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Secretary of Labor Hilda L. Solis
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ETA Final Rules

Federal-State Unemployment Compensation Program; Funding Goals for Interest-Free Advances; Final Rule   [9/17/2010]
[PDF]
FR Doc 2010-22926
[Federal Register: September 17, 2010 (Volume 75, Number 180)]
[Rules and Regulations]               
[Page 57145-57157]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17se10-14]                         


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Part III





Department of Labor





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Employment and Training Administration



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20 CFR Part 606



 Federal-State Unemployment Compensation Program; Funding Goals for 
Interest-Free Advances; Final Rule


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DEPARTMENT OF LABOR

Employment and Training Administration

20 CFR Part 606

RIN 1205-AB53

 
Federal-State Unemployment Compensation Program; Funding Goals 
for Interest-Free Advances

AGENCY: Employment and Training Administration, Labor.

ACTION: Final rule.

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SUMMARY: The Employment and Training Administration (ETA) of the United 
States Department of Labor (Department) issues this final rule to 
implement Federal requirements conditioning a State's receipt of 
interest-free advances from the Federal Government for the payment of 
unemployment compensation (UC) upon the State meeting ``funding goals, 
established under regulations issued by the Secretary of Labor.'' This 
final rule requires that States meet a solvency criterion in one of the 
5 calendar years preceding the year in which advances are taken; and to 
meet two tax effort criteria for each calendar year after the solvency 
criterion is met up to the year in which an advance is taken.

DATES: Effective date: This final rule is effective October 18, 2010.

FOR FURTHER INFORMATION CONTACT: Ron Wilus, Chief, Division of Fiscal 
and Actuarial Services, Office of Unemployment Insurance, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Room S-4231, 
Washington, DC 20210; telephone (202) 693-3029 (this is not a toll-free 
number).
    Individuals with hearing or speech impairments may access the 
telephone number above via TTY by calling the toll-free Federal 
Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION: 
    The preamble to this final rule is organized as follows:

I. Background--provides a brief description of the development of 
the rule.
II. General Discussion of the Rulemaking--summarizes and discusses 
comments on the funding goals regulations.
III. Administrative Information--sets forth the applicable 
regulatory requirements.

I. Background

    UC generally is funded by employer contributions (taxes) paid to a 
State. The State, in accordance with section 303(a)(4) of the Social 
Security Act (SSA) (42 U.S.C. 503(a)(4)) and section 3304(a)(3) of the 
Federal Unemployment Tax Act (FUTA) (26 U.S.C. 3304(a)(3)), deposits 
these contributions immediately upon receipt into its account in the 
Unemployment Trust Fund (UTF) maintained by the U.S. Treasury. Section 
1202 of the SSA (42 U.S.C. 1322) permits a State to obtain from the 
Federal Government repayable advances to this account to pay UC when 
the State account reaches a zero balance. These advances are interest-
bearing, except for certain short-term advances, which are called cash 
flow loans. Under section 1202(b)(2) of the SSA (42 U.S.C. 1322(b)(2)), 
these short-term advances are interest-free if:

    (1) The advances made during a calendar year are repaid in full 
before the close of September 30 of the same calendar year;
    (2) No additional advance is made during the same calendar year 
and after September 30; and,
    (3) The State meets funding goals relating to its account in the 
UTF, established under regulations issued by the Secretary of Labor 
(Secretary).

    The Balanced Budget Act of 1997 (Pub. L. 105-33, section 5404) 
added the third requirement, that is, that the State meet funding goals 
established under regulations by the Secretary. This statutory 
requirement is implemented in this final rule.
    State UC programs, created in the 1930s, were intended to be self-
financing social insurance programs that levied payroll taxes on 
covered employers and paid benefits to eligible unemployed workers. A 
primary goal of the program was to act as an automatic stabilizer for 
the economy, by automatically injecting needed income support during 
recessionary periods and delaying tax increases. This is accomplished 
by building trust fund reserves during expansionary periods and using 
the reserves as a cushion to finance benefit payments during 
recessions. However, to acquire and maintain levels of reserves that 
would guarantee all legitimate claims are paid can be prohibitively 
costly. In the case of the UC program, employers largely pay the taxes 
(employees may also pay in three States) and paying more in taxes means 
employers experience increased costs. As a result, employers may have 
less money available to grow their businesses and add jobs to the 
economy. Therefore, to satisfy financing needs and fulfill the primary 
goal of stabilizing the economy in recessions, the UC program is 
designed to build and maintain State UC reserves at a level that will 
ensure funds are available to pay benefits during average recessions 
while not building reserves so high as to impede economic growth. 
Report of the Committee on Economic Security: Hearings on S. 1130 
Before the Senate Committee on Finance, 74th Cong., 1st Sess. (1935).
    States have wide latitude in determining how to provide for 
increases in UC benefits. Generally, there are three methods of doing 
this: (1) Forward funding, whereby the State builds up its fund balance 
in anticipation of increased outlays; (2) pay-as-you-go financing, 
whereby taxes are raised as needed to cover benefits; and (3) deficit 
financing where a State uses alternative funds to pay UC. Most States 
use a combination of these methods.
    This final rule encourages States to improve their level of forward 
funding. Forward funding as a method of financing UC began 
deteriorating in the early 1990s. A steady decline in UC tax rates 
since then resulted in a measurable deterioration in the level of State 
UTF account balances. Following a mild recession in 2001, nine States 
depleted their UC reserves and were forced to take advances to pay UC. 
At the end of 2007, following more than 6 years of economic expansion, 
State UTF account balances, on average, stood at approximately 5 months 
of average recessionary benefits, a historically low level for that 
period in a cycle.
    Forward funding of State UC programs is desirable because taking 
large advances can result in undesirable State actions. Such actions 
might include lowering benefits, increasing taxes, or a combination of 
both, at a time when neither employers nor UC beneficiaries are best 
able to cope with the consequences. Obtaining advances can also create 
difficult political decisions for a State. For example, if the advance 
results in interest coming due, a State must finance the interest 
payment from a source other than the regular UC tax. Therefore, 
maintaining solvent State UTF accounts is in the best interest of all 
involved. This rulemaking will encourage each State to maintain solvent 
UTF accounts by conditioning interest-free advances upon the State 
having met funding goals established under section 1202(b)(2)(C) of the 
SSA.

II. General Discussion of the Rulemaking

    On June 25, 2009, the Department published a notice of proposed 
rulemaking (NPRM, at 74 FR 30402, Jun. 25, 2009) proposing, consistent 
with the statutory direction to the Department, regulations 
establishing ``funding goals * * * relating to the accounts of the 
States in the [UTF],'' that States must meet as a condition of an 
interest-free advance. The Department explained in the NPRM that the 
purpose of the

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funding goals requirement added by the Balanced Budget Act of 1997 was 
to provide an incentive for States to build and maintain sufficient 
reserves in their UTF accounts by restricting an existing Federal 
subsidy, in the form of an interest-free advance, to only those States 
that meet a forward funding solvency goal. The NPRM also explained that 
by restricting the subsidy, Congress hoped to encourage States to build 
cash reserves in order to adequately prepare for economic downturns. To 
meet the statutory requirement and its purpose of encouraging States to 
maintain sufficient balances in their UTF accounts to cover UC benefits 
in the event of a recession, the NPRM outlined three possible solvency 
approaches. All three approaches encouraged maintenance of adequate 
reserves.
    The approach selected in the NPRM had two prongs. The first prong 
required a State to meet a measure of UTF account adequacy, recommended 
by the Advisory Council on Unemployment Compensation (Advisory Council) 
(created by the Emergency Unemployment Compensation Act of 1991), in at 
least one of the 5 calendar years before the calendar year in which the 
advance was obtained. This prong assured that the State had made 
sufficient efforts to obtain solvency before the need for the advance. 
The second prong required that the State meet two tax effort criteria 
for each year after the solvency criterion is met up to the year in 
which the advance was obtained. This prong assured that the State made 
reasonable efforts through its taxing authority to maintain solvency, 
even though, despite these efforts, the State needed an advance to pay 
benefits. In short, a State must achieve fund solvency and have 
maintained its tax efforts, which satisfies the statutory direction to 
the Department to establish funding goals for a State's UTF account as 
a condition of receiving the benefit of an interest-free advance. While 
not a mandate on the States, these funding goals, consistent with 
Congressional intent, encourage the States to build and maintain 
adequate solvency levels during economic expansions, and maintain tax 
effort, before obtaining an interest-free advance.
    The NPRM proposed amending 20 CFR part 606. More specifically, the 
Department proposed amending Sec.  606.32 by re-designating existing 
paragraph (b) as paragraph (b)(1) and adding new paragraphs (b)(2) 
through (b)(5) to establish the funding goals required by the SSA. 
Paragraph (b)(2)(i) set forth the first prong of the requirement, that 
the State, as of December 31 of any of the 5 calendar years preceding 
the calendar year in which the advance was taken, had an average high 
cost multiple (AHCM) of at least 1.0. Paragraph (b)(2)(ii) set forth 
the second prong, requiring the State to maintain tax effort with 
respect to the years between the last year the State had an AHCM of at 
least 1.0 and the year in which the advance was taken. Paragraph (b)(3) 
explained the calculation of the AHCM, based, in part, upon the 
calculation of the average high cost rate, as provided by paragraph 
(b)(4).
    For any year, the AHCM consists of two ratios:
    (1) The ``reserve ratio'' -- The balance in a State's UTF account 
on December 31 divided by total wages paid to UC-covered employees 
during the 12 months ending on December 31; and,
    (2) The ``average high cost rate (AHCR)'' --The average of the 
three highest values of: Benefits paid during a calendar year divided 
by total wages paid to UC-covered employees during the same calendar 
year over whichever period is longer, either the most recent 20 years 
or the period covering the most recent three recessions.
    The AHCM is computed by dividing the reserve ratio by the AHCR. The 
resulting AHCM represents the number of years a State could pay UC 
benefits at a rate equal to the AHCR, without collecting any additional 
UC taxes.
    Paragraph (b)(5) set forth the details of the maintenance of tax 
effort requirement: A State has maintained tax effort if, for every 
year between the last calendar year in which it attained an AHCM of 1.0 
and the calendar year in which it obtained the advance, the State's 
unemployment tax rate as defined in Sec.  606.3 for each of the 
specified years was at least:

