Financing State Accounts in the Unemployment Trust Fund: Title XII Advances and Alternative Payment Options Suzanne Simonetta Chief, Division of Legislation
What Does the Borrowing Landscape Look Like?? Washington New Hampshire Oregon Nevada California Idaho Arizona Utah Montana Wyoming Colorado New Mexico North Dakota Minnesota Wisconsin South Dakota Iowa Nebraska Illinois Kansas Missouri Oklahoma Arkansas Vermont New York Michigan Pennsylvania Ohio Indiana West Virginia Virginia Kentucky North Carolina Tennessee South Carolina Maine Massachusetts Rhode Island Connecticut New Jersey Delaware Maryland District of Columbia Mississippi Alabama Georgia Alaska Texas Louisiana Florida Hawaii Virgin Islands Puerto Rico States with Bonded Indebtedness CO, ID, IL, MI, PA*, TX *PA hasn t sold bonds yet, but has taken out an interim loan and paid off Title XII advances. As of October 1, 2012 20 states $26.3 billion in advances
Objectives Brief overview of Title XII advances. The interest provisions and FUTA credit reduction. Alternatives to borrowing from the FUA account.
Title XII, SSA Provides for advances (loans) to states from the Federal unemployment account. Establishes eligibility criteria for transfers of funds, application requirements, and limitations. Establishes how and when advances (and interest) must be repaid.
Key Points State must use any Reed Act funds that are available to pay UC before it may receive an advance (UIPL 39-97 & 32-09). The total amount of advances received from FUA cannot exceed the certified amount. If additional funds are needed a supplemental request must be made.
Interest Payments 1202(b), SSA 20 CFR Part 606 Interest accrues daily on advances on a federal fiscal year basis Interest rate changes each calendar year equal to rate earned by UTF Oct.-Dec. Interest is generally due and payable no later than Sept. 30 Interest cannot be paid directly or indirectly from funds in the state s unemployment fund 3304(a)17 FUTA Reed Act funds cannot be used to pay interest as they reside in the fund
Interest Payments 3304(a)(17), FUTA and 303(c)(3), SSA Paying interest any interest required to be paid in a timely manner is a requirement to be certified under the FUTA (i.e. employer s tax credits) Paying interest required to be paid by the date on which such interest is required to be paid is a requirement to be certified under the SSA (i.e. state administrative grant)
Allowable Sources to Pay Interest & Administrative Cost of Borrowing Funding Source Title XII Advances Permissible Uses Non-federal Loans Description Interest Admin Interest Admin UC Admin Grant 302 Reed Act 903(a)&(d) UC Mod. Incentive Funds Special Admin Transfers All other unemployment fund moneys No Yes No Yes No Yes Yes Yes No Yes Yes Yes No No No No No No No No
Cash Flow Loans No interest will be assessed on advances received Jan. Sept. if: The advances are repaid by Sept. 30; No other advances are taken out between Oct. 1 and Dec. 31; and The state meets the funding goals specified in regulation (20 CFR 606.32 Final Rule published 75 Fed. Reg. 57146 September 17, 2010).
Cash Flow Loans Cont. If a state is required to obtain an advance between Oct. 1 and Dec. 31, the interest that would have been due must be paid in full by the day after the 1 st additional loan is obtained.
Funding Goals Final Rule The rule requires states to meet the following criteria: As of December 31 of any of the 5 years preceding the calendar year of the advance, have had an Average High Cost Multiple (AHCM) (defined in 20 CFR 606.3) meeting the specified target. For each year between the year in which the solvency target was last met and the year of the advance, the state s unemployment tax rate (defined in 20 CFR 606.3) is at least 80 percent of the prior year s unemployment tax rate and at least 75 percent of the state s five-year average benefit-cost ratio (defined in 20 CFR 606.21(d)).
Phasing In of AHCM Criterion For calendar years 2014 through 2018 the AHCM criterion will be phased in as follows: 2014 AHCM of 0.50 2015 AHCM of 0.60 2016 AHCM of 0.70 2017 AHCM of 0.80 2018 AHCM of 0.90 Beginning in 2019 the AHCM required to meet the funding goal criterion is 1.0.
Interest Payment Delays/Deferral A state may delay payment of interest accrued on new advances in May through September until Dec. 31 of the following calendar year. A state may defer interest payments if IUR equals or exceeds 7.5% for the first six months of the previous calendar year. A state may request to delay interest payment for nine months after Sept. 30, if the TUR averaged 13.5% or higher for the most recent 12 month period prior to Oct. 1.
