Unemployment Insurance: States' Reductions in Maximum Benefit Durations Have Implications for Federal Costs
Released: 2015-05-21T00:00:00

Letter

Background

UI: A Federal and State Partnership

The nation’s UI system is a joint federal/state partnership originally authorized by the Social Security Act and funded primarily through federal and state taxes on employers. Under this arrangement, states administer their own programs, generally known as regular UI benefits, according to certain federal requirements and under the oversight of DOL’s Office of Unemployment Insurance. The primary objectives of this partnership are to provide temporary, partial compensation for lost earnings to individuals who have become unemployed through no fault of their own and to help stabilize the economy during economic downturns.

Federal law sets forth broad provisions for the categories of workers who must be covered by the program, some benefit provisions, the federal tax base and rate, and program administration, such as how states will repay any funds they borrow from the federal government to pay benefits when state reserves are depleted.

States have considerable flexibility to set benefit amounts and their duration, or the maximum period of time that the state pays benefits, and establish eligibility requirements and other program details. Regarding duration, for example, most states provided up to 16 weeks in 1938, after the program was first established. More recently, states provided up to 26 weeks.reduced benefit duration, with 20 weeks—representing a reduction of In the wake of the recession, according to DOL, 9 states over 20 percent—the most common new maximum (see table 1). Among these states, 4 enacted new maximum durations that vary according to the state’s unemployment rate (referred to in this report as “variable duration”), while the other 5 states’ new maximum durations do not vary in this way (referred to in this report as “flat duration”). All 9 states established these new durations through changes in state law.

States also have flexibility to establish eligibility requirements, which can affect duration. There are two kinds of eligibility requirements. Monetary eligibility typically refers to an earnings threshold and employment history that applicants must meet in order to qualify for benefits. Based on such eligibility criteria, individuals may qualify for less than a state’s maximum duration. The other category of eligibility requirements is non-monetary, which according to DOL, refers to states’ criteria to determine if an individual’s job loss is through no fault of his or her own, and that the individual is able to work, available for work, and actively seeking work. According to DOL, each state’s law sets both monetary and non- monetary requirements for eligibility.

Federal Programs Can Provide UI Benefits Beyond the State Maximum

In addition to the state UI benefits, federal emergency and extended UI programs may sometimes provide additional weeks of benefits under certain economic conditions, such as rising unemployment or economic downturns.

Temporary Federal UI Programs. During economic downturns, Congress has sometimes passed legislation to provide temporary unemployment compensation. Most recently, such a temporary program was created by the Supplemental Appropriations Act, 2008 (Emergency Unemployment Compensation; “emergency benefits” for the purposes of this report). According to CRS, this represented the eighth time a federal temporary unemployment compensation program was created since the inception of the UI program. This program provided up to 53 additional weeks of emergency benefits to qualifying claimants and expired in December 2013. After establishing the recent emergency benefits program in 2008, Congress amended the program 11 times, extending it and in some cases adding weeks of benefits, according to information provided by DOL. From December 2008 until the program expired in December 2013, emergency benefits were available in all states, including the states that reduced duration, with the exception of North Carolina (see app. V).

Extended UI Benefits. In addition, states and the federal government provide “extended” benefits to workers. This program, which has no expiration date, provides up to 13 additional weeks of benefits to workers who have exhausted state unemployment insurance benefits during periods of high unemployment. According to CRS, some states have also utilized an option to pay up to 7 additional weeks of extended benefits when unemployment reaches certain levels. While financing for extended UI benefits is typically shared between the states and the federal government, the American Recovery and Reinvestment Act of 2009, as amended, provided for temporary full federal funding of the extended benefits program through December 2013.

According to DOL, from January 2009 to May 2013, 39 states met the criteria for extended benefits at various times, including all of the states that reduced duration, and since May 2013, no state has met the criteria for federal extended benefits (see app. V). During the recovery, the maximum period for all combined benefits—state, emergency, and extended—to qualifying claimants reached 99 weeks in some states (see fig. 1).

Calculating Federal Benefits

Under both emergency and extended benefit programs, the duration of an individual’s federal UI benefits has depended, in part, on the duration of his or her state UI benefits. If a claimant was entitled to fewer than 26 weeks of state benefits, the duration of any available federal benefits to the claimant would be reduced proportionally. Under the most recent rules for the emergency program, the formula specified that, for the first level or “tier” of benefits, benefits were payable for up to 54 percent of the duration of an individual’s total state benefits.provide up to 50 or 80 percent of the duration of an individual’s total state benefits, depending in part on the rate of unemployment in the claimant’s state. For the 80 percent level to be applicable, a state must have a provision in its laws causing extended benefits to become available when the unemployment rate reaches a certain level. Both federal emergency and extended benefits were available in 2011, when duration reductions were first enacted in 6 states (see fig. 2).

UI Financing

The UI program was designed to be forward funded and self-financed by states through a trust fund that the federal government maintains on behalf of the states.accounts through revenue from employer taxes during periods of economic expansion in order to pay UI benefits during economic downturns. Because unemployment can vary substantially during a business cycle, it is important that states build sufficient reserves so trust fund balances remain solvent during recessions.

Ideally, states build reserves in their trust fund The UI program is financed primarily by state taxes levied on employers, as well as a federal tax—the Federal Unemployment Tax Act (FUTA) tax—also levied on employers. depending on the extent to which their state UI programs comply with federal criteria. Specifically, states set a taxable wage base—the maximum amount of an employee’s wages subject to UI employer taxes—and any wages above this amount are not subject to taxation. In addition, states determine the employer tax rate levied on the taxable wage base. In order for employers in a state to qualify for the full FUTA tax credit, the state’s taxable wage base must at least be equal to the FUTA wage base—currently $7,000. In addition, the state’s tax rate for each employer may vary according to the employer’s layoff records—a practice known as experience rating. Experience rating results in lower tax rates for employers with fewer layoffs and higher tax rates for those with more layoffs. States can also levy other taxes on employers, known as surtaxes or surcharges, for various purposes.

This discussion of state tax provisions is based on DOL’s Comparison of State Unemployment Insurance Laws, 2014 (Washington, D.C.: 2015) and UWC— Strategic Services on Unemployment & Workers’ Compensation, Highlights of State Unemployment Compensation Laws 2014. Although these taxes are paid by the employer, economists generally have concluded that their cost is likely to be borne by workers. Additionally, 3 states—Alaska, Pennsylvania, and New Jersey—directly levy UI taxes on workers.

In addition to their ability to change tax rates, states can make changes to program benefits to help ensure that funds are available to pay future benefits. For example, as previously mentioned, states can change program eligibility provisions to limit or expand the population who qualify for benefits. States can also change benefit amounts directly. Figure 3 shows the various tools states generally use to balance program revenue and benefits.