    1. Eighty percent of the prior year's rate; and,
    2. Seventy-five percent of the average benefit-cost ratio over 
the preceding 5 calendar years, where the benefit-cost ratio for a 
year is defined as the amount of benefits and interest paid in the 
year divided by the total covered wages paid in the year.

    The first criterion assures that the State maintained its tax 
effort by not allowing employer contributions, that is, tax revenue, to 
decline unduly. The second criterion assures that the State maintained 
its tax efforts by keeping employer contributions at a reasonable 
proportion of UC paid, which assures that the State's tax structure is 
sufficiently functional to generate adequate revenue to cover a 
reasonable percentage of the 5-year average costs. Thus, the two 
criteria together assure that the State meets the maintenance of tax 
effort goal by both maintaining revenue and assuring that that revenue 
is reasonably adequate to finance benefits.
    In the NPRM, the Department also proposed amending the definition 
of benefit-cost ratio in Sec.  606.3. Previously, this definition 
applied only for purposes of the cap on tax credit reductions under 
section 3302(f) of the FUTA (26 U.S.C. 3302(f)). The Department 
proposed deleting the reference to the cap, thereby making the 
definition applicable to the funding goals as well. The Department 
similarly proposed amending the definition of ``State 5-year average 
benefit-cost ratio'' at Sec.  606.21(d), so that it also applies to the 
funding goals as well as the cap. Determining whether a State has met 
the maintenance of tax effort criteria involves the application of both 
definitions.
    Finally, in the NPRM, the Department also solicited comments on its 
proposal to apply the funding goals 2 years after publication of the 
final rule to allow States time to adjust their financing systems. 
NPRM, at 74 FR 30406, Jun. 25, 2009; See also http://
www.regulations.gov/search/Regs/home.html#docketDetail?R=ETA-2009-0002, 
Docket ID: ETA-2009-0002 (analysis of simulations applying solvency 
approaches discussed in NPRM).

Overview of the Comments Received on the NPRM

    The Department received eleven unique comments in response to the 
NPRM; all but one were from State UC agencies.
    The issue most frequently raised in the comments concerned the 
Department's proposal to apply the funding goals 2 years from 
publication of the final rule. Most commenters urged the Department to 
delay applicability due to the recession. In response to these 
comments, the Department has decided to delay and phase-in the funding 
goals requirement.
    Several commenters also addressed the details of the solvency and 
maintenance of tax effort criteria. Some commenters offered modest 
support of the Department's proposed rulemaking objective. In addition, 
some commenters sought additional stakeholder collaboration before a 
final approach was determined. A few commenters suggested that the 
Department avoid ``penalizing'' States that have demonstrated 
reasonable efforts to obtain solvency. One commenter challenged the 
Department's authority to promulgate funding goals regulations. Some 
commenters requested that the

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Department make available waivers from the funding goals requirement.
    The Department read and carefully considered all of the comments in 
the process of developing this final rule. The substantive issues 
raised by the comments that are germane to the rule are responded to 
below. Other than the changes related to the phase-in of the funding 
goals, the Department makes no substantive change from what it proposed 
in the NPRM.

Timing of Rule Applicability

    The most significant change to the rulemaking relates to the 
Department's intention to make the funding goals effective two years 
after publication of the final rule. In general, commenters argued that 
since the United States has experienced an economic downturn of 
historic proportion, now is not the time to require States to build and 
maintain sufficient reserves in their UTF accounts. Some of these 
commenters noted that the proposed 2-year timeframe for applicability 
was not sufficient for the States that have gone into debt due to the 
current recession. As one commenter stated, ``[t]he majority of 
[S]tates are dealing with record high benefit levels and immediate or 
near-future insolvency * * *. Implementing this new requirement will 
seriously hamper [their recovery] process.'' Another commenter 
contended that the solvency goal ``is not reasonably attainable to a 
large number of [S]tates that currently have negative balances in their 
funds.''
    Several commenters requested that the Department delay 
implementation of the funding goals requirements, with one commenter 
suggesting that the new funding goal requirements be delayed 
indefinitely in light of the length and severity of the current 
recession. One commenter suggested a delay of 5 years after the end of 
the current recession in the rule implementation, while another 
commenter suggested the funding goals should be implemented in 2017. 
Commenters also noted that section 2004 of the American Recovery and 
Reinvestment Act of 2009 (Pub. L. 111-5) (Recovery Act) waived all 
interest on advances during the period February 17, 2009, through 
December 31, 2010, and provided that no interest accrues on any advance 
during this period. They argued that this Act recognizes the need for a 
delay in the timing of the funding goal requirement. One commenter 
urged an extension of the existing waiver of interest on UTF account 
advances until 2011. Commenters also recommended that the solvency 
criterion, in particular, be phase-in over a period of time.
    The Department has carefully considered these comments and 
recognizes that the current recessionary environment has greatly 
stressed States' ability to meet their UC funding obligations. While 
the Recovery Act's interest provisions will help the States, the 
Department also recognizes that States needing access to interest-free 
advances after this statutory provision expires may not meet the 
measure of UTF account adequacy established by this rulemaking within 
the proposed 2-year timeframe. Therefore, the Department has decided to 
delay and phase-in implementation of the funding goals requirement.
    The Department has decided to delay application of the funding 
goals requirement until 2014, and to phase-in the solvency criterion 
thereafter. No funding goals requirement for an interest-free advance 
will apply through calendar year 2013. Starting in 2014, the 
maintenance of tax effort criteria will apply, as will a solvency 
criterion of 0.50 AHCM. The AHCM requirement will then increase by one-
tenth each year until it reaches the 1.00 requirement in 2019. (As 
explained below, the NPRM proposed an AHCM of 1.0, but the final rule 
adopts an AHCM of 1.00. The distinction is relevant for rounding.)
    In response to these comments, the Department chose to begin 
phasing in the funding goals requirement in 2014. Commencing 
application of the funding goals requirement in 2014 will give States 
more than a year of additional time to prepare for the requirement 
beyond what they would have under the 2-year application timeframe 
proposed in the NPRM. The Department decided to delay the application 
of the funding goals requirement in recognition that there will be a 
continued period when States will attempt to recover from a recession 
in the midst of unusually high unemployment. The Department's approach 
provides States additional time to repay advances and to build 
sufficient reserves to meet the requirement for an interest-free 
advance.
    Phasing in the solvency requirement will also make this goal 
reasonably attainable, thus addressing one commenter's concern. 
Although the Department remains committed to the eventual application 
of the 1.00 AHCM solvency criterion, it recognizes that the effects of 
the current recession remain and so it will allow access to interest-
free advances in 2014 to States with an AHCM of only 0.50 in at least 
one of the preceding 5 years. By then, the economy should be well into 
an expansionary period. Phasing in the AHCM also will provide States 
more severely impacted by the recession additional time to repay 
advances and build sufficient reserves to meet the requirement for an 
interest-free advance. Further, by increasing the solvency criterion by 
0.10 a year, the Department intends to continue to provide the benefit 
of interest-free advances to those States that are actively pursuing 
forward funding their UTF accounts but which cannot yet attain an AHCM 
of 1.00. By 2019, the lingering effects of the current recession will 
have abated sufficiently to make it reasonable for the Department to 
apply the full solvency criterion.
    While the Department's decision to delay implementation of the 
funding goals requirement provides States time to restore their 
finances, it also should encourage States to be more aware of the need 
to build cash reserves in order to adequately prepare for future 
economic downturns. Financing UC by the use of forward funding is a 
basic UC program goal. Forward funding allows a State to avoid the need 
to obtain advances as well the need to increase taxes or cut benefits 
when the economy is weak. Notably, several commenters supported the 
concept of a funding goal that builds UTF account solvency and tax 
effort maintenance goals into the UC system, with the caveat that 
sufficient time be provided for States to implement the proposed goals 
after the end of this current recession.
    While the UTF account solvency measure will be phased-in over a 5-
year period, the maintenance of tax effort goal begins in 2014. As the 
Department explained in the NPRM, it is important to maintain an 
adequate UTF account balance over the length of a business cycle rather 
than at just one point in time, in order to reduce the need for States 
to obtain advances. If the maintenance of tax effort criteria were not 
included, a State might reduce taxes too sharply during a period of 
economic expansion, which would likely leave the State to rely on 
advances from the Federal government during a recessionary period.
    As States move away from a pay-as-you-go funding goal approach and 
toward forward funding their UC programs, the Department encourages 
States not to freeze, restrict eligibility, or precipitously lower UC 
benefits. These actions would reduce the UC program's economic 
stabilization effect during recessionary periods and clearly would have 
a negative impact on the ability of unemployed workers to support 
themselves and their families.
    Many commenters acknowledged the need to maintain and restore 
solvency in their accounts to adequately prepare for the next economic 
downturn; to

