[Federal Register Volume 74, Number 121 (Thursday, June 25, 2009)]
[Proposed Rules]
[Pages 30402-30409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-14752]



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Part III





Department of Labor





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Employment and Training Administration



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20 CFR Part 606



 Federal-State Unemployment Compensation (UC) Program; Funding Goals 
for Interest-Free Advances; Proposed Rule

Federal Register / Vol. 74 , No. 121 / Thursday, June 25, 2009 / 
Proposed Rules

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DEPARTMENT OF LABOR

Employment and Training Administration

20 CFR Part 606

RIN 1205-AB53


Federal-State Unemployment Compensation (UC) Program; Funding 
Goals for Interest-Free Advances

AGENCY: Employment and Training Administration (ETA), Labor.

ACTION: Notice of proposed rulemaking (NPRM); request for comments.

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SUMMARY: The Department of Labor (Department) is proposing a rule to 
implement Federal requirements conditioning a State's receipt of 
interest-free advances from the Federal Government for the payment of 
unemployment compensation (UC) upon the State meeting ``funding goals, 
as established under regulations issued by the Secretary of Labor.'' 
The proposed rule would require that States: Meet a solvency criterion 
in one of the 5 calendar years preceding the year in which advances are 
taken; and meet two tax effort criteria for each calendar year after 
the solvency criterion is met up to the year in which an advance is 
requested.

DATES: To be ensured consideration, comments must be submitted in 
writing on or before August 24, 2009.

ADDRESSES: You may submit comments, identified by Regulatory 
Information Number (RIN) 1205-AB53, by only one of the following 
methods:
    <bullet> Federal e-Rulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Mail/Hand Delivery/Courier: Submit comments to Thomas M. 
Dowd, Administrator, Office of Policy Development and Research (OPDR), 
U.S. Department of Labor, Employment and Training Administration, 200 
Constitution Avenue, NW., Room N-5641, Washington, DC 20210. Because of 
security-related concerns, there may be a significant delay in the 
receipt of submissions by United States Mail. You must take this into 
consideration when preparing to meet the deadline for submitting 
comments.
    The Department will post all comments received on 
www.regulations.gov without making any changes to the comments or 
redacting any information, including any personal information provided. 
The http://www.regulations.gov Web site is the Federal e-rulemaking 
portal and all comments posted there are available and accessible to 
the public. The Department recommends that commenters not include 
personal information such as Social Security Numbers, personal 
addresses, telephone numbers, and e-mail addresses in their comments as 
such submitted information will be available to the public via the 
http://www.regulations.gov Web site. Comments submitted through http://www.regulations.gov will not include the e-mail address of the 
commenter unless the commenter chooses to include that information as 
part of his or her comment. It is the responsibility of the commenter 
to safeguard personal information.
    Instructions: All submissions received must include the agency name 
and the RIN for this rulemaking: RIN 1205-AB53. Please submit your 
comments by only one method.
    Docket: All comments will be available for public inspection and 
copying during normal business hours by contacting OPDR at (202) 693-
3700. You may also contact OPDR at the address listed above. As noted 
above, the Department also will post all comments it receives on http://www.regulations.gov.
    Copies of the proposed rule are available in alternative formats of 
large print and electronic file on computer disk, which may be obtained 
at the above-stated address. The proposed rule is available on the 
Internet at the Web address http://www.doleta.gov.

FOR FURTHER INFORMATION CONTACT: Sherril Hurd, Acting Team Lead for the 
Regulations Unit, OPDR, Employment and Training Administration, (202) 
693-3700 (this is not a toll-free number) or 1-877-889-5627 (TTY). 
Individuals with hearing or speech impairments may access the telephone 
number above via TTY by calling the toll-free Federal Information Relay 
Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

General

    For any insurance program to be successful, revenues generated by 
the program must, over the long run, exceed the cost of the liabilities 
against whose risk the program was designed. Complementing that long 
run objective is the highly desirable feature that the insurance 
program avoids periods during which reserves are unavailable to pay 
claims. However, to acquire and maintain levels of reserves that would 
always guarantee all legitimate claims would be paid can be 
prohibitively expensive. In the case of the Unemployment Compensation 
(UC) Program, employers largely pay the premiums (employees can also 
pay in three states) and paying more in premiums means employers have 
less to grow their businesses and add jobs to the economy. Hence for 
the UC Program the objective is to build and maintain reserves at a 
level that will ensure funds are available to pay benefits during 
average recessions, which many States have not done, while not building 
reserves so high as to impede economic growth. For more severe 
recessions, a back-up is available in the form of advances. However, 
borrowing can result in undesirable actions, either voluntarily by the 
State or through the mandate of Federal law, at points in the economic 
cycle for which the actions are least bearable. Such actions might mean 
lowering benefits, increasing taxes, or a combination of both at a time 
when neither employers nor UC beneficiaries are best able to cope with 
the consequences. Borrowing can also present difficult political 
decisions for a State. For example, if the advance results in interest 
coming due, a State must finance the payment from a source other than 
the regular UC tax. Therefore, maintaining a solvent UC trust fund 
account is in the best interest of all involved.
    UC is generally funded by employer contributions (taxes) paid to a 
State. The State, in accordance with sec. 303(a)(4) of the Social 
Security Act (SSA) (42 U.S.C. 503(a)(4)) and sec. 3304(a)(3) of the 
Federal Unemployment Tax Act (FUTA) (26 U.S.C. 3304(a)(3)), deposits 
these contributions immediately upon receipt into its account in the 
Federal Unemployment Trust Fund (UTF). Section 1202 of the SSA (42 
U.S.C. 1322) permits a State to obtain repayable advances (commonly 
called loans) to this account from the Federal Government to pay UC 
when the account reaches a balance of zero. These advances are 
interest-bearing, except for certain short-term advances, which are 
commonly called ``cash flow loans.'' Under sec. 1202(b)(2) of the SSA 
(42 U.S.C. 1322(b)(2)), these short-term advances are interest free if:
    (1) The advances made during a calendar year are repaid in full 
before the close of September 30 of the same calendar year;
    (2) No additional advance is made during the same calendar year and 
after September 30; and
    (3) The State meets funding goals relating to its account in the 
UTF, established under regulations issued by the Secretary of Labor 
(Secretary).
    The Balanced Budget Act of 1997 (Pub. L. 105-33, sec. 5404) added 
the

[[Page 30403]]

third requirement, that is, that the State meet funding goals 
established under regulations by the Secretary. This notice sets forth 
these proposed funding goals.

