[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
PRESIDENT'S UNEMPLOYMENT ADMINISTRATIVE FINANCING REFORM INITIATIVE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HUMAN RESOURCES
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MARCH 5, 2002
__________
Serial No. 107-62
__________
Printed for the use of the Committee on Ways and Means
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WASHINGTON : 2002
____________________________________________________________________________
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Human Resources
WALLY HERGER, California, Chairman
NANCY L. JOHNSON, Connecticut BENJAMIN L. CARDIN, Maryland
WES WATKINS, Oklahoma FORTNEY PETE STARK, California
SCOTT McINNIS, Colorado SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan LLOYD DOGGETT, Texas
PHIL, ENGLISH, Pennsylvania
RON LEWIS, Kentucky
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
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C O N T E N T S
__________
Page
Advisory of February 26, 2002, announcing the hearing............ 2
WITNESSES
U.S. Department of Labor, Hon. Emily Stover DeRocco, Assistant
Secretary, Employment and Training Administration.............. 8
______
American Federation of Labor and Congress of Industrial
Organizations, Christine Owens................................. 49
National Association of State Workforce Agencies, and Oklahoma
Employment Security Commission, Jon Brock...................... 42
National Federation of Independent Business, Dan Blankenburg..... 55
UWC--Strategic Services on Unemployment & Workers' Compensation,
and Tyson Foods, Inc., Chuck Yarbrough......................... 36
SUBMISSION FOR THE RECORD
American Federation of State, County and Municipal Employees,
AFL-CIO, statement............................................. 70
PRESIDENT'S UNEMPLOYMENT ADMINISTRATIVE FINANCING REFORM INITIATIVE
----------
Tuesday, March 5, 2002
House of Representatives,
Committee on Ways and Means,
Subcommittee on Human Resources,
Washington, DC.
The Subcommittee met, pursuant to notice, at 12:00 p.m., in
room B-318 Rayburn House Office Building, Hon. Wally Herger
[Chairman of the Subcommittee] presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
February 26, 2002
No. HR-10
Herger Announces Hearing on Unemployment Administrative Financing
Reform Initiative
Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human
Resources of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the Nation's Unemployment
Compensation system and the Administration's proposal for reform. The
hearing will take place on Tuesday, March 5, 2002, in room B-318
Rayburn House Office Building, beginning at 12:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include representatives from the U.S. Department of
Labor, employer and employee organizations, and State workforce
officials. However, any individual or organization not scheduled for an
oral appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
The Unemployment Compensation (UC) program provides benefits to
unemployed workers who have a history of employment. Within a broad
Federal framework, each State designs its own benefit program and
imposes taxes on employers to pay for regular unemployment benefits. A
Federal tax also is imposed on employers to fund the Federal
responsibilities under the system, including certain administrative
expenses, loans to States, and the Federal half of extended
unemployment benefit costs for certain workers. Taxes collected are
kept in Federal unemployment compensation trust fund accounts that are
part of the unified Federal budget. Since the 1950s, ``surplus''
Federal balances have transferred to State accounts (called ``Reed Act
transfers''). In recent years, a provision in the 1997 Balanced Budget
Act (P.L. 105-33) retained most surpluses in Federal accounts in an
effort to reduce Federal deficits. While this provision expires at the
end of fiscal year 2002, the House has passed three ``economic
stimulus'' bills in recent months to accelerate the transfer of at
least $8 billion in Federal surpluses to States to assist in their
administration of unemployment benefits and reemployment efforts.
In addition to accelerating the transfer of surplus Federal funds
and temporarily extending unemployment benefits by up to 13 weeks in
every State, President Bush's fiscal year 2003 budget proposes
additional reforms of the administrative financing of the UC and
Employment Service programs. The Administration's proposal would
gradually reduce the current Federal Unemployment Tax Act payroll tax,
while also lowering Federal transfers to States for the administrative
costs of their unemployment insurance systems. Federal funds available
for loans and extended benefits and remaining Federal administrative
responsibilities are projected to continue to rise under the proposal.
As under current law, States would have authority to raise taxes to
provide for targeted administrative funding needs.
In announcing the hearing, Chairman Herger stated: ``The
unemployment compensation program provides much-needed relief to
millions of hardworking Americans, especially in tough economic times.
The Administration has built on proposals developed in recent years to
improve the administrative financing of these programs so States can do
a better job getting unemployed workers back to work. I am excited to
have the Administration come and explain the benefits of their proposal
for employees, employers, and the economy.''
FOCUS OF THE HEARING:
The hearing will focus on proposals in the President's fiscal year
2003 budget to reform the administrative financing of the nation's
Unemployment Compensation and Employment Security programs.
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Those filing written statements who wish to have their statements
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The Committee seeks to make its facilities accessible to persons
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call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event
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Committee as noted above.
Chairman Herger. The Committee on Ways and Means,
Subcommittee on Human Resources, will come to order. Good
afternoon and welcome to our hearing. Today's hearing is on the
Administration's proposal to improve the administrative funding
of our Nation's unemployment insurance system. The unemployment
insurance (UI) program provides relief to millions of
hardworking Americans, particularly in tough economic times.
This Subcommittee has spent several years considering whether
to reformulize administrative funding and if so, how.
Organizations representing workers, employers, States, and now
two separate administrations have devoted considerable time and
effort to exploring that question. Here is a major reason why.
Let us say an employer pays $1 in Federal unemployment
taxes. Washington is supposed to send most of that dollar back
to the States to administer the UI programs. This money pays
for costs of providing unemployment checks, supports anti-fraud
efforts, and helps workers find new jobs. But here is what
actually is sent back to the State and for the record, I have
46 cents here. Forty-six cents is what actually reaches the
States, less than half.
Literally, billions of dollars each year remains in
Washington accounts instead of serving workers and employers as
intended. That is just not right. Under the current program
rules, employers pay too much in taxes, workers give up too
much in wages, and jobless workers get too little help finding
new jobs because too many tax dollars sit unused in Washington
accounts.
To his credit, President Bush has proposed a serious plan
for reform. The Administration's plan is ambitious. It would
reduce Federal unemployment taxes by 75-percent overtime.
States would fill in some of the difference, but it is
reasonable to assume that overall, taxes can fall while still
providing better service to workers given the 54 cents out of
every program dollar that sits idle today. And lower taxes mean
more jobs, which is the UI's program's goals. States would also
get $14 billion in special transition funds as well as
additional funds for smaller States.
More extended UI benefits would be available in States with
higher unemployment rates, making permanent a change that
already has passed the House in our most recent economic
stimulus bill. Federal responsibilities such as providing loans
to States in need would continue. All the while, today's large
Federal unemployment balances would continue to grow. Joining
us today to review this plan are experts representing Federal
and State governments, businesses and workers, who all have a
stake in this debate. We look forward to everyone's testimony,
which will help guide us as we consider the details of the
President's proposal and the next steps we would take.
[The opening statement of Chairman Herger follows:]
Opening Statement of the Hon. Wally Herger, a Representative in
Congress from the State of California, and Chairman, Subcommittee on
Human Resources
Good afternoon and welcome to our hearing. The subject of today's
hearing is the Administration's proposal for reform of the
administrative financing provisions of the nation's unemployment
system.
Our unemployment compensation program provides much-needed relief
to millions of hardworking Americans, particularly in tough economic
times. It operates as a unique partnership between the Federal
Government, states, employers, and workers to help those who lose their
jobs through no fault of their own as they transition to new jobs.
It is not a perfect system, and as Committee Members and those of
you in the audience who follow the unemployment issue know, a series of
hearings on this issue have been held over the past few years.
You also know that Members of this Committee have, over a number of
years, introduced a variety of bills developed to improve the system
and have a number of views on the best way top accomplish that goal.
With unemployment rates high, state trust fund balances shrinking,
and a shaky economy, it is more important than ever that we take a look
at the current system and find ways to make it better.
I was very encouraged when the President's fiscal year 2003 budget
included a proposal to improve the administrative financing of our
unemployment system and I am looking forward to the Administration's
presentation.
The plan as outlined in the fiscal year 2003 budget material will
allow payroll taxes to flow more directly to states, give states more
flexibility to run their unemployment and employment services programs,
lower the tax burden for businesses so they can create more jobs,
continue federal support for the extended benefit and loan programs,
and help workers by making the extended unemployment program more
responsive.
Chairman Herger. Without objection, each Member will have
the opportunity to submit a written statement and have it
included in the record at this point. Mr. Cardin, would you
like to make an opening statement?
Mr. Cardin. Thank you, Mr. Chairman, and thank you for
holding this hearing today. Holding up the dollar, I thought we
were going to do one of those ads for the long distance
carrier. I was going to grab it because I know the value of the
dollar. I think I should point out, though, that the whole
concept of the Federal Government's participation in
unemployment insurance is to create a reserve to use during
recessionary times. And your 46 cents may speak to what we have
been doing.
But if we extend the 13 weeks of additional unemployment
benefits, the States will actually be getting back a dollar and
a half for every dollar that we collect in Federal Unemployment
Tax Act (FUTA) taxes. And the reason for that is because we are
in a recession, and that is why we are trying to accumulate
some funds in order to be able to respond to that recession.
That is the partnership between the Federal Government and our
States to make sure there are adequate resources to meet the
unemployment insurance needs in all regions of our country,
those particularly the most hardest hit as a result of the
economic activities.
I guess, though, Mr. Chairman, my major concern is that we
are holding this hearing today under a very dark cloud because
we have not acted to deal with the extended benefits. The
United States Senate has passed the 13-week extension. We have
not seen fit to pass a clean 13-week extension bill. I regret
that. Every week we wait, 80,000 more Americans exhaust their
unemployment insurance benefits. We shouldn't be mixing that
issue with other controversial issues that divide us. We should
look for ways that we can work together in order to deal with
the people who are hurting out there, the people, through no
fault of their own, cannot find employment because of the
economy.
Regarding the Administration's long-term proposals on
administrative funding for the unemployment insurance system, I
am concerned the plan would begin to dismantle the current
Federal-State partnership in responding to unemployment. The
proposal would eliminate payments now sent by the Federal
Government to the States for administrative costs for the UI
programs, and would eliminate three-quarters of the Federal
FUTA tax, which finance extended unemployment benefits and
loans to the States in addition to the administrative ground.
The Administration's plans leaves States with three options
to make up for the loss of administrative payments they now
receive from the Federal Government. They could raise taxes.
That is certainly not a very pleasant option. They could cut
benefits. That is not a very pleasant option, or they could
reduce the solvency of their UI trust fund. That is also not a
very pretty option. So none of these options are particularly
attractive.
In addition, by draining money of Federal UI accounts and
by eliminating the Federal authority to disburse grants, the
plan may reduce the Federal Government's ability to respond to
rising unemployment during recessions. I am very troubled that
the Administration's proposal ignores one of the biggest
problems of the UI system, the lack of coverage for many low
wage and part-time workers. And we have had several discussions
about that.
The U.S. General Accounting Office has informed us that low
wage workers are only one half as likely to receive UI benefits
compared to higher wage workers even when employed for similar
periods of time. This inequity not only hurts many workers, but
also has troubling implications for our welfare reform efforts.
Congress and the States spent considerable time, money and
efforts in attempting to break the cycle of dependency on
welfare, but the UI system forces too many low wage workers
back onto the welfare rolls when they are let off.
Let me conclude by urging both this Committee and the
Administration to review the consensus proposal developed 18
months ago by the major stakeholders in the UI system. The plan
would have guaranteed States mandatory spending for their
administrative grants, but have eliminated one quarter of the
FUTA tax on employers and would have improved UI coverage for
low wage workers and would have allowed more people to collect
unemployment insurance by using the most recent wage quarter.
Mr. Chairman, we could have passed those recommendations a
year ago and have them in place for this current recession. I
stated that in a previous hearing that we had. It was a major
accomplishment to get the stakeholders to reach an agreement.
We should have moved on those proposals well before now in the
midst of a recession. In my opinion, such a balanced proposal
has a better chance of achieving bipartisan support and
eventual enactment, and I urge us to consider that proposal.
Thank you, Mr. Chairman.
[The opening statement of Mr. Cardin follows:]
Opening Statement of the Hon. Benjamin L. Cardin, a Representative in
Congress from the State of Maryland
Mr. Chairman, a dark cloud hangs over this committee today as we
discuss possible reforms to our Nation's unemployment insurance system.
We have yet to enact an extension of unemployment benefits, despite
the fact that more than 1.5 million jobless workers have had their
regular benefits expire since September 11th, and despite the fact that
Congress has routinely provided extended benefits during past
recessions.
It is far past time to separate a simple extension of unemployment
benefits from discussions about more controversial items. Every week we
delay consideration of this issue, another 80,000 Americans exhaust
their regular UI benefits. They do not need any more empty promises.
Unemployed workers need and deserve immediate assistance in paying
their bills and buying food for their families.
Regarding the Administration's long-term proposal on administrative
financing for the unemployment insurance system, I am concerned the
plan would begin to dismantle the current Federal/State partnership in
responding to unemployment. The proposal would eliminate the payments
now sent by the Federal Government to the States for the administrative
cost of their UI programs, and it would eliminate three-quarters of the
Federal FUTA tax, which finances extended unemployment benefits and
loans to the States, in addition to the administrative grants.