Although states have flexibility to change both revenues and benefits, they can exhaust their UI reserves during periods of exceptional unemployment. In such times, states may borrow from the federal government. If a state satisfies certain conditions, loans taken from January 1 through September 30 and repaid before October 1, are interest free as long as the state does not borrow again during the fourth quarter of the calendar year. In states that do not repay their loans within a specified period, employers lose a portion of the FUTA tax credit. However, states with outstanding loans can still seek relief from these loan provisions in the form of a limit to the reduction of the FUTA tax credit and the opportunity to delay interest payments. During the recent recession, most states opted to borrow from the federal government: 36 states had federal trust fund loans, and the total borrowed reached $48.5 billion in March 2011.Islands had trust fund loan balances, totaling about $14 billion.

As of March 2015, 9 states and the U.S. Virgin Measures of UI solvency are expressed as a percentage of wages, typically total annual wages earned by employees who are potentially eligible for receiving UI benefits. Among the measures that DOL reports are reserve ratios and the high cost multiple. A high cost multiple measure of 1.0 corresponds to sufficient reserves to pay benefits at the high cost rate for 1 year without taking in additional revenue, according to DOL. A similar measure is the average high cost multiple (AHCM), which divides a trust fund’s reserve ratio by the average high cost rate, which uses a multi-year average. An AHCM measure of 1.0 is the target for solvency, recommended by the Advisory Council on Unemployment Compensation and is specified in DOL regulations providing for interest- free loans. States also monitor their own trust fund balances. We have previously reported that almost all states measure their trust fund balances and make tax rate changes once per year. According to our previous report, the majority of states have trust fund balance targets written into their state laws, with triggers built in to adjust the tax rates according to the balance. Most states impose higher tax rates when their trust fund balances are low and lower rates when their balances are high, according to DOL.

States That Reduced UI Benefit Durations Generally Had Weak Pre-Recession Trust Funds and Raised Taxes While Improving Solvency

In our analysis of the 9 duration reduction states, we found that as a group they exhibited several characteristics that tended to distinguish them from other states.reduce duration, the states that reduced duration had: Overall, as compared to the states that did not weaker trust fund balances before the recession; lower total taxable resources; federal loans to a greater degree; higher unemployment rates; lower union membership rates; and greater political homogeneity.

In addition, while state officials cited a range of considerations in reducing benefit durations, we found that most duration reduction states, like most of the states we selected for comparison that did not reduce duration, raised taxes and made other changes to their programs. Overall, our interviews with state officials could not establish the degree to which any characteristics or considerations affected the decisions to reduce durations.

Duration Reduction States Generally Had Weaker Finances and Faced Higher Unemployment Rates than States That Did Not Reduce Duration

Weaker Trust Fund Balances

Duration reduction states were more likely than other states to enter the recession with trust fund balances that were inadequate to pay historical benefit levels. Specifically, 8 of the 9 duration reduction states (89 percent) had an AHCM below 1.0 in the last quarter of 2007—indicating an inadequate trust fund balance—as compared to 25 of the 42 states (60 percent) that did not reduce duration. Duration reduction states had a median AHCM of .33, which was less than half the median AHCM of .79 among states that did not reduce duration (see fig. 4). Consequently, the trust fund balances of the duration reduction states were particularly vulnerable to recessionary pressures and these states faced a greater risk of depleting their trust fund balances than states with more adequate trust fund balances. Among the states that reduced duration and among those that did not, there was variation in AHCM values: for example, as shown in figure 4, 1 duration reduction state among the 9 did have an adequate AHCM. In contrast, 17 of the 42 states that did not reduce duration had an AHCM greater than 1.

The inadequacy of trust fund balances may have been a factor in the decision to reduce duration for some states. Officials from 5 of the 7 duration reduction states with whom we had interviews cited the condition of their state’s trust fund balance as having been a likely consideration in the decision to reduce duration. One state UI director said it had been a driving factor in his state’s deliberation.

The weak or inadequate trust fund balances may have been partially a result of relatively low employer UI tax rates. Specifically, 5 of the 9 reduction states had average UI tax rates on total wages that were lower than the U.S. average for the 5 years preceding reduction. Additionally, stakeholders in 4 reduction states told us that there were periods (prior to the recession) of up to several years in which employer UI taxes were held to minimal levels through means such as tax holidays, tax cuts, actions to suppress automatic tax adjustment mechanisms, and actions to distribute some trust fund revenues to employers. We have previously reported that long-standing UI tax policies and practices in many states have eroded trust fund reserves, leaving states in a weak position prior to a previous recession.

Lower Total Taxable Resources

Additionally, duration reduction states had weaker overall fiscal capacity than other states. The total taxable resources of duration reduction states were generally lower than those of states that did not reduce duration, according to a measure of states’ overall fiscal capacity calculated by the Department of the Treasury. In 2010 (the year before any duration reductions occurred), 8 of the 9 duration reduction states had measures of total taxable resources below the median per capita indexed value for the U.S. overall, and 3 of these states had measures that were among the lowest in the country (see app. II for more information).

More Likely to Have Federal Trust Fund Loans

States that reduced their benefit durations were more likely to have received a federal trust fund loan since 2010 (see app. II for more information). Specifically, all 9 duration reduction states took such loans at some point during the recession; whereas 61 percent of nonreduction states had trust fund loans (see app. II for the maximum trust fund loan balances for each state). While the size of loans varied among reduction states, 2 of them (Michigan and North Carolina) ranked among the top 4 states nationwide with the largest debt per covered employee.

Higher Unemployment Rates

States that reduced UI benefit duration also tended to have higher unemployment rates. Before they adopted duration reduction, almost all— 7 of 9—duration reduction states had total unemployment rates of 9 percent or more.duration—one-third—had unemployment rates of 9 percent or more in 2010. Higher unemployment rates increase the pressure on UI trust funds because they reflect the population of those who could qualify for and receive UI benefits.

Lower Union Membership Rates

Duration reduction states also had lower rates of union membership. In 2010, 7 of the 9 duration reduction states had rates of union membership below the median for states that did not reduce duration—13.2 percent— and 3 of them had rates that were among the 5 states with the lowest rates in the country—5.6 percent or lower. Low union membership has been associated with lower benefits and wages in the economics literature.

Greater Political Homogeneity

Finally, duration reduction states also exhibited fairly homogenous political composition of their legislatures and governorships, which may have facilitated development and adoption of the state laws that included duration reduction. We found that 8 of the 9 duration reduction states had a single party in control of both the legislature and the governorship when In contrast, 45 percent of nonreduction states reductions were enacted.were politically homogeneous in 2010, although by 2013, this was the case for 71 percent.

State Officials Cited Some Additional Factors Relevant to Reducing Benefit Durations

Beyond the characteristics that tended to distinguish the states that reduced duration from other states, officials in some duration reduction states suggested other considerations as influential. Specifically, officials cited a federal program requirement and the availability of federal benefits, among other reasons for reducing duration.

In 4 of the 7 states where we interviewed UI officials, officials cited the federal nonreduction requirement as a possible factor. This requirement made states that directly reduced UI benefit amounts ineligible for federal UI emergency funds, thereby limiting the range of options available to states to reduce benefit costs.suggested that “no other effort to reduce benefits [beyond reducing duration] would be acceptable.”