Rationale for Proposed Funding Goals

    During periodic economic downturns there is an increase in UC 
benefit payments made from State trust fund accounts. Changes in 
insured unemployment reflect the changing economic scene, especially 
the impact of recessions and long-term unemployment. In economist Saul 
J. Blaustein's historical review of the unemployment compensation 
system, in Unemployment Insurance in the United States, the First Half 
Century, he noted that the 1960s concluded with about seven consecutive 
years of relatively moderate-to-low levels of unemployment compensation 
claims and benefit outlays, which he reasoned may have encouraged a 
certain amount of complacency about reserves and financing. The 
recessions in the early and mid 1970s that were followed by the 
successive and deep recessions of the early 1980s found many States 
insolvent by mid-1983. For the first time, the entire Federal-State 
system was in a net negative balance position with regard to the 
aggregates of all State and Federal unemployment compensation trust 
funds accounts. Since advances were available from the Federal 
Unemployment Account without interest at the time, some States may have 
been inclined to avoid the more difficult policies required to maintain 
solvency.
    Prior to the 1990-91 recession (December 1989), the aggregate 
balance of State trust fund accounts stood at 1.9 percent of total 
covered wages. Seven States used advances under Title XII of the Social 
Security Act during and following that relatively mild recession. After 
almost ten years of recovery, the aggregate balance only reached 1.5 
percent of total covered wages in December 2000, resulting in nine 
States borrowing during and following the 2001 recession, again a 
relatively mild one. Going into the current recession, as of December 
2007, State balances were only 0.8 percent of total covered wages. As 
of June 1, 2009, fourteen States had been forced to borrow.
    States have wide latitude in determining how to provide for 
increases in UC benefits paid from their trust fund accounts. 
Generally, there are three methods of doing this: (1) Forward funding, 
whereby the State builds up its fund balance in anticipation of 
increased outlays, (2) pay-as-you-go financing, whereby taxes are 
raised as needed to cover benefits, and (3) deficit financing where a 
State uses borrowed funds to pay UC benefits. Most States use a 
combination of these methods.
    Financing UC benefits by the use of forward funding is the most 
consistent with the overall UC program goals in that a State can avoid 
tax increases and/or benefit cuts when the economy is weak and can also 
avoid large amounts of borrowing. As noted above, the negative 
consequences of borrowing include interest charges and tax increases as 
well as potential benefit cuts.
    The U.S. Government Accountability Office and the Advisory Council 
on Unemployment Compensation (1994-1996) raised concern regarding the 
ongoing financial strain of the unemployment system. These groups 
documented the increasing trend for States to move away from forward 
funding of their UC programs. The Advisory Council on Unemployment 
Compensation, created by the Emergency Unemployment Compensation Act of 
1991, reported that during the previous decade many States with low or 
negative trust fund reserves found themselves in a position of either 
increasing taxes on employers in the midst of an economic downturn, or 
restricting eligibility and benefits for the unemployed. The Council 
reported that it was in the interest of the nation that the 
Unemployment Compensation System provide for a build-up of reserves 
during good economic times and drawing down reserves during recessions.
    In general, the past reviews of the Unemployment Compensation 
System concluded that if the forward-funding nature of the Unemployment 
Compensation System is not restored the shift in financing methods has 
the potential to dramatically increase borrowing, leading to interest 
charges and tax credit reductions at points in the business cycle when 
these additional costs to employers would be difficult to cope with and 
would also precipitate reductions in UC benefits. Both of these results 
would reduce the UC program's economic stabilization effect.
    It was in light of these reports that the Balanced Budget Act of 
1997 included an amendment to Title XII of the Social Security Act 
(SSA). Under Section 1202(b)(2) of the SSA, advances made from the 
Federal Unemployment Account during a calendar year are interest free 
if the following conditions are met:

--The advances are repaid in full before the close of September 30 of 
the calendar year in which the advances were made, and
--Following this repayment, no other advance is made to the State 
during the calendar year.

    The Balanced Budget Act added a third condition. States were now 
required to meet ``funding goals, established under regulations issued 
by the Secretary of Labor, relating to the accounts of the States in 
the Unemployment Trust Fund.''
    According to the House Committee report, this amendment was 
intended to encourage solvency of State unemployment funds:

    Should a State account become insolvent during an economic 
downturn, adverse conditions can result for the State and its 
employers. Borrowing Federal funds imposes a cost on the State at a 
time when it may face other financial difficulties. The State may 
react by raising taxes on its employers or cutting benefits, thereby 
discouraging economic activity during a period when its economy is 
already in decline. The provision would encourage States to maintain 
sufficient unemployment trust fund balances to cover the needs of 
unemployed workers in the event of a recession. (H. Rep. No. 105-
149, 104th Cong. 1st Sess. 108 (1997).)