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avoid the negative consequences of obtaining advances; and to restore 
the UC program to its forward funding nature. The funding goals 
requirement will help satisfy the legislative goal (as described in 
House Report No. 105-149, June 24, 1997, on the original House bill) to 
``encourage States to maintain sufficient unemployment trust fund 
balances to cover the needs of unemployed workers in the event of a 
recession.''
    In reviewing these comments, the Department realized that denoting 
a solvency goal that is rounded to the nearest tenth (0.1) does not 
reflect the established procedures for rounding the Department has 
adhered to when measuring the AHCM to assess trust fund adequacy. The 
Department has historically adhered to an established policy that 
carries out final calculations for the AHCM to the nearest hundredth 
(0.01) as demonstrated in the simulation analysis discussed in the NPRM 
and included in the rulemaking docket. This policy and changes made to 
the definitions in Sec.  606.3 to reflect the Department's rounding 
procedures are explained in detail below. Accordingly, in this final 
rule and as appropriate in this preamble and as explained more fully 
below, references to the AHCM will be expressed in hundredths to 
reflect the Department's established rounding procedures. In addition, 
the Department modified Sec.  606.32(b) to reflect the delay and phase-
in of the funding goals requirement. The Department added a sentence to 
what is now the permanent funding goals requirement at paragraph 
(b)(2), stating that the paragraph is effective January 1, 2019. The 
Department also added a new paragraph (b)(3) to address the phase-in of 
the funding goals requirement. Paragraph (b)(3) states what AHCM will 
be required for each calendar year between 2014 and 2018. Paragraph 
(b)(3)(i) provides the phase-in of the solvency criterion. Paragraph 
(b)(3)(ii) covers the tax maintenance criteria, which become effective 
in 2014. The historical simulation analysis cited in the NPRM is still 
applicable for estimating the impact of the funding goals once the 
program is fully implemented. The phase-in of the solvency criterion 
does not change that analysis.

Solvency and Maintenance of Tax Effort Criteria

    The Department received several comments about the solvency and tax 
maintenance criteria.
    Some commenters addressed the proposed solvency criterion of a 1.0 
AHCM; a few commenters suggested that this level was too high. One 
commenter suggested that, ``as a practical matter, the requirement 
would foreclose the possibility of cash flow loans for many, if not 
all, of the largest [S]tates.'' This commenter further contended that a 
1.0 AHCM is a ``luxury'' that many States will not be able to afford 
given the ``virtually unlimited demands'' facing State governments. 
Another commenter argued that a 1.0 AHCM would result in unnecessarily 
high reserves; maintaining that much money in the UTF account would be 
bad for local economies by diverting funds from those economies into a 
Federal account where the money is ``not needed and not used, for 
decades.''
    The Advisory Council recommended using a 1.0 AHCM as a measure of 
solvency in its report to Congress in 1996. The Advisory Council's 
recommendation was made to encourage States to avoid obtaining large 
advances and incurring the risk of having to reduce benefits and raise 
taxes during the early years of a recovery. The Department conducted 
simulations to determine the effects of applying the funding goals on a 
State's eligibility for an interest-free advance. The simulations were 
discussed in the NPRM. The analysis revealed that a 1.00 AHCM (using 
the Department's established rounding procedures) as a measure of trust 
fund adequacy best satisfied the legislative goal of encouraging States 
to maintain adequate reserves to pay benefits during recessionary time 
while being a realistic and obtainable measure for States.
    In the analysis discussed in the NPRM (NPRM, at 74 FR 30406, Jun. 
25, 2009), the Department created a set of annual State data from 1967 
through 2007, and then examined borrowing over the period 1972 through 
2007. (http://www.regulations.gov/search/Regs/
home.html#docketDetail?R=ETA-2009-0002, Docket ID: ETA-2009-0002). The 
results from the Department's simulation analysis determined that any 
of the three funding goal approaches proposed in the NPRM would make it 
more difficult for States with problematic financing systems to receive 
an interest-free advance. Going into a recession with an AHCM of at 
least 1.00 does not guarantee that a state will not need advances at 
some point. However, the analysis concluded that States that achieved 
an AHCM of 1.00 going into a moderate recession are less likely to need 
to obtain an advance during or after the recession than other States. 
For example, entering the 2001 recession, 28 States had achieved an 
AHCM of 1.00 and only one of those States received an advance during or 
after the recession. Additionally, during the recessionary periods from 
1974-2001, only 14 percent of States that entered the recession with an 
AHCM of 1.00 received an advance during or after the recession whereas 
60 percent of the States that entered those recessionary periods with 
an AHCM below 1.00 received an advance.
    Before the current recession, nineteen States had already met the 
1.00 AHCM criterion with an additional two States having AHCMs above 
0.95 for which little or no action would have been necessary to meet 
the criterion. Some States with lower AHCMs perceive a low risk of 
borrowing either because they have responsive tax systems or low 
unemployment projections, while other States prefer keeping their UC 
taxes low to spur further economic growth and such States are not 
likely to take action to meet the solvency criterion. For the States 
that might take action, achieving the solvency criterion would involve 
varying degrees of tax changes depending on how quickly achievement of 
the criterion is desired. With proper adjustment to their funding 
mechanisms, tax increases would only be in place until appropriate UTF 
account balances reflecting the solvency criterion are met. Only a few 
States are likely to take action to achieve the solvency criterion and 
any action is likely to involve temporary, modest increases to a tax 
that is relatively low.
    Therefore, the Department will implement an AHCM solvency criterion 
of 1.00.
    Raising a related issue, one commenter suggested a ``pay-as-you 
go'' approach that would include a measure of solvency of 50 percent of 
a State's average high cost of benefits. Using a solvency level of 50 
percent of the average high cost of benefits would be similar to using 
a 0.50 AHCM. However, forward funding of State benefits is needed in 
order for the UC program to act as a stabilizer for the economy. The 
funding goals requirement was enacted by Congress in the Balanced 
Budget Act of 1997 to encourage States to adequately forward fund their 
UC program and not rely on a ``pay-as-you-go'' system. The Department 
does not consider a solvency criterion of a 0.50 AHCM an adequate level 
of forward funding because, at this level of reserves, there is a high 
probability that the State will need to take advances during a 
recession. Historical data shows that on average 63 percent of the 
States that entered the last five recessions with an AHCM of 0.50 had 
to take advances to pay UC. However, of the States that entered those 
recessions

[[Page 57150]]