As one state official said, this rule Also, although the duration reductions will continue regardless of the availability of federal benefits, in 4 of the 7 states where we interviewed UI officials, officials said the availability of federal benefits may have played a role in the decision to reduce the maximum duration of state- funded benefits. The availability of federal benefits meant that claimants would generally continue to receive benefits, albeit federal benefits, beyond the new maximum state duration. One state UI official told us the state’s reduction was “not significant,” in part because federal benefits were then available, and another told us that the legislature likely anticipated minimal impact on claimants. In 7 of the 9 duration reduction states, the total maximum duration of all available benefits, including federal benefits, was at least 93 weeks at the time of duration reduction (see app. V).

During our interviews, officials in 2 states cited the state’s economic health and the need to encourage claimants’ reemployment efforts as reasons for reducing duration. Specifically, officials in Kansas said that duration in that state is tied to the health of the state’s economy so that longer durations are available when the unemployment rate is high. Kansas is 1 of 4 states, along with Florida, Georgia, and North Carolina, that adopted variable maximum durations. They provide more weeks of benefits when the total state unemployment rate is high, and fewer weeks when it is low (see app. III).

Duration Reduction States Raised Taxes and Made Other Program Changes

States reduced maximum benefit duration in the context of other changes to their UI programs, according to information provided by state officials and our review of selected state laws. Some of these changes, such as tax increases, played a role in repaying federal loans and improving their States also made other changes to their programs trust fund balances.that can reduce benefit payments, such as changes related to eligibility and program integrity.

Increasing Tax Revenues. Of the 9 duration reduction states, 7 adopted increases in employer taxes, some of them temporary, according to information provided by state officials. changed the taxable wage base, employer tax rates, supplemental taxes, or some combination of these (see app. III).

Of the 9 duration reduction states, 2 did not respond to our written questions. duration reductions as providing such a balance. To understand the relative role of duration reductions and tax increases, we asked the states whether they had estimated any cost savings associated with duration reductions. Of the 7 duration reduction states we contacted, 4 provided estimates of cost savings equivalent to 3.4 percent, 4.6 percent, 9.8 percent, and 44.9 percent of their maximum loan balances (see app. III).In addition, officials in the 3 other duration reduction states we contacted identified tax changes as among the actions that contributed most to repayment of the trust fund loan, and one of these states identified duration reduction as a major contributor to repaying the loan. One official estimated that state tax rate changes accounted for about 65 percent of the funds needed to restore the trust fund balance.

Other Changes. Two duration reduction states issued bonds to repay their loans. On the benefits side, one state lowered its benefit amount, according to CRS. In addition, 8 of the 9 duration reduction states made changes to program eligibility. These included changes to requirements for individuals regarding earnings or employment history, as well as changes to rules addressing conduct for which an individual could be disqualified. In one state, eligibility changes were enacted to reverse previous expansions of eligibility under federal law, such as eligibility for those who claimed UI on the basis of part-time employment.

Actions taken to address program integrity were reported by all 7 of the 9 duration reduction states that provided information, and included activities to address overpayments, detect fraud, and impose penalties for noncompliant employers. State officials reported that these actions were taken in response to both federal and state initiatives.

Comparison States Also Made Program Changes but Varied in Consideration of Benefit Duration

The 4 states we examined that did not reduce duration also reported making similar program changes in raising employer taxes, tightening eligibility, and strengthening program integrity. Specifically, 3 of the 4 comparison states reported increasing employer taxes. Of the 3 comparison states that had loans, two— Indiana and Tennessee— reported increasing employer taxes (see app. III).

The third state with a loan, Ohio, was considering changes to its UI program, including to employer taxes. The fourth state, Washington, did not require a loan, and officials told us that the state’s taxable wage base—the maximum amount of an employee’s wages subject to tax—was raised through a provision in state law that took effect automatically, while employer taxes were reduced.

Regarding eligibility, 3 of the 4 comparison states reported recent actions to tighten eligibility, such as by strengthening work requirements. states reported taking actions to strengthen program integrity, such as efforts to address overpayments.

The 4 comparison states varied in the extent to which they considered reducing maximum duration. Indiana, Ohio, and Tennessee were similar to the duration reduction states, for example, in terms of having had weak trust fund balances before the recession. However, UI officials in Indiana told us that benefit amounts for some claimants had already been reduced in 2011, and no further actions have been taken on the benefit side. In Ohio, which has a large outstanding loan balance, state UI officials told us that a bipartisan group of legislators was considering changes to the program, including a potential reduction in maximum duration. Officials in Tennessee and Washington told us that duration reduction had not been considered in their states.

According to information provided by an official in one comparison state, eligibility changes were enacted to reverse previous expansions of eligibility under federal law, such as eligibility based on part-time employment.

Reduction in Maximum Duration of UI Benefits Lowered Total Benefits for Some Individuals

Reduced Durations Decreased Total Benefits for Some Individuals

In the duration reduction states, those UI claimants who would have been eligible to receive benefits beyond the new maximum receive less in total benefits in the absence of federal UI programs. The foregone benefit for those individuals who would have exhausted benefits under the previous duration can be estimated as the product of the number of weeks of the reduction and the average weekly benefit amount. For example, Michigan had an average weekly benefit of $273 in the third quarter of 2014 and the maximum benefit duration was 20 weeks (a reduction of 6 weeks from the previous maximum). A claimant in Michigan who would have been eligible for 26 weeks of benefits absent the reduction could receive 20 weeks of benefits. The claimant’s foregone benefit can be estimated as $1,638 (or 6 times the average weekly benefit amount). Benefits foregone by individuals in the states whose durations do not fluctuate with unemployment rates (flat maximums) ranged from $289 to $1,638 (see table 2)

As expected, foregone benefits would vary for individuals who would have exhausted benefits under the previous duration in the 4 states where maximum durations are tied to the unemployment rates —Florida, Georgia, Kansas, and North Carolina. The benefit amount foregone by individuals in these states ranged from $1,370 to $2,926 (see table 3.)

One potential rationale for tying maximum durations to the unemployment rate is that a lower unemployment rate signals that more jobs are available and, consequently, a shorter UI duration may be sufficient to find employment. In such a scenario, UI claimants may find jobs sooner and may not be affected by the decreased maximum duration. On the other hand, improvement in the unemployment rate is not the only factor that affects unemployment levels—lower unemployment rates can be caused in part by individuals giving up the job search altogether and dropping out of the labor force.

Some state UI directors told us their states examined the average duration on UI when legislators were considering where to set the new maximum durations. For example, Georgia officials told us that average duration had been below 14 weeks for years, and was recently closer to between 11 and 13 weeks. On the other hand, average duration on UI does not always reflect the average length of unemployment for several reasons—for example, an unemployment spell can exceed the maximum weeks of UI benefits. When we examined the average length of unemployment for persons in these states, we found that it is generally longer than the state’s new maximum benefit duration.reduced duration, the average length of unemployment for all In the states that unemployed persons—not just those receiving UI—for 2014 ranged from almost 24 weeks to nearly 44 weeks. The maximum durations in these states ranged from 14 to 25 weeks, as of October 2014 (see table 4).