    The purpose of the ``funding goals'' requirement established by the 
Balanced Budget Act was to provide an incentive for States to build and 
maintain sufficient reserves in their accounts by restricting an 
existing Federal subsidy, in the form of an interest-free borrowing 
period, to only those States that meet a forward funding solvency goal. 
The original adoption of a short interest-free borrowing period (1982), 
in effect a Federal subsidy to State UC programs, was intended to 
assist only those States that required a relatively small advance for a 
short period of time, for cash-flow purposes. By choosing to restrict 
the current subsidy, Congress hoped to encourage States to be more 
aware of the need to build cash reserves in order to adequately prepare 
for economic downturns. Although the current subsidy is a relatively 
small amount compared to overall borrowing costs, it is used quite 
often by States during recessionary periods.
    The original bill (H.R. 2015, 105th Cong. sec. 9404 (1997)) 
specified a solvency standard that a State's UTF account had to meet in 
a specified past time period to obtain an interest-free advance. 
However, the bill ultimately enacted as the Balanced Budget Act, as 
explained by the legislative history (H.R. Conf. Rpt. 105-217, at 571, 
reprinted at 1997 U.S.C.C.A.N. 176, 950 (Jul. 30, 1997)), dropped the 
solvency standard and timeframe, leaving it to the Secretary ``to 
establish appropriate funding goals for States.''

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    To meet the statutory requirement and Congress's goal of 
encouraging States to provide for sufficient unemployment trust fund 
balances to cover the needs of unemployed workers in the event of a 
recession, the Department proposes funding goals which would encourage 
States to: (1) Build and maintain adequate solvency levels during 
economic expansions; and (2) avoid substantial reductions of tax effort 
prior to obtaining an advance. These proposed funding goals provide an 
incentive for States to increase their level of forward funding, but 
are not a mandate on States.
    The Department adhered to several principles in developing the 
proposed funding goals. These principles required that the funding 
goals should:
    <bullet> Be based on currently collected data from reports approved 
by the Office of Management and Budget (OMB), specifically tax rates 
calculated from contributions and wage data reported in the Quarterly 
Census of Employment and Wages (QCEW) report (OMB No. 1220-0012); State 
trust fund account balances and benefits paid data from the ETA-2112 
report (OMB No. 1205-0456)) which can be used to measure adequacy of 
trust fund account solvency and tax effort. These data are used to 
establish criteria for the funding goals discussed below;
    <bullet> Be based on established concepts and measures such as the 
reserve ratio and average high cost multiple that are commonly used by 
DOL, State offices, and researchers to assess trust fund account 
adequacy. See below for the definitions of ``reserve ratio'' and 
``average high cost multiple'';
    <bullet> Consider Trust Fund account balances over a reasonable 
period of time rather than at a single recent point-in-time in order to 
recognize that economic dynamics, such as a changing industrial mix, 
and a growing labor force could be responsible for an erosion in fund 
balances; and
    <bullet> Take into account State behavior in terms of an 
intentional reduction in revenues.

Funding Goals Considered

    The Department considered three approaches to establishing funding 
goals as required by sec. 1202(b)(2)(C) of the SSA. Each is discussed 
in turn.

Approach I

    Under this approach States would have to satisfy two criteria in 
order to qualify for an interest-free advance:
    (1) A solvency goal (described below) which requires a State to 
have met a specified solvency level in one of the 5 years prior to 
borrowing; and
    (2) The maintenance of a specified level of tax effort (mechanics 
described below) in the years between reaching the solvency goal and 
borrowing.
    The two criteria are complementary in terms of proper trust fund 
management and together support the intent of the Balanced Budget Act. 
The solvency goal is a measure of trust fund account adequacy at a 
point in time and reflects past efforts to ensure availability of funds 
to pay UC in an economic downturn. Legislative history shows 
Congressional interest in such a concept. The maintenance of tax effort 
requirement reflects State behavior over a period of time, i.e., the 
period between attaining the solvency goal and needing an advance to 
pay UC, and is designed to avoid giving an interest-free advance to a 
State whose need for an advance was precipitated by a deliberate State 
action such as a legislated tax cut that adversely impacted trust fund 
account solvency. As described below, the maintenance of tax effort 
requirement allows for reductions that might typically occur as a 
result of an automatic shift in tax schedules.

Solvency Goal

    The solvency goal would require that a State have an Average High 
Cost Multiple (AHCM), as calculated below, of at least 1.0 in one of 
the 5 years prior to the year in which a State seeks to obtain an 
interest-free advance. The AHCM is a measure of solvency that was 
refined and recommended by the Advisory Council on Unemployment 
Compensation (ACUC) in 1995. This measure is similar, but not identical 
to, the measure described in the legislative history (as outlined 
below). The ACUC, established by the Emergency Unemployment 
Compensation Act of 1991 (sec. 908, SSA; 42 U.S.C. 1108), recommended 
that States accumulate reserves sufficient to pay at least one year of 
benefits using the AHCM formula, that is, an AHCM of 1.0. The 
legislative history also recommended a level equal to one year of 
benefits.
    For any year, the AHCM consists of two ratios:
    (1) The ``reserve ratio''--The balance in a State's UTF account on 
December 31 divided by total wages paid to UC-covered employees during 
the 12 months ending on December 31; and
    (2) The ``average high cost rate (AHCR)''--Over whichever period is 
longer, either the most recent 20 years or the period covering the most 
recent three recessions, the average of the three highest values of: 
Benefits paid during a calendar year divided by total wages paid to UC- 
covered employees during the same calendar year.
    The AHCM is computed by dividing the reserve ratio by the AHCR. The 
resulting AHCM represents the number of years a State could pay UC 
benefits at a rate equal to the AHCR, without collecting any additional 
UC taxes.
    Based upon the Department's review of historical data, going back 
to 1967, States having an AHCM of at least 1.0 going into a moderate 
recession are not likely to borrow during or after the recession. None 
of the States borrowing during the current recession (as of June 9, 
2009) had an AHCM exceeding 0.4 at its beginning, December 2007. For 
the solvency goal under Approach I, the Department would require a 
State to have an AHCM of 1.0 as of the end of one of the 5 calendar 
years prior to the year in which it has taken the advance that could 
potentially qualify as an interest-free advance. Requiring that a State 
had met the solvency goal in one of the 5 years prior to borrowing 
demonstrates that the State had acted responsibly by achieving the goal 
in the recent past. The use of the five-year requirement also 
recognizes that economic dynamics may be such that a State may slide 
toward insolvency over a period of time. The time requirement suggested 
by the legislative history was much shorter, but was rejected as 
unworkable. The requirement also might enable a State to qualify for an 
interest-free advance in consecutive years, but no more than five, as a 
result of needing an AHCM of at least 1.0 in one of the 5 years 
preceding the advance. Because a State may qualify for interest-free 
advances over a 5-year period, there is ample time for it to fix its 
inability to adequately finance its UC program before losing access to 
interest-free advances.