with a 1.00 AHCM, only 25 percent on average have taken advances. For 
these reasons, the Department will not adopt the commenter's 
suggestion.
    The Department disagrees with the comment that it is difficult for 
large States to achieve the AHCM solvency goal; larger States will have 
the same relative degree of difficulty in meeting this goal as smaller 
States. Many large States do have smaller balances when considered in 
relation to the wages subject to UC taxes, but that is primarily due to 
deteriorating tax structures in those States rather than a result of 
the State's size. While large States should obviously have higher 
dollar amounts in their UTF accounts than smaller States, when viewed 
in relation to the wages being taxed there is no correlation between 
the size of a UTF account balance and the size of a State. That is, the 
measure of an adequate UTF balance is based on the average level of 
past high payouts in the State. A larger State will have paid out more 
benefits, but will also have collected taxes on more wages.
    In a related point, a commenter suggested that rather than 
promulgating one solvency goal for all States, the Department should 
``set goals for individual [S]tates based on their existing status and 
showing improved solvency over a period of time.'' The Department 
declines to adopt this suggestion, for several reasons. First, both the 
solvency and the maintenance of tax effort goals are structured and 
intended to prepare States to be able to pay the expected UC outlays 
required by a moderate recession. The Department wants every State to 
achieve that level of preparedness, and so it makes sense to uniformly 
apply the criteria to all States. Further, the solvency criterion is 
defined as a rate, so its very design accounts for variances among 
States. This is a balanced and fair approach and means that the goal is 
equally reasonable for any State to achieve. Finally, there are 
advantages to applying a uniform goal to every State. One advantage is 
administrative ease, but another is transparency; the factors that 
enable a State to obtain an interest-free advance will be known and 
uniform for all States and thus a State's progress in meeting the 
funding goals can be easily tracked.
    In the NPRM, the Department proposed December 31 as the date on 
which to measure a State's AHCM. One commenter recommended changing to 
a date after the collection of the first quarter tax revenues (May) 
because States have higher UTF balances at that time. However, 
selecting such a date would provide a false reading on the State's 
financial health; States generally do not sustain that balance over the 
course of the year. End-of-calendar-year UTF account balances are 
neither a seasonal high nor low. Accordingly, the Department retains 
December 31 as the AHCM measuring point.
    In the NPRM, the Department proposed a solvency requirement based 
upon whether a State had an AHCM of 1.0 on December 31 of any of the 5 
calendar years preceding the calendar year in which the advance was 
taken. The same commenter recommended using the last 7 years before the 
advance instead of the last 5 years for the time period used to 
determine achievement of the solvency criterion. The Department 
selected a period of 5 years because it is a reasonable balance between 
a lengthy period for deterioration in a State's solvency level and 
allowing insufficient time for the unpredictable arrival of the next 
recession. Specifically, choosing a period longer than 5 years would 
allow a prolonged period of possible tax reductions, which might keep 
the State above the tax maintenance effort limits but would still 
contribute to a slowly diminishing trust fund solvency level that is 
inadequate for the next recession. Choosing a period of less than 5 
years means less allowance for the normal swings between unexpected 
benefit payment levels and revenue flows that a state may experience.
    Other commenters addressed the maintenance of tax effort criteria. 
One commenter raised concerns about the second criterion for the 
maintenance of tax effort goal, which requires the average tax rate in 
each year after attaining the AHCM of at least 1.00 but before the year 
in which an advance is taken to be at least 75 percent of the average 
benefit-cost rate over the preceding 5 years. This commenter objected 
to this requirement, arguing that the methodology in the criterion is 
flawed because it is impossible to know in advance when benefit 
payments are going to spike. In other words, following a large increase 
in total benefits (due to an economic downturn), even if a State meets 
the solvency criterion, its average tax rate may still not meet the 75 
percent threshold compared to the State's 5-year average benefit-cost 
ratio because of the increased benefit payout, or spike, during the 
downturn.
    In fact, the Department chose a 5-year period and a 75 percent rate 
to provide States a generous limit to account for unexpected changes in 
benefit levels. Using a 5-year average for the benefit-cost ratio will 
mitigate any 1- or 2-year large increase, or spike, in benefits, making 
it much easier for the State's tax system to respond. The last several 
recessions lasted on average about a year, and although unemployment 
may continue to rise for a short time following a recession, a 5-year 
average of benefits is still an exceptionally low level for a State's 
average tax rate to meet.
    The Department ran historical simulations (available at http://
www.regulations.gov/search/Regs/
home.html#documentDetail?R=09000064809ff0d2) going back to 1967 
assuming the funding goal requirements had been in effect, and found 
that in the vast majority of cases, the only States unable to meet the 
75 percent criterion were those that had implemented large tax cuts, 
not those that had experienced significantly increased benefit outlays.
    The same commenter also proposed amending the 80 percent and 75 
percent tax rate thresholds in the maintenance of tax effort criteria 
so that a State would fail to achieve the criteria only if it failed to 
meet each requirement for 3 consecutive years rather than every year 
between the last year for which the solvency goal was met and the year 
in which a potentially interest-free advance is taken, as proposed in 
the NPRM. The tax maintenance criteria were included in the funding 
goals requirement specifically to discourage States from implementing 
large tax cuts after achieving an adequate level of solvency. 
Historically, a number of States have implemented significant tax cuts 
for short periods of time, for example 1 or 2 years, which have 
resulted in significant reductions in their trust fund solvency level. 
In some instances, States assigned a zero-percent tax rate to a large 
majority of their employers for the entire year. The 80 percent and 75 
percent criteria would allow the States some latitude to reduce their 
tax effort, but allowing States to avoid the tax effort criteria 
altogether for 1 or 2 years would undermine the funding goals because 
of the potential loss of solvency from large, temporary tax cuts. As a 
result, the Department has determined that it is appropriate to apply 
the tax effort criteria to every year, as originally proposed.
    In the NPRM, the Department described three possible approaches to 
funding goals. The first approach, the one selected, included the 
solvency criterion of a 1.0 AHCM and the two maintenance of tax effort 
criteria. The second possible approach eliminated the maintenance of 
tax effort criteria from Approach I. The third possible approach 
included a solvency criterion of a 1.7 reserve ratio and the two 
maintenance of tax effort criteria. One

[[Page 57151]]

commenter suggested that the Department chose the most burdensome of 
the possible approaches. While Approach I imposes obligations that the 
commenter considers burdensome, it is the best approach to funding 
goals. As explained in the NPRM, Approach III would have been roughly 
as stringent as Approach I. Simulations revealed that approximately the 
same number of States, though not necessarily the same States, would 
have qualified for an interest-free advance under Approach III during 
the period 1972-2007 as qualified using Approach I. The Department 
selected Approach I over Approach III because the AHCM is a better 
indicator of a State's ability to pay UC benefits in an economic 
downturn than the reserve ratio. The Department selected Approach I 
over Approach II because Approach I included incentives for States to 
achieve an adequately financed system via the maintenance of tax effort 
criteria.

Other Issues

    The comments raised a variety of other issues.
    One commenter suggested that the Department encourage States to 
amend their laws to achieve solvency in their UTF accounts by linking 
the FUTA tax credit employers receive to criteria designed to achieve 
solvency in their UTF accounts, noting that this approach would provide 
a strong incentive for State legislatures to enact responsible UC tax 
reforms. The Department cannot adopt this suggestion as it does not 
have the legal authority to link the FUTA tax credit to a solvency 
requirement for a State's account in the UTF. Section 3304(a) of the 
FUTA (26 U.S.C. 3304(a)) sets forth the requirements for approval of 
State UC laws, which are conditions for the tax credit under section 
3302(a)(1) of the FUTA (26 U.S.C. 3302(a)(1)). No requirement in 
section 3304(a) provides a basis for conditioning employer tax credits 
upon a State's meeting a solvency requirement.
    That being said, the Department does have the authority to 
condition a State's UC administrative grant upon the State meeting a 
solvency standard. Section 303(a)(1) of the SSA (42 U.S.C. 503(a)(1)) 
conditions a State's grant upon its law including provision for 
``[s]uch methods of administration * * * as are found by the Secretary 
of Labor to be reasonably calculated to insure full payment of 
unemployment compensation when due * * *.'' Since an insolvent UTF 
account could jeopardize the ``full payment of unemployment 
compensation when due,'' the SSA certainly authorizes the Secretary to 
prescribe ``methods of administration'' for maintaining the solvency of 
that account. Nevertheless, since section 1202(b)(2)(C) of the SSA (42 
U.S.C. 1322(b)(2)(C)) explicitly directs the Secretary to promulgate 
funding goals, that is the proper vehicle for addressing this matter. 
Accordingly, the Department makes no change in the final rule.
    One commenter took the position that mandating solvency goals as a 
requirement to obtain an interest-free advance may not be an effective 
mechanism to promote fund solvency. This commenter contended that 
States that do meet the solvency criterion will not need an advance, 
while some States cannot even meet the basic requirements for an 
interest-free advance (the advance is repaid in full by September 30 
and no additional advance is made after that date) and so the funding 
goals requirement provides no real incentive to forward fund their UTF 
account because those States cannot get an interest-free advance 
anyway.
    The Department disagrees with these comments. Section 1202(b)(2)(C) 
of the SSA explicitly directs the Secretary to promulgate funding goals 
regulations as a condition for an interest-free advance, even though 
the commenter believes that this is not an effective mechanism for 
promoting solvency. The Department also disagrees with the commenter's 
contention that this rule will provide insufficient incentive to affect 
the behavior of many States. During the 2001 recession, all nine of the 
States that obtained advances took interest-free cash flow loans. The 
Department is confident that many States will continue to seek these 
interest-free advances and will be consequently motivated to meet the 
funding goal.
    Also, it is not true that States that do meet the solvency 
criterion will not need an advance, since a severe recession occurring 
after a State meets this criterion may result in the State's UTF 
account becoming insolvent. Nevertheless, the solvency criterion will 
make it less likely that a State will need an advance, which, of 
course, is the purpose of this rule.
    One commenter recommended a ``waiver of the solvency goal when 
during a downturn or recession in which the benefits cost rates during 
the downturn are substantially higher than the AHCM standard.'' The 
Department interprets this comment to refer to a situation in which 
benefit costs in the current recession are higher than the historical 
benefit costs used in calculating the AHCM. The Department believes 
that no waiver is necessary in this situation. Under the proposed 
funding goals, a State that builds up a fund balance sufficient to 
cover a recession equal to the average of past recessions, but then 
experiences a worse recession and is forced to take advances, would 
meet the solvency criterion.
    Another commenter suggested that ``[S]tates that continue to be the 
hardest hit by recessions'' should be eligible for interest-free 
advances. First, to the extent that this comment is related to the 
current recession and the 2-year implementation date proposed in the 
NPRM, the delay and phase-in of the rule should mitigate the 
commenter's concern. To the extent the commenter is considering future 
recessions, the funding goals requirement promulgated in this rule is 
intended to encourage States to prepare for economic downturns. The 
solvency and tax maintenance effort criteria are designed so that 
States that meet those criteria are adequately prepared for an average 
recession.
    Another commenter suggested providing a waiver for States that 
demonstrate reasonable efforts to obtain solvency through changes in 
State law. As this commenter, a State, detailed its recent actions to 
obtain solvency, this comment may also relate to the current recession 
and the 2-year implementation date proposed in the NPRM. To that 
extent, again, the delay and phase-in of the rule should mitigate the 
commenter's concern. To the extent this comment relates to potential 
future efforts by States, such actions would be consistent with, and 
reflected in, the maintenance of tax effort criteria. This rule is 
intended to encourage States to make reasonable efforts toward solvency 
by forward funding their UTF accounts. The reward for doing so is 
access to interest-free terms for short-term advances, just as the 
commenter desires.
    One commenter argued that the Department's proposed funding goals 
``go well beyond the authority'' of the `Balanced Budget Act' by 
prescribing ``standards that were never codified in statute'' and 
``[i]n fact, the Congress by deciding in 1997 to drop the solvency 
standard and timeframe expressly rejected the idea of standards or 
sanctions.'' This comment apparently refers to the fact that the 
original House bill (H.R. 2015, 105th Cong, section 9404 (1997)) 
specified a solvency standard that was dropped from the enacted law. 
The commenter also maintained that this rulemaking overvalues the 
notion of building reserves as a solvency goal. The Department 
disagrees with both contentions. The Balanced Budget Act of 1997 added 
section 1202(b)(2)(C) to