The Administration's plan leaves States with three options to make
up for the loss of the administrative payments they now receive from
the Federal Government--raise taxes, cut benefits, or reduce the
solvency of their UI trust funds. None of these options are
particularly attractive. In addition, by draining money out of the
Federal UI accounts and by eliminating the Federal authority to
disburse grants, the plan may reduce the Federal Government's ability
to respond to rising unemployment during recessions.
I am also very troubled that the Administration's proposal ignores
one of the biggest problems with the UI system--the lack of coverage
for many low-wage and part-time workers. The Government Accounting
Office has informed us that low-wage workers are only half as likely to
receive UI benefits compared to higher-wage workers, even when employed
for similar periods of time. This inequity not only hurts many workers,
it also has troubling implications for our welfare reform efforts.
Congress and the States have spent considerable time, money, and effort
in attempting to break the cycle of dependency on welfare, but the UI
system forces too many low-wage workers back on to welfare when they
are laid off.
Let me conclude by urging both this Committee and the
Administration to review a consensus proposal developed 18 months ago
by the major stakeholders in the UI system. The plan would have: (1)
guaranteed States mandatory spending for their administrative grants,
(2) eliminated one-quarter of the FUTA tax on employers, and (3)
improved UI coverage for low-wage and part-time workers.
In my opinion, such a balanced proposal has a better chance of
achieving bipartisan support and eventual enactment. Thank you.
Chairman Herger. I thank the Ranking Member.
Before recognizing the Honorable Emily DeRocco, Assistant
Secretary of Employment and Training Administration at the U.S.
Department of Labor, I would like to remind everyone that not
only did this Congress pass extended benefits of 13 weeks once,
we passed it twice, once in December 2001; again in February
2002; and we may very well do that again today, and that is in
addition to the stimulus bill that we passed in October 2001.
We were working on this, but we do need some help from our good
friends in the Senate as well.
Mr. Cardin. Would the gentleman yield on that point?
Chairman Herger. I will.
Mr. Cardin. I appreciate you yielding. The problem is that
the package that we passed cost over $100 billion? It was
included in a huge stimulus package which has controversy. The
unemployment provisions don't have controversy. Why can't we
bring out the extension of the 12 weeks as the Senate did by, I
believe, a unanimous vote, and just pass that? We can get that
done.
Mr. McCrery. Will the Chairman yield?
Chairman Herger. The gentleman from Louisiana.
Mr. McCrery. I am always impressed by Mr. Cardin's remarks.
Mr. Cardin. Thank you. I appreciate the Chairman yielding.
Mr. McCrery. And I would hope that the gentleman from
Maryland would be consistent in his reasoning. It seems to me
that there is not much controversy about the fact that States
don't get enough money back from the Federal Government for
administrative funding. And yet the gentleman, on the one hand,
says we shouldn't mix something controversial with something
that is taken for granted, and yet that is exactly what he is
suggesting to do when those of us who want to get that money
out to the States so they can provide employment services and
get people back to work, you want to mix it up with
controversial things like covering part-time workers, low wage
workers, all those things that you know are controversial. I
would hope that the gentleman would take a look at the
Administration's proposal, and maybe, at least, pass it and
then we can go onto some of those----
Chairman Herger. I think we should press on at this point.
The Honorable Assistant Secretary DeRocco, if you would proceed
with your testimony, please.
STATEMENT OF THE HON. EMILY STOVER DEROCCO, ASSISTANT
SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S.
DEPARTMENT OF LABOR
Ms. DeRocco. Mr. Chairman and distinguished Members of the
Subcommittee, I appreciate the opportunity to appear before you
today to outline the President's Employment Security Reform Act
of 2002. And I have slides to help along the way with my
presentation. This proposal will reform the unemployment
insurance and employment service programs, and it represents a
new balance.
The Administration proposes short--and long-term strategies
to strengthen UI and Employment Service (ES) for America's
workers and businesses, encourage flexibility and promote
economic growth. Our short-term strategy includes a temporary
Federal extension of UI benefits for up to 13 weeks in all
States and distribution of $9.2 billion in special Reed Act
funds to States for expansion of benefits, better reemployment
services, shoring up trust fund reserves, and/or cutting
employer payroll taxes.
The Administration's long-term vision includes allowing
States to finance UI and ES administration while providing a
very responsible transition, reforming extended benefits, and
reducing FUTA taxes. A key component of the proposal is the
transfer of funding authority from the Federal to the State
level, which would be phased in over several years to give
States sufficient time to make necessary administrative and
legislative changes.
As shown in the next two slides, in fiscal years 2003 and
2004, there would be full Federal appropriations supporting the
Administration. In 2005 and 2006, States would receive partial
Federal funding, and full State funding would commence in 2007.
Federal appropriations would be made throughout the transition
period, fiscal years 2002 through 2006, and Reed Act
distributions would be made in fiscal years 2002, 2004, and
2005.
The next slide speaks to the impact on the Federal
unemployment trust fund accounts. There would be adequate
balances in the Federal unemployment trust fund accounts to
fund a temporary 13-week extension of extended benefits as well
as transfer of over $14 billion to the States during the
transition period. Under current economic assumptions, Federal
account balances would continue to build during this transition
period, and the reserves would be available to fund extended
benefits and loans in future recessions. As you can see, even
with the Reed Act distributions and the proposed tax cut to
two-tenths percent, the accounts reach their current balance of
$39 billion, again by 2008.
We are proposing two important changes to the extended
benefits program. The insured unemployment rate trigger would
be reduced from 5 to 4 percent. With this action, extended
benefits would be available faster in recessions, more workers
would get up to 13 weeks of extra benefits, and extended
benefits would be more responsive as an economic stabilizer.
The chart to your right illustrates how the change would
help more States and more workers. In addition to the insured
unemployment rate change, the special Federal rules concerning
eligibility would be repealed. States would use their existing
eligibility requirements, and this would make extended benefits
easier and less costly for States to administer.
In terms of the proposed Federal unemployment tax
reduction, we are proposing a significant reduction. The rate
would be reduced from eight-tenths to six-tenths in 2003,
eliminating that two-tenths surcharge we heard much about in
past years.
The rate would be further reduced to four-tenths in 2005,
two-tenths in 2007, for a total tax reduction of 75 percent
from the current level. The Federal tax savings for employers
over a 10-year period would be $36.5 billion.
In terms of the advantages of this proposal, we firmly
believe that the Administration's proposal has advantages for
all major stakeholders. For States, the distribution of $14
billion in excess Federal funds would improve solvency, would
cushion the administrative funding shift, and would be
available for States to expand eligibility for, or levels of,
benefits. The small States supplemental funding would assure
good services and no tax increases in small States, and States
would be able to determine administrative funding levels and
target them where most needed.
For workers, eligible jobless workers would get an
immediate 13-week temporary extension of UI benefits. The lower
trigger and repeal of restrictive Federal requirements would
make extended benefits (EB) available earlier in more States
and to more workers in future recessions. And adequate funding
would surely produce better services for workers.
For businesses, FUTA taxes would be reduced significantly.
The shifting of administrative funding would not require a net
unemployment tax increase in any State and streamlining
quarterly filing of FUTA tax forms would save businesses
valuable time.
I want to emphasize this proposal continues to recognize
the national interest and the important Federal role in
unemployment insurance and employment service programs.
Specifically, the Federal Government would supplement funding
for small States and fund Federal activities through State
grants on an ongoing basis. We would continue to pay 50 percent
of extended benefits in the permanent EB program. We would make
loans available to States, if needed, for benefits or for
administration. The Federal Government would continue to ensure
State conformity and compliance with Federal requirements.
Examples of these include prompt and proper payment of
benefits, fair hearings, broad coverage for workers and a new
requirement that States provide a public labor exchange
service. The Federal Government would continue to monitor State
performance against Federal standards.
Mr. Chairman and Members of the Subcommittee, we believe
the States can do a better job of funding these programs and
that the transfer of funding can be accomplished with no net
tax increases and no State losers. Improved funding means
better services to workers and businesses and a stronger
unemployment insurance and employment service system.
While the proposal shifts funding responsibility to States,
it keeps a strong Federal-State system. We look forward to
working with this Committee and with the stakeholders as we
move forward. I appreciate the opportunity to speak with you
this morning, and I will be pleased to answer any questions you
might have.
[The prepared statement of Ms. DeRocco follows:]
Statement of the Hon. Emily Stover DeRocco, Assistant Secretary,
Employment and Training Administration, U.S. Department of Labor
Mr. Chairman and distinguished Members of the Subcommittee, I
appreciate the opportunity to appear before you today to outline the
President's Employment Security Reform Act of 2002.
This proposal for reform of the unemployment insurance (UI) and the
employment service (ES) programs represents a New Balance. It addresses
short-term needs and provides long-term changes to assist economic
growth, promote flexibility, and strengthen the critical services that
states provide to America's workers and businesses. Together, the UI
and ES programs represent core elements of the public workforce system.
UI is key to the economic security of our nation, acting as a
stabilizer during economic downturns by being the primary source of
temporary, partial wage replacement for workers who have been laid off
and are seeking jobs. ES helps unemployed workers find jobs and
employers find new workers; it is the backbone of the One-Stop service
delivery system established under the Workforce Investment Act of 1998.
Background
Over the past several years, all major stakeholders involved with
the UI and ES programs have expressed dissatisfaction with some aspects
of the present system.
LWorker advocates are concerned about responsiveness to
worker needs during recessions.
LState program administrators are dissatisfied with what
they see as continued under-funding of the UI and ES programs.
LBusiness leaders are frustrated with the level of UI
taxes, and what they see as complicated paperwork, opportunities for
program fraud and abuse, and the use of revenues for other than the
intended purposes.
In response to these concerns, the President is proposing actions
and reforms that would continue the federal-state partnership that has
been responsible for these programs for nearly 70 years, but would
strike a New Balance between the federal and state governments,
empowering states to manage funds and direct policy with greater
flexibility and freedom.
Short-Term Actions
Short-term actions are designed to meet the present needs of
unemployed workers during the current economic slowdown. The
Administration's proposal includes a temporary extension of
unemployment benefits and an immediate distribution of excess federal
unemployment funds (commonly called a Reed Act distribution).
Temporary Extended Unemployment Compensation (TEUC)
To aid unemployed workers who have exhausted regular state UI
benefits during the economic downturn that began last March and to
promote recovery, we are proposing a temporary extension of
unemployment benefits. TEUC would be payable under agreements between
the Secretary of Labor and states and would be in effect for weeks of
unemployment beginning after the date of agreement and ending before
January 1, 2003. There would be no state triggers under TEUC; benefits
would be payable in all states. The program would be entirely federally
financed, almost all from the federal Unemployment Trust Fund (UTF)
accounts. Generally, benefits would be payable to individuals who filed
an initial claim for regular compensation on or after the week
including March 15, 2001, and have exhausted regular benefits. Eligible
individuals would receive 50 percent of their regular compensation up
to a maximum of 13 weeks as long as they meet the continuing
eligibility conditions of state law.
Reed Act Distribution
Current levels of unemployment, exacerbated by the terrorist
attacks on September 11, have strained the capacity of states to
provide needed benefits and services. In response, we propose to
distribute to states about $9.24 billion in excess federal unemployment
trust funds, some of which are otherwise scheduled to be distributed on
October 1, 2002. These funds could be used to enhance services to
businesses and reemployment services to unemployed workers through One-
Stop Career Centers, shore up low reserves in state trust funds
accounts, allow a cut in state unemployment payroll taxes, or expand
benefits. The funds would be distributed by the current-law formula,
i.e., based on the state's share of federal taxable wages.
Long-Term Reforms
Consistent with these immediate actions, the Administration is
proposing a long-term vision that would make UI and ES programs more
responsive to the needs of workers and business by:
Lallowing states to control administrative funding--
helping improve the timeliness and accuracy of benefit payments,
targeting more resources on preventing and detecting overpayments, and
enabling improved reemployment services to unemployed workers;
Lproviding extended benefits to more workers--making the
program more responsive to unemployment swings; and
Lreducing employers' federal unemployment taxes--spurring
economic expansion.
Administrative Funding
To address state concerns about inadequate federal funds for UI and
ES services, we are proposing to transfer the administrative funding of
UI and ES programs to states. Under current law, the Federal Government
collects a federal unemployment tax, holds some of the revenue in
reserve, and sends the rest back to states to operate their UI and ES
programs. States have long complained that inadequate funds were
returned to provide the services needed by employers and workers with
ES levels basically ``frozen'' since 1984 and with UI levels falling 10
percent or more below need in the 1990's, even though plenty of money
was available in the UTF. States already collect state unemployment
taxes to fund benefits, so it makes sense to give the states
responsibility for and control of administrative costs as well.
A question has been raised whether this could cause states to cut
benefits and services to workers to achieve lower taxes for employers.
