The Unemployment Trust Fund and Reed Act Distributions

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Under the Federal Unemployment Tax Act (FUTA, P.L. 76-379), the federal unemployment tax
on employers finances: the states’ administrative costs of Unemployment Compensation (UC),
half of extended UC benefits, and loans to states with insolvent UC programs. These funds are
placed into the Unemployment Trust Fund (UTF) that—among its many accounts—contains three
federal accounts and 53 individual state accounts from the states’ unemployment taxes. Under
certain financial conditions, excess federal tax funds in the Unemployment Trust Fund (UTF) are
transferred to the individual state accounts within the UTF. The transferred funds are referred to
as Reed Act distributions.
The Reed Act, P.L. 83-567, set ceilings in the federal UTF accounts that trigger funds to be
distributed to state accounts; Congress has changed these ceilings several times ( P.L. 105-33, P.L.
102-318, and P.L. 100-203). There are other transfers in the UTF that are labeled by legislation as
special Reed Act distributions. These are distributed in a manner similar to the Reed Act but do
not follow all of the Reed Act provisions.
The most recent regular Reed Act distribution was $15.9 million and occurred in 1998. The
Balanced Budget Act (BBA) of 1997, P.L. 105-33, limited Reed Act distributions for the 1999 to
2001 period to special Reed Act distributions of $100 million each year. In March 2002, the Job
Creation and Worker Assistance Act of 2002, P.L. 107-147, provided for a one-time special Reed
Act distribution of up to $8 billion to state accounts. According to the Department of Labor, there
is no projected Reed Act distribution through FY2013 on account of additional benefits paid from
the extended unemployment compensation account (EUCA) for the Emergency Unemployment
Compensation (EUC08) program.
Introduced on January 8, the Unemployment Insurance Modernization Act (UIMA), H.R. 290,
would distribute up to a total of $7.5 billion to the states through a special transfer of funds from
the federal accounts within the UTF to the state accounts, using the methodology required by the
Reed Act to determine the maximum state allotments. As proposed by the House of
Representatives, The American Economic Recovery and Reinvestment Plan has an almost
identical provision. It is expected that the Senate stimulus proposal will also have a similar
provision.
This report will be updated if legislative activity affects Reed Act distributions.

What Is the Reed Act?.....................................................................................................................1
How Does the Release of Reed Act Funds Occur?.........................................................................2
How Was the $8 Billion Reed Act Distribution Spent by the States?............................................3
Policy Issue......................................................................................................................................4
Legislation in the 111^th Congress.....................................................................................................4
Table 1. Reed Act Distributions.......................................................................................................3
Author Contact Information............................................................................................................5

Unemployment Compensation (UC) is a joint federal-state program and is financed by federal
taxes under the Federal Unemployment Tax Act (FUTA) and by state payroll taxes. The
underlying framework of the UC system is contained in the Social Security Act: Title III
authorizes grants to states for the administration of state UC laws; Title IX authorizes the various
components of the federal UTF; and, Title XII authorizes advances or loans to insolvent state UC
programs. Among its 59 accounts, the federal UTF in the U.S. Treasury includes the Employment
Security Administration Account (ESAA), the Extended Unemployment Compensation Account ¹²
(EUCA), and the Federal Unemployment Account (FUA), 53 state accounts, the Federal
Employees Compensation Account, and two accounts related to the Railroad Retirement Board.
Federal unemployment taxes are placed in the ESAA, the EUCA, and the FUA; each state’s
unemployment taxes are placed in the appropriate state’s account.
In law, the term Reed Act refers to a part of the Employment Security Financing Act of 1954, P.L. ³
83-567. This legislation amended Titles IX and XII of the Social Security Act (SSA) and
established the basic structure of the UTF. The amendments to Title IX, among other things,
provided for the transfer of excess funds in the federal portion of the UTF to the individual state
accounts under certain conditions.
In practice, there have been two forms of Reed Act distributions. The first form, regular Reed Act
distributions, follows the terms as set forth in the Reed Act. The second type, special Reed Act
distributions, distributes some of the federal UTF funds to the states where these special
distributions may follow some but not all of the conditions set by the Reed Act. The 1998-2002
Reed Act distributions were special distributions.
Federal law restricts states to using Reed Act distributions only to cover the cost of state benefits,
employment services (ES), labor market information, and administration of state UC and ES
programs. Suggested uses by the Department of Labor included establishing revolving funds for
UC and ES automation costs, UC and ES performance improvement, costs related to reducing UC ⁴
fraud and abuse, and improvement in UC claims filing and payment methods. An appropriation
by the state’s legislature is necessary before the state’s share of this distribution may be used for ⁵
UC and ES administrative expenses. Funds may not be used to extend a temporary ⁶
unemployment benefit such as the Emergency Unemployment Compensation (EUC08) program.