When federal UI benefits were in effect (most recently generally from 2009 until the end of 2013), those individuals who were eligible to receive UI benefits for the maximum total state and federal duration would have received substantially less benefits following reduction, since duration in each federal benefit program depends, in part, on the duration of state benefits. Specifically, in a state that reduced benefits from 26 to 20 weeks, those claimants who would have received state and federal benefits for up to 93 weeks before the reduction would receive benefits for up to 72.4 weeks after the reduction, as illustrated in figure 5.

However, UI benefit durations would not change for those claimants who would have received benefits for less than 72.4 weeks before the reduction. For example, prior to any reductions in maximum benefit durations, an individual who found employment after 36 weeks of receiving UI benefits would have received 26 weeks of state benefits and 10 weeks of federal emergency unemployment benefits. All else equal, such an individual would have still received a total of 36 weeks of benefits in a scenario in which the state reduced maximum duration, for example, to 20 weeks, although the source of the benefit would change: 20 weeks of state benefits and 16 weeks of federal emergency unemployment benefits (see fig. 6).

To illustrate how reductions in state benefit durations could have affected UI claimants who were eligible to receive benefits for the maximum state and federal durations, we calculated a hypothetical foregone benefit amount to illustrate how the reduction in state maximum duration could impact benefits paid through the federal programs. For this hypothetical scenario (for example in May 2013), we assume that a claimant was eligible for the maximum benefit duration available, and that 20 weeks of federal extended benefits and all four tiers of emergency benefits were in effect, although this was not the case in all states. In such a scenario, hypothetical foregone benefits could range from around $700 to over $20,000 (see table 5).

Shorter Benefit Durations Reduce Household Spending and May Not Hasten Reemployment

In light of our findings that some individuals may have received less total UI benefits due to duration reduction, we also examined research on the impact of decreases in UI benefits on individuals.reviewed considered the theoretical basis for and empirical research on the implications for individuals of changes in UI benefits (amounts and duration) in terms of labor market behavior, poverty, and enrollment in social safety net programs.

The literature we Theories of economic efficiency generally propose that the ideal UI benefit amount and duration would prevent sharp reductions in the claimant’s household spending without creating incentives for an unnecessarily lengthy job search. Benefits that are too high prolong job searches and can elevate unemployment, while benefits that are too low reduce spending during jobless spells and cause workers to accept sub- optimal employment.

According to the research, some claimants facing shorter UI benefit durations may find employment, while others may leave the labor force. Some models show that a longer benefit period—and thus a longer job search—can result in better job offers that enable workers to be more productive, although empirical support for this possibility is limited. Nevertheless, with low or unavailable benefits, research has found that some people give up on seeking employment and leave the labor force altogether. Unemployment benefits promote labor force participation, both on the “front end’ by reducing the layoff risk in work covered by UI, and on the “back end” in the event of layoff, by reducing labor force exit.

In our own work, some of the state UI directors and stakeholders we interviewed told us that they hoped reduced benefit duration would increase reemployment. However, the available research on UI duration and claimants’ reemployment offers little support to the premise that reducing duration increases reemployment. In an economy with few jobs relative to the number of job seekers—as was the case during the recession and the slow recovery when the ratio of job seekers to job openings rose to as much as six to one—a shorter benefit period is not likely to return individuals to the labor force sooner. One study estimated that as many as one-third of claimants who exhaust benefits are unable to find work. many people do or do not find jobs once they stop receiving benefits because of limited data on individuals who have left the program.

David Grubb, Assessing the Impact of Recent Unemployment Insurance Extensions in the United States, Working Paper (Paris: Organization for Economic Cooperation and Development, May 2011).

Empirical research indicates longer durations prolong spells in the program. However, the implication of longer spells for the overall unemployment rate is ambiguous. Shortened durations could lead to reemployment, but the reemployed UI claimant might have taken a job otherwise obtained by someone outside the program. Alternatively, shorter durations could also lead to earlier exit from the labor force. Lengthened durations could lead to longer spells in the program, but also, with the benefit of more search time, to the program participant finding a job for which they are better suited. Studies that specifically consider net employment for the entire labor force indicate little effect from shorter benefit durations. For the same reason, research finds that shorter durations have a negative effect on consumption in families of unemployed workers, since shorter benefit durations do not necessarily result in rapid reemployment.

Some research finds that reduced benefits—including those resulting from reduced durations—lead to a greater incidence of poverty among those eligible for UI benefits. UI has been shown to reduce poverty; the Census Bureau estimated that UI benefits kept 1.2 million people out of poverty in 2013. rate among unemployed workers from 22.5 percent to 13.6 percent.

Carmen DeNavas-Walt and Bernadette D. Proctor, Income and Poverty in the United States: 2013, (U.S. Census Bureau Current Population Reports, September 2014).

Nutrition Assistance Program (formerly known as food stamps). For example, a 2010 study found that UI extensions reduce SSDI claims, while a 2013 study found no relation between benefit exhaustion and disability claims.applications that would eventually be made to other programs, such as SSDI.

However, longer benefit durations may delay We examined UI program and economic indicators, and found that, on average, individuals in reduction states were less likely to participate in UI and more likely to leave the labor force than individuals in nonreduction states. Additionally, while the rates at which claimants exhausted their UI benefits increased during the recession, and declined since 2010, these rates were consistently higher in duration reduction states on average as compared to states that did not reduce duration. Although duration reductions may have affected some of these indicators, it is difficult to attribute causation, given the many other program changes made by the states and federal government, as well as the changes occurring in the economy. For more information on our analysis of individual states, see appendix V.

Duration Reduction by States Shifted Some Costs from States to the Federal Government

In the presence of federal UI benefit programs, reducing maximum state UI benefit durations affects federal program costs in two opposing ways. First, at the front end, claimants use federal benefits earlier than they would have absent a state reduction, so the federal government pays some costs that states otherwise would have paid. For example, in states that reduced the maximum duration of state UI benefits from 26 weeks to 20 weeks, those claimants who were eligible for benefits for more than 26 weeks transitioned to federal benefits 6 weeks earlier. In addition, federal benefits were paid to some claimants who would not have received any federal benefits absent the reduction. Specifically, in states that reduced duration to 20 weeks, federal benefits were paid to any eligible claimants who exited the program during weeks 21 through 26.

Second, at the back end, federal benefits were not available for as long as they would have been absent a reduction in state durations, which potentially led to some federal savings. For example, claimants could receive up to 67 weeks of federal benefits when the maximum state benefit duration was 26 weeks. After a reduction to 20 weeks, those claimants could receive a maximum of 52.4 weeks of federal benefits. As a result, some of the upfront costs that were shifted to the federal government in weeks 21 through 26 are offset by shorter federal benefit durations at the back end, as shown in table 6.

The net cost to the federal government due to the reduction in state benefit durations is difficult to measure because the amount and duration of federal program benefits depend on both a claimant’s state benefits For example, we found that before and how long he or she is eligible.duration reduction, a claimant who received benefits for 75 weeks—26 weeks of state benefits and 49 weeks of federal benefits—would receive fewer total weeks of benefits after reduction in state duration to 20 weeks, but more weeks of federal benefits. Specifically, the claimant would receive 20 weeks from the state, and then 52.4 weeks of federal benefits, providing a total of 72.4 weeks of UI benefits. (See fig. 7.)

