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Funding the Unemployment Insurance Program’s Administrative Costs

Unemployment insurance (UI) is a program jointly administered by the federal government and each state that provides relief to eligible unemployed workers by replacing a portion of their wages for a limited time. The U.S. Department of Labor (DOL) oversees UI while states retain significant latitude to administer their own programs. 

Alongside broad discretion to determine eligibility standards and benefit amounts, states are responsible for funding UI benefits through state unemployment taxes.  However, the federal government covers 100% of the costs required to administer UI, including paying for salaries and the technology states use to run their programs. 

Significant differences exist across state economies, demographics, and UI program design, so administrative demands vary accordingly. DOL thus employs a multistep process to allocate administrative funding.

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UI Administrative Duties

  • State governments: Specify eligibility requirements, duration, and benefit levels within federal guidelines; receive and process claims; disburse UI benefits; and evaluate recipients’ continuing eligibility.

  • Federal government: Ensure compliance of state programs with federal law, set administrative guidelines, monitor state performance, provide technical assistance, and oversee the Unemployment Trust Fund.

1. Data Collection: Each January, DOL collects comprehensive data on each state’s population and UI administrative costs, including operating costs from the prior fiscal year, staffing levels and hours, and projected claims and expenditures for the next two fiscal years. DOL also collects data on the states’ current UI administration methods, including their use of technology. Regional and national DOL offices then review the data to ensure accuracy and consistency.

2. Resource Justification Model (RJM), Part I: DOL uses the RJM—a comprehensive data organization and analysis tool—to analyze state data and inform the president’s annual budget request to Congress. DOL has used the RJM since 2002 to justify the federal appropriation needs of the UI system.

3. Appropriations: Each fiscal year, Congress considers the president’s budget request and appropriates state administrative funds. The annual appropriations language has two parts

  • Congress allocates a base level of UI administrative funding, which DOL distributes to states as grants. 
  • Appropriators provide for additional state administrative funding should unemployment unexpectedly increase, for example during an economic recession. After the end of the fiscal year, the federal government activates this contingent funding if nationwide unemployment claims rose above the appropriators’ baseline projection, measured by average weekly insured unemployment (AWIU).<sup>i</sup> The exact amount of contingent funding depends on the volume of claims above baseline. 

UI Administrative Appropriations in Action

  • The Biden administration’s fiscal year 2022 budget proposal contains $2.88 billion in funding for state UI administration—an amount sufficient to process an average of 2,008,000 continued claims per week.

  • The proposal also includes contingency language: for every 100,000 increase in AWIU above 2,008,000, Congress will apportion an additional $28.6 million to states (prorated for increases of less than 100,000).

Congress can also enact supplemental appropriations, as it did with the American Rescue Plan Act (ARPA) in response to COVID-19. In addition to the $2 billion UI modernization effort led by DOL with ARPA funds, four states—Hawaii, Nevada, New Jersey, and Virginia—have used ARPA grants to modernize and improve the administration of their UI programs. Alternatively, states can fund improvements to UI administration on their own, using a state-level revenue stream or state general funds, but often choose not to do so.

4. RJM, Part II: Using the RJM, DOL divides the actual congressional appropriation for UI administration between the states. The federal government then disburses those funds as quarterly grants.

DOL withholds a portion of the total appropriated funds, however, in case individual states demonstrate an unexpected increase in UI claims during the year and require additional funding. These “above-base” funds do not require additional congressional approval. At the end of the fiscal year, DOL can provide any unused above-base funds to states for various reasons, including systems improvements, integrity initiatives, and program assessments.

Sources

i AWIU is calculated as the total continued claims during a fiscal year divided by 52.

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