Proposed Maintenance of Tax Effort Goal

    The maintenance of tax effort goal is based upon two measures. The 
first is the ``unemployment tax rate'' (UTR), defined at 20 CFR 
606.3(j) as, for any taxable year, the percentage obtained by dividing 
the total amount of State UC taxes paid into the State unemployment 
fund by ``total wages.'' (``Total wages,'' as defined in 20 CFR 
606.3(l), is the sum of all remuneration covered by a State law, 
disregarding any dollar limitation on the amount of remuneration which 
is subject to contributions under the State's law. Since State UC laws 
tax only a portion of wages paid, disregarding this dollar limitation 
means that ``total wages'' includes all the wages paid.) The UTR, also 
known as the Average Tax Rate, is published in the quarterly UI Data 
Summary. The second is the ``benefit-cost ratio'' (BCR),

[[Page 30405]]

defined at 20 CFR 606.3(c) as the percentage obtained by dividing all 
UC paid under State law during a calendar year by ``total wages.'' (UC 
paid to former employees of reimbursing employers, that is, employers 
not subject to UC taxes, but who instead ``reimburse'' the costs of 
benefits, is excluded.)
    For a State to meet the maintenance of tax effort goal, it must 
satisfy two requirements demonstrating that it attempted to maintain 
the solvency of its UTF account through its tax system. First, for each 
year between the last year in which the solvency goal was met and the 
year of the potential interest-free advance, the State's UTR must be at 
least 80 percent of the prior year's rate. Since the UTR is a measure 
of revenue generating capacity, this requirement would prohibit a State 
from receiving an interest-free advance if it allowed its revenue 
generating capacity to decline by more than 20 percent annually for any 
year between the last year the solvency goal was met and the year of 
the potential interest-free advance. A reduction in the UTR of 20 
percent or less from one year to the next is considered an acceptable 
variation as historical data show UTR drops of this magnitude are 
common and largely attributable to tax schedule shifts. If the State's 
UTR were lower than 80 percent of the prior year's UTR for any year at 
issue, the State would be considered to be making insufficient efforts 
to fund UC.
    Second, for each year between the last year in which the solvency 
goal was met and the year of the potential interest-free advance, the 
UTR must be at least 75 percent of the average of the State's BCRs, as 
determined under 20 CFR 606.21(d), over the previous 5 years. This 
requirement supplements the first by assessing whether a State has 
contributed to its benefit financing problems. The first requirement 
assures that the State maintained its tax effort by not allowing 
employer contributions, that is, tax revenue, to decline unduly. The 
second requirement assures that the State maintained its tax efforts by 
keeping employer contributions at a reasonable proportion of UC paid, 
which assures that the State's tax structure is sufficiently functional 
to generate adequate revenue to cover a reasonable percentage of the 5-
year average costs. Thus, the two requirements together assure that the 
State meets the maintenance of tax effort goal by both maintaining 
revenue and assuring that that revenue is reasonably adequate to 
finance benefits.

Approach II

    Approach II eliminates the tax effort requirement from Approach I. 
This approach focuses on attainment of adequate trust fund account 
solvency at a point in time relatively close to the time borrowing 
begins. Attaining an adequate trust fund account shows a State did act 
responsibly to build reserves to guard against the risks of high 
unemployment. This approach dilutes the incentive for achieving and 
maintaining trust fund account solvency, while making it easier for 
States to qualify for interest-free advances.

Approach III

    This approach is modeled on Approach I, but instead of having an 
AHCM of 1.0, the State would have to have a reserve ratio of 1.7 
percent. (As explained above, the ``reserve ratio'' is the balance in a 
State's UTF account on December 31 divided by total wages paid to UC-
covered employees during the 12 months ending on December 31.) The 
reserve ratio is a widely used measure of trust fund levels, making it 
attractive. But it does not contain any measure of previous State 
payouts which makes it less powerful as a solvency measure than the 
AHCM. Setting the threshold at 1.7 percent makes the approach roughly 
as stringent as Approach I, which is based on the ACUC recommendation. 
Simulations revealed that approximately the same number of States, but 
not necessarily the same States, would qualify for an interest-free 
advance over the period 1972 through 2007 using the reserve ratio as a 
measure of trust fund account adequacy with a threshold of 1.7 percent 
as using an AHCM with a threshold of 1.0.
    Including the maintenance of tax effort criterion would guard 
against a State's taking deliberate action resulting in reduced 
revenue, thereby precipitating the need for an advance. The provision 
would encourage States to act responsibly to avoid the need to borrow 
funds.

