire at the end of 1990. The UI program was supposed to operate on a forward-funding basis: that is, tax rates and benefit amounts were set so that the system accu- mulated reserves during periods of rising economic activity m ortfcr to have sufficient reserves to cover benefit payments during periods of Page 8 GAO/HRLh90124 Unemployment Insurance Tour Funds contents Letter 1 Appendix I 8 Detailed Background Appendix II 12 Results of GAO Current UI System Reserves Are Inadequate Effect of a Taxable Wage Base Increase 12 13 Analysis Effect of Increased Taxable Wage Base and Revised 1.5 Extended Benefits Appendix III 17 Simulation Results Appendix IV 18 Economic Assumptions Used in RecessionSimulation Appendix V 19 Major Contributors to This Report Related GAO Products 20 Tables Table 1: Effects of a Severe Recession Under Three Policy 4 Conditions (Fiscal Years 1991-96) Table I: Financial Status of UI Accounts (1970-89) 10 Table II. 1: Effects of Severe Recession Under Current 13 Legislation (Fiscal Years 1991 Through 1995) Table 11.2:Effects of Severe Recession Under Current and 15 Proposed Legislation (Fiscal Years 1991 Through 1995) Table 11.3:Effect of Increased Taxable Wage Base 1.’ (1978-83) Table III. 1: Current Funding Structure 1; Table 111.2:Increased Taxable Wage Base 1; Page 6 GAO/HltB~lZ4 Unemployment Insurance Trust Funds 5239714 Table 1: Effects ot a Severe Recerrion Under Three Policy Conditions (Fiscal Dollars m bllhons Years 1991-95) Increased wage base and Increased extended - Current law wage base benefits State borrowmg $174 $14 3 $163 General fund advances to loan account $6 6 $44 $5 8 State loan balances, end of 1995 $107 $6 5 $7 4 Net state UI balances. end of 1995 $16.5 $29 1 $23 6 Insolvent states 17 16 1R The detailed results of our analysis are contained in appendix II. In addition, appendix III provides details on the results of each of the simu- lations for the three policy conditions. Information on the economic assumptions used in Labor’s model are contained in appendix IV. Although state trust fund accounts are in their best financial condition Conclusions since the years before the 1973 recession, the reserves in both the fed- eral and state accounts are not adequate to handle a severe recession in the near future. Such a recession, starting in 1991, would result in another round of state borrowing, accompanied by advances from the general fund. Recent experience indicates that in order to repay loans, states raise taxes and cut benefits while unemployment is still high. Such actions lessen the effectiveness of the UI program in achieving its principal purposes of providing (1) income maintenance to the unem- ployed and (2) a countercyclical stimulus to the economy. These actions could be reduced if states maintained adequate balances in their trust funds. The proposed increase in the taxable wage base is a means of moving in the direction of restoring the forward-funding basis of the program. The increased wage base would (1) improve federal trust fund reserves, (2) reduce the amount of general fund advances needed should a major recession begin anytime soon, (3) improve reserves in some states, thereby reducing the need for them to borrowand (4) provide resources for a larger Extended Benefits Program. However, if states behave as in the 1980s they will reduce tax rates as the wage base is increased. To the extent this occurs, state trust fund reserves may continue to remain inadequate. 5239714 of their purchasing power. The program is designed to operate on a for- ward-funding basis, under which the system is supposed to accumulate sufficient reserves during periods of economic growth to pay benefits during periods of economic decline. In recent years, however. many states have not accumulated reserves sufficient to cover benefits during a recession: !nstead, they have relied on advances from the federal 1.1 loan accoun ) sustain their programs during economic downturns. ‘he drop in accumulated reserves has been caused, in part, by high unemployment during four recessions in the last two decades, additional expenditures for the continuation of benefits under the Extended Benefits Program, and increases in benefits without offsetting increases in revenues.4 In the past, the states have received substantial loans from the federal UI loan account. This account has needed general fund advances from time to time because of insufficient balances. Since the early 197Os, the states have borrowed about $29.6 billion to pay benefits. H.R. 3896 is aimed, in part, at restoring the forward-funding basis of the UI program by providing the means for the federal and state accounts to accumulate reserves sufficient to cover a recession. The bill would (1) increase the taxable wage base from $7,000 to $10,000 over 3 years and then index this base to the growth in average annual covered wages and (2) revise the Extended Benefits Program by making it easier for states with long- term, high unemployment to qualify for the program. Additional back- ground on the UI program is contained in appendix I. The UI system has built considerable reserves during the past 7 years of Results in Brief economic expansion-$& 1 billion in the federal accounts and $36.2 bil- lion in the state trust funds, as of January 1990. Nevertheless, the cur- rent fiiancial condition of the WIsystem appears to be inadequate to handle a severe recession. According to Labor’s model, under current law a severe recession in 1991 would result in 22 states having to borrow an estimated $17.4 billion between 1991 and 1995 to sustain their programs. During or immediately following the recession period, 17 of these states would become insolvent-that is, their trust funds would have negative balances at the end of a year. Fifteen states would o The federal UI account9 include three accounts-the loan account, the extended benefl~s rl( ~r~mt, and the administration account. 4For a detailed discussion of the madequacy of UI trust fund reserves and the factors thal INI to lb decline in the 1970s. see Unemployment Insurance: Trust Fund Reserves Inadequate (GAO/HRD-88-65, Sept.-ZKlIW). l -
Unemployment Insurance: Trust Fund Reserves Inadequate to Meet Recession Needs
Published by the Government Accountability Office on 1990-05-31.
Below is a raw (and likely hideous) rendition of the original report. (PDF)