Over time, some claimants find jobs or exit the program for other reasons. As a result, there are likely to be fewer claimants receiving benefits at the back end of the program than during the front end. Therefore, even though state duration reductions may have resulted in fewer weeks of federal benefits, costs to the federal government may have increased. In other words, the front end cost caused by an earlier transition to federal programs by more claimants may exceed any savings generated by paying fewer weeks of federal benefits to those claimants still receiving benefits at the back end of the federal programs.

It is difficult to measure the magnitude of the front end costs and back end savings because, while DOL collects aggregate data on benefits paid, it does not collect data on weekly benefits at the individual level. Nevertheless, using data provided by two states, Missouri and Georgia, we found that the earlier transition to federal benefits shifted some costs from these states to the federal government.

In order to illustrate the front end cost shift to the federal government for one calendar year quarter for the weeks from the end of state benefits through week 26, for example, we analyzed data from Missouri and Georgia on the number of claimants who received weekly benefits, by benefit week. For each benefit week beyond the new state maximum duration, we multiplied the number of claimants by the average weekly benefit amount in each state. Missouri reduced its maximum duration from 26 weeks to 20 weeks effective April 2011. Using the average weekly benefit amount for claimants in Missouri, we calculated the federal government would have paid about $23.7 million in benefits for one calendar year quarter for the claimants who received benefits for weeks 21 through 26. See figure 8 for estimated costs to federal programs for the first 6 weeks after reduction.

Whether front end costs to the federal government were offset by back end savings generated by paying fewer weeks of benefits depends on the amount the federal government would have paid in the weeks eliminated by the reduction in state benefit durations. Specifically, if the federal cost of UI benefits for weeks 72.4 through 93 exceeds $23.7 million, then the federal government would have realized cost savings by paying benefits for weeks 21 to 26 while eliminating benefits in weeks 72.4 through 93. Conversely, if the federal cost of benefits for weeks 72.4 through 93 is less than $23.7 million, then the federal government would have realized cost increases as a consequence of the state duration reduction.

Similarly, Georgia reduced its benefit duration from 26 weeks to a variable duration of 14 to 20 weeks, effective July 1, 2012. Using the average weekly benefit amount for claimants in Georgia, and assuming a maximum duration of 18 weeks, we calculated that the federal government would have paid about $27.2 million in benefits that the state would previously have paid for the claimants who received benefits for weeks 19 through 26, as shown in figure 9.

Our analysis of these 2 states shows that there could be a net cost shift to the federal government, perhaps unintended, as a result of state duration reductions. As we have previously reported on state policy changes in past recessions, knowledge of the unintended consequences of such changes—including estimates of the impact on federal costs—can inform federal assistance to states in future recessions. Additionally, in our report on best practices in estimating costs, we have noted that cost estimates should identify and reflect budgetary uncertainties. However, DOL has not assessed the extent to which state duration reductions, adopted by states in the wake of the recent recession, affected costs to the federal government. To do so would require an analysis of weekly benefit data for individuals, which are collected by the states, and not by DOL. Without an analysis of the cost implications of duration reductions, DOL and Congress lack information needed to plan for future economic downturns and the equitable role of the federal government in the federal/state UI partnership.

Research Suggests That Reductions in Benefit Duration May Lessen UI’s Positive Effects on the Economy

The relevant economic literature on UI that we reviewed, including analysis by the Congressional Budget Office (CBO), considers the benefits to be a source of economic stabilization, by increasing aggregate demand through a “multiplier effect” during downturns. The multiplier effect is derived from claimants’ tendency to spend a high proportion of their benefits. The maximum duration of state benefits has not varied substantially since the 1960s, according to CRS. We reviewed the research that focuses on maximum durations of benefits (federal and state benefits combined). To the extent benefits are reduced, such as by a shortened benefit period, the effects on gross domestic product (GDP) and employment are likely to be negative, although the precise magnitude would be difficult to determine. effect captures the effects of this initial spending, as well as the subsequent stream of spending by other parties. The UI claimant spends benefits, and those who benefit from this spending, in turn, increase their own spending, and so on. The sum total of all such ripple effects is embodied in estimates of a multiplier associated with the initial spending increase. Effects of changes in individual states’ duration could have less pronounced effects than national changes.

Experts provide varying estimates of the extent to which an increase in government spending causes those whose incomes are directly benefited, such as the unemployed, to increase their own spending, and by extension increase aggregate demand and GDP. However, estimates of the multipliers in the short term are almost always positive. Responding in 2011 to a proposed extension of UI benefits, CBO estimated multipliers for UI of between .4 and 1.9 using a model that draws from multiple schools of thought, including leading models used by other institutions, related to proposed extensions of UI benefits. A private sector estimate also found a positive effect. In 2012, investment firm Moody’s estimated the multiplier for UI to be 1.55, also in relation to proposed extensions of benefits. Both estimates found that the multiplier for UI is generally higher than those for other types of spending, such as reductions in payroll taxes for workers and employers.

Moreover, traditional models used by CBO and others have found that multipliers are estimated to be greater during downturns than at other times, because there is greater potential for stimulus at such times. However, there is professional disagreement regarding these models.(See fig. 10.)

Similarly, some recent studies have estimated the effect on GDP and employment of UI benefit terminations, as decreases in benefits can also have ripple effects. In 2013, for example, the Council of Economic Advisors and DOL used private-sector and CBO estimates to determine that discontinuation of federal emergency benefits could reduce GDP by .2 to .4 percentage points. This report also estimated that terminating these federal benefits could result in a potential loss of 240,000 jobs. Additionally, in December 2011, using a CBO multiplier, the Joint Economic Committee estimated that continuing federal benefits could generate up to 400,000 jobs overall.

Identifying any effects from 9 states’ duration reductions on the economy as a whole would be complicated by potentially offsetting factors. For example, the effect of a spending decrease in one program, in this case, UI, could be mitigated by a spending increase in another program, because multipliers work in both directions.

Furthermore, experts disagree on the extent to which an increase in government spending may provoke offsetting behavior by other entities, based on our review of relevant literature. For example, UI claimants may spend their benefits, but taxpayers may reduce their spending in anticipation of higher taxes to service government debt, canceling the intended stimulus effect.

With regard to the role UI plays in stabilizing the economy during economic downturns, the program stands out as an important component of the federal government’s automatic stabilizers. It avoids the shortcomings of other types of fiscal stimulus because it is highly targeted to individuals with low income and a high likelihood of spending the benefits, and it is timely because it promptly increases in periods of rising unemployment and falls as the economy recovers.