Impact on Federal State Unemployment Compensation (UC) Program

    The overall impact of the funding goals will be the potential 
reduction in the amount of Federal subsidies going to States in the 
form of increased interest payments from States that no longer qualify 
for the interest-free borrowing period. Although a high proportion of 
States that borrow Federal funds to pay UC benefits receive this 
subsidy, it is actually small compared to overall borrowing costs. For 
example, following the 1991 recession, seven states borrowed Federal 
funds to pay UC benefits. All seven used the interest-free borrowing 
period at some point in their borrowing. Following the 2001 recession 
(2002-2007), nine States borrowed approximately $5 billion to pay UC 
benefits. All nine States that borrowed Federal funds during this 
period at some point received an interest-free borrowing period. Their 
foregone interest payments totaled an estimated $17 million. However, 
this was only about 9% of the total of $184 million in interest 
payments that these States made.
    When the proposed criteria for each approach of the funding goals 
was applied to these two recessions, only two of the seven States that 
qualified for an interest-free advance following the 1990-1991 
recession would have qualified under any of the proposed approaches. 
Only one of the nine States that qualified following the 2001 recession 
would have qualified under the proposed approaches. That one state, 
Massachusetts, avoided only approximately $1 million in interest 
payments, which represented less than one percent of all borrowing 
costs following this recession.
    Besides these measurable impacts, the proposed funding goals will 
also have significant impacts that are difficult to quantify. One 
unquantifiable benefit is that by establishing a solvency goal, an 
inadequately funded State could no longer misuse the interest-free 
borrowing period by taking an interest-free advance in one year and 
repaying it with funds from other sources, and then possibly repeating 
that process in consecutive years--thereby avoiding the payment of 
interest on the use of Federal funds. The adoption of an interest-free 
borrowing period was intended to assist those States that required only 
a relatively small advance for a short period of time, not to encourage 
States to maintain small trust fund account balances and misuse the 
interest-free mechanisms, which has occurred on several occasions.
    Another unquantifiable benefit will be the publication in Federal 
regulations, for the first time, a reference to the importance of the 
level of trust fund solvency. Since no solvency standards currently 
exist in Federal statutes or regulations, this would be the first 
guideline that States could refer to when considering the adequacy of 
their UC trust fund accounts.
    Finally, State reaction to the funding goals will determine the 
extent to which solvency is improved and future borrowing reduced. To 
the extent States do react and interest-free borrowing is

[[Page 30406]]

reduced, the policy goal of reducing the subsidy provided by interest-
free advances will be achieved.

Impact on Eligibility for Interest-Free Advances

    The Department conducted simulations using historical data to 
examine the effects of applying the three solvency approaches on the 
eligibility for an interest-free advance. To do these simulations, the 
Department created a set of annual State data from 1967 through 2007, 
and then examined borrowing over the period 1972 through 2007. (The 
earlier data were used to satisfy the proposed five-year look-back 
criterion.) Between 1972 and 2007, States borrowed in a total of 246 
years. These individual borrowing years were then aggregated into 67 
borrowing episodes (defined as periods of consecutive years in which a 
State borrowed). Only the first year of each episode was tested for 
eligibility under the three approaches, assuming that the first year of 
borrowing is when a State would most likely seek an interest-free 
advance. These episodes may have lasted for a single year or multiple 
years and may have required interest payments. The episodes lasted 3.3 
years on average, with 17 of them being less than one year long. They 
have tended to become shorter with milder recessions. Information was 
not available to determine how many States would have qualified for 
interest-free advances under the existing criteria, and the States' 
borrowing practices may well have changed after 1982, when interest was 
imposed on borrowing. As a result, the analysis based on these 
historical data is only able to show the number of episodes for which 
the new funding goals would have been met in the first year, not 
whether States had met the other criteria for interest-free cash-flow 
advances that year.
    The results, based on the 67 borrowing episodes, are summarized 
below.

Approach I

    <bullet> In 23 instances (34 percent of the time) the State would 
have met the funding goals for an interest-free advance in the first 
year of borrowing under the proposed approach.
    <bullet> In 19 instances (28 percent of the time) the State would 
not have met the 1.0 AHCM solvency goal.
    <bullet> In 9 instances (13 percent of the time) the State would 
have met the solvency goal, but not the maintenance of tax effort goal.
    <bullet> In 16 instances (24 percent of the time) the State would 
have met neither the solvency goal nor the maintenance of tax effort 
goal. (Percentages do not add to 100 due to rounding.)

Approach II

    <bullet> In 32 instances (48 percent of the time) the State would 
have met the funding goals for an interest-free advance in the first 
year of borrowing under the proposed approach.
    <bullet> In 35 instances (52 percent of the time) the State would 
not have met the 1.0 AHCM solvency goal

Approach III

    <bullet> In 22 instances (33 percent of the time) the State would 
have met the funding goals for an interest-free advance in the first 
year of borrowing under the proposed approach.
    <bullet> In 19 instances (28 percent of the time) the State would 
not have met the 1.7 percent reserve ratio solvency goal.
    <bullet> In 9 instances (13 percent of the time) the State would 
have met the solvency goal, but not the maintenance of tax effort goal.
    <bullet> In 17 instances (25 percent of the time) the State would 
have met neither the solvency goal nor the maintenance of tax effort 
goal. (Percentages do not add to 100 due to rounding.)
    An examination of the simulation results reveals that imposing any 
of the three approaches will make it more difficult for States with 
problematic financing systems to receive an interest-free advance. Of 
the 67 borrowing episodes studied, States would have met the funding 
goals for interest-free borrowing under the three funding goal 
approaches 34 percent, 48 percent, and 33 percent of the time 
respectively. Thus, while imposition of any of the three approaches as 
additional qualifying criteria for an interest-free advance restricts 
such advances, they are not so restrictive that interest-free advances 
would be eliminated. A detailed break-out of the data used for the 
simulations and results is available by contacting the Department 
through the contact information provided above as well as on 
www.regulations.gov as part of the supplemental information provided 
with this NPRM.

Impacts on Employers and Claimants

    The impact of implementation of the funding goals depends on what 
choices States make. If a State chooses to take no action, the State 
will pay more interest in the event it has a cash-flow loan, which will 
ultimately impact taxes and/or benefits. If a State chooses to increase 
its trust fund level to meet the funding goals, there are also 
potential impacts on taxes and benefits. Either way, the ultimate 
impacts fall on employers or claimants, although some of the costs for 
one group are benefits for the other group and vice-versa.
    There are identifiable benefits and costs to employers and 
claimants. Identifying and quantifying the distribution of the impacts 
to these groups is done to provide a breakdown. However, the impacts 
between groups are not exclusive of one another. The table below 
summarizes these identifiable annual impacts of the three approaches. 
The estimates were made by simulating the adoption of each approach 
during the 1999-2006 period. This period contained a relatively high 
frequency of State borrowing with extensive use of the existing 
interest-free advance provision, and a relatively large number of 
States responding to that recession by increasing tax revenue and/or 
reducing benefits. Each State's situation was examined and assumptions 
made about how the State would react to the implementation of each of 
the three approaches compared to what actually occurred. Estimated 
impacts were then calculated for employers and for claimants.

