Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

The Fiscal Fix Our Unemployment Insurance Systems Need

State agencies are trying to address technical shortcomings that led to as much as $135 billion in fraud during the pandemic. But declining and volatile federal funding for administration is impeding those efforts.

Closed unemployment office
A surge of unemployment insurance applications during the pandemic overwhelmed state offices. (Lev Radin/Shutterstock)
Four years after Congress passed the CARES Act and opened up crucial assistance to jobless workers, costly unemployment insurance system malfunctions remain unresolved. During the COVID-19 pandemic, state UI agencies experienced an overwhelming surge of benefit applications. Criminals took advantage of this disarray, ultimately stealing as much as $135 billion. Inadequate communication between states and poor use of available data verification networks, in particular, made it difficult to distinguish between legitimate claimants and fraudsters.

State UI agencies have begun addressing an array of technical shortcomings, but Congress still has not addressed a core problem that prevents them from making durable investments in program integrity: decades of declining and volatile federal support for UI administration.

Every year, state UI agencies attempt to plan around congressional base allocations — discretionary funding for administration that is topped up quarterly only when the workload for core functions exceeds expectations. But these amounts have not kept up with inflation. As I outline in a new report, since 2007 the inflation-adjusted base funding sent to states annually for UI administration has declined by $900 million. This amounts to a 27 percent reduction that has forced agencies to understaff and delay crucial system upgrades.

Furthermore, states cannot rely on stable funding levels from one year to the next. Since administrative allocations are based on workload projections, the total amount states receive drops as the economy improves. So just as agencies finally regain capacity to focus on system improvements, funding that could go to updates is stripped away.

U.S. Department of Labor officials and the Government Accountability Office have determined that such long-standing fiscal issues left state agencies unable to handle the high volume of applicants and defend against criminal operations during the pandemic. Although Congress attempted to counter the influx in claims with a quick infusion of administrative funding, the support came too little too late. Agencies could not address years’ worth of neglected maintenance within weeks. A more dedicated funding stream was, and remains, necessary to avoid similar breakdowns in the future.

Part of the solution is to raise more funds for UI agencies. Employers typically pay a 0.6 percent federal unemployment tax, known as FUTA, on the first $7,000 of an employee’s wages, or $42. While other parts of the tax code automatically adjust for inflation, FUTA’s wage base has remained at $7,000 since the early 1980s. This stagnation has made it harder to fund administration.

Yet without reforming how the funds are used, increased FUTA revenue is unlikely to go to agencies. Under current law, 80 percent of FUTA funds are deposited in a federal fund for program administration, the Employment Security Administration Account, while a 20 percent share is automatically directed to an account for emergency benefit payments.

This division would be reasonable, except that state agencies do not receive the entire 80 percent share placed in ESAA for administrative support. Because Congress allocates funding according to projected case workloads rather than what is placed in ESAA for administration, state agencies do not receive all the available revenue to update their systems regularly. Since 2006, there has been an average annual difference of nearly $400 million between what is deposited in ESAA to fund program administration and what Congress has allocated to states to manage their programs.

Instead of giving UI agencies these resources, this funding is often diverted from ESAA and placed in the emergency benefits account. Current law mandates that the end-of-year ESAA balance be no more than 40 percent of what is appropriated for administration over the past fiscal year. When that threshold is surpassed, the excess funds are transferred despite the emergency benefits account already receiving its 20 percent share.

This requirement led to over $4.5 billion being removed from ESAA and set aside for emergency benefit payments during the five fiscal years before the COVID-19 pandemic. In hindsight, it would have been better to let states apply those funds to improve program performance before the crisis. One billion dollars from the American Rescue Plan Act has helped states take steps to modernize their systems. Still, more consistent investments nationally are needed.

Congress can strengthen the connection between what is raised for administration and what ends up in state agency hands by eliminating the 40 percent ESAA balance rule and ending the use of workload projections when structuring allocations. Funds deposited in the account for administrative purposes should be readily sent out to states to invest in program upgrades. Only then will state UI agencies have a fighting chance to secure their systems.

Will Raderman is an employment policy analyst at the Niskanen Center who focuses on social insurance policy issues with a particular focus on unemployment insurance.

Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
From Our Partners