States, under current law, already have the responsibility to determine
UI eligibility for benefits and to set and collect experience-rated
taxes, which will total about $30 billion for fiscal year 2003, for
financing these benefits. Our proposal shifts administrative funding
responsibility of about $3.5 billion to the states while also shifting
a federal payroll tax cut of over $5.5 billion to their employers. We
believe that the states have sufficient incentives to adequately fund
the UI and ES benefits and services that assist workers and employers,
and therefore, that the transfer of responsibility will have absolutely
no negative effect on such benefits and services.
To give states sufficient time to make any necessary administrative
adjustments or law changes, the transfer of funding authority from the
federal to the state level would be phased-in over several years.
Special Reed Act distributions would be provided in fiscal years 2004
and 2005. Federal transition grants would be provided in fiscal years
2005 and 2006. Beginning in fiscal year 2007, states would be
responsible for full funding of state UI and ES programs.
We understand that small states are concerned that the proposed
FUTA tax savings for a small state's employers may not equal the amount
of the current federal UI and ES grants for such states. Our proposal
would address these concerns by providing federal supplemental funding
in such cases to states with a civilian labor force of fewer than
1,000,000. Currently 17 states meet this criteria. This funding would
be available during the transition and thereafter.
Extended Benefit Program
We are also proposing two changes in the extended benefit (EB)
program. The insured unemployment rate required to make EB available in
states would be lowered from 5.0 percent to 4.0 percent. Also, the
special federal EB eligibility requirements would be eliminated. State
requirements for regular compensation would then apply, simplifying
state administration and cutting ``red tape'' for workers. These
changes combined would improve recession readiness and economic
stabilization by making EB available sooner and to more workers in an
economic downturn. Extending benefits when unemployment is high helps
keep money flowing into local economies. Research shows that each $1.00
in benefits generates $2.15 in economic activity.
Federal Unemployment Tax Act (FUTA)
Employers have long complained that FUTA taxes are too high and too
little of FUTA revenues are used for their intended purposes. Indeed, a
0.2 percent FUTA surcharge that was levied in 1977 fulfilled its
purpose of repaying general revenue loans to the UTF in 1987. However,
this ``temporary'' tax, which generates about $1.8 billion annually,
has been extended through 2007. This has produced very healthy reserves
in the UTF accounts of about $39 billion. These reserves would allow us
to cut taxes without risking the availability of funds to make advances
to states needing money to pay UI benefits or to pay the federal share
of extended benefits.
The tax rate would be reduced to 0.6 percent in 2003, cutting taxes
by 25 percent. The rate would be further reduced to 0.4 percent in
2005, and to 0.2 percent in 2007, and thereafter, for a federal
unemployment tax cut of 75 percent from the current level. The 0.2
percent remaining FUTA tax would be used to make federal loans
available to any state that runs out of funds to pay UI benefits or
administrative costs, pay the federal share of extended benefits (EB),
make state grants for, and pay for federal administration of, certain
federal activities, and supplement administrative funding for ``small
states.'' In addition to the tax reduction, FUTA forms and filing
requirements would be streamlined through a technical change to federal
law, and employers would be required to deposit unemployment taxes no
more frequently than quarterly.
The Federal Role in the ``New Balance''
At this point, I want to emphasize that the New Balance proposal
continues to recognize the important national interest in the
performance of these programs; they are critical to our economy, and
the proposal maintains a strong role for the Federal Government in
their oversight. Examples of federal requirements that would be
retained are, for the UI program, prompt and proper payment of
benefits, impartial hearings, and broad coverage for workers who are
subject to involuntary unemployment. For the ES program, states would
be required to administer a free public labor exchange and deliver
employment services for the benefit of businesses and job seekers.
States would have to meet federal requirements for UI and ES in
order for their businesses to qualify for a substantial credit against
FUTA. Failure by a state to comply with the requirements would (after
due process) result in employers in the state losing the tax credit.
The potential for a large increase in employer rates is the current
means by which many federal UI requirements are enforced. This proposal
maintains this tax credit mechanism and extends it to the UI
requirements currently applicable only to administrative grants and to
the ES program. Specifically, the current total FUTA tax is 6.2
percent, the maximum credit is 5.4 percent, and the net tax is 0.8
percent. In 2007, the total tax and the net tax drop to 5.6 percent and
0.2 percent, respectively, but the maximum credit remains at 5.4
percent.
As noted previously, federal grants to states would continue for
certain federal activities, such as federal unemployment claims, alien
labor certification, various required reports, and to supplement small
states.
Conclusion
Mr. Chairman, we hope that we can count on your support for these
reforms that, with federal assistance and commitment, provide
sufficient funding and give states the autonomy to customize programs
that best serve their businesses and workers.
Thank you for the opportunity to testify today. I will be happy to
answer any questions you may have about the New Balance proposal.
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Chairman Herger. I thank you, Madam Assistant Secretary,
and now we will turn to questions. I would like to remind the
Members that they each have 5 minutes for witness questioning,
and with that, would the gentleman from Louisiana, Mr. McCrery
like to inquire?
Mr. McCrery. Yes. Thank you, Mr. Chairman.
Ms. DeRocco, let us talk about the need for administrative
financing reforms. I said in my little conversation with Mr.
Cardin that it is apparent to any of us who have looked at
this, that the States are not getting back from the Federal
Government sufficient funding for administrative purposes of
the program, and some States like mine have had to exact
additional taxes in order to fund administrative expenses
because we are getting, I think, back 41 cents on the dollar
for administrative expenses.
So I think that is apparent. But in your proposal, you
shift really the responsibility to the States for collecting
those taxes and using them for either administrative funding or
increases in benefits or any of the other things they can use
the money for. Some people say that this would destroy the
safety net of the unemployment insurance system. How would you
respond to that complaint?
Ms. DeRocco. I think States have both the responsibility
and the capability to ensure a strong safety net program for
their workers and businesses. They have a tremendous incentive
to continue a strong unemployment insurance program, because UI
benefit payments enable workers who are temporarily unemployed
to maintain their opportunities to look for new jobs, maintain
their families, maintain stable communities at the same time
stronger employment services could more readily move unemployed
workers back to work into productive employment and livable
wages. This UI and ES system is a critical component of every
State's economic development agenda, and it is critically
important for their employers as well. I spoke about the
requirements that we would continue to impose on the States to
maintain a quality unemployment insurance program, and we would
do so by not changing the offset credit mechanism that is
currently in place.
Employers would not want their State to lose the offset
credit against the Federal tax and therefore, there would be
tremendous interest and pressure on State legislators and
Governors to ensure that the safety net program was strong in
the State.
Mr. McCrery. So in other words, the safety net won't be
gone under the Administration proposal. There will be Federal
regulations that States will have to comply with. Is there any
penalty under the Administration's proposal for States failing
to comply with Federal regulations?
Ms. DeRocco. Again, failure to comply jeopardizes the
employer's offset credit (i.e., 5.4 percent). Although we talk
about a reduction in the Federal unemployment tax to two-
tenths, in fact the tax would be set at a rate which allows the
employers in each State, which are adequately funding and
supporting an unemployment insurance and employment system, to
achieve that offset credit.
Mr. McCrery. Is the penalty for failure to comply with
Federal regulations any different under your proposal than it
is under current law?
Ms. DeRocco. No, sir, it is not.
Mr. McCrery. And you talked about what employees or former
employees would lose because of lack of administrative
financing. They would lose access to good employment services.
What about employers? If the State doesn't have an adequate
employment services administration, what do the employers lose?
Ms. DeRocco. As you know, I worked for 10 years under the
State unemployment insurance and employment service system, and
employers support a very, very strong system and an effective
labor exchange. It is their source for new employees. It is a
service that they need for their continued growth as they
create jobs; they turn to the employment service for new
employees, for a productive workforce, and they are most
interested in a stronger employment service and the Federal
Government has allowed them to maintain it through the return
on their investment.
Mr. McCrery. What about their tax rate? Is it affected by
poor employment services?
Ms. DeRocco. Under our proposal?
Mr. McCrery. Under current law or your proposal.
Ms. DeRocco. Actually, the employment service would be much
stronger under the proposal.
Mr. McCrery. Are employers experienced rated?
Ms. DeRocco. Yes.
Mr. McCrery. If they have laid off employees that get jobs
more quickly it affects their tax rate?
Ms. DeRocco. Absolutely.
Mr. McCrery. Both workers and employers have an interest in
strong employment services?
Ms. DeRocco. Absolutely they do.
Mr. McCrery. Unfortunately, Mr. Chairman my time has
expired.
Chairman Herger. I thank the gentleman. Now we will turn to
the gentleman from Maryland, Mr. Cardin, to inquire.
Mr. Cardin. Thank you, Mr. Chairman. First, let me say that
last year, we were given certain projections on the state of
our economy and what we thought was going to happen with the
projected surplus, and Congress and our Committee, the
Committee on Ways and Means, took definitive action based upon
projections. So excuse me for being a little bit concerned
about some of the projections that are currently being made.
You showed a chart on the impact on the Federal accounts
based upon the enactment of the recommendations, and although
the chart was difficult to read at the quick review, it looked
like a healthy line for the reserves that were being held in
case of need at the national level for a recession. Do you know
how much you assume would be consumed during that period of
time by the Federal Government on extended benefits shared with
the States?
Ms. DeRocco. For the 13-week extended benefits?
Mr. Cardin. Not the 13 weeks of new benefits, the current
extended benefit program that is in law with the easier
trigger. How much are you projecting that the Federal
Government FUTA taxes will be used or consumed during that
period of time in that chart on the Federal share of the
extended benefits of current law, not the 13 weeks additional?
Ms. DeRocco. One-point-seventy-five billion dollars, which
is on the far right on this chart. The cost that is under the
proposal, for 2 years.
Mr. Cardin. I am asking you how much do you assume during
the next 5 years in your chart. Not that chart.
Ms. DeRocco. You are talking about the----
Mr. Cardin. You had a 5-year projection where you showed
the Federal FUTA funds staying healthy, and I guess if you
could make available to our Committee how much you assume will
be used for extended benefits and/or loans to the States in
order to meet the needs during the next 5 years, I think that
would be helpful.
I am concerned that you are taking a very rosy projection,
and in fact, are not being realistic as to the need of that
fund if our economy does not perform as well as you think it is
going to perform, which was the case we saw a year ago. My
second question deals with why is the Administration ignoring
or walking away from the stakeholders' agreement of 18 months
ago? I mean, that agreement dealt with the administrative
costs. I agree with the gentleman from Louisiana. I think we
have to do something about the administrative costs and
predictability.
The stakeholders' agreement provided predictable financing.
It reduced the surtax and the FUTA tax, and it also dealt with
some issues that my friend thinks is controversial, but quite
frankly the elimination of the surtax in some quarters is
considered to be controversial but dealt with the fact that so
few people unemployed receive unemployment benefits today--less
than half. So it dealt with the part-time and dealt with more
recent wage quarters. Why?
I mean, here you have people with different views who are
the stakeholders in the system at last coming to an agreement,
and the Administration walks away from it.
Ms. DeRocco. This Administration was not part of the
deliberations on that agreement, but let me give you two
failings of that agreement. I think incredibly good work was
done, in fact, hundreds of proposals were looked at by the
stakeholders who eventually developed that particular proposal
in 2000. But there are two principal problems from this
Administration's standpoint. One, we stand on the principle of
the unemployment insurance system as it was originally
designed, which leaves to the States responsibility for
determining eligibility for benefits and benefit levels.
We continue to believe that is a State prerogative and
should remain a matter of State law, and we believe that the
national association representing the States in this matter
believe that as well.
Secondarily, that proposal for an administrative financing
fix essentially moved to a very, very robust workload type
formula, and then moved it to the mandatory side of the Federal
budget. And both the Administration and many, many Members of
Congress have essentially told us that they would not consider
putting administrative funding on the mandatory side of the
budget as an entitlement program. So those were the two
principal failings in that proposal.
Mr. Cardin. I am glad you didn't mention the expansion--
well you did mention flexibility. I regret that. Let me ask one
more question for the record, because my time is expiring, and
the Chairman is very strict on the clock. If you could make
available for our Committee how many States you think would
actually reduce their funding for the administrative side,
assuming the Federal Government uses the .2 for the Federal
functions which is what you are assuming. I think the States
would have to impose a .4 in order to stay about equal on their
administrative support. How many States you project would
actually have less funds available to deal with the more
complicated administrative side of the UI system?
Ms. DeRocco. We have done that analysis, and I will be glad
to provide it for the Committee.
[The information follows:]
It is in a state's best interest to provide good service to its
citizens, so they have motivation to properly fund administration of
the Unemployment Insurance (UI) and Employment Service (ES) Programs.
Combining that observation with the fact that administrative funding
has not kept pace with the cost increases since at least the middle
nineties for UI and the middle eighties for ES, it is not clear that
any state would reduce funding for administration.
If states had to rely on the revenue equivalent of 0.4% on a $7,000
wage base, 26 states would not have generated enough revenue in 2001 to
cover the grants they received from the FY 2001 appropriation. However,
14 of those states are ``small'' states which would be given
supplemental funds under the proposal. While all 26 states would need
to increase taxes above the 0.4% level, only 12 would do so without any
supplemental funding from the Federal Government.
