30402 Federal Register / Vol. 74, No. 121 / Thursday, June 25, 2009 / Proposed Rules 

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. 

SUMMARY: The Department of Labor 

(Department) is proposing a rule to 

implement Federal requirements 

conditioning a State’s receipt of interestfree 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: 

• Federal e-Rulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• 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 


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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: 

• 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; 

• 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’’; 

• Consider Trust Fund account 

balances over a reasonable period of 

time rather than at a single recent pointin-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 

• 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 UCcovered 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 interestfree 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), 


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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 interestfree 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 interestfree 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 


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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 

• 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. 

• In 19 instances (28 percent of the 

time) the State would not have met the 

1.0 AHCM solvency goal. 

• In 9 instances (13 percent of the 

time) the State would have met the 

solvency goal, but not the maintenance 

of tax effort goal. 

• 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 

• 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. 

• In 35 instances (52 percent of the 

time) the State would not have met the 

1.0 AHCM solvency goal 

Approach III 

• 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. 

• In 19 instances (28 percent of the 

time) the State would not have met the 

1.7 percent reserve ratio solvency goal. 

• In 9 instances (13 percent of the 

time) the State would have met the 

solvency goal, but not the maintenance 

of tax effort goal. 

• 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 interestfree 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 interestfree 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 


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ESTIMATED POTENTIAL IMPACTS ON EMPLOYERS AND CLAIMANTS (1999–2006)—Continued 

[Annualized amounts in $millions] 

Approach I Approach II Approach III 

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 § 606.32 to add the 

funding goal described in Approach I to 

the existing requirements for an interestfree 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 § 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 


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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 § 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 wellbeing. 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 wellbeing 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 


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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: 

§ 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: 

§ 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: 

§ 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 

§ 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 

§ 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 § 606.21(d). 

[FR Doc. E9–14752 Filed 6–24–09; 8:45 am] 

BILLING CODE 4510–FW–P 


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