Conclusions

The joint federal and state unemployment partnership provides temporary financial relief to individuals who have become unemployed through no fault of their own, and stabilizes the economy during economic downturns. While states determine the amount and duration of benefits paid to individuals through unemployment insurance, their decisions have an impact on the federal government’s role and costs. In the recent recession and slow recovery, 9 states chose to reduce the maximum duration of benefits paid to individuals and, as previously mentioned, none of the states that we interviewed reported any restoration of the previous maximum duration. As we have shown, these states’ actions will lead to reductions in total benefits for some claimants. If total benefits were reduced, the UI program’s objectives to provide relief to unemployed individuals and help stabilize the economy during downturns would be adversely affected.

The states’ decisions to reduce benefit durations reflect the flexibility afforded states that can help them make adjustments appropriate to their particular circumstances during challenging economic times. In addition, a larger federal role during downturns is consistent with the part that UI plays as an economic stabilizer. Yet the state duration reductions also had the unintended consequence of recasting the federal role—causing the federal programs to fund weeks of benefits that were formerly the responsibility of states. Further, these costs were shifted to the federal government without necessarily providing more weeks of total benefits for the individual. DOL does not have information about the costs shifted to the federal government and about the changes in total durations resulting from the states’ actions. As we have previously reported on state policy changes in past recessions, knowledge of the unintended consequences of such changes—including estimates of the impact on federal costs— can inform federal assistance to states in future recessions. Without an analysis of the extent to which costs were shifted to the federal government as a result of state duration reductions, the agency and Congress lack information needed to plan for future economic downturns and the equitable role of the federal government in the federal/state unemployment insurance partnership.

Recommendation for Executive Action

To inform the design of any future federal UI programs, the Secretary of Labor should examine the implications of state reductions in maximum UI benefit duration on federal UI costs, for example, by modeling the net effect of paying federal benefits earlier to more beneficiaries, albeit for a possibly shorter period of time, and develop recommendations for the program, if appropriate.

Agency Comments and Our Evaluation

We provided a draft of this report to DOL for review and comment. In its written comments, reproduced in appendix VI, DOL agreed with our recommendation. Specifically, DOL noted that additional study would be useful, and indicated it will begin to assess an approach for determining the implications of reductions in maximum duration on federal costs. DOL noted that measuring the net cost to the federal government is difficult, and we acknowledge this difficulty. However, understanding the federal cost associated with state duration reductions will inform any proposed modifications to the UI federal-state partnership and the balance of costs. DOL noted that it has proposed incentives to states to maintain maximum durations of 26 weeks, included in the President’s fiscal year 2016 budget. For example, one proposal would make several changes to the extended benefits program, including providing 100 percent federal funding for states with 26-week maximum durations. DOL also provided technical comments, which we incorporated as appropriate.

Additionally, we provided selected state UI agencies with a draft of pertinent sections and incorporated their technical comments as appropriate. We also asked an external expert to review the report, and made technical changes based on this review as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Labor, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. Please contact me on (202) 512-7215 or at sherrilla@gao.gov if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

To address the objectives of this request, we used a variety of methods. Specifically, we reviewed relevant federal laws and regulations and state laws, and confirmed information regarding state laws with relevant state officials; interviewed federal unemployment insurance (UI) program officials and state UI officials in 7 states that reduced duration and 4 states that did not reduce duration, and in 4 of the 7 states that reduced duration, we also interviewed other stakeholders with an interest in UI duration, such as employer groups and advocates; conducted a cluster analysis using data from the Department of Labor’s (DOL) Office of Unemployment Insurance, the Bureau of Labor Statistics (BLS), and other sources; analyzed data on a range of variables using data from DOL and BLS; calculated survival rates (the probability that a claimant will continue receiving benefits after a given week) based on data provided to us; conducted an economic literature review on key implications of UI benefits for individuals; and conducted an economic literature review that focused primarily on the stimulative effects of UI, and identified reasonable conclusions about the likely economic effects of duration reduction.

Interviews of Federal and State UI Officials and Other Stakeholders

To identify the circumstances in which states reduced the maximum duration of state benefits, we interviewed federal UI program officials and state UI officials in 7 of the 9 states that reduced duration and 4 states that did not reduce duration (Indiana, Ohio, Tennessee, and Washington). We selected Indiana, Ohio, and Tennessee based on their similarity to the duration reduction states on certain criteria, including presence of a trust fund loan and the size of the loan; geographic location; average high cost multiple; total taxable resources; and total unemployment rate. In addition, we selected Washington on the basis of expert recommendation and mention in selected studies. Washington was among a minority of states that did not require a federal UI trust fund loan at any point during the recession and recovery. The UI officials in Florida and North Carolina did not respond to our questions. We also conducted site visits to two duration reduction states—Georgia and Michigan—where we interviewed a wide range of stakeholders, including employer groups (such as the state Chambers of Commerce and affiliates of the National Federation of Independent Business), legislators who supported and opposed duration reduction, academic experts, governor’s workforce policy staff, and advocates (such as the National Employment Law Project and similar state-level organizations). We selected these states based on the magnitude of the duration reduction and the structure of the duration reductions (i.e., a mix of flat and variable maximum durations), timing of duration reduction, and geographic diversity. In the 2 duration reduction states where we were unable to interview UI officials—Florida and North Carolina—we interviewed advocates and employer groups. See table 7 for the range of stakeholders interviewed for each state.

In our interviews we asked questions about the circumstances that led to duration reduction, trust fund solvency, other recent changes to the UI program, estimates of cost savings or individuals affected, broader economic effects, and reemployment programs. We also interviewed academic experts regarding these topics, including Dr. Jeffrey Wenger, University of Georgia; Dr. Christopher J. O’Leary, W.E. Upjohn Institute for Employment Research; Dr. Patrick Conway, University of North Carolina; Dr. Michael Leachman and Dr. Chad Stone, Center on Budget and Policy Priorities; Dr. H. Luke Shaefer, University of Michigan; and Dr.

Wayne Vroman, The Urban Institute. In addition, Dr. Vroman reviewed a draft of the report.

Cluster Analysis of UI and BLS Data

Additionally, we conducted a cluster analysis using data from DOL’s UI program, the Bureau of Labor Statistics (BLS), and other sources. Our analysis included numerous variables, including industry composition, population over 55, unemployment rates, and trust fund loans. Cluster analysis methods assessed the degree to which these variables simultaneously were similar within various possible groups of states but were different across the groups. We used these methods to identify characteristics that were shared among states that reduced duration. Cluster analysis allowed us to identify broad, shared patterns among states across multiple variables at once, which yielded insights that can be more difficult to discern by comparing states on individual characteristics one at a time. In this way, cluster analysis can discover patterns in data, but they cannot explain why they exist or confirm cause- and-effect relationships.

We used a particular form of cluster analysis, known as hierarchical agglomerative methods, to identify potential clusters of states and their decisions to reduce UI benefits. We selected variables related to program benefits and financing, as well as variables exogenous to the program, such as states’ capacity to tax, selected state demographic information, and state industry composition. After collecting the variables above for all 50 states and the District of Columbia, we standardized the scales of all variables such that each variable’s mean was equal to 0 and its variance was equal to 1. Because the natural scales of the variables were generally percentages, the specific method of standardization should not strongly influence our results. After standardizing the scales, we calculated a multivariate Euclidean distance matrix for all variables and states. We then applied a hierarchical agglomerative clustering algorithm to this distance matrix, which used average linkage methods to form various clusters at increasing distances.