Chairman Herger. I thank the gentleman. I just might note
for the record that my understanding is that currently we have
14 States that have special State taxes to pay for the
administration because the average is only 46 cents out of the
dollar that they are receiving. Those States include Alabama,
California, Colorado, Georgia, Idaho, Kentucky, Louisiana,
Minnesota, Montana, North Carolina, New York, South Carolina,
and Washington.
So it would seem to me that if we go ahead with this, those
States will be able to lower, if not eliminate, those extra
taxes that they already have. With that, I turn to the
gentlelady from Connecticut, Mrs. Johnson to inquire.
Mrs. Johnson. Thank you and welcome. This is a very
important subject and has received a lot of attention both in
the private sector and by this Committee over a number of years
now, and so I welcome your work in this area. The States,
however, have raised a number of questions, which I am sure you
must have seen about your proposal. Would you like to comment
on any of them? Are you familiar?
Ms. DeRocco. I am aware that they have a list of questions.
I don't have them in front of me.
Mrs. Johnson. I thought maybe you might have seen them
because they are substantial, and one of them does go to this
issue of whether the funds--you know, how they would do over
time under this funding change. And I think all of us will need
to understand that.
Ms. DeRocco. Is the question related specifically to the
small States? I know there was a misunderstanding that the
commitment to supplementing the small State funding was only
for a 10-year period, and that was a misunderstanding. We have
a commitment to continue the grants to small States to ensure
that they are not in a position of having to have tax
increases.
Mrs. Johnson. And while I appreciate your comments about
part-time employees and feeling that States should be setting
those standards, we do have a number of States that have been
covering part-time employees. And I would hope that, and I
would ask that you do some research on what might be the
definition of permanent part-time employee. I personally think
it is extremely important that we allow, for example, a parent
who is working part-time, desperately needs to work because one
salary is no longer enough. But by working part-time, can
adjust the schedule, so that the couple together do not have
babysitting or day care costs.
You know that is better for the children. It is far more
economical, and it is the only way that a lot of young families
are surviving. So if you get laid off from your part-time job
to be required as a condition of receiving compensation to be
available for full-time work is counter effective to many of
society's long-term goals.
So I would hope that you would begin looking at, do any
States provide special benefits to someone who has small
children or a disabled person at home. There are definable
circumstances, at the very least, that I think if the Federal
Government helped define, we could make progress on it. We
could determine whether that should be mandatory or voluntary,
but at least we need better criteria.
And I wonder on your work in unemployment compensation, you
have done any review of how effective State standards are in
overseeing whether people are really looking for work? Given
our experience now with welfare reform, we have much better
ways of helping people into the workforce, overseeing their
progress in the workforce. And I know when I look at the new
information management system that my Commissioner of Labor in
Connecticut wants to put together. I mean, he has got it
integrated in his computer, and it is going to cost $4 million.
He could do a much better job in helping people in any
situation into the workforce and then moving up the wage
ladder.
I think that is an aspect of this whole system that your
proposal doesn't focus on and that I think any reform needs to
focus on. So while we may want to step back, I think there are
standards that we need to begin to think about for States that
will address the kind of workforce development that we need in
the future. We don't just need unemployment compensation. We
need workforce development. And so to make this big a change
without any mandate on the States, so to speak, for which we
are going to hold them accountable, is, in my estimation, not
adequate to the future.
Ms. DeRocco. If I may comment, Mrs. Johnson, on two points.
One, I believe the State commissioners of Labor and the
Governors have a very, very strong interest in taking a system-
wide approach to serving workers and businesses in their
States. And our proposal, in fact, provides to the States a
greater opportunity to integrate and work through both the
Workforce Investment Act and the unemployment insurance, and
employment services to build an integrated service system that
speaks to the very issues you are speaking to.
Mrs. Johnson. Does it, in any way, strengthen that mandate
in the law? Does it change wordings because I think that is
what you need to get back to us on.
Ms. DeRocco. Absolutely. We are proposing to make the
employment services a conformity issue. We are continuing all
the requirements of the Social Security Act, vis-a-vis the
workers that are covered by unemployment insurance, and we are
continuing the strong Federal role of oversight, national
standards, and moving to a much more fully integrated system on
behalf of businesses and workers in the country.
I think you will find that under this proposal, Connecticut
and your Labor Department would take a very, very strong role
in that integrated service, and in better recognizing the
demographics of your worker population and better serving those
workers who have family requirements or challenges be they
physical or otherwise among the disabled community. We are
cognizant of all of those and we are eager to work with the
States to move to a much more integrated and effective system.
Chairman Herger. Thank you very much. I thank the
gentlelady from Connecticut. Now the gentleman from Michigan,
Mr. Levin, to inquire.
Mr. Levin. Thank you. By the way, Mrs. Johnson, I very much
agree with your statement about the need for unemployment comp
to have a broader focus. But let me ask you this, who controls
the expenditures for administrative expenses now, the Congress?
Ms. DeRocco. Yes.
Mr. Levin. Now if the Congress wanted to appropriate
adequate funds, it could do so, right?
Ms. DeRocco. I assume it could, yes.
Mr. Levin. So one alternative is for you to come here and
say to Congress, spend trust fund moneys the way they were
supposed to for administrative expenses, right?
Ms. DeRocco. I think every administration makes a request
for administrative dollars for the system.
Mr. Levin. You can do that without talking about
devolution, right?
Ms. DeRocco. I don't believe I am talking about devolution
now, but yes.
Mr. Levin. So essentially, it has been the failure of
Congress to appropriate adequate funds, right?
Ms. DeRocco. I think there has been a shared responsibility
of the Administration and the Congress to make a determination
on the amount of money that is returned to the States from this
payroll tax.
Mr. Levin. Well, you have the irony that a lot of those who
had responsibility for appropriating adequate funds in this
Congress are now suggesting that we do something else instead
of appropriating adequate funds. We don't need to change the
system to appropriate adequate funds, do we? We just
appropriate them.
Ms. DeRocco. Well, I don't envy you the budget pressures
that you have to deal with every year.
Mr. Levin. So, the answer is avoid the budget pressures and
simply let the States do it?
Ms. DeRocco. I believe the answer is let the States be the
taxing authority on their employers and keep their payroll
taxes from their employers at home.
Mr. Levin. So that is your basic assumption, and I am glad
you stated that boldly. Now what happens when there is a
recession nationally and there is a need for very substantial
funding from one State to another? Let me just give you an
example, and I use Michigan. In 1992, the Federal unemployment
taxes were $188 million. The Federal--this is during the last
recession--spent $719 million. That is in 1 year. Now if we
have a serious recession, where is the funding going to come
from Federally to help the States?
Ms. DeRocco. We are proposing to maintain the unemployment
trust fund, which is what you saw on the slide; it continues to
grow even at a two-tenths FUTA tax; we retain the Federal
unemployment account, which Congress created in order to make
loans available to States when they ran into difficulties and
deep recessions.
Mr. Levin. And this is Mr. Cardin's question. We need a
very, very clear-cut answer. You are saying now we are taxing 8
percent, we can reduce it to 2 percent and that will have
enough money in it to handle all of the functions including
unemployment comp extension. We are now talking about a
federally funded unemployment extension, a redone, extended
benefit structure that with two-tenths of 1 percent that you
can say to this Congress for the next 5 to 10 years that we are
going to have adequate moneys?
Ms. DeRocco. That is presently what our actuaries have
reported to us.
Mr. Levin. You should give us all of the assumptions.
Ms. DeRocco. We will do that.
Mr. Levin. Do you have them here?
Ms. DeRocco. I will be more than glad to.
Mr. Levin. Have you made them part of your presentation?
Ms. DeRocco. They were represented by one slide, yes.
Mr. Levin. It just stated the conclusion.
Ms. DeRocco. It illustrated by a bar chart, the level of
the unemployment trust funds Federally held through, I believe
2012.
Mr. Levin. Let me ask you this in terms of leaving it to
the States. On the average today, what percentage of the
unemployed people that become employed are covered for
unemployment comp under State standards?
Ms. DeRocco. Nationally--we have another chart that
illustrates this. The number of job losers who are those, as
you know, who are eligible for unemployment insurance, 83
percent in UI claimants.
Mr. Levin. No. But those who become unemployed, what
percentage receive unemployment compensation?
Ms. DeRocco. That is the figure that I believe someone
heard used that was in the neighborhood of 40 percent, but that
is really a misrepresentation of the unemployment insurance
system which was designed as temporary wage replacement for
individuals who are in the ``covered'' workforce; how many of
those individuals are eligible for unemployment insurance.
Mr. Levin. So you are saying it is irrelevant that on
average nationally, 40 percent for those----
Ms. DeRocco. Forty-nine percent.
Mr. Levin. I am not sure. There is dispute about that. But
that is the latest. It has been low, as low as 40 percent, has
it not? You say it is irrelevant that 40 percent, or now 49
percent of the people who become unemployed, are covered with
unemployment compensation?
Ms. DeRocco. I am not saying it is irrelevant at all. I am
saying that job leavers, people who leave their jobs, new
entrants who don't have work attachment, the unemployment
insurance system was not designed to cover that, never has
been. And if there is a different design sought for an
unemployment insurance system that would cover even a new
entrant that spends a couple of weeks on the job and decides to
leave and look for a different kind of job, that is not what
the unemployment insurance system is all about.
Chairman Herger. The gentleman's time has expired. Again, I
want to thank you. I think the purpose of this hearing is to
show and emphasize how inefficient the current system is. For
example, the gentleman who was just inquiring in his State of
Michigan of every dollar that is paid in unemployment taxes,
only 50 cents is returned to your State.
Mr. Levin. Will the gentleman yield? What was the
percentage in 1992?
Chairman Herger. I don't know that, but we can certainly
find out?
Mr. Levin. Is it relevant? Yes. And I will ask Ms. DeRocco,
what is your hunch in 1992, what percentage of the dollars sent
in from Michigan was returned to the State?
Ms. DeRocco. I am sorry----
Mr. Levin. It would be several hundred percents, wouldn't
it?
Chairman Herger. Reclaiming my time, in my own State of
California, we don't get as much back. Only 46 cents.
Mr. Levin. When California was in a recession in 1991,
1992, what percentage----
Chairman Herger. Again reclaiming my time, the point is the
system is not working. It should not be that only 46 cents out
of a dollar is returned on average to a State, and that we
actually have 14 States who were forced to put in their own tax
and make up the difference--to be able to implement their
unemployment programs. It shows that we have a major problem.
And Ms. DeRocco, I would like to ask a question if I could, the
President's plan calls for reducing Federal unemployment taxes.
These Federal unemployment taxes are payroll taxes, which means
they tax and thus discourage employment.
What effect would you project reducing these payroll taxes
might have on businesses and their ability to hire new workers?
And I might mention, you had a graph up here a little earlier
when you were testifying, and maybe we could put that back up.
Ms. DeRocco. This is the extended benefits graph.
Chairman Herger. Why don't we address the first question
first.
Ms. DeRocco. Clearly, and employers, as I know you will
have represented on the next panel, will speak to their
opportunities for job creation and job growth as payroll taxes
on employers are lessened. And although we are shifting
responsibility to the States for approximately $3.5 billion in
administrative costs, that is about what it runs now, the
payroll taxes we are reducing amounts to about $5.5 billion.
There is a lot of buffer in there for States to have the
option of increasing extended benefits if, in fact, that is the
State's decision or to further reduce the employer taxes, which
gives to the employers the opportunity to expand production, to
increase jobs and to be an economic development factor in their
States. And I think that is an important opportunity that this
proposal opens. Specifically, on the extended benefits chart
you asked about, this depicts the number of States and workers
that would be impacted by the proposal to lower the extended
benefit trigger from 5 percent to 4 percent.
[GRAPHIC] [TIFF OMITTED] T9437A.019
[GRAPHIC] [TIFF OMITTED] T9437A.020
[GRAPHIC] [TIFF OMITTED] T9437A.021
Chairman HERGER. Thank you. The gentlelady from
Connecticut.
Mrs. Johnson. I just want to follow up on some information
that it would be helpful if you got back to us. This chart that
you have, impact on Federal accounts, that really needs to show
what under current law the Federal Government would collect and
what portion of what we would collect would automatically be
returned to the States, because I think that goes to my
colleague from Michigan's question. If collections are going to
go up, but they will automatically go back out to the States
under the Reed Act, then what is the remainder and what will be
the impact of your tax reductions? And then you will be down to
that bar chart. And then if you could further accommodate that
bottom line below the bar chart for--if there is a recession
or, you know, various factors, at what point--how much economic
damage would we have to sustain before we would not only begin
to touch the growing reserves which will continue to grow but
deplete them? So I think that is where we--because that is one
of the big issues the States are asking you to know of. So
thank you.
Chairman Herger. I thank the gentlelady, and now the
gentleman from Texas, Mr. Doggett, to inquire.
Mr. Doggett. Thank you so much and thank you for your
testimony.
Do you share the general view of some that if unemployment
and health care benefits for the unemployed are too generous it
will discourage people from seeking employment?
