Q:  What happens when state unemployment funds run out of money?  Do the benefits stop being paid?

A:  No.  Federal law provides that a portion of the federal unemployment tax employers pay is contributed to a trust fund called the Federal Unemployment Account (FUA).  When a state fund becomes insolvent, loans are made from FUA to the state fund and benefit payments are continued.  Employers in the affected state are ultimately responsible for paying back the loans with higher state unemployment taxes, higher federal unemployment taxes or both.  In the history of the system, benefits have never stopped being paid when a state trust fund went broke.

Q: Is it possible that the FUA could become insolvent during this recession? 

A: In fact, it already has.  The FUA did become insolvent for the first time in the history of the UI system in July this year.  However, Congress passed legislation that transferred funds from the Treasury to the FUA so that loans could continue to be made.  There was no limitation to the amount that could be requested in loans to FUA.

Q: Aren't these loans going to get pretty expensive in terms of employer taxes?

A: Yes, and more so than you may think.  According to Steve Carter, Sr. Manager, Government Relations, "This situation is going to get pretty severe for employers in the years to come.  While the Obama administration granted the states some relief by making these federal loans interest free through the end of 2010, the money being lent to the FUA does have interest that will have to be paid back in addition to the amount borrowed. In essence, the feds are borrowing interest bearing loans to make interest free loans to the states, that's a little goofy.  To give you some perspective, about 25 states have become insolvent and have borrowed about $20B.  USDOL estimates that 40 states may become insolvent in this recession with borrowing about $90B.  That number may be low.  California recently upped its estimate of needed borrowing from $18B to over $27B...and that number may be low." 

Q: So, if the states are using interest bearing money to borrow on interest free loans, who pays back the interest? 

Any guesses?

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Tammy Mullin