                       Estimated Potential Impacts on Employers and Claimants (1999-2006)
                                        [Annualized amounts in $millions]
----------------------------------------------------------------------------------------------------------------
                                                                    Approach I      Approach II    Approach III
----------------------------------------------------------------------------------------------------------------
Employers:
    A. Decreased Taxes..........................................             0.6             0.6             0.5
    B. Increased Contributions..................................            -4.2            -2.1            -2.9
Claimants:
    C. Smaller UC Benefit Reductions............................             1.8             2.5             2.0

[[Page 30407]]

 
    D Reduced UC Benefits.......................................            -1.2            -0.8           -1.1
----------------------------------------------------------------------------------------------------------------
 The estimated impacts on employers and claimants are within the total estimated State impact and depend on how
  the State would react to the implementation of each of the three approaches as described below.

    The funding goals would provide a benefit to employers in the form 
of a reduced risk of higher taxes that could occur when most 
detrimental--during a recession or its aftermath (line A in the table). 
For States that increase account balances to meet the solvency goal, 
higher interest earnings will be realized on those balances. The 
resulting higher account balances will put some downward pressure on 
tax rates once the higher balances are achieved, to the benefit of 
employers. In addition, the higher balances will reduce the likelihood 
of borrowing and the possibility of having to pay interest. The payment 
of interest can be a problem since States cannot use funds from their 
UTF accounts to pay it (sec. 1202(b)(5), SSA), raising the possibility 
of a separate tax on employers to pay the interest. Further, if 
advances are taken from the UTF and not repaid within a specified 
period of time, a State's employers could pay higher taxes through a 
reduction in the FUTA credit to help repay the advance (sec. 
3302(c)(2), FUTA). With higher balances in a State's trust fund account 
at the beginning of a recession, the period during which an advance is 
needed would be shorter, thus reducing interest charges and reducing 
the risk of FUTA credit reduction.
    One identifiable cost to employers is the possible higher 
unemployment compensation taxes in States that may lose their current 
ability to receive interest-free borrowing privileges or in those 
States that choose to meet the funding goal requirements (line B in the 
table). In the first case, States would need to find a way to make 
interest payments as those payments may not, under sec. 1202(b)(5), 
SSA, be made from revenues collected to pay unemployment compensation. 
That might mean a separate tax on employers, or using other State 
money. In the second case, in States that choose to meet the funding 
goal criteria but currently do not, higher UC taxes (resulting from 
either tax increases or smaller tax reductions than might otherwise be 
the case) would need to be implemented.
    There is also a benefit to workers. Some States whose trust fund 
accounts become depleted may choose to limit scheduled benefit amount 
increases or to reduce benefits. States adopting the funding goal are 
more likely to avoid the need to borrow as well as the need to 
negatively impact the benefits of unemployed workers (line C in the 
table).
    The funding goal could also impose a cost on workers by cutting 
benefits (line D in the table). States that respond to insolvency by 
cutting benefits may be induced to cut further because of the increased 
interest cost. Also, States that try to achieve the solvency criterion 
may cut benefits to do so (although this seems unlikely), in addition 
to increasing taxes.
    These estimates, as can be seen, are relatively small given that 
they fall within the limits of the interest foregone from attaining an 
interest-free borrowing period. Interested parties can obtain the 
backup information from the Department through the contact information 
provided above or on www.regulations.gov as part of the supplemental 
information provided with this NPRM.

Selected Approach and Justification

    Upon careful review of the three approaches, the Department 
selected Approach I to best satisfy the legislative goal of encouraging 
States to maintain adequate reserves to pay benefits during 
recessionary periods. All three approaches encourage maintenance of 
adequate reserves but vary in terms of complexity and impact, and these 
factors were also weighed in the decision process as well as the fact 
that there was relatively little difference in the quantitative impact 
analysis among the three approaches, given the size of the UC program 
(in fiscal year 2008, $32 billion in State revenues and $38 billion 
paid in State benefits).
    Approach I uses as a measure of trust fund account adequacy, the 
AHCM, which was recommended by the ACUC. Benefit costs are a key 
determinant of trust fund account solvency and the AHCM includes 
benefits as a component to help measure the risk of insolvency, while 
the reserve ratio does not include benefits. As a result, the AHCM is 
believed to be a better indicator of a State's ability to pay UC in an 
economic downturn. Hence that consideration supported Approach I over 
Approach III which had the same tax maintenance effort requirement as 
Approach I.
    Approach II dropped from Approach I the maintenance of tax effort 
criterion in order to create a simpler, more easily understood funding 
goal that still reflected Congressional intent. The simulations show 
that, compared to Approach I, eight more borrowing episodes could have 
qualified as interest-free advances without the maintenance of tax 
effort requirement. So, absent the tax effort requirement, a State 
might reduce taxes too sharply, causing it to borrow, but nevertheless 
qualify for an interest-free advance despite its poor tax management. 
This simulation result reinforces the concept that it is important to 
maintain an adequate trust fund over the length of the business cycle 
rather than at just one point in time in order to reduce the need to 
borrow. Thus, the incentive to achieve an adequately financed system is 
reduced under Approach II compared to Approach I. Therefore, Approach I 
is superior to Approach II in light of the objective.
    On the above analysis, Approach I was selected.