Ms. DeRocco. I know we have some studies that indicate more
benefits or higher unemployment benefits tend to increase
duration. But, however----
Mr. Doggett. You mean to increase the----
Ms. DeRocco. Duration on unemployment. The extended benefit
provision sometimes increases duration in unemployment. I would
like to believe, however, that most people would much prefer a
job.
Mr. Doggett. Can you forward those studies to the----
Ms. DeRocco. Yes.
Mr. Doggett. Committee?
Ms. DeRocco. Yes, sir, we will.
[The study is being retained in the Committee files.]
Mr. Doggett. Do you believe that it is prudent for a State
to cut taxes during periods of prosperity and to double them
during periods of recession on their unemployment tax?
Ms. DeRocco. That is a very general question, and I do
believe that States are competent administrators of their
financial situation and that some choose to leave money in the
economy to keep their businesses growing and create jobs.
Others might choose to----
Mr. Doggett. It is actually intended to be a very Texas-
specific question.
Ms. DeRocco. I thought it might.
Mr. Doggett. And not general, and I guess you have answered
the question, that you consider a program of cutting taxes,
unemployment taxes at the State level, during periods of
prosperity and doubling them during periods of recession, which
appears to be what it is going to take in Texas, is an example
of prudent administration of the State plan by the State?
Ms. DeRocco. I am not aware that the State of Texas needs
to double its taxes, but you are probably better----
Mr. Doggett. That is what is reported on Texas, but then
just take it as a hypothetical. Do you think if a State cuts
taxes on unemployment during periods of prosperity and doubles
them during periods of recession that is an example of prudent
administration?
Ms. DeRocco. I think that, particularly as it relates to
the State unemployment tax and the level of the State's
reserve, that should be and has been a State decision. And if
it was Texas' decision or New York's decision to keep money in
their economy rather than to increase the taxes on businesses
in order to keep their economy growing and then to take
advantage of the fact that the Congress and the Administration
created a loan account for the very purpose of those States who
chose to seek a loan during periods when their reserves did
not--were not adequate to----
Mr. Doggett. Then you applaud the decision and cite it as
an example of their competence?
Ms. DeRocco. That is not the Employment and Training
Administration's preferred approach to trust fund reserves. We
do have guidance that indicates that there should be an average
high-cost multiple in their reserves of 1.0. There are many
States who do not maintain that.
Mr. Doggett. I believe that is true, and given the short
time that I have, is it correct, then, that under the
Administration plan, that in less than 5 years when States like
Texas assume all the administrative cost, unless they choose to
raid their trust fund, regardless of the economic conditions
that exist in 2007 and beyond, that they will have a choice of
either cutting benefits or raising taxes?
Ms. DeRocco. No, I do not believe that. As I indicated
earlier in answer to another question, we are shifting
responsibility to the States for about $3.5 billion in
administrative costs. Sixty-five percent of those
administrative costs are not related to benefit levels. We are
at the same time reducing the payroll tax at the Federal level
by $5.5 billion. So there is ample opportunity for the States
to adjust their tax level to ensure they can provide the same
level of service.
Mr. Doggett. So you think basically a little like last
year's budget proposal. They can have it all, they can keep
taxes low, they can provide the same level of benefits and
satisfy all of their administrative needs?
Ms. DeRocco. I believe States have the fiscal capability
and the administrative capability to manage administrative
funding for this system.
Mr. Doggett. As to the point that Mr. Levin was just
making, isn't it correct that taking a snapshot of a State's
return on its unemployment tax dollars in a single year without
regard to the economic conditions is not very insightful, since
the entire purpose of having a Federal backstop involves the
Federal Government sometimes providing hundreds of percent
return on the Federal unemployment tax dollars and sometimes
providing only a fraction of the return of the dollars,
depending on economic conditions?
Ms. DeRocco. I can only tell you that for 10 years of
working with the States, specifically on their return on the
dollars their employers are putting in the Federal Unemployment
Trust Fund, that they have spoken for a decade about inadequate
return of their payroll dollars.
Chairman Herger. I thank the gentleman, and I can see why
the gentleman from Texas is concerned. Currently the State of
Texas is only receiving 32 cents out of every dollar of the
FUTA taxes collected in Texas. So there would be money left
over so that even if Texas was to begin collecting their own
taxes there would still be a lot of money left over.
Mr. Cardin. Would the gentleman yield?
Chairman Herger. Yes.
Mr. Cardin. I know you keep and will continue to mention
the impact on each of one of our States. I would just ask that
we have made available for the record the last 10 years, the
last 20 years how much money has been returned to the States
through these funds. If you pick 1 year where there has been
very little use of the funds for dealing with a recessionary
problem, obviously it is going to be impacted in a negative
way.
Also I might say, Mr. Chairman, many of us have been
urging, including, I believe, the gentleman from Louisiana,
that the Congress do the right thing on the administrative
cost, and we haven't done the right thing on the administrative
cost. One thing is clear, that if this proposal were to be
enacted, it would mean a $16 to $18 billion loss of revenues at
the Federal level.
The question whether the States will make that up or not is
uncertain, and I know we can keep on talking about our
individual States. Many of us are concerned that our individual
States have enough administrative support, and we don't know
what is going to happen. We know under current law the
structure is in place. It has not worked the way it should, but
I think it is just unfair to keep on mentioning 1 year we
should have the historical number.
Mr. McCrery. Would the Chairman yield?
Chairman Herger. Yes.
Mr. McCrery. I appreciate the gentleman's point, and I
don't think anybody would deny you that information. However, I
do believe it is irrelevant. The system is designed to provide
States much more money during times of high unemployment.
Extended benefits shouldn't be in the mission of administrative
funding for the States. Year after year after year after year
there is inadequate administrative funding for the States, and,
yes, it is our fault, we the Congress, because we have not
appropriated sufficient funds for them, but don't mix that up
with the extended benefits program, which is designed to be
Federally funded to the tune of 50 percent. So it is just
mixing apples and oranges. So----
Mr. Cardin. I agree.
Mr. McCrery. You all can keep making that point. It is
irrelevant. I object.
Mr. Cardin. I agree with you.
Chairman Herger. I would like to request that information.
Ms. DeRocco. Yes, sir.
[The information is being retained in the Committee files.]
Chairman Herger. The fact that we do know is that these
numbers are accurate now. They are numbers that would appear to
be growing. It would appear that the trust fund, rather than
becoming smaller, continues to grow, and with that, I will turn
at this time to the gentleman from Michigan----
Mr. Doggett. Could I just inquire of you, Mr. Chairman, to
broaden the request to include one other factor? And that is
along with that, in that same table, that she would give us for
however many years you are going to do it, show as to each
State how many of the people who are actually unemployed in
that State are covered by the system. In Texas it is about one
out of four, and since the administrative costs are related to
the workload, one of the reasons we have such a low return is
that we are covering so few people that are unemployed and it
would be useful to have that----
Chairman Herger. Again, reclaiming my time, that is the
State's decision to make that. If we could just get the
original question answered, we would appreciate it.
Again, now I turn to the gentleman from Michigan, Mr. Camp,
to inquire.
Mr. Camp. Thank you, Mr. Chairman. I have a question really
that kind of follows up on Mr. McCrery's comments, and that is
that the President's budget is making suggested changes in the
administrative financing of the unemployment insurance program.
Is there any discussion of changing the benefit levels
involved?
Ms. DeRocco. The weekly benefit levels? Again, we believe
that is a matter of State law, has always been a matter of
State law, and should continue to be a matter of State law.
Mr. Camp. The only change would be then in changing the
rate at which the extended benefits would be triggered. Is that
correct?
Ms. DeRocco. Correct. We do propose lowering the trigger
rate for extended benefits.
Mr. Camp. From 5 to 4 percent?
Ms. DeRocco. Correct.
Mr. Camp. And would that be a permanent change under the
President's plan?
Ms. DeRocco. Yes.
Mr. Camp. So that would then incorporate the temporary
extension of unemployment benefits that were in the House-
passed stimulus bills in December and February?
Ms. DeRrocco. Yes. The President has supported the 13-week
temporary extension of benefits as a short-term strategy. The
long-term strategy envisioned is to lower the trigger rate so
that more States trigger on in a recession, covering more
workers.
Mr. Camp. All right. Thank you very much. Thank you, Mr.
Chairman.
Chairman Herger. I thank the gentleman from Michigan. The
gentleman from Oklahoma, Mr. Watkins.
Mr. Watkins. Mr. Chairman, I don't have any questions. I
will apologize to you and the panel and all. I just got here
just a while ago on the airplane. I normally leave at a 3:00
a.m. flight out of--I leave Stillwater about 3:00 a.m. and get
to Oklahoma City, but this morning after the snow and ice I
scraped a little bit of that before I left, and I left on the
5:00 a.m. something flight or a little later flight. So I
apologize. I don't have any questions. Glad to be here, though.
Chairman Herger. I thank the gentleman from Oklahoma. Your
participation is always appreciated. With that, we thank you,
Assistant Secretary.
Mr. Cardin. Mr. Chairman, I know you have been very
generous of time. Could I just ask one more question today?
Would that be possible?
Chairman Herger. Yes, a quick question.
Mr. Cardin. It will be a quick question. The question will
be very quick. But my question is, if the House were to pass
the exact same bill the Senate has passed on the 13-week
extension, would the Administration sign it?
Ms. DeRocco. I am sorry. I am not here to state the
Administration position on the ultimate result of the economic
security deliberations.
Chairman Herger. Again, for the record we have passed it
out of the House three times, almost four, and the Senate is
yet to act. With that, I would like to excuse you and thank you
for your testimony and ask our next panel to come to the
witness table, please.
On the second panel this afternoon we will be hearing from
Chuck Yarbrough, Chairman, Board of Directors of UWC--Strategic
Services on Unemployment and Workers' Compensation; Christine
Owens, Director of Public Policy, American Federation of Labor
and Congress of Industrial Organizations, AFL-CIO; Dan
Blankenburg, Manager, Legislative Affairs, National Federation
of Independent Business; and we also, I understand, have a
constituent of the gentleman from Oklahoma. Would you like to
introduce the witness, Mr. Watkins?
Mr. Watkins. Mr. Chairman, Members of the Committee, it is
my honor, really very much so, to introduce the gentleman. He
is our Executive Director of the Oklahoma Employment Security
Commission, but Jon Brock is more than that this year. He is
now President of the National Association of State Workforce
Agencies. So I am very proud of the fact of his position and of
the distinction there. I think it shows what credibility he has
got and the reputation he has got with his colleagues in the
workforce area.
So I am very pleased that he is with us today. Jon, I am
glad that plane got down so I could get here.
Chairman Herger. Thank you, Mr. Watkins. With that we will
begin the testimony with Mr. Yarbrough.
STATEMENT OF CHUCK YARBROUGH, DIRECTOR, CORPORATE HUMAN
RESOURCES, TYSON FOODS, INC., SPRINGDALE, ARKANSAS, AND
CHAIRMAN, BOARD OF DIRECTORS, UWC--STRATEGIC SERVICES ON
UNEMPLOYMENT & WORKERS' COMPENSATION
Mr. Yarbrough. Thank you, Mr. Chairman, and members of the
panel. I appreciate the opportunity to be here today.
My name is Chuck Yarbrough, and we were very pleased to
learn that the Committee was having hearings today on President
Bush's proposal on Administration finance reform.
We hope to acquaint you with some of the employer concerns,
and as Chairman of UWC, I would like to first talk about a few
things that we support. First of all, we do support a strong
unemployment insurance and employment service system with a
limited Federal role.
Second of all, we support a strong UI/ES system that
provides fair and affordable benefits to the citizens of our
State. UWC supports moving the FUTA trust fund moneys to the
States so that we can have more local control regarding how
benefits are determined and taxes are assessed.
The UWC supports a two-tenths reduction in the FUTA tax
rate. This two-tenths surtax has been in effect for more than
25 years and is due to expire in 2007. But UWC members are
concerned that many States may increase their UI taxes to
compensate for the six-tenths reduction in FUTA taxes contained
in the Bush Administration proposal. The UWC wanted to amend
the proposal to prohibit the States from increasing their UI
taxes by more than $28 per year.
In general, we support the Administration's proposal to
transfer the financial responsibility for administering the UI/
ES system to the States. But we also believe that including any
expansion of benefit eligibility in the proposal will threaten
the solvency of State trust fund accounts. A risk of insolvency
will create pressure to decrease benefits.
I am a member of the Governor's Workforce Agency Advisory
Council at home, where it is made up of business and labor and
public members. I have a letter of support from our Governor on
the President's proposal. One issue that our State, Workforce
Investment Agency, and employers have experienced is that while
we have continued to pay a 25-percent surtax, our employment
service staff has been reduced. We have seen our State UI
agency lay people off in order to give other employees merit
increases.
Employment offices are also no longer certifying that the
workers they refer to us are eligible to work in the United
States. We have seen continued limited monies for services,
both for employees and employers who go to UI offices for help.
We have had to open up our own Main Street recruitment offices
to provide the labor and workforces that we need, while UI
offices continue to reduce the number of their employees who
could refer trained workers to us.
And again some employer communities have struggled with the
employment verification process that has been delegated to us
when the States could have definitely provided that service for
us.