[[Page 57152]]

the SSA, explicitly requiring the Secretary to issue regulations 
governing ``funding goals * * * relating to the accounts of the States 
in the [UTF].'' Further, the SSA explicitly conditions an interest-free 
advance upon a State meeting these funding goals. That is exactly what 
this regulation does. It establishes funding goals that a State account 
in the UTF must meet as a condition of an interest-free advance.
    The original House bill required, for an interest-free advance, 
that the average daily balance of a State's account ``for each of 4 of 
the 5 calendar quarters preceding the calendar quarter in which such 
advances were made exceeds the funding goal of such State (as defined 
in subsection (d)).'' Subsection (d) defined ``funding goal'' as 
meaning ``for any State for any calendar quarter, the average of the 
unemployment insurance benefits paid by such State during each of the 3 
years, in the 20-year period ending with the calendar year containing 
such calendar quarter, during which the State paid the greatest amount 
of unemployment benefits.'' The report (H.R. Rep. No. 105-149 (1997)) 
accompanying the original House bill made clear that the funding goal 
requirement was a ``provision [that] would encourage States to maintain 
sufficient unemployment trust fund balances to cover the needs of 
unemployed workers in the event of a recession.'' Thus, that ``funding 
goal'' was clearly a ``solvency'' standard which a State's account had 
to meet over a specified period in order for the State to qualify for 
an interest-free advance.
    The enacted legislation deleted the specified ``funding goal,'' but 
nevertheless required that a State meet ``funding goals, established 
under regulations issued by the Secretary of Labor * * *.'' 
Accordingly, the final bill only deleted the particular ``funding 
goal'' specified in the House bill, which was a ``solvency'' 
requirement, and instead directed the Secretary of Labor to establish 
``funding goals,'' that is, a solvency requirement. There is no 
indication that the House/Senate conference decided that a ``funding 
goal'' in the form of a solvency requirement was inappropriate, only 
that it should be the Secretary, rather than Congress, that determined 
the ``funding goals.'' As the House Conference Report (H.R. Rep. No. 
105-217, at 950 (1997) (Conf. Rep.)) stated, ``[t]he conference 
agreement follows the House bill, with the modification that the 
Secretary is to establish appropriate funding goals for States.'' Thus, 
although the original House bill would have established the funding 
goal, Congress ultimately decided that the Secretary should select the 
specific level of reserves necessary. Congress, therefore, did not turn 
away from a ``solvency'' requirement; it only turned away from 
selecting the particular ``solvency'' requirement itself, and, instead, 
delegated to the Secretary the determination of the solvency standard. 
This is precisely what the NPRM proposed.
    Further, section 1202(b)(2)(C) of the SSA clearly makes the funding 
goal a condition of obtaining an interest free advance. The NPRM simply 
proposed incorporating this condition into the existing regulations 
setting forth the requirements for an interest-free advance. 
Accordingly, no change is made to the final rule.
    This same commenter also argued that there was no statutory basis 
for a requirement that a state maintain a specified level of tax effort 
in order to receive an interest-free advance. The Department again 
disagrees. Because the maintenance of tax effort criteria are essential 
components of sound funding goals, the statutory basis for these 
criteria is the statutory direction to the Secretary to ``establish[] 
under regulations'' funding goals ``relating to the accounts of the 
States in the [UTF].'' Merely requiring a State to achieve solvency at 
some point in time before receiving an advance would serve no purpose 
if the State could thereafter ``squander'' that solvency by 
significantly reducing its tax effort. Thus, the maintenance of tax 
effort and solvency criteria work in tandem to encourage proper 
management of the State's UTF account.
    In the NPRM, the Department stated that, ``[t]o the extent States 
do react and interest-free borrowing is reduced, the policy goal of 
reducing the subsidy provided by interest-free advances will be 
achieved.'' 74 FR 30406, Jun. 25, 2009. One commenter argued that no 
such policy goal exists because Congress did not mention it in the 
Balanced Budget Act of 1997. Regardless of whether a reduction in the 
subsidy provided by interest-free advances was considered by Congress 
to be a policy goal, the Department is required to promulgate these 
funding goals regulations which encourage States to forward fund their 
UTF accounts. A reduction in advances is a likely consequence of 
improved forward funding.
    One commenter argued that the maintenance of tax effort criteria 
are effectively at odds with the experience rating aspect of the UC 
system. The Department disagrees. The tax maintenance criteria do not 
restrict a State's ability to award reductions in tax rates based on an 
individual employer's experience with layoffs. The criteria place a 
limit on the State's overall tax rate reduction once a State has 
achieved an adequate trust fund balance. A State may still individually 
assign any distribution of rates it desires. In fact, the tax 
maintenance limits were made intentionally low to avoid the possibility 
that in any one year the movement of employers within the existing 
range of rates of any State's effective tax schedule would affect the 
level of tax effort and cause a State to fall below the limit.
    A commenter also contended that, if States do not satisfy the 
criteria, they will be subject to sanctions without recourse. As an 
initial matter, the Department disagrees with characterizing the 
requirement that a State pay interest on an advance as a ``sanction,'' 
when, in fact, paying interest is the norm. The SSA requires that 
interest be paid on all advances and then provides incentives for 
States to obtain interest-free advances, which is a significant 
benefit. Failure to meet the conditions under which this benefit is 
offered is not a sanction. Additionally, the SSA does not provide a 
process for a State to challenge the denial of an interest-free 
advance, which is why the Department did not create such a process 
through regulations. A State seeking recourse could challenge funding 
goals determinations through other legal processes.
    The same commenter suggested measuring each State's solvency effort 
against its own history. The AHCM is calculated using State data to 
determine the adequacy of its UTF account. This measure takes the 
current balance of a State's account in the UTF and compares it to its 
own benefit payout history in order to derive the length of time the 
current account balance would last under an average recession in that 
State. Thus, the rule accords with the suggestion, and the Department 
makes no change in the final rule.
    This commenter also suggested that the Department reward States 
that have made meaningful progress toward solvency with additional 
administrative grant funding. Congress thought that the way to promote 
solvency is to establish funding goals, as required by section 
1202(b)(2)(C) of the SSA, which established the mechanism for 
encouraging States to achieve funding goals. Accordingly, the 
Department does not adopt this suggestion.
    A commenter argued that placing any further conditions on obtaining 
interest-free advances might result in a State not qualifying for one, 
which would impose interest costs on the State. The commenter further 
argued that meeting

[[Page 57153]]