II. Proposed Amendments

    The proposed rule would amend paragraph (b) of Sec.  606.32 to add 
the funding goal described in Approach I to the existing requirements 
for an interest-free advance. More specifically, the amendments would 
require that a State have had an AHCM of at least 1.0 in one of the 5 
years prior to the year in which that State seeks to obtain an 
interest-free advance. Also, the State must have maintained tax effort 
between the last year the State had an AHCM of at least 1.0 and the 
year in which the advance or advances were made. The amendments would 
then specify the calculation of the AHCM as well as how to determine 
whether a significant tax cut was made.
    The proposed rule would also amend the definition of ``BCR'' at 
Sec.  606.3(c). Currently, this definition applies only for purposes of 
the cap on tax credit reductions under sec. 3302(f) of the Federal 
Unemployment Tax Act (26

[[Page 30408]]

U.S.C. 3302(f)). The proposed rule would delete the definition's 
reference to the cap, thereby making it applicable to the funding goal 
as well. Paragraph (d) of Sec.  606.21, which defines the ``State 5-
year average benefit cost ratio,'' would similarly be amended so as to 
apply to the funding goal as well as the cap.
    The Department intends that the final rule establishing funding 
goals would apply 2 years after its date of publication to allow States 
time to adjust their financing systems if they choose to do so. The 
Department also invites comments about the possibility of phasing in 
the funding goals and related mechanics.

Request for Comments

    The Department proposes in this NPRM to amend part 606 to establish 
the funding goals required by sec. 1202(b)(2)(C) of the SSA. The 
Department is interested in receiving comments on the three approaches 
to funding goals considered here, as well as in receiving other 
suggestions for funding goals.

III. Administrative Provisions

Executive Order 12866

    This proposed rule is not an economically significant rule. Under 
Executive Order 12866, a rule is economically significant if it 
materially alters the budgetary impact of entitlements, grants, user 
fees, or loan programs; has an annual effect on the economy of $100 
million or more; or adversely affects the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or communities 
in a material way. This proposed rule is not economically significant 
under the Executive Order because it will not have an economic impact 
of $100 million or more on the State agencies or the economy as 
explained above. However, the proposed rule is a significant regulatory 
action under Executive Order 12866 at sec. 3(f) because it raises novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. This 
proposed rule updates existing regulations in accordance with 
Congressional mandates. Therefore, the Department has submitted this 
proposed rule to the Office of Management and Budget (OMB) for review.

Paperwork Reduction Act

    Under the Paperwork Reduction Act (PRA), the Department is required 
to submit any information collection requirements to the Office of 
Management and Budget (OMB) for review and approval. 44 U.S.C. 3501 et 
seq. This proposed rule does not impose any new requirements on the 
States that have not already been approved by OMB for collection. 
Therefore, the Department has determined that this proposed rule does 
not contain a new information collection requiring it to submit a 
paperwork package to OMB. Data to be used is covered by the following 
OMB approvals: OMB No. 1220-0012 for the Quarterly Census of Employment 
and Wages report and OMB No. 1205-0456 for the ETA-2112 report 
containing State trust fund account balances and benefits paid data.

Executive Order 13132: Federalism

    Section 6 of Executive Order 13132 requires Federal agencies to 
consult with State entities when a regulation or policy may have a 
substantial direct effect on the States or the relationship between the 
National Government and the States, or the distribution of power and 
responsibilities among the various levels of government, within the 
meaning of the Executive Order. Section 3(b) of the Executive Order 
further provides that Federal agencies must implement regulations that 
have a substantial direct effect only if statutory authority permits 
the regulation and it is of national significance. The proposed rule 
does not have a substantial direct effect on the States or the 
relationship between the National Government and the States, or the 
distribution of power and responsibilities among the various levels of 
Government, within the meaning of the Executive Order. Any action taken 
by a State as a result of the rule would be at its own discretion as 
the rule imposes no requirements. In addition, the primary estimate on 
an annualized basis for the difference of costs over benefits is $4.2 
million. That $4.2 million would be added to State unemployment trust 
fund accounts.

Unfunded Mandates Reform Act of 1995

    This regulatory action has been reviewed in accordance with the 
Unfunded Mandates Reform Act of 1995. Under the Act, a Federal agency 
must determine whether a regulation proposes a Federal mandate that 
would result in the increased expenditures by State, local, or tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any single year. The Department has determined that 
this proposed rule does not create any unfunded mandates as it will not 
significantly increase aggregate costs of the UC program. The main 
effect of this proposal is to encourage States to build and maintain 
adequate balances in their UC accounts. Accordingly, it is unnecessary 
for the Department to prepare a budgetary impact statement. Further, as 
noted above, the impact is positive for State trust fund accounts.

Plain Language

    The Department drafted this proposed rule in plain language.

Effect on Family Life

    The Department certifies that this proposed rule has been assessed 
according to sec. 654 of Public Law 105-277 for its effect on family 
well-being. This provision protects the stability of family life, 
including marital relationships, financial status of families, and 
parental rights by encouraging the States to maintain adequate funding 
of their UTF accounts. It will not adversely affect the well-being of 
the nation's families. Therefore, the Department certifies that this 
proposed rule does not adversely impact family well-being.

Regulatory Flexibility Act/SBREFA

    We have notified the Chief Counsel for Advocacy, Small Business 
Administration, and made the certification according to the Regulatory 
Flexibility Act (RFA) at 5 U.S.C. 605(b), that this proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. Under the RFA, no regulatory flexibility analysis is required 
where the rule ``will not * * * have a significant economic impact on a 
substantial number of small entities.'' 5 U.S.C. 605(b). A small entity 
is defined as a small business, small not-for-profit organization, or 
small governmental jurisdiction. 5 U.S.C. 601(3)-(5). This proposed 
rule would directly impact States. The definition of small entity does 
not include States. Therefore, no RFA analysis is required.
    In addition, this proposed rule encourages States to build and 
maintain adequate balances in their UC accounts but does not require 
that they do so. Before the current recession, nineteen States had 
already met the 1.0 AHCM criterion with an additional two States having 
AHCMs above 0.95 for which little or no action would have been 
necessary to meet the criterion. Some States with lower AHCMs perceive 
a low risk of borrowing either because they have responsive tax systems 
or low unemployment projections, while other States prefer keeping 
their UC taxes low to spur further economic growth and such States are 
not likely to take action to meet the solvency criterion. For the 
States that might take action, achieving the solvency criterion would 
involve varying degrees of tax changes