We also support allowing States access to the National
Director of New Hires to prevent fraud. We feel like that would
certainly help us, but also I would like to say if they could
use--the agency could use that, the wage history that is
involved and the person's work history that has a claim and
also add the basic pilot program from the Justice Department,
then that would ensure that all workers referred by the
Employment Security Department would be eligible to work in the
United States. That would be a real plus for the Employment
Service to be able to hang that banner outside. This means that
all work being performed on government contracts would be done
by workers who are eligible to work in the United States.
We have been here several times to talk about many
different proposals in the last 10 years, from Shaw, to McCrery
1, to McCrery 2, to the current President's reform. All I can
say, help. We are overtaxed. We are understaffed. We are
underequipped. And 50 percent of our employment security
employees will be retiring within the next 2 or 3 years. Some
agencies haven't made hires in over 15 years, and they are not
going to have anybody or any knowledge to carry on the system.
We have got to cut some money loose.
We need to elevate the statewide services of first choice
to refer trained workers coming out of the Workforce Investment
Act 1998. We need to be able to refer laid off workers as soon
as possible as a first choice, and we need to be able to
guarantee the eligibility of the workers that they refer.
Three things I want to leave with you: Universal agreement
to reform administrative funding. Everyone agrees that needs to
happen. Congress should take a strong look at the
Administration's proposal, because it does bring a workable
solution to this problem, as have many other things brought to
this panel.
We have sought reform for 10 years, but don't let this
Congress close without taking action on behalf of the workers
and the business community, because we are waiting. Because my
Governor said in his last paragraph to the Secretary this
proposal is not only good for States but, more importantly, it
is good for American workers and business.
As a debate on the reform for UI insurance and unemployment
insurance proceeds, I hope that we can all work together to
benefit America's workers and business. Thank you.
[The prepared statement of Mr. Yarbrough follows:]
Statement of Chuck Yarbrough, Director, Corporate Human Resources,
Tyson Foods, Inc., Springdale, Arkansas, and Chairman, Board of
Directors, UWC--Strategic Services on Unemployment & Workers'
Compensation
Good afternoon, Mr. Chairman and Members of the committee. My name
is Chuck Yarbrough, and I am Director of Corporate Human Resources for
Tyson Foods, Inc., the nation's leading producer of protein consisting
of poultry, beef and pork, as well as other convenience food products.
I am testifying on behalf of UWC--Strategic Services on
Unemployment & Workers' Compensation. I am proud to serve as the
Chairman of the UWC Board of Directors. UWC, which was founded in 1933,
is the only business organization specializing exclusively in public
policy advocacy on national unemployment insurance (UI) and workers'
compensation issues. UWC is intimately acquainted with UI laws; our
research arm, the National Foundation for Unemployment Compensation &
Workers' Compensation, publishes numerous materials on UI, including
the annual Highlights of State Unemployment Compensation Laws. I have
also been a member of the National Employers Council (NEC). I served as
NEC's elected representative for employers in the Department of Labor's
Region VI (Arkansas, Louisiana, New Mexico, Oklahoma, and Texas). In
this capacity, I represented employers before the Department of Labor
(DOL) and state employment security administrators.
We are pleased that the Human Resources Subcommittee is holding
these hearings today on the Bush Administration UI reform proposal. We
appreciate the opportunity to acquaint you with the concerns of
employers and provide our recommendations on how to maintain a sound UI
and employment services system, especially relating to proposals for
administrative financing reform.
UWC supports a strong UI/ES program through which employers provide
fair and affordable insurance benefits for a temporary period of time
to workers with a strong attachment to work who are temporarily and
involuntarily jobless when suitable work is no longer available. UWC
believes that a sound UI program is best embodied through the state UI/
ES system, with a limited federal role where uniformity of state law is
considered essential.
The principal federal role in the UI system is to provide
administrative financing. Unfortunately, the present administrative
financing system is not working effectively. Workers are under-served,
employers are over-taxed, and state UI/ES agencies are under-funded.
Under the current system the Federal Government holds 100% of Federal
Unemployment Tax Act (FUTA) receipts but returns only 50% to the
states.
Major employer concerns with the present federal role in the UI
system can be summarized as follows:
The FUTA tax rate is excessive and resulting FUTA surpluses
are not being returned to state UI trust accounts as required by the
Reed Act.
Under current law, the Federal Unemployment Tax Act (FUTA) rate is
0.8%. This rate is 25% too high as the result of a 0.2% ``temporary''
surtax which is no longer needed. Although FUTA funds are held in a
trust account and may be expended only for limited purposes spelled out
by statute, the surtax is now being maintained only because inclusion
of FUTA funds in the unified federal budget makes more money available
to meet budget targets for other spending programs. The practice of
counting FUTA funds for spending on other programs, leaving only an IOU
and an accounting entry behind, is contrary to the very reason why
Congress placed these funds in the Unemployment Trust Fund in the first
place. In effect, the budget rules allow the misuse of FUTA funds for
purposes unrelated to the UI/ES system.
Congress originally imposed the surtax more than 25 years ago to
pay for a temporary federal program of supplemental unemployment
benefits. The surtax was to expire upon the retirement of this deficit.
The deficit was paid off in 1987 but the surtax has been extended 4
times and now expires at the end of 2007.
Despite the fact that the ceilings on the FUTA accounts in the
Unemployment Trust Fund were doubled when the surtax was last extended,
balances in these accounts now far exceed their statutory ceilings.
When the FUTA accounts are all at their maximum, as they are today and
into the foreseeable future, a law known as the ``Reed Act'' requires
any amount above the ceiling to be distributed into the state UI
benefits accounts. Last October DOL reported to Congress that over the
next 10 years, Reed Act distributions will total $43 billion. While
these projections have now been somewhat reduced, a substantial Reed
Act distribution of $3.2 billion is projected for FY 2003. These Reed
Act funds are urgently needed to replenish state UI benefits trust fund
balances that have been drawn down in the aftermath of September 11 and
the recession. Reed Act funds may also be used by states, upon state
appropriation, to supplement state UI/ES administrative funding,
eliminating or reducing the need for supplemental state UI taxes.
Let me repeat: The revenue from the FUTA surtax is not needed for
the UI program. Only 50 cents out of every FUTA dollar is being spent
as intended on administration of the UI program and state employment
services. Furthermore, no additional accumulation of funds in the
account used to pay the 50% federal share of extended benefits (EB) is
necessary to meet foreseeable needs, including temporary extensions of
UI duration that have recently passed the House and Senate.
State administrative grants are inadequate for efficient
administration, resulting in quadruple taxation of employers.
To effectively serve their customers, UI/ES agencies must be
efficiently administered. In recent years, this goal has been
frustrated because federal appropriations for state UI agencies have
been inadequate, leading to a reduction in services for jobless workers
and employers. UI claimants in turn draw additional weeks of UI
benefits. This situation results in higher state UI benefit costs and
in turn, higher payroll taxes to finance the additional weeks claimed.
Because state UI taxes and benefit payments are also included in the
unified federal budget, inadequate funding for administration also
increases federal outlays.
The hidden consequences of inadequate administrative funding also
results in more fraud and abuse. The latest Department of Labor
statistics show that 9.5% of UI payments are estimated to be improper.
Last year the Senate Government Affairs Committee issued a report
called ``Government at the Brink'' that included UI fraud as one of
``The Federal Government's Top 10 Worst Examples of Mismanagement.''
Because of inadequate federal administrative grants for state UI/ES
agencies, employers have been asked to pay a second, third, and fourth
time for the same service for which FUTA taxes are assessed--amounting
to quadruple taxation. The inadequate federal grants have directly
increased the state tax burden on employers in several ways.
Many states have been forced to dip into their own
general revenues or impose new add-on payroll taxes on employers--above
and beyond the state tax used to finance UI benefits--to make up some
of the shortfall in FUTA funding from Washington. Most of the
additional tax burden directly or indirectly falls on employers.
In addition to the add-on taxes, basic state UI taxes are
inflated because workers are collecting additional weeks of UI
benefits. A recent estimate showed that the average duration was 2
weeks longer than expected at comparable levels of unemployment.
On top of paying higher state taxes, many employers are
forced to expend additional resources for employment services they have
already paid for through FUTA but don't receive because states have
been forced to close offices and eliminate employment counselors and
other services. This has been an acute problem for workers in rural
areas and others who are costly to serve. My own company has actually
paid the rent to keep the local employment service office open in
Carthage, Texas.
Freeing FUTA funds already contributed by employers for the very
purpose of providing efficient and effective UI and ES services will
eliminate the need for supplemental taxes and unnecessary indirect
expenses.
SOLUTIONS
To fix these problems, UWC has been a staunch advocate of reform of
the administrative financing system for state UI and employment
services (ES) agencies. This reform is urgently needed to strengthen
the state unemployment insurance and employment services (UI/ES) system
and deliver the services for which business has paid through our
Federal Unemployment Taxes. Reform will also provide funds needed to
implement the Workforce Investment Act.
Although there is great controversy regarding proposals for federal
expansions of UI eligibility and benefit levels, there is a consensus
in support of administrative financing reform. Reform will help jobless
workers return to employment more quickly, reduce payroll taxes, and
alleviate the financial pinch on state administrators. Now that's what
I'd call a ``win-win-win'' situation.
However, while there is agreement on the need for administrative
financing reform, a consensus regarding the right way to achieve it has
not yet formed. There are several proposals to improve and simplify UI/
ES administrative financing reform which recently have been under
active consideration.
In evaluating these proposals, UWC believes there are 3 core
ingredients:
1. Eliminate the unnecessary ``temporary'' 0.2% Federal
Unemployment Tax Act (FUTA) surtax on employers, which should have
expired in 1987.
2. Impose employer taxes to finance system administration
consistent with sound UI operations needs rather than inflexible
federal budget rules.
3. Financing for UI/ES administration is provided at adequate
levels, avoiding both under-funding and excessive taxes.
Specific criteria which should be applied in implementing these
principles are attached to this state.
One approach, on which we testified before this subcommittee on
February 29, 2000, was introduced in the 105th Congress and
reintroduced in the 106th by Rep. Jim McCrery, with bipartisan support.
This approach had the support of an informal coalition of more than 100
business organizations and 34 states and is therefore known as the
Coalition approach. UWC launched and served as the business leader of
this coalition.
The McCrery bill eliminated the 0.2% FUTA surtax but preserved the
remaining 0.6%. However, instead of pooling all FUTA payments in a
single federal UI/ES administration account (ESAA), subject to
Congressional appropriations and an allocation among the states
theoretically based on workload, FUTA taxes paid by employers in each
state are credited to a new administration account set up for each
state. Each state legislature, rather than Congress, determines how
much it needs to administer its own UI/ES program. A small amount is
transferred into a special account to be used for supplemental grants
to small states which need additional funds to administer their
program, and a small amount is set aside for U.S. Labor Department
operations related to UI. Under this approach, FUTA funds that are not
needed for administration--and excess FUTA funds that have already been
accumulated--automatically flow into the state's UI benefits account.
The Department of Labor (DOL) has now proposed another approach to
administrative financing. We are looking forward to seeing the actual
DOL proposal and all of its elements, but we can make some general
comments about the DOL approach pending our review of bill language.
DOL proposes to reduce the FUTA tax rate to 0.2% and states will be
responsible, after a transition period, for raising the revenue needed
for system administration.
The DOL approach has the potential for significant benefit to the
UI program. We are pleased that it includes a repeal of the FUTA surtax
and believe it will provide the opportunity to improve funding needed
for state UI/ES agencies. It is a great virtue that the DOL approach
eliminates the fatally flawed federal appropriations mechanism. We
believe adequate funding for administration is much more likely to
occur using this approach, because state legislatures are of necessity
closer to their own state agencies and UI programs than Congress, and
because UI/ES administrative funding will no longer have to compete
with other federal spending priorities. Additional savings are possible
through the release of surpluses in FUTA receipts into state benefit
accounts and through the repeal of state tax diversions and add-on
taxes on employers, which will no longer be necessary. A reduction of
as little as one week will save another $1.5 billion a year for
employers by reducing their state unemployment tax.
There are two respects where we believe refinements to the DOL
approach are necessary. While giving states the responsibility for
administrative funding provides an opportunity for a net reduction in
the total administrative cost burden on employers, it may also allow
states to impose higher administrative taxes on some or all employers
than under current law. For example, if states levy a new
administrative tax using their existing wage base, many employers in
states with a wage base over $7,000 could face a significant tax
increase.
The DOL approach also leaves open the possibility of commingling UI
benefits and administrative revenue. Such commingling could lead to the
diversion of revenue needed for benefit payments and ultimately lead to
higher benefits payroll taxes.
UWC will work with Congress to provide appropriate protections
against net increases in administrative taxes and against commingling
of benefits and administrative moneys.
CONCLUSION
UWC supports a strong UI system and the concept of a federal-state
partnership, under which the UI system has been a general success.
