Connecticut lawmakers recently took steps to improve their ailing Unemployment Insurance (UI) program. After paying outstanding federal loans, the legislature expanded and indexed the taxable wage base to improve financing and prevent future erosion. This enabled the reduction of employer UI contributions rates, benefiting both Connecticut workers and businesses.
State UI programs are designed to be self-financed and fiscally sustainable, with states drawing funds during recessions and replenishing their trust fund accounts during periods of growth. However, many states have struggled to maintain solvency following the last two major economic crises.
During the Great Recession, 36 state UI trust funds became insolvent as they worked to support unemployed workers. While state lawmakers focused on repaying federal loans and restoring their depleted reserves, the COVID -19 pandemic triggered another surge in unemployment. As businesses shut down or scaled back to comply with new regulations, UI claims spiked, depleting many states’ UI trust funds.
Although states have taken steps to rebuild their UI funds, most have yet to reach the recommended solvency levels needed to withstand another major economic downturn. Aggregate state UI reserves plummeted from nearly $76 billion in 2019 to just $2.7 billion by August 2020. While these funds rebounded to $65 billion by the end of 2023, according to the latest solvency report, the figures underscore states’ significant fiscal challenge in generating sufficient revenue to replenish their reserves before the next recession.
How States Approach UI
States take different approaches to their UI programs, which can be broadly categorized in one of three ways: (1) a limited social protection approach, (2) an unbalanced social protection approach, or (3) a balanced social protection approach.
States that take a limited approach offer low benefits and minimal trust fund financing. Several states reduced benefit durations and/or weekly maximums following the Great Recession. For example, lawmakers in Florida cut the maximum benefit duration to as few as 12 weeks, well below the previous 26-week standard. Additionally, Florida’s maximum weekly benefit of $275 is among the lowest in the country, despite the state’s weekly wage being $1,262.
These limited benefits are paired with minimal UI trust fund financing. Florida maintains the minimal taxable wage base required by federal law, which accounts for less than one percent of total taxable wages in the state.
Other states take an “unbalanced” approach to their UI programs, offering benefits that are not supported by adequate financing mechanisms. In California, for example, maximum benefits are relatively low compared to average wages and the high cost of living. Yet, the state’s UI Trust Fund remains over $20 billion in debt, largely due to poor UI financing.
Following the Great Recession, California took nearly a decade to repay the $10 billion through federal loans. However, lawmakers failed to implement necessary financial reforms to strengthen the trust fund, leaving it the most inadequately funded in the country heading into the COVID-19 pandemic. While California was among the 23 states that borrowed federal funds to cover UI claims, it is one of only two—along with New York—that has yet to repay its loans. As a result, employers face higher taxes due to FUTA credit reductions.
Both limited and unbalanced approaches harm workers and employers. Inadequate benefits can leave workers at risk and increase long-term use of other programs, such as disability insurance. Meanwhile, insufficient financing often forces states to raise UI tax rates, which can disincentivize hiring, penalize employers and workers in low-wage industries, and encourage firms to move to low-tax states.
In contrast, a balanced approach enables states to protect workers and employers through generous benefits and proper financing. Minnesota exemplifies this model, covering a high proportion of lost wages for unemployed workers, while maintaining one of the nation’s lowest levels of improper payments and fraud. This success is enabled by a well-financing system, including a broad taxable wage baseindexed to state average wages, which helps to bolster the UI fund’s solvency.
How Connecticut is Approaching UI
Connecticut’s UI fund has faced persistent insolvency challenges due to consecutive economic downturns, only recently repaying its federal loans. These issues prompted Connecticut lawmakers to bolster the state’s Unemployment Insurance Trust Fund through several recent reforms to address long-run solvency. Most notably, lawmakers took the crucial step of expanding the state’s long-eroding taxable wage base.
Connecticut lawmakers set the state’s UI taxable wage base at $15,000 in 1999 but did not index it. Indexation is a common feature meant to prevent erosion in the real value of the tax base by tying dollar amounts to indices, such as the consumer price index or the national average wage index, that adjust for the changing cost of living or labor conditions over time. Without any indexation, Connecticut’s taxable wage base covers an increasingly small proportion of total wages over time (see Figure 1 below).
Figure 1: Taxable Wages as a Percentage of Total Covered Wages (1999-2023)
To address this, last year, the legislature expanded the taxable wage base to $25,000 and, this year it started indexing it to the Employment Cost Index (ECI) to prevent the same cycle of base erosion that it experienced in 1999.
Broadening the base and paying off the federal loans allowed lawmakers to reduce contribution rates. For instance, the New Employer rate dropped to 2.2%, down from 3.5% in 1999–the last time the taxable wage base increased.
With the federal loans fully repaid, Connecticut employers will also avoid reductions in Federal Unemployment Tax Act (FUTA) credits, which would have resulted in higher tax burdens. In contrast, New York employers currently pay an additional $250 per employee on average, thanks to FUTA credit reductions stemming from outstanding loans.
Connecticut’s recent reforms make significant progress in protecting its employers, workers, and families. Lawmakers took steps to bolster the state’s UI trust fund to provide long-term stability without increasing tax rates or reducing benefit durations or amounts, as other states have done. While maximum weekly benefits are frozen, increases will resume after October 2028, once the transition period ends.
A New Leader in New England?
All states should prioritize the responsible management of UI funding to ensure its long-term sustainability and effectiveness. However, given their shared economic and demographic challenges, other New England states may benefit most from adapting Connecticut’s approach.
A key strategy is expanding and indexing the taxable wage base, as Connecticut has now done. With this reform, Connecticut joins Rhode Island as the only New England states using this crucial safeguard against fund erosion (Vermont adjusts annually but is not technically indexed) (see Table 1 below).
| Table 1. UI Program Characteristics of New England States | |||||
| State | Taxable Wage Base (2025) | Taxable Wage Base as a Percentage of Average Wages* | Maximum Weekly Benefit | Replacement Ratio | Average Weekly Benefit |
| Connecticut | $26,100 | 31.87% | $796.00 | 0.433 | $495.07 |
| Maine | $12,000 | 20.19% | $1,041.00 | 0.495 | $476.77 |
| Massachusetts | $15,000 | 16.75% | $1,051.00 | 0.478 | $692.06 |
| New Hampshire | $14,000 | 18.57% | $427.00 | 0.336 | $373.40 |
| Rhode Island | $29,800 | 44.93% | $903.00 | 0.443 | $455.81 |
| Vermont | $14,800 | 24.86% | $729.00 | 0.533 | $525.45 |
| Notes: *Average Wages calculated using Department of Labor (DoL) most recently reported quarters (Q1 & Q2 2024); Replacement Ratio, Avg Weekly Benefit Amount and Avg Weekly Wage are Q3 2024 via DoL; Replacement Ratio = Weighted Average of: WBA / (Normal Hourly Wage x 40 Hrs.) (Ratios greater than or equal to 2 have been excluded as outliers.) | |||||
Given Connecticut’s high average wages, robust UI financing is essential to support workers through economic downturns. The state’s recent reforms demonstrate that such support is possible. By expanding and indexing the taxable wage base while clearing federal debt, Connecticut lawmakers have forged a balanced path that protects workers and employers, setting a standard for New England neighbors. These states should consider similar reforms to ensure adequate UI funding and protect their workers and economies from an inevitable recession. Neglecting to do so risks significant hardship for workers and employers and long-term economic consequences.