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Under FUTA, the federal tax on employers finances the administrative costs of UC, half of
extended UC benefits, and loans to states with insolvent UC programs. State UC payroll taxes
finance the costs of regular UC benefits and half of extended UC benefits. Under FUTA, ⁷
employers pay a federal tax of 6.2% on wages of up to $7,000 a year paid to each worker. The
law, however, provides a credit against federal tax liability of up to 5.4% to employers who pay
state taxes in a timely manner. Accordingly, in states meeting the specified requirements,
employers pay an effective federal tax of 0.8%, or a maximum of $56 per covered worker, per
year.
At the end of the federal fiscal year, on September 30^th, the net balance of the ESAA is
determined. If the amount in this account exceeds 40% of the prior year’s appropriation by
Congress, then an “excess” balance exists. This excess balance is transferred first to the EUCA.
When that account reaches its statutory maximum, the remaining excess balance is transferred to ⁸
the FUA. When all three accounts are at their statutory maximums, any remaining excess
balance is distributed to the accounts of the states in the UTF based on each state’s share of U.S.
covered wages. These distributions are called Reed Act distributions.
Reed Act distributions occurred in 1956 through 1958 and 1998 through 2002. Table 1 lists the
distributions. The most recent Reed Act distribution that was a regular and not a special Reed Act
distribution was $15.9 million and occurred in 1998. The Balanced Budget Act (BBA) of 1997,
P.L. 105-33, limited the Reed Act distributions for the 1999 to 2001 period to special distributions
of $100 million each year. Any amounts in excess of the $100,000,000 that—absent the BBA
amendments—would have been transferred to the states “shall, as of the beginning of the
succeeding fiscal year, accrue to the federal unemployment account, without regard” to its
statutory limit.
In March 2002, the Job Creation and Worker Assistance Act of 2002, P.L. 107-147, provided for a
one-time special Reed Act distribution of up to $8 billion to state accounts in the UTF, where the
funds were distributed based upon the formula used for regular Reed Act distributions, using ⁹
calendar year 2000 state information. The law labeled this transfer a “Reed Act” distribution
although it differed from traditional Reed Act distributions, most notably because the law
distributed a set dollar amount which was not determined by the statutory ceilings in the federal
accounts and was distributed before the end of a fiscal year.
There was no Reed Act distribution in 2003, and there is no projected distribution through ¹⁰
FY2013. According to the Department of Labor, there is no projected distribution through ¹¹
FY2013 on account of the Emergency Unemployment Compensation (EUC08) program.

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Table 1. Reed Act Distributions
^{(in millions)}
^Year^{Reed Act Am}^ount
¹⁹⁵^{6 33.4}
¹⁹⁵^{7 71.0}
¹⁹⁵^{8 33.5}
¹⁹⁹^{8 15.9}
¹⁹⁹⁹^a^100.⁰
²⁰⁰⁰^a^100.
²⁰⁰¹^a^100.
²⁰⁰²^b^8,00^0.0
²⁰⁰^{3 0.0}
²⁰⁰^{4 0.0}
²⁰⁰^{5 0.0}
²⁰⁰^{6 0.0}
²⁰⁰^{7 0.0}
²⁰⁰^{8 0.0}
^Source:^{CRS table created from}^{U.S. Department of Labor, E}^mpl^{oyment and Training Administrati}^{on data.}
^a.^{These distributions were}^set^{by t}^{he Balanced Budget Act of}¹⁹^97.
^b.^{This distribution was set b}^y^Job^{Creation and Worker Assistanc}^e^{Act of 20}^02.

According to a Government Accountability Office (GAO) report, the $8 billion Reed Act
distribution reduced 2003 unemployment taxes in 22 states and UC administration costs in 17 ¹²
states. The Center for Employment Security Education and Research (CESER), a component of
the National Association of State Workforce Agencies (NASWA), with the assistance of Booz
Allen Hamilton and Decern Consulting, examined how states used the $8 billion special Reed Act ¹³
Distribution of 2002. This study found that approximately half of the Reed Act distribution was
used to lower state unemployment taxes in 2003 and 2004 from what they would have otherwise
been. The special distribution also led to increases in spending on UC benefits, UC administration
and employment services.

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Congress has changed the Reed Act’s statutory ceilings that trigger surplus funds to return to the ¹⁴
states’ accounts several times. Although the surplus funds are credited to the UTF, the revenue
from FUTA becomes part of the general federal fund surplus or deficit. An increase in a UTF
trigger has the impact of lowering the federal deficit and decreasing the amount of UTF monies ^th
that would have otherwise gone to the states. There is no legislation in the 111 Congress that
considers altering the statutory ceilings of FUA or EUCA.
State administrators generally have maintained that all surplus revenue collected by the FUTA
should be distributed to the states’ FUTA accounts through Reed Act distributions. The National
Governors Association (NGA) has voiced its belief that the current ceiling for the loan account
within the UTF is too large ( FUA, 0.5%). The NGA has maintained a position of reducing the
ceiling to the rate that existed in 1987 (0.125% of covered wages paid in the last year). The NGA
maintains that changes in UC laws now make it impossible for a state to default on federal UC
loans and thus the FUA ceiling should be lowered. Furthermore, they maintain that if there is a
need for states to borrow and the FUA does not have sufficient funds to accommodate the ¹⁵
borrowing by states, the FUA is authorized to borrow from the general fund.

On January 9, 2009, Representative McDermott introduced H.R. 290, the Unemployment
Insurance Modernization Act (UIMA). H.R. 290 would provide a special transfer of UTF funds
from the federal unemployment account (FUA) of up to a total of $7 billion to the state accounts
within the UTF as “incentive payments” for changing certain state UC laws. The maximum
incentive payment allowable for a state would be calculated using the methods used in Reed Act
distributions. That is, funds would be distributed to the state UTF accounts based on the state’s
share of estimated federal unemployment taxes (excluding reduced credit payments) made by the
state’s employers. In addition, H.R. 290 would transfer a total of $500 million from the federal
employment security administration account (ESAA) to the state’s accounts in the UTF.
As proposed by the House of Representatives, The American Economic Recovery and
Reinvestment Plan has proposal has an almost identical provision. It is expected that the Senate
stimulus proposal will also have a similar provision.

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