The Unemployment Trust Fund and Reed Act Distributions
Released: 2012-09-12T00:00:00

What Is the Reed Act?

Unemployment Compensation (UC) is a joint federal-state program and is financed by federal taxes under the Federal Unemployment Tax Act (FUTA) and by state payroll taxes. The underlying framework of the UC system is contained in the Social Security Act: Title III authorizes grants to states for the administration of state UC laws; Title IX authorizes the various components of the federal UTF; and Title XII authorizes advances or loans to insolvent state UC programs. Among its 59 accounts, the federal UTF in the U.S. Treasury includes the Employment Security Administration Account (ESAA), the Extended Unemployment Compensation Account (EUCA), and the Federal Unemployment Account (FUA); 53 state accounts; the Federal Employees Compensation Account; and two accounts related to the Railroad Retirement Board. Federal unemployment taxes are placed in the ESAA, the EUCA, and the FUA; each state's unemployment taxes are placed in the appropriate state's account.

In law, the term Reed Act refers to a part of the Employment Security Financing Act of 1954, P.L. 83-567. This legislation amended Titles IX and XII of the Social Security Act (SSA) and established the basic structure of the UTF. The amendments to Title IX, among other things, provided for the transfer of excess funds in the federal portion of the UTF to the individual state accounts under certain conditions.

In practice, there have been two forms of Reed Act distributions. The first form, regular Reed Act distributions, follows the terms as set forth in the Reed Act. The second type, special Reed Act distributions, distributes some of the federal UTF funds to the states where these special distributions may follow some but not all of the conditions set by the Reed Act. The 1998-2002 Reed Act distributions were special distributions.

Federal law restricts states to using Reed Act distributions only to cover the cost of state benefits, employment services (ES), labor market information, and administration of state UC and ES programs. Suggested uses by the Department of Labor included establishing revolving funds for UC and ES automation costs, UC and ES performance improvement, costs related to reducing UC fraud and abuse, and improvement in UC claims filing and payment methods. An appropriation by the state's legislature is necessary before the state's share of this distribution may be used for UC and ES administrative expenses. Funds may not be used to extend a temporary unemployment benefit such as the Emergency Unemployment Compensation (EUC08) program.

How Does the Release of Reed Act Funds Occur?

Under FUTA, the federal tax on employers finances the states' administrative costs of UC and loans to states with insolvent UC programs. State UC payroll taxes finance the costs of regular UC benefits. The extended benefits program is funded 50% by the federal government and 50% by the states, but the 2009 stimulus package ( P.L. 111-5 §2005) as amended temporarily provides for 100% federal funding of this program through March 7, 2012.

Under FUTA, employers pay a federal tax of 6.0% on wages of up to $7,000 a year paid to each worker. The law, however, provides a credit against federal tax liability of up to 5.4% to employers who pay state taxes in a timely manner. Accordingly, in states meeting the specified requirements, employers pay an effective federal tax of 0.6%, or a maximum of $42 per covered worker, per year.

At the end of the federal fiscal year, on September 30 th , the net balance of the ESAA is determined. If the amount in this account exceeds 40% of the prior year's appropriation by Congress, then an "excess" balance exists. This excess balance is transferred first to the EUCA. When that account reaches its statutory maximum, the remaining excess balance is transferred to the FUA. When all three accounts are at their statutory maximums , any remaining excess balance is distributed to the accounts of the states in the UTF based on each state's share of U.S. covered wages. These distributions are called Reed Act distributions.

Reed Act distributions occurred in 1956 through 1958 and 1998 through 2002. Table 1 lists the distributions. The most recent Reed Act distribution that was a regular and not a special Reed Act distribution was $15.9 million and occurred in 1998. The Balanced Budget Act (BBA) of 1997, P.L. 105-33 , limited the Reed Act distributions for the 1999 to 2001 period to special distributions of $100 million each year. Any amounts in excess of the $100 million that—absent the BBA amendments—would have been transferred to the states "shall, as of the beginning of the succeeding fiscal year, accrue to the federal unemployment account, without regard" to its statutory limit.

In March 2002, the Job Creation and Worker Assistance Act of 2002, P.L. 107-147 , provided for a one-time special Reed Act distribution of up to $8 billion to state accounts in the UTF, where the funds were distributed based upon the formula used for regular Reed Act distributions, using calendar year 2000 state information. The law labeled this transfer a "Reed Act" distribution although it differed from traditional Reed Act distributions, most notably because the law distributed a set dollar amount which was not determined by the statutory ceilings in the federal accounts and was distributed before the end of a fiscal year.

There was no Reed Act distribution in 2003, and no regular Reed Act distribution is projected through FY2021. According to the Department of Labor, there is no projected distribution through FY2021 on account outstanding loans owed to the general fund of the U.S. Treasury.

How Was the $8 Billion Reed Act Distribution in 2002 Spent by the States?

According to a General Account Office (GAO, now know as the Government Accountability Office) report, the $8 billion Reed Act distribution reduced 2003 unemployment taxes in 22 states and UC administration costs in 17 states. The Center for Employment Security Education and Research (CESER), a component of the National Association of State Workforce Agencies (NASWA), with the assistance of Booz Allen Hamilton and Decern Consulting, examined how states used the $8 billion special Reed Act Distribution of 2002. This study found that approximately half of the Reed Act distribution was used to lower state unemployment taxes in 2003 and 2004 from what they would have otherwise been. The special distribution also led to increases in spending on UC benefits, UC administration, and employment services.

Transfers to States in the 2009 Stimulus Package

The American Recovery and Reinvestment Act ( P.L. 111-5 §2003) provided for a special UTF distribution. The law provided a special transfer of UTF funds from FUA of up to a total of $7 billion to the state accounts within the UTF as "incentive payments" for changing certain state UC laws. The maximum incentive payment allowable for a state was calculated using the methods also used in Reed Act distributions. That is, funds were to be distributed to the state UTF accounts based on the state's share of estimated federal unemployment taxes (excluding reduced credit payments) made by the state's employers. In addition, the act transferred a total of $500 million from the federal ESAA to the state's accounts in the UTF.