Unemployment Insurance -- Financing -- Reserve Funds
A recent trend in the management of state unemployment insurance programs is the establishment of special accounts known as reserve funds. Reserve funds are the product of the desire to expand the services offered by state unemployment insurance programs as well as the long-term financial stability that some state unemployment accounts enjoy. The result is a cost-effective and low-risk way of improving the lives and the prospects of those individuals facing unemployment.
Establishing a Reserve Fund
The first "prerequisite" for a state seeking to establish a reserve fund is a surplus of funds in the state's unemployment insurance account. These surpluses must exist in both absolute and relative terms-the total balance in the account as well as the balance relative to the size of the state's economy. It is at this point that a state may want to divert some of its resources.
Current state and federal laws require that all deposits to the unemployment insurance fund (that come in the form of tax payments) must be used only for the payment of unemployment benefits. What a state may do, however, is divert some of the interest earned on that principal balance. Typically, this is a two-step process. First, some of the taxes collected from employers' payrolls are diverted into a special account. This fund is maintained separately by the state as a "reinsurance" account, one that can be tapped by the state to pay benefits in times of need. The interest that is earned by that account is what ultimately makes up the state's reserve fund.
It should be noted that the timeframe for this process might be several years, as a state must prove that its reallocation is not jeopardizing the solvency of its primary unemployment insurance account. At the same time, however, once these funds are established, they fare remarkably well. In addition to the fact that most states with reserve funds have resisted the temptation to tap into them for one unrelated cause or another, the flexibility of investing the monies in the fund have resulted in impressive yields.
Use of Funds
The benefit of reserve funds is that they may be used in a much wider variety of ways than the standard unemployment insurance fund. While a state's unemployment insurance fund can be used only to pay unemployment benefits, a reserve fund may be tapped for any use relevant and beneficial to those who are unemployed. This includes job training and placement programs as well as improved administrative services.
How a state chooses to focus the use of its reserve funds can vary based on the state's current needs. Job training, for example, may be developed in the form of programs aimed at a target group (those recently unemployed or those who may not qualify for federal retraining programs) or at the job market (such as employers looking to recruit workers in new or expanding industries). Both the implementation of such programs and recent cuts to administrative funding from the federal government may also lead states to use reserve funds to support and staff their unemployment programs.
Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.
