The Workforce Investment Act (WIA) was enacted in 1998 and replaced the Job Training Partnership Act (JTPA) as the federal government's primary employment and job training legislation. Title I of WIA—Workforce Investment Systems—authorizes job training and related services to unemployed or underemployed individuals. Funds authorized under Title I, Subtitle B of WIA ("Statewide and Local Workforce Investment Systems") are allocated to states by formula and are used for workforce development activities. The three formula grant programs in Title I—youth, adults, and dislocated workers—authorize funding for employment and training activities available through the national system of One-Stop centers and are provided by service providers in local communities. Title I of WIA is administered by the Employment and Training Administration (ETA) of the Department of Labor (DOL). The majority of funding for WIA Title I programs is provided through state formula grants. For example, in program year (PY) 2010 nearly $3 billion of the total Title I funding of $5.5 billion was allocated by state formula grants. WIA allocation formulas are specified by statute, which defines formula factors, specifies factor weights, and prescribes the distribution of funds to states and localities. The allocation formulas take the form of mathematical equations through which DOL calculates the specific grant amounts to each state. The dislocated worker program is the largest of the three Title I grant programs and is intended to provide funding for employment and training activities for a specific group of unemployed individuals—dislocated workers. In recent years, the dislocated worker program has provided approximately $1.2 billion annually in formula grants to states, the majority of which was subsequently suballocated to local areas within states. Interest in the dislocated worker program has intensified recently for several reasons. First, while the dislocated worker formula is, partially by design, more volatile (i.e., the size of an individual state's grant varies from year to year) than the two other state allocation formulas used in WIA (Adult and Youth programs), the recent recession and the large and rapid rise in the number of unemployed it produced has magnified the formula's allocation volatility. In the past two to three years, several states have seen funding declines from the prior year in excess of 40%. In addition, some states with high and persistent unemployment were the hardest hit in terms of funding cuts, even while experiencing rising levels of unemployment. This recent pattern of large, unpredictable, and in many cases countercyclical, swings in funding fails to meet one of the underlying aims of the dislocated worker program—allocation of funds to states in a manner that consistently reflects their absolute and relative need and that consistently corresponds with changes in the state level of need. Second, the large shifts in state funding from year to year make it difficult to plan, budget for, and operate a program that is designed to be responsive to economic dislocations. When states have rising unemployment, it becomes more difficult to provide employment and training services with level funding. However, when funding declines, in a manner and at levels that cannot be anticipated, in times of rising unemployment, it is unlikely that states can consistently operate cohesive programs and can meet the demand for services. Third, in addition to concerns about the dislocated worker program formula leading to significant volatility and concerns about a mismatch between changes in unemployment and changes in funding, a fundamental misalignment between the formula factors and the intended population of the formula has also come under some scrutiny. WIA authorized a formula specifically to allocate resources for dislocated workers—a subpopulation of unemployed workers in general. Yet the formula as currently designed does not incorporate a measure that specifically identifies this subpopulation of workers. Thus, the stated intent in WIA of targeting funds separately for dislocated workers does not match the formula specified in statute to allocate funds for this population. As reauthorization of WIA is considered, there is substantial interest in exploring ways to improve the formula design so that it better aligns with the statutorily specified goals of the dislocated worker program. This report addresses issues related to the dislocated worker program allocation formula by examining the extent to which problems may exist in the current formula regarding alignment of the formula factors with the program aims and volatility in year-to-year allocations; examining how aspects of the current formula's design may contribute to misalignment and volatility; and analyzing the strengths and weaknesses of alternative design options that may have the potential of improving alignment and reducing year-to-year volatility in state grant levels. A majority of funding for programs authorized by Title I of WIA is allocated by formulas. WIA Title I state formula grant funds are allocated from ETA to individual states by formulas (discussed in the sections below). There are three state formula grant programs in Title I: adult, dislocated worker, and youth. From these allocations, a portion of the