Title XII Cash Flow Interest Free Borrowing
Several months ago, the US DOL proposed changes to the Final Rules on Title XII Cash
Flow Interest Free Borrowing. These rule changes were finalized on September 17, 2010.
The significance of the new regulation is that “cash flow loans”, interest free Title
XII loans to state UI trust funds, are going to be harder to get in the future. Prior
to this ruling, if an agency borrowed under Title XII, no interest was due if the
borrowing occurred after January 1st of a calendar year and the loan was repaid by
September 30 in the same year and the agency avoided further borrowing through the
balance of the rest of the same calendar year.
With the new ruling, beginning in 2014, a state applying for a Title XII advance will
have to demonstrate that trust fund reserves were at least at the 0.50 AHCM level
in one of the past five years prior to applying for the advance. This standard will
increase in 0.10 increments each year until the required AHCM level reaches 1.0 in
2019. Second, the state will have to demonstrate that no reduction in taxation effort
occurred during the period that the AHCM was met and the date of the request.
Not stated in the regulation, however, is a third important change. You will recall
that AHCM or Average High Cost Multiple is essentially a measure of UI trust reserves
equal to a one year payout of benefits based upon the average yearly payout of the
last three most severe recessions in the past 20 years. Up until this recession, that
level of funding had remained fairly constant. When this recession is officially declared
over, it will replace one of the three in the current average. In other words, a AHCM
of 0.50 – 1.0 will be much more in 2014 than those same values in 2008.
The average AHCM for the US, reported in the Q3/2009 USDOL UI Data Summary was 0.40.
Since then, the agency has not reported a AHCM value as Title XII advances have exceeded
net total cash reserves in state UI trust funds since Q4/2009. The AHCM value for
the US was 0.52 at the onset of the present recession.
The action taken by the agency is in line with the report issued by the GAO in May,
2010. That report indicated that UI financing at the state level was directly responsible
for the trust fund insolvencies that occurred in this recession. By making cash flow
loans more difficult to obtain and giving significance to the AHCM measure as well
as future tax increases, the USDOL has accomplished some of the objectives set out
in the GAO report calling for more forward funding (higher reserves) in state UI trust
funds. You’ll also recall that the GAO strongly recommended a significant increase
in the FUTA wage base which would also impact state taxable wage bases. More to follow…
Government Relations – Tax
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