Evaluation of Solvency Standards for State Unemployment Insurance Trust Funds1

As a result of relatively large state unemployment insurance trust fund (UITF) balances and the perceived low risk of recessionary economic conditions, business leaders and policy makers across the U.S. are appealing for a moratorium or a reduction of unemployment insurance (UI) taxes. This article examines the advisability of this action in relation to adequacy standards endorsed by industry advisory groups. Using multivariate techniques, this article evaluates the relevance of the most widely used standard and determines how the maintenance of this standard affects the estimated length of time until insolvency after the onset of a recession. Assuming an economic downturn of the severity of the 1970s recession, we find that the standard is overly conservative with an associated probability of failure of less than 1 percent and with an ability to withstand a recession 100 months in length.