From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Watchdog Report #18: Risk of Insolvency of State
Unemployment Insurance Trust Funds

Audio interview by GAO staff with Andrew Sherrill, Director, Education,
Workforce & Income Security

Associated Report Number: GAO-10-440

Released on: May 6, 2010

[ Background Music ]

[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the Government Accountability Office. It's May 6, 2010.
The recent economic downturn has put significant pressure on state
unemployment insurance trust funds, many of which were already
struggling to remain solvent. A group led by Andrew Sherrill, a director
in GAO's Education, Workforce, and Income Security team, recently
examined state financing policies for these trust funds.  GAO analyst,
Jeremy Cluchey, sat down with Andrew to learn more.

[ Jeremy Cluchey: ] How do state unemployment insurance trust funds
work?

[ Andrew Sherrill: ] The unemployment insurance program has two main
objectives. First, to provide temporary partial compensation for the
lost earnings of people who become unemployed through no fault of their
own. And second, to help stabilize the economy during economic
downturns.  The program is a federal-state partnership. The federal
government sets a broad framework, but each of the states manages its
own program and makes decisions about what level of benefits to pay, how
much taxes that will employers will pay, things like that. Most states
pay regular unemployment insurance benefits for up to 26 weeks, about
half a year, and they're based on the amount of the wages that the
worker was receiving prior to being unemployed. And there are also
provisions for extending benefits when that period ends.

[ Jeremy Cluchey: ] What's the current status of state unemployment
insurance trust funds?

[ Andrew Sherrill: ] Currently, the state unemployment trust funds are
in historically poor condition. As of April 1st, 34 of the states had
outstanding loans from the federal government. They didn't have enough
with their own trust funds to pay benefits, so they had to obtain loans
from the federal government. And those outstanding loans totaled about
$39 billion. And that balance increased 50 percent in just the first 3
months of 2010. So, there's really a rising problem here.

[ Jeremy Cluchey: ] Given this current status, it seems the UI trust
funds may not have been as well prepared for the current economic
downturn as they could had been? What contributed to this?

[ Andrew Sherrill: ] That's exactly right. This is--there's been a
long-term financial decline largely due to state's financing policies
for these unemployment insurance trust funds over the last 3 decades
that have left states in a weak financial position even prior to the
current recession. The root cause is this that state, the taxation
levels they collect--taxes from employers--have declined since the
1970s. And most states don't index their taxable wage base to increases
in worker's earnings over time. So that's a big part of the problem
'cause the states that do index the taxable wage base--how much they
collect from employers and these taxes--are in better financial
condition relatively speaking. Last year, the Department of Labor issued
a report saying that all but six of the states had average tax rates
below the level that would be adequate to cover benefits and maintain
solvency. So, it's a long-standing problem of not having enough money
coming into the fund to really weather a strong recession like the
current one.

[ Jeremy Cluchey: ] What is GAO recommending to improve the financial
condition of state UI trust funds moving forward?

[ Andrew Sherrill: ] GAO has identified several options that Congress
might consider to help improve the long-term solvency and
forward-funding of state UI trust funds. One of the options that we
highlight--is especially potentially promising--has to do with raising
the federal taxable wage base and indexing that. The problem is that the
federal tax has remained the same since 1983. And part of the problem is
that states haven't have to at least set their own state tax wage base
at the same or higher level than the federal level, and many states have
kept their own state tax wage basis relatively low as well. So, we think
this option has promise because if the federal government were to
increase the federal taxable wage base, that would provide an incentive
to states to increase their own taxable wage bases, and also perhaps to
index it to inflation in workers' wages overtime. So we think that's one
of the most promising strategies that for the long term could really
make a substantial difference in this area.

[ Background Music ]

[Narrator:] To learn more, visit GAO's Web site at gao.gov, and be sure
to tune in to the next edition of GAO's Watchdog Report for more from
the congressional watchdog, the Government Accountability Office.