funds are retained by the states for statewide activities and the remainder of the funds are suballocated to local Workforce Investment Boards (WIB). There are both required and allowable statewide and local employment and training activities. Statewide required and allowable employment and training activities include dissemination of the state list of eligible providers of training services, evaluations of state workforce investment programs, assistance to local areas in establishing One-Stop delivery systems, operation of a fiscal and management accountability system in order to report on and monitor the use of WIA funds, and various forms of technical assistance. Local required and allowable employment and training activities are centered on establishing and operating a local One-Stop delivery system and providing core, intensive, and training services. The programs for adult and dislocated worker participants in WIA are structured around a sequential service strategy that consists of three levels of services: core, intensive, and training. Service at one level is a prerequisite for service at the next level. That is, any individual may receive "core" services (e.g., job search assistance). To receive intensive services (e.g., career planning), WIA requires that individuals be unable, after receiving core services, "to obtain or retain employment that allows for self-sufficiency." To receive training (e.g., occupational skills, on-the-job), after receiving intensive services, an individual must have been unable to obtain or retain employment that allows for self sufficiency. Further, to be considered for training, an individual must also have the "skills and qualifications" to participate successfully in training (as determined by a One-Stop case manager), choose a training service linked to an occupation in the local area (or be willing to locate to another area where the occupation is in demand), and be unable to obtain other grant assistance (e.g., Pell grants) for the training services. The dislocated worker program is the largest of the three WIA state formula grant programs, representing in FY2010 nearly 40% of total state formula grant funding ($1.2 billion of the approximately $3 billion in state formula funding). Unlike the two other formula grant programs in Title I of WIA—Adult and Youth—the dislocated worker program clearly targets a subpopulation within the larger category of unemployed workers. That is, WIA carves out a separate program and separate funding stream for a population that is identified by a particular type of unemployment. In addition, and unlike the WIA programs for youth and adults, the dislocated worker program receives an annual allocation of more than $200 million ($229 million in FY2010) to fund the National Reserve, which funds, among other items, national emergency grants and various types of programs to respond to major economic dislocations. The funds in the National Reserve are allocated at the discretion of the Secretary of Labor but are part of the total funding for dislocated workers. The dislocated worker (DW) program provides training and related services to individuals ages 18 and older who are classified as "dislocated." WIA defines a "dislocated worker" as an individual who has been terminated or laid off (or has been notified of a termination or layoff), is sufficiently attached to the workforce (demonstrated either through eligibility for/exhaustion of unemployment compensation or through other means), and is unlikely to return to the previous industry or occupation; has been terminated or laid off (or has been notified of a termination or layoff) as a result of any permanent closure of (or substantial layoff at) a facility or is employed at a facility that is scheduled to close within 180 days; was self-employed but is unemployed because of general economic conditions in the individual's community or because of natural disasters; or is a displaced homemaker. There is some breadth in the definition of a "dislocated worker" under WIA. For instance, eligibility is afforded in cases of anticipated facility closings and for self-employed workers. However, the core eligibility requirement is dislocation due to no-fault termination or facility closing. There is no eligibility requirement under WIA related to the cause of the dislocation. From the perspective of the individual, however, the classification of "adult" or "dislocated" will not make a difference in terms of services funded by formula grants and provided through One-Stop centers. That is, dislocated workers, like others accessing services through a One-Stop center, receive core services and may receive intensive services and training depending on the circumstances and characteristics of the individual. Funding for the dislocated worker program in WIA consists of two parts: the National Reserve and state formula grants. From total funding appropriated for the Dislocated Workers Activities program in a fiscal year, Section 132(a)(2)(A) specifies that 20% is to be used for a National Reserve account, which provides for National Emergency Grants (NEG) and other services for dislocated workers. Funding for the dislocated worker state formula grant program is allocated from ETA to states according to a three-factor formula based on each state's relative share of each factor.