However, the present UI/ES administrative financing mechanism is not
working effectively. The federal budget process as now applied to FUTA
taxes and UI/ES administrative funding is detrimental to a sound,
efficiently administered program. Considering that federal stewardship
of program administration now over-taxes employers and yet under-
finances UI/ES administrative agencies, we believe that workers,
employers, and the public will be better served if states are allowed
greater control over administrative funding. There are several
different ways to accomplish this objective. The Department of Labor
has made a significant proposal with potential to solve the problem,
and UWC looks forward to working with the Bush Administration and
Congress to enact positive administrative financing reform this year.
Attachment
UI/ES Administrative Financing Reform Policy
February 28, 2002
Proposals to reform the state unemployment compensation and
employment services (UI/ES) administrative financing system have the
potential for significant cost savings for employers while improving
the integrity of the unemployment insurance (UI) system, which is also
important to employers. To satisfy those objectives, administrative
financing reform must be in accordance with the following principles:
The 0.2% FUTA surcharge is discontinued.
Employer taxes used to finance the UI system are imposed
consistent with sound UI/ES operations needs rather than federal
deficit reduction.
Financing for UI/ES administration is provided at
adequate levels, avoiding both under-funding and excessive taxes.
IMPLEMENTATION PRINCIPLES
Any new administrative financing system must include the following
protections:
1. Federal law must continue to require that states maintain a
UI program and a public employment service.
2. Federal requirements for due process, payments when due,
etc., are retained.
3. States are required to continue responsibility for the
interstate compact.
4. To the extent that states are responsible for imposing and
collecting an employer payroll tax to finance their own administrative
agencies
1. The tax should be collected as a line item on the state
UI tax form.
2. To maintain the relative share of contributions from
high-wage and low-wage employers, the state tax rate for this purpose,
when applied to the taxable wage base, shall not generate an amount
exceeding $28 per full-time employee/year.
3. States are required to reserve for future administrative
needs but must have the right to borrow from federal general revenues
(with interest) if necessary.
4. Funds for administration are not commingled with revenue
used for benefits.
5. Dedicated funding must be maintained for essential
federal UI/ES functions, such as Department of Labor oversight, the
federal share of extended benefits (EB), and supplemental funding for
small states. This amount could be collected by continuing a reduced
FUTA tax which we estimate should not exceed .2% on the $7,000 FUTA
wage base, or a comparable amount collected as a surcharge on state UI
taxes.
5. To enhance the accountability of state UI agencies, states
must provide to the state legislature, the U.S. Department of Labor,
and the public annual data and reports on employment services provided
to UI claimants. The initial report would be due within 90 days after
completion of the first fiscal year in which the new administrative
financing system is implemented, and then annually thereafter. UWC
believes that rather than impose federal performance standards, it is
preferable to give each state the maximum latitude to determine how
best to serve its own claimants, while providing information on agency
performance needed by employers and others interested in the UI program
through these reports.
6. The full cost (including administrative costs) of Federal
programs such as Trade Adjustment Assistance, emergency unemployment
assistance, and UCFE and military programs should be funded by the
Federal Government out of general revenues rather than FUTA revenue.
Congress has recognized that benefits under these program should not be
an employer financial responsibility and has provided general revenue
funding. UWC believes that it is also inappropriate to tax private
employers for the administrative costs of these programs.
7. There is no need for a pre-funded loan account. States may
borrow from federal general revenues, subject to interest, or borrow
from other sources.
8. The Reed Act should be maintained, allowing FUTA dollars
exceeding an actuarially determined cap based on UI program needs to be
returned to state UI benefits trust accounts.
9. UI taxes may be collected no more often than quarterly.
Chairman Herger. Thank you, Mr. Yarbrough. Now we will hear
from Mr. Jon Brock, President, National Association of State
Workforce Agencies. Mr. Brock.
STATEMENT OF JON BROCK, EXECUTIVE DIRECTOR, OKLAHOMA EMPLOYMENT
SECURITY COMMISSION, AND PRESIDENT, NATIONAL ASSOCIATION OF
STATE WORKFORCE AGENCIES
Mr. Brock. Mr. Chairman, Members of the Subcommittee on
Human Resources, I am Jon Brock, President of the National
Association of State Workforce Agencies (NASWA) and Executive
Director of the Oklahoma Employment Security Commission. Thank
you for inviting me to testify today for NASWA and its members.
The NASWA represents 53-State and territorial workforce
agencies in general, and the Unemployment Insurance and
Employment Service programs in particular.
Most of our State members also administer the programs
authorized under the Workforce Investment Act and welfare-to-
work programs.
I thank the Chairman for scheduling a hearing on President
Bush's New Balance proposal. The NASWA stands ready to begin
work immediately on enacting reform legislation this year.
Mr. Chairman, NASWA believes there are five major problems
that call for Unemployment Insurance and Employment Service
reform legislation. First, the Federal Government has been
overtaxing employers under the Federal Unemployment Tax Act.
Second, the Federal Government has been underfunding
employment services, labor market information services, and
unemployment insurance administration.
Third, the permanent Federal-State Extended Benefits
program barely works.
Fourth, States need certain technical amendments to Federal
law.
And, fifth, worker representatives believe the unemployment
insurance recipiency rates and wage replacement rates are too
low in many States, and they want the Federal Government to
expand eligibility and benefit levels.
In addressing these problems, NASWA believes in the
following principles: That the Federal Government should
collect only enough Federal unemployment tax revenue to fund
the system and maintain solvent trust fund accounts. The NASWA
strongly supports repeal of the temporary .2 percent Federal
unemployment surtax.
Unemployment taxes should fund fully employment services,
labor-market information services, unemployment insurance
administration, and the Federal half of the Extended Benefits
program. This funding should be stable, predictable, and
equitable. States have been struggling to stay afloat in this
system. In fiscal year 2001 alone, they added nearly $300
million to our system from their own funds.
Mr. Chairman, at this time I would like to ask permission
to submit for the record a copy of the NASWA State supplemental
funding survey which shows the contributions to this system
made by each State in their own funds in fiscal year 2001.
Chairman Herger. Without objection.
[The information follows:]
NASWA STATE SUPPLEMENTAL FUNDING SURVEY SUMMARY
Final Results June 2001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Job Trng. and/or
Unemployment Employment Labor Market One Stop One Stop All Programs* Grand Total
Insurance Services Information Implementation Implementation
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FY94
State Penalty and Interest Funds.................. 39,332,955 38,952,596 983,645 -- -- -- 79,269,196
State General Funds Appropriated.................. 231,800 5,127,609 2,424,229 -- -- -- 7,783,638
State Administrative Tax Revenues................. 16,617,534 54,998,329 3,924,130 -- -- -- 75,539,993
Other Sources..................................... 266,575 153,200 45,300 -- -- -- 465,075
Total for State................................. 56,448,864 99,231,734 7,377,304 -- -- -- 163,057,902
FY95
State Penalty and Interest Funds.................. 45,608,874 50,449,154 1,353,873 -- -- -- 97,411,901
State General Funds Appropriated.................. 231,800 4,050,039 1,943,315 -- -- -- 6,225,154
State Administrative Tax Revenues................. 13,101,378 50,706,946 4,179,190 -- -- -- 67,987,514
Other Sources..................................... 713,268 376,100 4,179,190 -- -- -- 1,402,668
Total for State................................. 59,655,320 105,582,239 7,789,678 -- -- -- 173,027,237
FY96
State Penalty and Interest Funds.................. 42,945,536 56,154,594 1,219,084 -- -- -- 100,319,214
State General Funds Appropriated.................. 7,469,372 3,737,098 1,625,381 -- -- -- 12,831,851
State Administrative Tax Revenues................. 11,188,751 47,297,773 5,129,667 -- -- -- 63,616,191
Other Sources..................................... 2,044,745 401,800 48,900 -- -- -- 2,495,445
Total for State................................. 63,648,404 107,591,265 8,023,032 -- -- -- 179,262,701
FY97
State Penalty and Interest Funds.................. 43,838,305 41,478,113 796,394 3,929,113 796,666 5,212,806 96,051,397
State General Funds Appropriated.................. 12,994,348 8,449,124 451,300 14,972,282 843,100 550,500 38,260,654
State Administrative Tax Revenues................. 10,519,433 30,401,249 485,144 16,806 -- 3,942,000 45,364,632
Other Sources..................................... 1,443,500 20,280,568 561,428 500,000 356,492 16,470,347 39,612,335
Total for State................................. 68,795,586 100,609,054 2,294,266 19,418,201 1,996,258 26,175,653 219,289,018
FY98
State Penalty and Interest Funds.................. 52,383,481 41,797,237 660,209 6,088,374 606,156 8,007,332 109,542,879
State General Funds Appropriated.................. 13,978,493 17,227,236 1,358,900 10,868,549 6,577,035 4,002,693 54,012,906
State Administrative Tax Revenues................. 14,803,927 37,719,957 728,736 17,500,000 173,839 8,425,575 79,352,033
Other Sources..................................... 1,711,803 31,170,742 868,677 5,800,750 46,092 2,150,058 41,748,122
Total for State................................. 82,877,704 127,915,172 3,616,612 40,257,673 7,403,122 22,585,658 284,655,940
FY99
State Penalty and Interest Funds.................. 53,322,298 51,661,400 1,158,050 12,276,225 776,943 7,443,310 126,638,226
State General Funds Appropriated.................. 15,947,031 15,609,761 1,361,558 12,320,470 4,150,000 4,649,321 54,038,141
State Administrative Tax Revenues................. 39,491,786 43,258,391 1,147,526 24,500,000 60,182 1,792,155 110,250,040
Other Sources..................................... 3,313,463 26,646,158 1,054,839 6,625,940 -- 2,954,600 40,594,999
Total for State................................. 112,074,578 137,175,710 4,721,973 55,722,635 4,987,125 16,839,386 331,521,407
FY00
State Penalty and Interest Funds.................. 46,604,531 57,455,166 1,392,635 26,490,885 700,000 6,178,122 138,821,339
State General Funds Appropriated.................. 24,234,384 9,950,723 3,207,769 120,827,171 4,597,998 9,993,393 172,811,438
State Administrative Tax Revenues................. 66,536,223 54,139,765 1,217,306 125,899,617 1,298,428 4,035,709 253,127,048
Other Sources..................................... 3,691,919 30,092,881 1,288,298 4,617,100 4,899,799 1,715,305 46,305,302
Total for State................................. 141,067,057 151,638,535 7,106,008 277,834,773 11,496,225 21,922,529 611,065,127
FY01
State Penalty and Interest Funds.................. 56,548445 52,993,792 1,732,000 20,968,239 -- 6,006,844 138,249,320
State General Funds Appropriated.................. 5,362,516 15,970,307 3,053,348 114,137,665 4,874,000 2,632,490 146,030,326
State Administrative Tax Revenues................. 65,100,812 52,656,392 989,665 133,830,889 1,273,444 4,323,108 258,174,310
Other Sources..................................... 1,800,427 31,286,500 1,380,664 7,683,800 -- 4,056,267 46,207,658
Total for State................................. 128,812,200 152,906,991 7,155,677 276,620,593 6,147,444 17,018,709 588,661,614
TOTAL FY94-01
State Penalty and Interest Funds.................. 380,584,425 390,942,052 9,295,980 69,752,836 2,879,765 32,848,414 886,303,472
State General Funds Appropriated.................. 80,449,744 80,121,897 15,425,800 273,126,137 21,042,133 21,828,397 491,994,108
State Administrative Tax Revenues................. 237,359,844 371,178,802 17,801,364 301,747,312 2,805,893 22,518,547 953,411,761
Other Sources..................................... 14,985,700 140,407,949 5,561,406 25,227,590 5,302,383 27,346,577 218,831,604
Total for State................................. 713,379,713 982,650,700 48,084,550 669,853,875 32,030,174 104,541,935 2,550,540,946
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Denotes that funding could not be broken out
Mr. Brock. Continuing with NASWA's principles, the Extended
Benefits program should be reformed as proposed previously by
NASWA and now President Bush. The Federal Government should
enact technical amendments as proposed previously by NASWA and
now President Bush. States, not the Federal Government, should
make decisions about benefit eligibility and benefit levels.
The NASWA strongly supports an immediate extension of the
unemployment insurance benefits for up to 13 weeks, and a $9.2
billion Reed Act distribution to the State accounts in the
Unemployment Trust Fund.
Many of those who claimed unemployment insurance benefits
in September or later are now beginning to exhaust their
regular State benefits. They need additional help, and many
States need additional help with funding State benefits and
administrative costs of their programs.
Mr. Chairman, it is imperative that you enact the proposed
Reed Act distribution. If the Federal Government enacts only
the 13-week extension, it will consume projected Reed Act
distributions for at least the next 2 years and make it very
hard for the Federal Government to reform this system in the
future.
Under the President's long-term reform, NASWA strongly
supports many specific provisions, such as giving States access
to the national directory of new-hires.
Now, with respect to the .4 percent cut in the Federal
unemployment tax rate and administrative funding reform, our
Members have a number of questions. After the Federal
unemployment tax rate is cut by .4 percent, will State law
require States to enact new State unemployment taxes to fund
the system? Will certain States such as California, Colorado,
and Washington be required by their State Constitutions or laws
to hold a voter referendum on the new State taxes to fund the
system and can the Federal Government assure small States will
receive the funding they need if the small State supplement is
discretionary spending? Could the Administration and Congress
accept treating the small State supplement as mandatory
spending?