We examined the results of the clustering algorithm to identify the individual variables that appeared to influence the results strongly. We further assessed, in concert with the political homogeneity of the state legislature and governorship, the degree to which states in various possible clusters reduced UI benefit duration. This allowed us to identify a group of benefit reduction states (Arkansas, Florida, Georgia, Missouri, North Carolina, and South Carolina) that were similar on the characteristics we analyzed, as well as benefit reduction states (Illinois, Kansas, and Michigan) that were not similar to this group. In addition, we identified comparison states (Indiana, Ohio, and Tennessee) that the algorithm clustered with the benefit reduction states but which had not reduced benefit duration. The comparison states helped us to examine why states in similar circumstances chose not to reduce benefits. For more information on the variables we examined, see table 8.

In addition, we used data from the National Conference of State Legislatures to identify the partisan composition of state legislatures and governorships when duration reductions were adopted. These data were analyzed separately from the cluster analysis, because cluster analysis requires continuous, rather than categorical, variables.

Analysis of Federal and State UI Program Data

To identify the individual implications of duration reduction, we analyzed UI program data on a range of variables using data from DOL’s Office of Unemployment Insurance and BLS, including the value of the foregone state and federal benefits for individuals who reach the maximum duration. We used data from DOL’s Employment and Training Administration 5159 (Claims and Payment Activities) and 218 (Benefit Rights and Experience) reports, which states submit to DOL on a monthly basis. These reports include information on average weekly benefit amounts, initial claims, recipiency rates, and exhaustions. For selected variables, we analyzed data from 2006, before the recession began, to 2014, focusing on the 9 duration reduction states and the 4 states we selected that did not reduce duration. We also analyzed data from the Bureau of Labor Statistic’s Current Population Survey—such as length of unemployment—and Local Area Unemployment Statistics—such as seasonally adjusted employment rates. The Current Population Survey is the nation’s source of official government statistics on employment and unemployment, and it is conducted on a monthly basis with about 60,000 households. The Local Area Unemployment Statistics program provides monthly estimates of employment and unemployment for approximately 7,300 areas.

Calculation of Survival Rates

We calculated survival rates (the probability that a claimant will continue receiving benefits after a given week) based on data provided to us by Georgia and Missouri. We obtained aggregate data for each quarter on the number of claimants receiving state benefits, by benefit week, for approximately a year prior to duration reduction through two quarters following reduction. We then analyzed data from the quarter closest to each state’s policy change that did not appear seasonally inflated, in order to estimate a baseline survival function prior to the policy change. Michigan provided data from a sample of claims drawn from the time period we requested. We used the estimated survival functions to estimate the possible impact of reducing maximum benefit duration in three ways. First, we calculated the probability that claimants would be affected by a maximum duration reduction, equal to the estimated survival probability at the new maximum duration. Second, we calculated the total number of claimants affected by the policy change, equal to the survival probability at the new maximum duration multiplied by the population of claimants receiving benefits at the beginning of the quarter. (We did not calculate this quantity for Michigan, due to uncertain population sizes from which our sample was drawn.) Finally, we calculated the benefit that a claimant receiving the average benefit amount in the period shortly before the policy change could have expected to lose due to a shorter maximum duration, equal to the survival probability at the new maximum duration multiplied by the total benefits received by the average recipient over the weeks exceeding the new maximum duration.

Washington State Simulation

We also asked Washington’s state Employment Security Department to project the implications of reducing benefits from 26 weeks to 20 weeks, using the state’s Benefit Financing Model. According to Washington officials, the model was originally developed by Wayne Vroman of the Urban Institute as part of an earlier analysis of program solvency conducted for Washington in the mid-1990’s. The Washington model has continued to be used and supported by the Employment Security Department since 2000 with a review of the model completed by Dr. Vroman in June 2007, and the department also conducts quarterly benchmarking on the results. The model was developed to model current law projections and legislative changes impacting Washington’s trust fund account. According to Dr. Vroman, it is an actuarial model, and actuarial projections always have an element of uncertainty with the degree of uncertainty increasing as the projection extends further into the future. Macro factors such as the unemployment rate, the inflation rate and the level of statewide employment present major uncertainties.

Economic Literature Review

We also reviewed selected economic literature on key implications of UI benefits for individuals, such as labor force attachment, job search behavior, poverty reduction, and participation in other federal programs such as Social Security Disability Insurance, specifically on the effects of changing benefit levels or changing duration of eligibility for benefits. We obtained recommendations for studies from internal GAO and external UI researchers and policy experts, including DOL officials; searched various databases for peer-reviewed journal articles and other publications; and reviewed policy and research organization websites for relevant studies. Based on this research, we identified reasonable conclusions about the likely implications of duration reductions for individuals. As noted in this report, research on the questions discussed reaches different conclusions.

To identify what is known about the economic effects of reductions in benefit duration, we conducted an economic literature review that focused primarily on the stimulative effects of UI, and based on that research, we identified reasonable conclusions about the likely economic effects of duration reduction. In addition, we interviewed researchers from the Congressional Budget Office to understand its economic multiplier model. As noted in this report, research on the questions discussed reaches different conclusions. We have not done an exhaustive review of the voluminous literature on this topic.

Data Reliability

Because external data were significant to each of our research objectives, we assessed the reliability of the publicly and privately held data obtained from federal agencies and an association. To assess the reliability of DOL data sets, we administered a survey form that was specifically tailored to the system in question and addressed data uses, internal controls, and data entry practices. Once each survey was completed, we reviewed responses to assess the adequacy of the internal controls and processes in place. We determined that each data set was sufficiently reliable for the analytical purposes of this report. For data on partisan composition, we used data from the National Conference of State Legislatures. For data on total taxable resources, we obtained data from the Department of the Treasury. For these data sources beyond DOL, we obtained information on how the relevant data were generated and maintained and determined they were sufficiently reliable for the cluster analysis.

We conducted our work between November 2013 and April 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Financial Characteristics of Selected States

Appendix II: Financial Characteristics of Selected States This figure represents the average loan per covered employee for the non-duration reduction states that incurred loans.

This is the median total taxable resources per capita index for all states that did not reduce duration.

Maximum trust fund loan (in millions)

When DOL data showed the same maximum trust fund loan balance in 2 or more successive quarters, the most recent quarter is shown.

According to DOL, South Carolina qualified for avoidance of its FUTA tax credit reduction. See 26 U.S.C. § 3302(g).

Appendix III: Specifications for Variable Maximum Durations, Estimated Cost Savings, and Additional UI Program Changes for Selected States

Maximum duration available (weeks)

Maximum duration following duration reduction (weeks)

Maximum duration as of October 2014 (weeks) increase in the unemployment rate above 5 percent triggers an additional week 23 10.5 percent or more 14 6.5 percent or less increase in the unemployment rate triggers an additional week 20 9 percent or more 16 Less than 4.5 percent 20 4.5 percent to less 26 6 percent or more 12 5.5 percent or less increase in the unemployment rate triggers an additional week 20 More than 9 percent Florida and North Carolina did not provide information about the maximum durations that were in effect following duration reduction or as of October 2014. We imputed these durations based on the applicable unemployment rates, as calculated by BLS.

