DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 30-86
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	BARBARA ANN FARMER Acting Administrator for Regional Management
SUBJECT	:	Permissibility of the Use of Special Funds for the Payment of Interest Due on Title XII Advances

1. Purpose. To clarify the Employment and Training Administration's (ETA) position regarding the use of a special State fund apart from the unemployment fund for the payment of interest due on Title XII advances.

2. Reference. Sections 1202(b)(5) and 303(c)(3) of the Social Security Act; Section 3304(a)(17) of the Federal Unemployment Tax Act.

3. Background. Section 1202(b)(5) of the Social Security Act provides that:

   Interest required to be paid under paragraph (1) shall not be paid (directly or indirectly) by a State from amounts in its unemployment fund.  If the Secretary of Labor determines that any State action results in the paying of such interest directly or indirectly (by an equivalent reduction in State unemployment taxes or otherwise) from such unemployment fund, the Secretary of Labor shall not certify such State's unemployment compensation law under Section 3304 of the Internal Revenue Code of 1954.  Such noncertification shall be made in accordance with Section 3304(c) of such code.

   Section 303(c)(3) of the Social Security Act and Section 3304(a)(17) of the Federal Unemployment Tax Act also prohibit paying interest directly or indirectly from the State's unemployment fund.  ETA has previously taken the position that the use of funds from a special State fund created for other purposes--such as a penalty and interest fund--may not be used for the payment of interest if surplus funds or amounts in excess of a specified ceiling in such special fund would be transferred into the State's unemployment fund.  Questions have arisen as to whether payment of interest from these types of special funds is indeed prohibited by Federal law.  Based on these questions, ETA has undertaken a thorough review of the issue, taking into consideration concerns and points of view from a number of sources.

4. Revised Interpretation. Payment of interest on Title XII advances from any State fund other than the State unemployment fund is not prohibited by Federal law even if State law requires or permits excess amounts in that fund to be transferred to the unemployment fund.  Accordingly, States may use penalty and interest funds (or similar type funds) to pay interest on Title XII advances regardless of whether the State law provides for transfer (either mandatory or permissive) of excess amounts to the unemployment fund.  Similarly, States are not prohibited from making interest payments from special funds which have been created solely for the payment of interest and provide for transfer of excess amounts to the unemployment fund.

5. Action Required. Administrators are requested to provide the information to the appropriate staff.

6. Inquiries. Questions should be directed to appropriate regional staff.