On June 4, 2024, Will Raderman testified at a hearing of a subcommittee of the U.S. House’s Ways and Means Committee. The hearing concerned “Reforming Unemployment Insurance to Support American Workers and Businesses.” Will’s testimony focused on his recent research on the fundamental gaps in funding for UI administration and its impact on overall program performance, efficiency, and integrity.
Written Testimony
Chairman Smith, Chairman LaHood, Ranking Member Davis, and Members of the Committee, thank you for inviting me here today and for holding a hearing on how to better administer unemployment benefits. My name is Will Raderman, and I’m an employment analyst at the Niskanen Center, a non-partisan think tank founded in 2015. Our central economic philosophy is the idea that strong free markets and robust social policies together provide the foundation for a free and fair society.
Unfortunately, programs meant to complement our dynamic labor market and keep families stable following job loss are falling short. This includes recurring performance issues with the state unemployment insurance (UI) systems, caused, in part, by flawed administrative financing from the federal government.
My testimony will touch on three related points:
1. One. Federal funding sent to state UI agencies for administration has been eroded by inflation and fluctuates year-to-year, making it difficult to develop strategic long-term investments.
2. Two. Substantial amounts of tax revenue raised specifically for program administration is not ending up in state agency accounts to fund upgrades.
3. Three. Congress should reform the financing process so that state agencies have the resources needed to maintain program integrity.
Early on in the Covid pandemic, it became clear that UI agencies were not equipped to handle the surge of claims. Although the agencies received an influx of additional funding to help manage the situation, years’ worth of necessary improvements could not be implemented once the crisis arrived. Many legitimate applicants were forced to wait months before receiving their benefits, while criminals stole up to $135 billion dollars.
The magnitude of the fraud was unprecedented. However, the administrative shortcomings were not. Past emergencies like Hurricane Katrina exposed many of the same system gaps that were exploited at a far more costly scale during Covid. Similar types of malfunctions will repeat themselves without changes to the administrative financing process, so that state agencies can steadily invest in program modernization. One-off funds are not a substitute.
Each year, Congress provides state agencies with a base allocation to fund program administration, which they must try to plan around. But those base allocations are not reliable. Since 2007, the value of the base allocations sent out to states has declined by $900 million dollars when adjusting for inflation, a 27% decline. Every agency is worse off as a result.
States’ base funding is also volatile. Less funding is released during stronger economic years when fewer claims are projected. The result is that UI agencies get fewer resources when they have the most opportunity to focus on system updates.
To make matters worse, the approved funding is divided up differently each year through a distributional Resource Justification Model. This formula causes states’ allocations to fluctuate over time – making it hard to advance long-term plans – and tends to shortchange agencies struggling the most to process benefit claims. In particular, this formula contributes to significant regional disparities that hurt Central and Southern states. Their agencies can receive half as many dollars per-working age resident as the best-funded ones.
Part of the problem is that we are leaving hundreds of millions of dollars of revenue already raised annually for the purpose of UI administration on the sideline. 80% of the funding raised through the Federal Unemployment Tax is kept in a federal account to fund program administration, while 20% is automatically directed to an emergency benefits account. Yet, agencies are not given full access to the 80% of funds intended for program administration due to congressional appropriations and complex trust fund rules.
The spare revenue could be used by state UI agencies to improve their systems, but it is rarely made available for that purpose. Instead, a strict account law frequently causes unused funds in the Administrative Account to be diverted to the emergency benefits account. In the five years leading up to the pandemic, alone, over $4.5 billion dollars was transferred out of the Administrative Account due to this balance requirement. A better use of those funds would have been to allow state UI agencies to upgrade their institutional capacity over that period.
To counter these issues, we advise Congress to pursue reforms to:
- Establish a stronger connection between what is raised for program administration and what goes back to UI agencies; and
- Ensure that agencies receive steadier, inflation-adjusted allocations over time.
In conclusion, administrative financing fixes are necessary to maximize agency performance and integrity.
Chairman Smith, Chairman LaHood, Ranking Member Davis, and members of the committee, thank you again for the opportunity to testify today. I look forward to hearing your questions.