those costs might reduce the amount of money available for the payment 
of benefits. In fact, the funds in a State's trust fund account may 
only, with exceptions not relevant here, be used to pay for UC (section 
3304(a)(4) of the FUTA; section 303(a)(5) of the SSA), and may not, 
therefore, be used to pay interest costs, so the payment of interest 
would not, at least directly, reduce funds available for the payment of 
benefits. Nevertheless, the Department may not decline to impose 
funding goals because they might result in interest costs, since 
section 1202(b)(2)(C) of the SSA requires that the Secretary establish 
them by regulation.
    Some commenters sought more involvement in the development of a 
funding goal approach. The Department believes that it provided 
stakeholders ample opportunity through the rulemaking process to 
provide reasonable alternatives to the funding goal approach selected 
by the Department. These commenters did not provide an alternative 
solvency goal for the Department to consider; therefore, the Department 
will not further delay this rulemaking.
    A few commenters suggested that the Department's proposed funding 
goals requirement failed to adequately account for or appreciate the 
action(s) that some States have taken to maintain solvency. To the 
extent that this comment relates to the effects of the current 
recession, the delay and phase-in of this rule should mitigate the 
commenters' concern. Viewed more globally, the Department agrees that 
the funding goals ought to take into account what actions a State has 
undertaken to achieve and/or maintain solvency; this rule has been 
designed to do exactly that. The solvency criterion indicates whether a 
State has put sufficient funds in its UTF account to cover expected 
outlays during a recession. The maintenance of tax effort criteria 
indicate the adequacy of a State's tax structure. As both funding goals 
directly reflect State action(s), the Department has determined that 
the rule adequately accounts for State actions aimed at improving 
solvency.
    One commenter also took issue with the Department's assertion, 
which the commenter found in the supporting and related materials 
(available at http://www.regulations.gov/search/Regs/
home.html#docketDetail?R=ETA-2009-0002) that States have ``misuse[d]'' 
the system. The commenter appears to be referring to the sentence in 
the Impact Analysis that one advantage of this rule is ``stemming the 
possibility of misuse of the current system by taking an interest-free 
advance and repaying it with funds from other sources, thereby avoiding 
the payment of interest on the use of federal funds.'' The commenter 
argues that since this is permitted under Federal law, it is not a 
misuse.
    Although these actions are legally permissible, the SSA requires 
the Secretary to establish funding goals under regulations. To the 
extent that a State receives advances in the January to September 
period and repays by the September 30 deadline with funds from a non-UC 
source, but fails to actually improve its solvency, the system is not 
functioning in accordance with the obvious intent of section 
1202(b)(2)(C) of the SSA. These funding goals will, of necessity, 
prevent a State from using the interest-free terms of the short-term 
advance to avoid confronting and addressing the underlying lack of 
solvency in the State's UTF account. It is a benefit that this rule may 
deter such behavior in the future, because a State will have to have 
made real efforts to obtain solvency to avoid interest.

Clarifying and Technical Corrections

    We made several clerical and technical corrections to the 
regulations. These changes are intended to add clarity and accuracy but 
do not change the meaning or intent of the regulation.
    We made several changes to Sec.  606.3. Since the ``Calculation of 
AHCM'' and ``Calculation of the AHCR'' are definitions, they were moved 
from Sec.  606.32(b)(3) and (4), where they respectively appeared in 
the NPRM, to Sec.  606.3, ``Definitions.'' The words, ``Calculation 
of'' were removed from the headings of those paragraphs and acronyms 
for these terms spelled out.
    We added a definition for the reserve ratio to Sec.  606.3. We also 
modified the definition of the AHCM to explain that it is calculated by 
dividing this reserve ratio by the AHCR and to include rounding to the 
nearest multiple of 0.01. Adding a definition for the ``reserve ratio'' 
to Sec.  606.3 and using this term to describe the calculation of the 
AHCM is more accurate and consistent with the preamble discussion. In 
the NPRM, we described the AHCM as consisting of two ratios: The 
``reserve ratio'' divided by the ``average high cost rate (AHCR).'' We 
described the ``reserve ratio'' as the balance in a State's UTF account 
on December 31 divided by total wages paid to UC-covered employees 
during the 12 months ending on December 31. However in Sec.  
606.32(b)(3) of the NPRM, we defined the calculation of the AHCM as: 
``The State's AHCM as of December 31 of a calendar year is calculated 
by: (i) Dividing the balance in the State's account in the Unemployment 
Trust Fund as of December 31 of such year by the total paid to UC 
covered workers during such year; and (ii) Dividing the amount so 
obtained by the State's average high cost rate (AHCR) for the same 
year.'' The first ratio defined in Sec.  606.32(b)(3)(i) was not 
identified as the ``reserve ratio.'' In the NPRM, we noted that this 
rulemaking would ``be based on established concepts and measures such 
as the reserve ratio and the average high cost multiple that are 
commonly used by DOL, State offices, and researchers to assess trust 
fund account adequacy.'' Adding a definition for the ``reserve ratio'' 
and referencing the ``reserve ratio'' as the first of the two ratios 
used to calculate the AHCM ensures that these established concepts and 
measures are reflected in this rulemaking. The reserve ratio is rounded 
to the nearest multiple of 0.01. The calculation of the AHCM remains 
unchanged. These revisions do not substantively change this rulemaking.
    We also changed the definition for the Average High Cost Rate to 
ensure consistency with the preamble language that uses the term 
``average'' instead of ``mean'' for the final calculation of the AHCR. 
In the NPRM, Sec.  606.32(b)(4)(iii) read ``calculate the mean of the 
three highest ratios from paragraph (b)(4)(ii) of this section and 
round to the nearest multiple of 0.01 percent.'' This has been revised 
in Sec.  606.3 to read ``Average the three highest calendar year 
benefit cost ratios for the selected time period from paragraph (b) of 
this section. Final calculations are rounded to the nearest multiple of 
0.01 percent.'' The calculation of the AHCR remains unchanged. This is 
not a substantive change to the rulemaking.
    We removed the paragraph designations in Sec.  606.3 (Definitions) 
and added, in alphabetical order, definitions for Average High Cost 
Multiple (AHCM), Average High Cost Rate (AHCR), and ``Reserve Ratio''. 
In subparts A and C of Sec. Sec.  606.3 and 606.2 through 606.22, we 
removed the references of Sec.  606.3(c), (f), (j), (k), and (l) and 
added in their place references to Sec.  606.3.
    In the NPRM, we changed the definition of ``benefit-cost ratio'' by 
removing the phrase ``for cap purposes.'' The existing part 606 
regulations, in addition to setting forth the conditions for interest-
free advances, implement Federal provisions governing the ``capping'' 
of the reduction in the credits against the Federal unemployment tax 
where a State does not timely repay an advance. Eliminating this phrase 
makes clear that the definition applies to the funding goals provisions 
of part 606, in addition to the ``cap purposes'' of part 606. The 
benefit-cost ratio is also

[[Page 57154]]

rounded to the nearest multiple of 0.01 percent when calculated for 
funding goal purposes; however, for cap purposes, final calculations 
are rounded to the nearest multiple of 0.1 percent as required by FUTA 
section 3302(f)(5)(E).
    In the NPRM, we used the following heading for Sec.  606.21(d), 
``State five-year benefit-cost ratio.'' In keeping with conventions 
governing Government printing, the heading now reads, ``State 5-year 
average benefit-cost ratio.'' Similarly, we changed the reference 
within that section from ``five preceding calendar years'' to ``5 
preceding calendar years.'' We also added two hyphens to the section, 
each between ``benefit'' and ``cost.''
    We made several technical changes to Sec.  606.32. We moved the 
heading ``Cash flow loans'' from paragraph (b)(1)(i) to paragraph (b), 
and added the heading, ``Availability of interest-free advances'' to 
paragraph (b)(1). We moved to paragraph (b)(1) the first word and last 
phrase of the sentence that appeared in the NPRM in paragraph (b)(1)(i) 
so that paragraph (b)(1) now reads, ``[a]dvances are deemed cash flow 
loans and shall be free of interest provided that:''. For clarity, 
paragraphs (b)(1)(i)-(iii) have become explicit conditions a State must 
meet to avoid interest on the cash flow loan; the language for those 
paragraphs is drawn from what appeared in the NPRM as the first half of 
the sentence in paragraph (b)(1)(i), paragraphs (b)(1)(i)(A) and (B), 
and paragraph (b)(1)(ii).
    We added the word ``requirement'' to paragraph (b)(2) of Sec.  
606.32, after the words, ``funding goals,'' for clarity. In paragraph 
(b)(2)(i), we moved the words, ``[t]he State'' from the middle to the 
beginning of the sentence for clarity and to be consistent with 
paragraph (b)(2)(ii). Also in paragraph (b)(2)(i), we added the word, 
``consecutive'' between the ``5'' and ``years,'' again for clarity. In 
paragraph (b)(2)(ii), after the sentence begins with, ``[t]he State 
maintained tax effort,'' we deleted the phrase, ``with respect to the 
years between the last year the State had an AHCM of 1.00 and the year 
in which the advance or advances are made,'' because repeated 
information in the ``maintenance of tax effort'' paragraph (now 
paragraph (b)(4)).
    We added the word, ``criteria'' after ``[m]aintenance of tax 
effort'' in the heading of what used to be paragraph (b)(5) but is now 
paragraph (b)(4). Also in paragraph (b)(4), we rephrased the opening 
sentence for clarity and accuracy. Most notably, we removed the word 
``not'' which had appeared between ``is'' and ``at least.'' The 
preamble to the NPRM correctly described the maintenance of tax effort 
criteria but the word ``not'' was inadvertently used in the NPRM 
regulatory text. Also, in the NPRM, we mistakenly included the word 
``any'' between the words, ``for'' and ``year;'' that is corrected to 
now read, ``for every year,'' which is consistent with how the preamble 
to the NPRM described the maintenance of tax effort criteria.
    Due to these changes, we have renumbered and re-lettered the 
affected paragraphs of the rule. We also adjusted references to all 
relocated provisions throughout this rule.