Title XII Interest Statistics 29 States paid $1,237,719,086.96 in interest in FY 2011. The amounts ranged from $211,151.47 in Hawaii to $303,457,802.62 in California. 28 States paid $1,128,043,564.13 in interest in FY 2012. The amounts ranged from $605,040.77 in Alabama to $308,391,382.00 in California.
FUTA Credit Reduction If a state retains a Title XII advance balance on 1/1 of two consecutive years and has not fully repaid all advances on November 10 of the second year, contributory employers may be subject to reduction of their FUTA credit. The credit reductions generally increase those employers effective FUTA rate by 0.3% each year the balance remains unpaid. Receipts are credited against the loan balance.
FUTA Credit Reduction Years After First Loan 1 Basic Credit Reduction Additional Credit Reduction Total FUTA Rate 2 1 0.0% 0.0% 0.6% 2 0.3% 0.0% 0.9% 3 0.6% 2.7 Add-on 1.1% or more 4 0.9% 2.7 Add-on 1.4% or more 5 1.2% BCR Add-on 3 1.7% or more * * * * * * * * * * * * 19 5.4% BCR Add-on 6.0% 1 Consecutive January 1st with an outstanding balance. 2 Effective FUTA rate with full 5.4% credit is currently 0.6%. 3 If BCR Add-on is waived, 2.7 Add-on applies.
Avoidance of FUTA Credit Reduction A state may avoid credit reduction by: Paying an amount equal to the amount employers would pay through credit reductions; Increasing solvency by an amount equal to amount of FUTA credits employer would lose; Repaying any advances received during the one one-year period ending Nov. 9 that year; and Not receiving advances from Nov. 1 of the tax year through Jan. 31 the following year.
FUTA Credit Reduction - Cap Beginning with the 2nd year a state faces credit reduction, states may have the reduction capped if these criteria are met: No action taken by state during previous FFY to reduce tax effort or decrease solvency; State s average tax on total wage exceed 5 year benefit cost rate on total wages; Advance balance not greater than balance 3 years earlier. A state that qualifies for a cap will have its credit reduction set at the greater of 0.6% or the prior year s level. If the state qualifies for a cap, that year is not counted in the number of consecutive January 1sts.
FUTA Credit Reduction Statistics States with.3% Reduction States with.6% Reduction States with.9% Reduction States with Other Amounts CY 2009 1 0 0 0 CY 2010 2 1 0 0 CY 2011 19 1 1 0 CY 2012 5 19 2 1* *In CY 2012 VI is facing a 1.5% reduction due to a 0.9% addon based on their average tax rate. Additionally SC qualified for avoidance of 0.6% reduction it was facing in CY 2011. Further, SC has an application for avoidance pending for CY 2012.
Alternative Financing (Non-Federal Loans) There is a federal requirement to pay UC as soon as is administratively feasible (JAVA). Insolvency does not eliminate this requirement. States may receive advances from the FUA. States are not required to receive advances from the FUA.
Bonds States may issue bonds: To retire Title XII advances; To restore UTF reserves; and/or To make future UC payments.
Federal Requirements for Repayment of non-federal Financing Amounts in state s UTF account and future employer contributions may be used to repay the principal only if the following conditions are met: 1. The loan is made for the solely for the purpose of paying UC under the state law, and the proceeds of the loan have either actually been used for the payment of UC or have been deposited in the state's account in the Unemployment Trust Fund (UTF). If the loan is not limited to the payment of UC (for example, if a bond issuance also finances workers compensation or temporary disability payments), the amount that may be repaid from the state's unemployment fund is limited to the amount actually used for the payment of UC plus any amount deposited in the state's account in the UTF that is limited to the payment of UC.
Federal Requirements for Repayment of non-federal Financing Cont. 2. The money used for the payment of UC is explicitly characterized as a loan for the payment of UC at the time it is dedicated to the payment of UC. If it is not so characterized, there is no loan for the payment of UC. 3. The loan and repayment are consistent with the state law as interpreted by competent state authority. This assures that the expenditure of the loan for UC was lawful and that repayment of the loan is a proper withdrawal from the unemployment fund. See UIPL 7-04 and UIPL 7-04, Change 1 for further information.
Restrictions on Use of Federal Funds Title III funds (or any other federal grant funds) may not be used to pay interest --- see OMB Circular A-87. Title XII advances may not be used to pay principal or interest.
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