[[Page 30409]]

depending on how quickly achievement of the criterion is desired. With 
proper adjustment to their funding mechanisms, tax increases would only 
be in place until appropriate UTF account balances reflecting the 
solvency criterion are met. Only a few States are likely to take action 
to achieve the solvency criterion and any action is likely to involve 
temporary, modest increases to a tax that is relatively low. Under any 
of the alternatives, only a few States would take action which would 
translate to a minimal impact on all entities given the impact 
estimates and size of the UC tax. Therefore, the Department certifies 
that this proposed rule will not have a significant impact on a 
substantial number of small entities and, as a result, no regulatory 
flexibility analysis is required.
    In addition, consistent with the impact analysis discussed above, 
this proposed rule is not a major rule as defined by sec. 804 of the 
Small Business Regulatory Enforcement Act of 1996 (SBREFA).

List of Subjects in 20 CFR Part 606

    Employment and Training Administration, Labor, and Unemployment 
compensation.

Words of Issuance

    For the reasons stated in the preamble, the Department proposes to 
amend 20 CFR part 606 as set forth below:

    Signed at Washington DC, this 16th day of June 2009.
Douglas F. Small,
Deputy Assistant Secretary, Employment and Training Administration.

PART 606--TAX CREDITS UNDER THE FEDERAL UNEMPLOYMENT TAX ACT; 
ADVANCES UNDER TITLE XII OF THE SOCIAL SECURITY ACT

    1. The authority citation for 20 CFR part 606 is revised to read as 
follows:

    Authority:  42 U.S.C. 1102; 42 U.S.C. 1322(b)(2)(C); 26 U.S.C. 
7805(a); Secretary's Order No. 3-2007, April 3, 2007 (72 FR 15907).

    2. Section 606.3(c) introductory text is revised to read as 
follows:


Sec.  606.3  Definitions.

* * * * *
    (c) Benefit-cost ratio for a calendar year is the percentage 
obtained by dividing--
* * * * *
    3. Section 606.21(d) is amended by revising the first sentence to 
read as follows:


Sec.  606.21  Criteria for cap.

* * * * *
    (d) State five-year benefit-cost ratio. The average benefit cost 
ratio for the five preceding calendar years is the percentage 
determined by dividing the sum of the benefit cost ratio for the 5 
years by five. * * *
    4. Section 606.32 is amended by revising paragraph (b) to read as 
follows:


Sec.  606.32  Types of advances subject to interest.

* * * * *
    (b)(1)(i) Cash flow loans. Advances repaid in full prior to October 
1 of the calendar year in which made are deemed cash flow loans and 
shall be free of interest; provided, that:
    (A) The State has met the funding goals described in paragraph 
(b)(2) of this section; and
    (B) The State does not receive an additional advance after 
September 30 of the same calendar year.
    (ii) If such additional advance is received by the State, interest 
on the completely repaid earlier advance(s) shall be due and payable 
not later than the day following the date of the first such additional 
advance. The administrator of the State agency shall notify the 
Secretary of Labor no later than September 10 of those loans deemed to 
be cash flow loans and not subject to interest. This notification shall 
include the date and amount of each loan made in January through 
September and a copy of documentation sent to the Secretary of the 
Treasury requesting loan repayment transfer(s) from the State's account 
in the Unemployment Trust Fund to the Federal unemployment account in 
such Fund.
    (2) Funding goals. A State has met the funding goals if:
    (i) As of December 31 of any of the 5 calendar years preceding the 
calendar year in which such advances are made, the State had an average 
high cost multiple (AHCM) of at least 1.0, as determined under 
paragraphs (b)(3) and (b)(4) of this section; and
    (ii) The State maintained tax effort with respect to the years 
between the last year the State had an AHCM of at least 1.0 and the 
year in which the advance or advances are made, as determined under 
paragraph (b)(5) of this section.
    (3) Calculation of AHCM. The State's AHCM as of December 31 of a 
calendar year is calculated by:
    (i) Dividing the balance in the State's account in the Unemployment 
Trust Fund as of December 31 of such year by the total wages paid to UC 
covered workers during such year; and
    (ii) Dividing the amount so obtained by the State's average high 
cost rate (AHCR) for the same year.
    (4) Calculation of the AHCR. A State's AHCR is calculated as 
follows:
    (i) Determine the time period over which calculations are to be 
made by selecting the longer of:
    (A) The 20-calendar year period that ends with the year for which 
the AHCR calculation is made; or
    (B) The number of years beginning with the calendar year in which 
the first of the last three completed national recessions began, as 
determined by the National Bureau of Economic Research, and ending with 
the calendar year for which the AHCR is being calculated.
    (ii) For each calendar year during the selected time period, 
calculate the benefit-cost ratio, as defined at Sec.  606.3(c); and
    (iii) Calculate the mean of the three highest ratios from paragraph 
(b)(4)(ii) of this section and round to the nearest multiple of 0.01 
percent.
    (5) Maintenance of Tax Effort. A State has maintained tax effort 
for any year between the last calendar year in which the funding goals 
in paragraph (b)(1)(i) of this section were met and the calendar year 
in which an interest-free advance is sought, if the State's 
unemployment tax rate as defined in Sec.  606.3(j) for the calendar 
year is not at least--
    (i) 80 percent of the prior year's unemployment tax rate, and
    (ii) 75 percent of the State 5-year average benefit cost ratio, as 
determined under Sec.  606.21(d).

[FR Doc. E9-14752 Filed 6-24-09; 8:45 am]
BILLING CODE 4510-FW-P