How to Improve Unemployment Insurance Administration

With no end in sight to the COVID-19 pandemic’s economic fallout, unprecedented levels of joblessness continue to test America’s patchwork UI system. Some state UI programs are experiencing long delays in providing benefits to unemployed workers, upending lives and threatening financial security. In late spring, BPC conducted a poll suggesting that just 61% of UI applicants had received the benefits for which they are eligible, with 30% describing the process as difficult to navigate.

These challenges are rooted in the fact that funding for UI administration, the vast majority of which comes from the federal government, is on a long-term downward trend, having declined by 30% on an inflation-adjusted basis over the past 20 years. Consequently, in a 2017 survey of state workforce agencies, 55% of surveyed states indicated that they faced a “serious” or “critical” funding shortfall in UI administration.

Furthermore, not all state UI programs are created equal. States have broad discretion over the design and implementation of their programs, and many are running on antiquated computer systems. Nearly 80% of state workforce agencies characterized their IT systems as “barely functional” or “needs improvement” in 2017—long before the current economic jolt—and 12 states use computer systems built with COBOL, a decades-old coding language whose programmers have mostly aged out of the labor force.

While states bear a majority of responsibility for the design of their UI programs, the federal government does maintain a significant footprint. Specifically, UI is funded via payroll taxes on employers collected by both the federal government and the states. These revenues are held by the U.S. Treasury Department in individual trust funds for each state. States are not held to reserve requirements, meaning the federal government serves as the backstop, providing loans to states that experience shortfalls. States that keep their UI programs in a healthy financial state during periods of economic growth receive preferential borrowing terms during economic downturns. Additionally, states that hold no debt or pay back their loans in a timely manner receive a tax credit that reduces employers’ federal UI tax burden. (See our previous blog for more details on how the system operates.)

In exchange for federal support, states are required to pay out benefits in a timely manner, but many are struggling to do so, a result of historic underfunding combined with unprecedented joblessness that has illuminated glaring shortcomings in UI staffing and infrastructure.

With tens of millions of Americans relying on these state programs, it is imperative that Congress act to increase the speed and efficiency of UI benefit delivery. This will require additional resources, and while states could theoretically fund these improvements themselves, their budgets are already under enormous strain.

Congress should provide support for UI administration in a forthcoming COVID relief package. In March 2020, Congress allocated $1 billion for UI administration in the Families First Coronavirus Response Act, but continued delays suggest that additional support is needed. Further resources could address short-term challenges—for example, surge staffing to deal with heightened demand—as well as tackle longer-term issues like the need to update state computer and IT systems.

In either case, additional financial resources should be leveraged by including strong provisions that incentivize speedy benefit delivery and increase system capacity to adapt to changes in policy. Specifically, Congress should consider developing performance metrics designed to measure administrative improvements, the financing of which could be structured in several ways:

• Tie a portion of direct additional COVID relief funding to performance. Under this framework, Congress would allocate funding for UI administration in a forthcoming COVID relief package and link a portion of this funding to measures that incentivize state programs to boost the speed and efficiency of their benefit delivery. This would be a straightforward way to generate change and would also aid states by providing them with new resources to improve performance.
• Link federal tax benefits to performance measures. Currently, employers in a given state are eligible for a tax credit that greatly reduces their federal UI payroll tax burden. Restrictions do apply, but these credits are generally tied to whether and for how long the state has borrowed from the federal government to fund its UI benefits. Congress could reform the tax credit to incentivize administrative improvements to UI, such as by tying a portion of the credit to measures of efficiency and timeliness of benefit delivery. The requirements could be phased in over a period of time in order to avoid employers in some states facing a tax increase in the midst of the recession.
• Tie federal trust fund borrowing to performance measures. States have the ability to borrow from the federal government to finance UI benefits and can also receive preferential borrowing terms so long as their trust funds maintain reserves above a given threshold. Congress could consider attaching additional strings to trust fund borrowing to improve UI administration, such as by making timely benefit delivery a requirement in order for states to receive the preferential borrowing terms.

It should be noted that these options are not mutually exclusive. Additionally, whatever performance metrics are chosen should be robust and avoid perverse incentives. For example, poorly designed metrics could incentivize UI programs to prioritize easy-to-process claims while moving the more complicated cases to the bottom of the pile.

The UI system provides crucial support to jobless Americans, particularly during difficult and uncertain times like these, but it is only effective if unemployed workers can access benefits in a timely manner. Unfortunately, the system is plagued with administrative challenges such as aging infrastructure and insufficient staffing. Congress should provide additional resources and realign incentives for states to improve benefit delivery, thereby ensuring that unemployed Americans receive the UI benefits they are owed and need.