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, Congressional Research Service
Updated June 10, 2019
Funding the State Administration of Unemployment
Compensation (UC) Benefits
Background: A joint Federal-State
Program
The Unemployment Compensation (UC) program is
constructed as a joint federal-state partnership providing
temporary and partial wage replacement to involuntarily
unemployed workers. Federal law sets broad guidelines
regarding UC benefits and financing. State laws establish
specific requirements, resulting in 53 different UC
programs operating in the states, the District of Columbia,
Puerto Rico, and the U.S. Virgin Islands. The U.S.
Department of Labor (DOL) provides oversight for state
UC programs. DOL also administers the federal portion of
the UC system, including grants to the states for UC
administration.
For a brief overview of the UC program, see CRS In Focus
IF10336, The Fundamentals of Unemployment
Compensation. For additional details on UC, see CRS
Report RL33362, Unemployment Insurance: Programs and
Benefits.
Dedicated Federal Tax Revenue Finances
UC Administration
The UC system is financed through payroll taxes paid by
employers. State unemployment taxes (SUTA) may only
fund UC benefits and the state share of the Extended
Benefit (EB) program. Federal unemployment taxes
(FUTA) on employers pay for the administration of the
program (as well as other expenditures, including the
federal share of EB and loans to insolvent states).
The net FUTA tax rate on employers in states with UC
programs that are in compliance with all federal rules is
0.6% on the first $7,000 of each worker's earnings per year.
(The FUTA tax rate for employers is 6.0% on the first
$7,000 of each worker's earnings, but a 5.4% credit against
the federal FUTA tax is available to employers in states
with complying UC programs, bringing the net FUTA tax
down to 0.6%.) DOL projects that $6.4 billion in FUTA
taxes will be collected in FY2019.
FUTA revenues are deposited into an account, the
Employment Security Administration Account (ESAA), in
the federal Unemployment Trust Fund (UTF) and then 20%
of the deposits are immediately transferred to the Extended
Unemployment Compensation Account (EUCA), which
funds the federal share of EB. These funds are made
available through the annual federal appropriations process,
designating ESAA funds to be used by DOL for the costs of
administering the state UC programs.
Underlying Rationale for Federal
Funding of UC Administration
This atypical arrangement of state-funded benefits and
federally funded administration has its roots within the
development of the Social Security program. In its 1935
report, the President's Committee on Economic Security
(CES) provided an outline of the UC program. It
recommended that federal grants be provided to the states
for the administration of UC benefits. The committee
asserted that the federal unemployment tax would be an
adequate source of funds for federal and state
administration and provide a level playing field for all
states. By structuring the funding for administration to be
paid from FUTA revenue, the federal government could
require proper standards of administration at the state level.
States today must comply with federal tax laws regarding
the administration of their UC programs or face increased
FUTA taxes.
For a discussion of the interaction of proper state
administration of the UC program and federal
unemployment tax law, see CRS Report R44527,
Unemployment Compensation: The Fundamentals of the
Federal Unemployment Tax (FUTA).
The full 1935 report from the CES can be accessed at
https://www.ssa.gov/history/reports/ces5.html. (See the
chapter titled Unemployment Compensation: Outline of
Federal Act.)
Annual Appropriations for UC
Administration
As discussed above, each fiscal year, funds are made
available through the appropriations process to make
distributions of FUTA revenue for state UC administration,
and for the federal costs of administration. Annual
appropriations to DOL for administrative expenses are
based upon DOL's assessment of state budgetary
requirements, not the size of FUTA collections. These
appropriations customarily include a base level of funding
as well as an additional contingent appropriation. The
appropriations language customarily provides a baseline
estimate of national unemployment, as measured by the
volume of unemployment compensation claims expected to
be filed per week (the average weekly insured
unemployment [AWIU]). Additionally, the contingent
funding includes a trigger based upon the average volume
of weekly UC claims exceeding the AWIU baseline. For
example, under the President's FY2020 budget proposal,
for every 100,000 increase in the total AWIU above the
1,758,000 baseline, an additional $28.6 million in funding
would be available. (The proposal may be accessed at
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