Rounding Procedures

    As we noted earlier in this preamble, we have changed the way we 
denote the AHCM to reflect the actual level of precision used to 
examine the proposed solvency goal in the NPRM. The simulation 
analysis, included in the NPRM and the rulemaking docket, assessed the 
solvency goal using an AHCM that was computed to the nearest hundredth 
(0.01). The simulation analysis, which examined the three possible 
solvency approaches outlined in the NPRM, used a set of annual State 
data from 1967 through 2007, and then examined borrowing over the 
period 1972 through 2007. The AHCM data used to determine eligibility 
for an interest-free advance in this analysis was calculated to the 
nearest hundredth (0.01).
    In addition, quarterly financial reports on State-reported 
unemployment insurance data, which have been published by the 
Department on its Web site for more than a decade, reported a State's 
AHCM to the nearest multiple of 0.01. These quarterly reports can be 
found at http://www.ows.doleta.gov/unemploy/content/data.asp.
    The AHCM as a measure of solvency was recommended by the Advisory 
Council. The Advisory Council recommended that States accumulate 
reserves sufficient to pay at least one year of benefits. This level of 
reserves was commonly described in the Advisory Council's 1996 report 
as an AHCM of 1.0. However, this description did not represent the 
level of precision the Advisory Council used to analyze the AHCM. The 
Advisory Council based its recommendation on a review of historical 
data that calculated the AHCM to the nearest hundredth (0.01). The 
Advisory Council used data provided by the Department to substantiate 
its AHCM recommendation and showed State AHCM data calculated to the 
nearest hundredth (0.01) in supporting tables in its 1996 report to 
Congress. Thus, an AHCM calculated to the nearest hundredth (0.01) also 
reflects a level of precision used by the Advisory Council to arrive at 
its recommendation that a State accumulate reserves sufficient to pay 
at least one year of benefits.
    In addition, a majority of States that use an AHCM to assess trust 
fund solvency calculate the AHCM to the nearest hundredth (0.01).
    An AHCM calculated to the nearest hundredth (0.01) reflects the 
long-standing and established procedure used by the Department to 
assess trust fund solvency. We calculate the AHCM to the nearest 
hundredth (0.01) because this level of precision more accurately 
measures a State's trust fund solvency than using an AHCM calculated to 
the nearest tenth (0.1).
    Based upon a further review of data over a 40-year period, the 
Department determined that the use of a 1.00 AHCM, rather than a 1.0 
AHCM, would have adversely affected only three States. Therefore, in 
Sec.  606.3, we are revising the definition of the AHCM to include 
rounding it to the nearest multiple of 0.01.
    The reserve ratio is rounded to the nearest multiple of 0.01 
percent to conform to the rounding procedure for the AHCM. Also, the 
practice among a majority of States is to round the reserve ratio to 
the nearest multiple of 0.01.
    The benefit-cost ratio is also rounded to the nearest multiple of 
0.01 percent when calculated for funding goal purposes to conform to 
the procedures for rounding the AHCM and the reserve ratio; however, 
for cap purposes, final calculations are rounded to the nearest 
multiple of 0.1 percent as required by section 3302(f)(5)(E) of the 
FUTA.

III. Administrative Information

Executive Order 12866: Regulatory Planning and Review

    This final rule is not an economically significant rule. Under 
Executive Order 12866, a rule is economically significant if it 
materially alters the budgetary impact of entitlements, grants, user 
fees, or loan programs; has an annual effect on the economy of $100 
million or more; or adversely affects the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or communities 
in a material way. This final rule is not economically significant 
under the Executive Order because it will not have an economic impact 
of $100 million or more on the State agencies or the economy as 
explained above. However, the final rule is a significant regulatory 
action under Executive Order 12866 at section 3(f) because it raises 
novel legal or policy issues arising out of legal

[[Page 57155]]

mandates, the President's priorities, or the principles set forth in 
the Executive Order. This final rule updates existing regulations in 
accordance with Congressional mandates. Therefore, the Department has 
submitted this final rule to the Office of Management and Budget (OMB) 
for review.

Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995 (PRA), 44 
U.S.C. 3501 et seq., include minimizing the paperwork burden on 
affected entities. The PRA requires certain actions before an agency 
can adopt or revise a collection of information, including publishing a 
summary of the collection of information and a brief description of the 
need for and proposed use of the information.
    A Federal agency may not conduct or sponsor a collection of 
information unless it is approved by OMB under the PRA, and displays a 
currently valid OMB control number, and the public is not required to 
respond to a collection of information unless it displays a currently 
valid OMB control number. Also, notwithstanding any other provisions of 
law, no person shall be subject to penalty for failing to comply with a 
collection of information if the collection of information does not 
display a currently valid OMB control number (44 U.S.C. 3512).
    The Department has determined that this rule does not contain new 
information collection requiring it to submit a paperwork package to 
OMB. Data to be used is covered by the following OMB approvals: OMB No. 
1220-0012 for the Quarterly Census of Employment and Wages report and 
OMB No. 1205-0456 for the ETA-2112 report containing State account 
balances in the UTF and benefits paid data.

Executive Order 13132: Federalism

    Section 6 of Executive Order 13132 requires Federal agencies to 
consult with State entities when a regulation or policy may have a 
substantial direct effect on the States or the relationship between the 
National Government and the States, or the distribution of power and 
responsibilities among the various levels of government, within the 
meaning of the Executive Order. Section 3(b) of the Executive Order 
further provides that Federal agencies must implement regulations that 
have a substantial direct effect only if statutory authority permits 
the regulation and it is of national significance.
    The Department received 11 unique comments during the public 
comment period for the NPRM. All but one of these comments were made by 
States. The Department's implementation of a phased-in approach for the 
AHCM levels is in response to feedback received from the States' 
through the NPRM. In addition, the Advisory Council's recommendation of 
using a 1.0 AHCM as a measure of solvency was developed through 
consultation with the States.
    Moreover, the rule does not have a substantial direct effect on the 
States or the relationship between the National Government and the 
States, or the distribution of power and responsibilities among the 
various levels of Government, within the meaning of the Executive 
Order. Any action taken by a State as a result of the rule would be at 
its own discretion as the rule imposes no requirements.

Unfunded Mandates Reform Act of 1995

    This regulatory action has been reviewed in accordance with the 
Unfunded Mandates Reform Act of 1995. Under the Act, a Federal agency 
must determine whether a regulation proposes a Federal mandate that 
would result in the increased expenditures by State, local, or tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any single year. The Department has determined this 
final rule does not include any Federal mandate that may result in 
increased expenditure by State, local, and Tribal governments in the 
aggregate of more than $100 million, or increased expenditures by the 
private sector of more than $100 million.
    One commenter argued that this rule constitutes an unfunded Federal 
mandate. However, this rule is not a Federal mandate because States are 
not required to comply; this rule provides an incentive (in the form of 
access to interest-free advances) to achieve the funding goals 
requirement. The effect of this rulemaking is to encourage, but not 
require, States to build and maintain adequate balances in their UTF 
accounts.
    Accordingly, it is unnecessary for the Department to prepare a 
budgetary impact statement. Further, as noted above, the impact is 
positive for State UTF accounts.

Plain Language

    The Department drafted this rule in plain language.

Effect on Family Life

    The Department certifies that this final rule has been assessed 
according to section 654 of the Treasury and General Government 
Appropriations Act, enacted as part of the Omnibus Consolidated and 
Emergency Supplemental Appropriations Act of 1999 (Pub. L. 105-277, 112 
Stat. 2681), for its effect on family well-being. This provision 
protects the stability of family life, including marital relationships, 
financial status of families, and parental rights by encouraging the 
States to maintain adequate funding of their UTF accounts. It will not 
adversely affect the well-being of the nation's families. Therefore, 
the Department certifies that this final rule does not adversely impact 
family well-being.

Regulatory Flexibility Act/SBREFA

    We have notified the Chief Counsel for Advocacy, Small Business 
Administration, and made the certification according to the Regulatory 
Flexibility Act (RFA) at 5 U.S.C. 605(b), that this final rule will not 
have a significant economic impact on a substantial number of small 
entities. Under the RFA, no regulatory flexibility analysis is required 
where the rule ``will not * * * have a significant economic impact on a 
substantial number of small entities.'' 5 U.S.C. 605(b). A small entity 
is defined as a small business, small not-for-profit organization, or 
small governmental jurisdiction. 5 U.S.C. 601(3)-(5). This final rule 
would directly impact States. The definition of small entity does not 
include States. Therefore, no RFA analysis is required.
    In addition, this final rule is not a major rule as defined by the 
Small Business Regulatory Enforcement Act of 1996 (SBREFA). The 
Department provides the following analysis to support this 
certification.
    This final rule encourages States to build and maintain adequate 
balances in their UC accounts but does not require that they do so. 
Before the current recession, nineteen States had already met the 1.00 
AHCM criterion with an additional two States having AHCMs above 0.95 
for which little or no action would have been necessary to meet the 
criterion. Some States with lower AHCMs perceive a low risk of 
borrowing either because they have responsive tax systems or low 
unemployment projections, while other States prefer keeping their UC 
taxes low to spur further economic growth and such States are not 
likely to take action to meet the solvency criterion. For the States 
that might take action, achieving the solvency criterion would involve 
varying degrees of tax changes depending on how quickly achievement of 
the criterion is desired. With proper adjustment to their funding 
mechanisms, tax increases would only be in place until appropriate UTF 
account balances reflecting the solvency criterion are met. Only a few 
States are

[[Page 57156]]

likely to take action to achieve the solvency criterion and any action 
is likely to involve temporary, modest increases to a tax that is 
relatively low. Under any of the alternatives, only a few States would 
take action which would translate to a minimal impact on all entities 
given the impact estimates and size of the UC tax. Although we cannot 
quantify the magnitude of any possible tax increases that might result 
from this final rule, we are confident that States would be unwilling 
to adopt tax increases of a size which would even approach $100 million 
in the aggregate as a condition for receiving interest-free advances. 
Therefore, the Department certifies that this final rule will not have 
a significant impact on a substantial number of small entities and, as 
a result, no regulatory flexibility analysis is required.

