During the COVID-19 pandemic, unemployment insurance (UI) provided over 53 million workers access to benefits and put $870 billion back into the economy. However, the pandemic unveiled a multitude of inefficiencies in state UI systems, which struggled to process unemployment claims and distribute benefits to workers on time. For example, less than half of workers who lost work in the first two months of the pandemic’s forced shutdowns were able to receive benefits by the end of April 2020. A recent Government Accountability Office study concluded that states “were not well positioned to handle the unprecedented surge in claims volume” when the pandemic began, and designated the system at high risk of not meeting its responsibility to workers and to make accurate payments.
Decades of underinvestment in the administration of the program resulted in overburdened and outdated state UI systems without the human and technology resources needed when claims surge. While Congress provided extra funding to the states to handle increased claims during the pandemic, that could not cover up years of neglect with temporary increases. The scale of the problem is finally awakening the attention of federal policymakers, who are working to reinvest in the core capacity of this critical safety net. The president has released his budget for fiscal year 2023, and has allocated $3.185 billion to states for UI, including $2.8 billion in UI grants for states to run administration. When funding for national activities is taken into account, this amounts to a 17 percent increase in federal spending on UI administration over last year.
The scale of the problem is finally awakening the attention of federal policymakers, who are working to reinvest in the core capacity of this critical safety net.
Congress has also been active in shoring up support for the program. On July 5, The House of Representatives Labor HHS Appropriations Subcommittee reported out an appropriations bill approved the $200 million increase that the Biden administration requested for state grants, and on July 28, the Senate Appropriations Committee chair Patty Murray (D-WA) introduced a bill to do the same.
This fact sheet reviews and evaluates these important proposals to increase core unemployment insurance financing.
States rely on federal funding for UI administration, but funding has been too low.
Unemployment insurance is set up as a federal–state partnership. The federal government provides grants to fund the staffing, technology, phone systems, and appeals that enable the processing of unemployment benefits in both good economic times and bad. The federal funding scheme includes a baseline amount and additional funding based on workload. Additional funding is tied to the amount of weekly unemployment claims that states process, so states receive less funding when the economy is doing well and fewer people are out of work.
Overall, administrative funding has taken a 30 percent decline from 1999 to 2019 on an inflation-adjusted basis. This decrease in funding has forced states to cut back on permanent staff, and facilitate a reliance on self-service online systems, rather than receiving and processing claims by phone or in person. While many states provide their own funding to supplement limited federal grants, these additions are not sufficient to make up the shortfall. As of 2017, 55 percent of state workforce agencies have described their current level of funding as a “critical” or “serious” shortfall. This complaint came during a steep 21-percent drop in federal funding after the Great Recession, from $3.2 billion in 2009 to $2.5 billion in 2019.
Poor infrastructure left their systems vulnerable to identity theft and improper payments, which surged during the pandemic as criminal networks stole billions from state UI systems.
As seen during the pandemic, a myriad of states struggled with outdated and overloaded IT infrastructure. Seventeen states and territories admitted to GAO that their IT systems were not sufficient to implement provisions of the CARES Act. The problems were broader in scope than a core inability to process claims: poor infrastructure left their systems vulnerable to identity theft and improper payments, which surged during the pandemic as criminal networks stole billions from state UI systems. According to a report from the Department of Labor, there has been an increase in improper payments from $8.0 billion to $78.1 billion over the span of a fiscal year due to increased identity theft. Increased funding for UI administration would enable long-term improvements in service delivery, prompt and equitable access to benefits, and a decrease in administrative burden on claimants.
The Biden administration and the House Labor HHS Appropriations Subcommittee have proposed a significant increase in funding.
The Biden administration has requested a nearly 17 percent increase in funding for fiscal year 2023 compared to the final fiscal year 2022 budget, with increases in funding dedicated to state grants, national activities, and reemployment services. Both the House Labor HHS Appropriations Committee proposal and the Senate Labor HHS Appropriations proposal have agreed to this significant increase in state administrative grants portion of the budget request. They have both proposed a $200 million increase in core state grant funding from $2.6 billion to $2.8 billion. This increase comes on top of a $235 million increase from the interim $2.37 billion allocated in the FY 2022 continuing resolution to the final FY 2022 budget. However, the Senate and House Labor HHS FY2023 appropriations bills came in below the Biden’s administration suggestions for national activities. The Senate proposed the same $18 million as last year compared to the Biden administration’s $168 million request, while the House proposed $118 million.