Illinois’ duration reduction was only applicable to claims filed in 2012.

State officials described these changes as temporary. In some cases, automatic readjustments may be tied to the condition of the trust fund balance. For example, according to state officials, in Michigan, if the trust fund reaches $2.5 billion for 2 consecutive quarters, the taxable wage base will revert from $9,500 to its previous level of $9,000. Michigan issued bonds in the amount of $3.3 billion to repay its loan. Although employers must pay a special assessment to repay the bond, the interest rate was more favorable to the state than the federal loan would have been, according to state officials. Additionally, officials state that, by repaying the federal loan in this way, the state avoided FUTA tax credit reductions for its employers. These states reported changes to the definition of misconduct among the non-monetary eligibility changes. In February 2013, North Carolina enacted legislation that reduced benefit amounts as of July 2013, thereby losing eligibility for the emergency benefits program, according to CRS. However, states that made changes to their benefit amounts before March 1, 2012 are not subject to the nonreduction requirement. Pub. L. No. 112-96, § 2144, 126 Stat. 156, 171 (2012).

Appendix IV: Washington State Simulation Using Benefit Financing Model

We asked Washington State’s UI agency, the Employment Security Department, to project the implications of reducing benefits from 26 weeks to 20 weeks, using the state’s Benefit Financing Model. The model was originally developed by Wayne Vroman of the Urban Institute as part of an earlier analysis of program solvency conducted for Washington in the mid-1990s. According to state officials, the Washington model has continued to be used and supported by the state since 2000 with a review of the model completed by Dr. Vroman in June 2007, and the state also conducts quarterly benchmarking on the results. The model was developed to model current law projections and legislative changes impacting the UI trust fund account.

Table 16 below shows the impact of a reduced maximum duration on key UI benefit variables in 2013 under two scenarios. The first scenario reflects current law assumptions while the proposal shows the same benefit variables assuming a 20 weeks maximum duration. Assuming a reduction in the maximum duration from 26 weeks to 20 weeks would have led to a 9.5 percent reduction in total benefit payments in 2013.

According to state officials, Washington has a system with two taxes. The first tax is experience-based and indexed to the benefit ratio. The other is a “social tax” that is assessed yearly and is mandated by statute to collect the amount required to make sure the UI trust fund remains solvent.

The state UI agency applied the 9.5 percent reduction in weeks compensated that was calculated in 2013 to the UI model starting in 2015. As a result, UI tax collections would be reduced by $381 million from 2016 through 2020 and tax rates in all years from 2016 forward would also be decreased. The Employment Security Department estimated that by 2020, duration reduction would increase the UI trust fund balance by $257 million.

Appendix V: Analysis of Individual States

Dynamics of the Larger Economy

The economic recovery following the recession affected trends such as The average duration on UI and average length of unemployment.national unemployment rate decreased from a high of 10 percent in October 2009 to 5.6 percent in September 2014. In addition, the magnitude of the recession in terms of the substantial numbers of private- sector jobs lost, and more modest gains in jobs during the recovery, had an impact on the trends we analyzed (see fig. 11).

Furthermore, despite the decline in the unemployment rate, the participation rate for the civilian labor force continues to decline to historically low levels, reflecting departures from the labor force altogether.

Availability of Federal Benefits

The effects of the changes in state UI benefit durations were mitigated by the duration of federal benefits, which were largely available when state duration reductions went into effect. For example, the total number of weeks available, including federal benefits, reached 46, 53, and 99 weeks at different points in time in various states, according to the Congressional Research Service. The availability of these federal benefits would affect any impact of duration reductions.

Other UI Program Changes

UI program changes, such as restrictions on eligibility, could also have affected participation in the UI program. For example, according to state officials, South Carolina’s new definition of “gross misconduct” now results in immediate, full disqualification for any claimant engaging in certain behaviors, such as illegal drug use during either work or non-work hours. Other states, including Georgia, implemented stronger work search requirements, according to their UI directors. Florida mandated that applications only be done online and that applicants complete a skill assessment intended to help develop a reemployment plan, which, according to advocates with whom we spoke, could deter some individuals from completing their applications.

Appendix VI: Comments from the Department of Labor

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments:

In addition to the contact named above, Nagla’a El-Hodiri (Assistant Director), Chris Morehouse (Analyst-in-Charge), Susan Aschoff, James Bennett, Susan Bernstein, Jesse Elrod, Alex Galuten, Susan Offutt, Kirsten Lauber, Kathy Leslie, Max Sawicky, Linda Siegel, Amy Sweet, Jeff Tessin, and Frank Todisco made significant contributions to this report.

Related GAO Products

Unemployed Older Workers: Many Experience Challenges Regaining Employment and Face Reduced Retirement Security. GAO-12-445. Washington, D.C.: April 25, 2012.

Unemployment Insurance: Economic Circumstances of Individuals Who Exhausted Benefits. GAO-12-408. Washington, D.C.: February 17, 2012.

State and Local Governments: Knowledge of Past Recessions Can Inform Future Federal Fiscal Assistance. GAO-11-401. Washington, D.C.: March 31, 2011.

Unemployment Insurance Trust Funds: Long-standing State Financing Policies Have Increased Risk of Insolvency. GAO-10-440. Washington, D.C.: April 14, 2010.

Unemployment Insurance: Low-Wage and Part-Time Workers Continue to Experience Low Rates of Receipt. GAO-07-1147. Washington, D.C.: September 7, 2007.

Unemployment Insurance: More Guidance and Evaluation of Worker- Profiling Initiative Could Help Improve State Efforts. GAO-07-680. Washington, D.C.: June 14, 2007.

Unemployment Insurance: States’ Tax Financing Systems Allow Costs to Be Shared among Industries. GAO-06-769. Washington, D.C.: July 26, 2006.

Unemployment Insurance: Enhancing Program Performance by Focusing on Improper Payments and Reemployment Services. GAO-06-696T. Washington, D.C.: May 4, 2006.

Unemployment Insurance: Factors Associated with Benefit Receipt. GAO-06-341. Washington, D.C.: March 7, 2006.

Unemployment Insurance: Better Data Needed to Assess Reemployment Services for Claimants. GAO-05-413. Washington, D.C.: June 24, 2005.

Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments. GAO-02-697. Washington, D.C.: July 12, 2002.

Unemployment Insurance: Role as Safety Net for Low-Wage Workers Is Limited. GAO-01-181. Washington, D.C.: December 29, 2000.

Unemployment Insurance: Program’s Ability to Meet Objectives Jeopardized. GAO/HRD-93-107. Washington, D.C.: September 28, 1993.

Unemployment Insurance: Trust Fund Reserves Inadequate to Meet Recession Needs. GAO/HRD-90-124. Washington, D.C.: May 31, 1990.