List of Subjects in 20 CFR Part 606

    Employment and Training Administration, Labor, Unemployment 
compensation.


0
For the reasons stated in the preamble, the Department amends 20 CFR 
part 606 as set forth below:

PART 606--TAX CREDITS UNDER THE FEDERAL UNEMPLOYMENT TAX ACT; 
ADVANCES UNDER TITLE XII OF THE SOCIAL SECURITY ACT

0
1. The authority citation for 20 CFR part 606 is revised to read as 
follows:

    Authority:  42 U.S.C. 1102; 42 U.S.C. 1322(b)(2)(C); 26 U.S.C. 
7805(a); Secretary's Order No. 3-2007, April 3, 2007 (72 FR 15907).


0
2. Amend Sec.  606.3 as follows:
0
a. Remove the paragraph designations and arrange definitions in 
alphabetical order;
0
b. Add in alphabetical order definitions for ``Average High Cost 
Multiple (AHCM)'', ``Average High Cost Rate (AHCR)'', and ``Reserve 
Ratio'';
0
c. Revise the introductory text and paragraph (2) and add a new 
paragraph (3) in the definition for ``Benefit-cost ratio'';
0
d. Amend paragraph (2) in the definition of ``Benefit-cost ratio'' by 
removing the reference ``Sec.  606.3(l)'' and adding in its place, the 
reference ``Sec.  606.3''; and
0
e. Amend the definition of ``Unemployment tax rate'' by removing the 
reference ``Sec.  606.3(l)'' and adding in its place, the reference 
``Sec.  606.3''.
    The revisions and additions read as follows:


Sec.  606.3  Definitions.

* * * * *
    Average High Cost Multiple (AHCM) for a State as of December 31 of 
a calendar year is calculated by dividing the State's reserve ratio, as 
defined in Sec.  606.3, by the State's average high cost rate (AHCR), 
as defined in Sec.  606.3, for the same year. Final calculations are 
rounded to the nearest multiple of 0.01.
    Average High Cost Rate (AHCR) for a State is calculated as follows:
    (1) Determine the time period over which calculations are to be 
made by selecting the longer of:
    (i) The 20-calendar year period that ends with the year for which 
the AHCR calculation is made; or
    (ii) The number of years beginning with the calendar year in which 
the first of the last three completed national recessions began, as 
determined by the National Bureau of Economic Research, and ending with 
the calendar year for which the AHCR is being calculated.
    (2) For each calendar year during the selected time period, 
calculate the benefit-cost ratio, as defined in Sec.  606.3; and
    (3) Average the three highest calendar year benefit cost ratios for 
the selected time period from paragraph (2) of this definition. Final 
calculations are rounded to the nearest multiple of 0.01 percent.
* * * * *
    Benefit-cost ratio for a calendar year is the percentage obtained 
by dividing--
    (1) * * *
    (2) The total wages (as defined in Sec.  606.3) with respect to 
such calendar year.
    (3) For cap purposes, if any percentage determined by this 
computation for a calendar year is not a multiple of 0.1 percent, such 
percentage shall be reduced to the nearest multiple of 0.1 percent. For 
funding goal purposes, if any percentage determined by this computation 
for a calendar year is not a multiple of 0.01 percent, such percentage 
is rounded to the nearest multiple of 0.01 percent.
* * * * *
    Reserve Ratio is calculated by dividing the balance in the State's 
account in the unemployment trust fund (UTF) as of December 31 of such 
year by the total wages paid workers covered by the unemployment 
compensation (UC) program during the 12 months ending on December 31 of 
such year. Final calculations are rounded to the nearest multiple of 
0.01 percent.
* * * * *


Sec.  606.20  [Amended]

0
3. In Sec.  606.20, amend paragraph (a)(3) by removing the reference 
``Sec.  606.3(c)'' and adding in its place, the reference ``Sec.  
606.3'' and by removing the reference Sec.  606.3(j)'' and adding in 
its place, the reference ``Sec.  606.3''.

0
4. In Sec.  606.21, amend paragraph (c) by removing the reference 
``606.3(j)'' and adding in its place, the reference ``Sec.  606.3'' and 
amend paragraph (d) by revising the first sentence to read as follows:


Sec.  606.21  Criteria for cap.

* * * * *
    (d) State five-year average benefit-cost ratio. The average 
benefit-cost ratio for the 5 preceding calendar years is the percentage 
determined by dividing the sum of the benefit-cost ratios for the 5 
years by five. * * *


Sec.  606.22  [Amended]

0
5. In Sec.  606.22, amend paragraph (b)(4) by removing the reference 
``Sec.  606.3(f)'' and adding in its place, the reference ``Sec.  
606.3''; and amend paragraphs (c)(1) and (c)(3) by removing the 
reference ``Sec.  606.3(k)'' and adding in its place, the reference 
``Sec.  606.3'': and by amending paragraphs (c)(2) and (d)(3) by 
removing the reference ``Sec.  606.3(l)'' and adding in its place, the 
reference ``Sec.  606.3''

0
6. Section 606.32 is amended by revising paragraph (b) to read as 
follows:


Sec.  606.32  Types of advances subject to interest.

* * * * *
    (b) Cash flow loans. (1) Availability of interest-free advances. 
Advances are deemed cash flow loans and shall be free of interest 
provided that:
    (i) The advances are repaid in full prior to October 1 of the 
calendar year in which the advances are made;
    (ii) The State does not receive an additional advance after 
September 30 of the same calendar year in which the advance is made. If 
the State receives an additional advance after September 30 of the same 
calendar year in which earlier advances were made, interest on the 
fully repaid earlier advance(s) is due and payable not later than the 
day following the date of the first such additional advance. The 
administrator of the State agency must notify the Secretary of Labor no 
later than September 10 of the same calendar year of those loans deemed 
to be cash flow loans and not subject to interest. This notification 
must include the date and amount of each loan made beginning January 01 
through September 30 of the same calendar year, and a copy of 
documentation sent to the Secretary of the Treasury requesting loan 
repayment transfer(s) from the State's account in the UTF to the 
Federal unemployment account in the UTF; and

[[Page 57157]]

    (iii) The State has met the funding goals described in paragraph 
(b)(2) or (b)(3) of this section.
    (2) Funding goals. This paragraph (b)(2) is applicable to all 
States as of January 1, 2019. A State has met the funding goals 
requirement if:
    (i) The State, as of December 31 of any of the 5 consecutive 
calendar years preceding the calendar year in which such advances are 
made, had an AHCM of at least 1.00, as determined under Sec.  606.3; 
and
    (ii) The State maintained tax effort as determined under paragraph 
(b)(4) of this section.
    (3) Phasing in funding goals. This paragraph (b)(3) applies for 
calendar years 2014 through 2018. A State has met the funding goals 
requirement if it has satisfied the solvency criterion in paragraph 
(i), and the maintenance of tax effort criteria in paragraph (ii), of 
this Sec.  606.32(b)(3).
    (i) A State has met the solvency criterion if:
    (A) For calendar year 2014, as of December 31 of any of the 5 
consecutively preceding calendar years, the State had an AHCM of at 
least 0.50, as determined under Sec.  606.3;
    (B) For calendar year 2015, as of December 31 of any of the 5 
consecutively preceding calendar years, the State had an AHCM of at 
least 0.60, as determined under Sec.  606.3;
    (C) For calendar year 2016, as of December 31 of any of the 5 
consecutively preceding calendar years, the State had an AHCM of at 
least 0.70, as determined under Sec.  606.3;
    (D) For calendar year 2017, as of December 31 of any of the 5 
consecutively preceding calendar years, the State had an AHCM of at 
least 0.80, as determined under Sec.  606.3;
    (E) For calendar year 2018, as of December 31 of any of the 5 
consecutively preceding calendar years, the State had an AHCM of at 
least 0.90, as determined under Sec.  606.3;
    (ii) A State has met the maintenance of tax effort criteria if it 
maintained tax effort as determined under paragraph (b)(4) of this 
section.
    (4) Maintenance of tax effort criteria. A State has maintained tax 
effort if, for every year between the last calendar year in which it 
met the solvency criterion in paragraph (b)(2)(i) or (b)(3)(i) of this 
section and the calendar year in which an interest-free advance is 
taken, the State's unemployment tax rate as defined in Sec.  606.3 for 
the calendar year is at least--
    (i) 80 percent of the prior year's unemployment tax rate; and
    (ii) 75 percent of the State 5-year average benefit-cost ratio, as 
determined under Sec.  606.21(d).

    Signed at Washington, DC, this 8th day of September, 2010.
Jane Oates,
Assistant Secretary, Employment and Training Administration.
[FR Doc. 2010-22926 Filed 9-16-10; 8:45 am]
BILLING CODE 4510-FW-P