Nonetheless, the alignment at this stage is a promising sign, with the White House, Senate, and House on the same page for the most important part of the administrative budget. There is a long way to go finalizing the FY 2023 budget, including securing a bipartisan agreement for the overall budget target and increases for defense and non-defense spending. Once that agreement is reached, however, the next step is securing most or all of the increase in the final negotiations.
Baseline funding must be adequate for the system to scale to needs.
Current administrative funding for fiscal year 2022 has provided states $2,365,816,000 in grants at an average weekly insurance unemployment (AWIU) level of 1,728,000 claims per week. The AWIU for FY2022 is projected to be 2,124,000 and as of March 2022 the anticipated amount of apportionment for AWIU contingency funding is $105,137,000. While contingency funding makes sense as a way to adjust grant dollars to state volume, baseline funding for FY2022 has not been sufficient to cover administrative costs.
This problem can be described by analogy. In order for any business to operate, the business must have the proper equipment and trained staff to meet initial requirements to run. If a restaurant did not have proper kitchen equipment and trained chefs to complete requested orders, it would prove extremely difficult to meet the needs of their customers and continue to complete orders when order demand increases. This is the same for baseline funding for state administration: states must have enough baseline funding to meet the initial needs of processing claims with properly trained staff and updated technology. To fit within a shrinking baseline grant, states have leaned into early retirement incentives and have been left with a brain drain of skilled staff. Without this, states are not adequately prepared to process a higher number of claims even with the ability to request contingency funding.
Many of the worst delays during the pandemic related to adjudications and appeals that can only be decided by trained staff, not temporary workers. When a surge of claims come in, the number of contested claims is bound to go up, putting pressure on trained staff. This problem persists: as of May 2022, states are still digging out of the backlog of cases. Federal regulations direct states to settle their benefit appeals within thirty days, but as of May 2022, half of appeals have been pending for more than four months, and one in seven have been pending for more than a year.
The Biden administration has proposed reforming the way the Department of Labor allocates UI money to states.
When determining administrative funding allocation for states, The Department of Labor uses a resource justification model (RJM) to determine a state’s administrative budget. Under this model, each state submits detailed information about their operations and the RJM calculates the value of personnel expenses needed to complete the projected workload. States can ask for additional funds for “non-personnel” services like IT and communications.
However, the current RJM does not take into account the states’ performance or quality of service. This could mean that states who are not efficiently processing claims and delivering benefits in a timely manner are still receiving the same amount of funding based on their workload compared to states who have innovated their operations. The Biden administration’s budget announced their intention to reform the resource justification model so that it makes a more realistic calculation of state costs, with a priority for personnel costs. This reformed RJM will be the basis for the higher budget, with new calculations for all activities. The recently proposed GUARD Act would go even further, allowing DOL to hold up to 15 percent of the state’s grant if they fail to pay benefits in an accurate and timely manner.
The budget proposal, while important, does not address other systemic problems in administrative funding.
State administrative grants are funded by the Federal Unemployment Tax Act (FUTA), which requires employers to pay a 0.6 percent tax on the first $7,000 paid to each employee. This wage base has not been increased since 1983, and has proceeded to expand divergence between taxable and total wages as inflation and wage growth continue to rise, and thus it is regressively charged on lower-wage workers and their employers. These administrative costs are pooled and redistributed to states according to the resource justification model.
While these federal unemployment taxes are collected for UI administration and placed into a separate federal unemployment account, they are not truly sequestered. The unemployment trust funds are part of the federal unified budget, and thus are not sufficiently protected from other uses. This means that funds that have been designated for administration are not seen as mandatory, and Congress can appropriate less than is collected in UI taxes for administration of the program. Whatever balances that remain in the federal unemployment accounts then are counted as a reduction of the federal deficit.
In order to ensure that these UI taxes are used solely for the purpose of administering state UI programs, the Biden administration could go further to protect the federal unemployment trust fund. Making UI administration mandatory spending would require Congress to appropriate all of the federal UI taxes collected from employers to UI purposes alone, rather than applying them to deficit reduction.
Now is the time to make sure we don’t repeat past mistakes.
Americans will never forget their frustrations of waiting weeks, even months, for unemployment benefits during the pandemic. Congress and the Biden administration have taken an important step in the right direction by allocating a significant increase in grants to states for UI administration. These increases are an important priority as Congress finishes work for the FY 2023 budget and the nation braces for a possible labor market downturn.