Mr. Chairman, on behalf of the State workforce agencies, we
thank you for the opportunity to testify. The enactment of
unemployment insurance and employment service reform is
critical. We want to work with all interested groups in coming
up with meaningful reform. Please do not let this vital
Federal-State system wither any further. Please act now.
Thank you.
[The prepared statement of Mr. Brock follows:]
Statement of Jon Brock, Executive Director, Oklahoma Employment
Security Commission, and President, National Association of State
Workforce Agencies
Mr. Chairman and Members of the Subcommittee on Human Resources, I
am Jon Brock, President of the National Association of State Workforce
Agencies (NASWA) and Executive Director of the Oklahoma Employment
Security Commission. Thank you for inviting me to testify today for
NASWA and its Members. NASWA represents 53 state and territorial
workforce agencies in general and Unemployment Insurance and Employment
Service programs in particular. Most of our state members also
administer the programs authorized under the Workforce Investment Act,
welfare-to-work programs and some administer public assistance
programs, such as Temporary Assistance for Needy Families or ``TANF.''
I want to thank and commend the Chairman for scheduling a hearing
on President Bush's ``New Balance'' proposal. NASWA appreciates the
attention the Administration has brought to this critical issue through
its effort to develop this proposal and stands ready to begin work
immediately on enacting reform legislation this year.
Mr. Chairman, NASWA believes there are five major problems that
call to the need for Unemployment Insurance and Employment Service
reform legislation:
The Federal Government has been overtaxing employers
under the Federal Unemployment Tax Act (FUTA).
The Federal Government has been under funding
employment services, labor market information services, and
unemployment insurance administration for many years.
The permanent federal-state Extended Benefits program
barely works. States need certain technical amendments to federal law to
help them better administer their unemployment insurance programs.
Worker representatives believe the unemployment
insurance recipiency rate and wage replacement rates are too low in
many states and they want the Federal Government to expand eligibility
and benefit levels.
In addressing these problems, NASWA believes in the following
principles:
The Federal Government should collect only enough
federal unemployment tax revenue to fund the system and maintain
solvent trust fund accounts. NASWA strongly supports repeal of the
temporary 0.2 percent federal unemployment surtax.
Unemployment taxes should fund fully employment
services, labor market information services, unemployment insurance
administration, and the federal half of the Extended Benefits program.
This funding should be stable, predictable, and equitable. Mr.
Chairman, states have been struggling to stay afloat in this system. In
fiscal year 2001 alone, they added nearly $300 million to our system
from their own funds. In fiscal year 2001, the State of California
alone added $43 million of its own funds.
The Extended Benefits program should be reformed as
proposed previously by NASWA and now President Bush.
The Federal Government should enact technical
amendments as proposed previously by NASWA and proposed by President
Bush that will help states better administer their unemployment
insurance programs.
States, not the Federal Government, should make
decisions about benefit eligibility and benefit levels.
In general, NASWA strongly supports the President's short-term
reforms described in his New Balance proposal. NASWA also supports many
of the provisions in the President's long-term reform proposal, but has
many questions and some concerns about the proposed federal tax cuts
and administrative financing reform.
NASWA strongly supports an immediate extension of unemployment
insurance benefits for up to 13 weeks and a $9.2 billion Reed Act
distribution to the state accounts in the unemployment trust fund. We
know the recent economic news has been promising and that many
economists now say the recession might be over, but we also know that
unemployment lags economic recoveries and could stay high well into
2002. Many of those who claimed unemployment insurance benefits in
September, or later, are now beginning to exhaust their regular state
benefits. They need additional help, and many states need additional
help with funding state benefits and the administrative costs of their
programs.
Mr. Chairman, it is imperative that you enact the proposed Reed Act
distribution along with the 13-week extension of benefits. If the
Federal Government enacts only the 13-week extension, it will consume
projected Reed Act distributions for at least the next two years and
make it very hard for the Federal Government to reform this system in
the foreseeable future. Indeed, this could be the last year in which
the Federal Government can reform our system during the careers of most
of the individuals in this hearing room.
Under the President's long-term reform, NASWA strongly supports:
Giving states access to the National Directory of New
Hires for quick detection of individuals who have gone back to work,
but continue to collect unemployment insurance benefits.
Permitting states to pay certain tax collection
activities by maintaining compensating balances in the banks performing
the activities.
Making technical changes so that states will follow
state, rather than federal requirements, for Reed Act appropriations by
state legislatures.
Clarifying unemployment insurance claimants are not
required to present proof of citizenship in person when they claim
benefits that include federal funds.
Making technical changes to the Short-Time Compensation
program, which will allow states to continue operating these programs
as they currently exist.
Permitting states to use proceeds from sale of federal
equity in real property for program purposes.
Repealing a provision that results in certain federal
employees being denied unemployment insurance benefits in cases where
other workers would be eligible.
Prohibiting states from reducing benefits due to
rollover of pensions.
With respect to the 0.4 percent cut in the federal unemployment tax
rate and administrative funding reform, NASWA has a number of questions
before it could take an official position:
After the federal unemployment tax rate is cut by 0.4
percent, will state constitutions or state law require states to enact
new state unemployment taxes to fund employment services, labor market
services, and unemployment insurance administration?
In the Administration's analysis of ``gains and
losses'' to state resources in its proposal, shouldn't the
Administration have used the 0.4 percent cut in the permanent federal
unemployment tax rate instead of 0.6 percent? NASWA believes employers
want a permanent 0.2 percent cut in unemployment taxes and will not
want to give back the repeal of the temporary 0.2 percent federal
unemployment surtax in additional permanent state unemployment taxes.
Should the Federal Government reduce the ceiling on the
federal loan account to a nominal amount and distribute the nearly $20
billion in the account to state accounts? The Federal Government does
not need these balances for the system because the loan account can
borrow from the general fund and federal law virtually makes certain
states will repay these loans with interest.
Should the ultimate federal unemployment tax in the
proposal be lower than 0.2 percent? Does the Federal Government really
need all of that revenue?
Will certain states, such as California, Colorado, and
Washington, be required by their state constitutions or laws to hold a
voter referendum on new state taxes to fund employment services, labor
market services, and unemployment insurance administration?
Can the Federal Government assure small states will
receive the funding they need if the small-state supplement is
discretionary spending under annual federal appropriations? Could the
Administration and Congress accept treating the small-state supplement
as mandatory spending?
Will employers object to funding our system with state
taxes that use a higher taxable wage base than the federal $7,000 base?
Will co-mingling of benefit and administrative funds
adversely affect the funding of administration or benefits?
Are there enough federal and state benefits in the
President's proposal to gain support from those concerned about worker
benefits?
Mr. Chairman, I realize this is a long list of questions, and
normally it is the Subcommittee, not witnesses, who ask questions.
However, NASWA needs answers to these questions from the Administration
and other interested parties before we can say more about the New
Balance proposal.
On behalf of the state workforce agencies, we thank you for the
opportunity to testify before this subcommittee today on this important
issue. We want to work with all interested groups in coming up with
meaningful reform.
Enactment of unemployment insurance and employment service reform
is urgent and critical. I hope we can find answers quickly to all of
our questions. And, I hope Congress will consider reform immediately.
Please do not let this vital federal-state system wither any further.
Please act now.
Thank you.
Chairman Herger. Thank you very much, Mr. Brock. And now we
are pleased to hear from Ms. Christine Owens, Director of
Public Policy, American Federation of Labor and Congress of
Industrial Organizations, AFL-CIO.
STATEMENT OF CHRISTINE OWENS, DIRECTOR, PUBLIC POLICY, AMERICAN
FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS
Ms. Owens. Thank you, Mr. Herger. It is good to be here
today with this Subcommittee and the representative of my home
State of Maryland, though I have spent plenty of time in
Oklahoma and Louisiana just last week. So it is nice to be here
with all of you.
I think we all agree that fixing the UI system is long
overdue, and recent discussions have focused in the past
several months and today on extension of UI benefits for
unemployed workers. With 80,000 workers exhausting their
benefits every week, 1,600 a day, that action is crucial and
should be taken immediately, but it is no substitute for a
careful and thoughtful examination of how to change the program
to better enable it to meet its intended goals of providing
income support for jobless workers and job search service and
helping to stabilize the national economy during times of
economic downturn.
We fear that the Administration's proposal does none of
these. The Administration's plan turns over to the States a
primary Federal responsibility, which is the administrative
financing of State operations. The upshot of this proposal
could well be to place funding for benefits in competition with
funding for administration at the State level, potentially
imperiling both.
The plan would also significantly reduce Federal
unemployment insurance premiums for employers, but does so
without insuring any corresponding increases in coverage and
benefits for workers.
I would like to elaborate on our concerns. First, as
several Members have addressed, too few of today's unemployed
workers receive too little in UI benefits for too short a
period of time. These system inadequacies reflect the failure
of the system to modernize in order to keep up with changes in
the economy and in the workforce and with technological changes
that allow for up to date reporting of workers' tenure and
wages. And it also reflects the pressures on States to cut
taxes and to trim budgets. Consequently, nationally fewer than
4 in 10 unemployed workers receive UI benefits, and benefit
levels replace only 33 to 39 percent of former earnings.
In part to address these shortcomings, the stakeholder
process, which Mr. Cardin has referred to several times, came
up with a proposal which did not provide everything that every
participant wanted, but it provided something of real value to
every participant. For workers it provided a mechanism to
extend coverage to low-wage workers and to women working part
time. For employers, it cut the FUTA tax by the .2 of a
percent, and for States it transferred administrative financing
to the mandatory side of the budget and created a formula which
reflected need and recipiency rates and good performance at the
State level.
The Administration's proposal walks away from this deal. In
fact, the proposal will likely exacerbate the shortcomings in
coverage and benefits for workers who are not currently
covered. When States have to rely on their own employer tax
base for administrative financing, as they will in 5 years,
they will be pressured to either raise taxes or cut benefits.
The experience of the boom times of the nineties, when we
had nearly a full employment economy, indicate just how strong
the pressures are to reduce taxes. Those pressures will grow in
recessionary conditions.
We believe that the Administration's proposal ultimately
undercuts States. We have attached a chart to our testimony
which shows that a number of States, if we assume that States
were to increase their own State tax by .4 of a percent to make
up for the loss of the FUTA tax, that a number of States that
have high recipiency rates will actually fare less well under
the Administration's proposal than they currently fare or than
they would have fared under the stakeholders' proposal.
Finally, we are concerned that by eliminating the Federal
role, the Administration's plan would also damage the counter-
cyclical and national risk sharing elements of the national
Federal-State partnership. Now Federal grants are allocated
among States according to workloads, and the Federal Government
automatically releases additional administrative funding if
national unemployment rises above certain levels and the
State's number of claimants also rise. Individual States would
not have the capacity to replicate this national funding
scheme.
I will close now and be glad to answer questions later.
[The prepared statement of Ms. Owens follows:]
Statement of Christine Owens, Director, Public Policy, American
Federation of Labor and Congress of Industrial Organizations
Chairman Herger, Ranking Member Cardin, and distinguished Members
of the Human Resources Subcommittee, on behalf of the 13 million
working men and women of the AFL-CIO, I appreciate the opportunity to
join you today to present our views on the Administration's proposals
for changing the nation's unemployment insurance (UI) and employment
services (ES) system.
The AFL-CIO believes that legislative debate about how best to fix
the nation's unemployment system is long overdue. The only recent
debate concerns extending benefits for workers who have exhausted their
regular UI benefits. While such relief is critical, especially now,
when 11,000 workers are exhausting their UI benefits daily, it is no
substitute for a careful and thoughtful examination of the ways in
which the program should be changed to meet its intended purposes,
while providing greater certainty of funding and more flexibility for
states and reducing some burdens for employers.
Regrettably, however, the Administration's proposal--which
gradually cuts employer federal unemployment taxes 75 percent and
transfers the responsibility for administrative financing to the
states--falls short of these goals. The Administration's flawed
approach would unravel a careful balance that has served national,
state and individual interests for over 60 years. The proposal puts
worker benefits in direct competition with UI administration, placing
both at risk. The plan turns over to the states a primary federal
responsibility, the administrative financing of state operations. It
would significantly reduce employer premiums but fails to address the
long-term decline in coverage of unemployed workers, and, in fact, may
exacerbate the problem. In short, instead of strengthening this
important economic security system, the President's proposal could
weaken it further.
The Unemployment System Fails to Meet the Needs of Today's Working
Families
The UI and ES systems are in substantial need of repair and reform.
Too few of today's unemployed workers receive too little in benefits
for too short a time with too little help in securing new employment.
In most states, UI eligibility rules mirror decades-old labor market
conditions, when most workers were men in full-time manufacturing jobs.
But the workforce has changed dramatically over the past thirty years,
with more women, more ``contingent'' workers and more part-time workers
than ever before. The current UI system fails many of today's workers
for three main reasons.
First, most states do not use the ``alternative base period'' for
determining UI eligibility and instead, continue to count only the
first four of the last five completed quarters of employment, thus
excluding a worker's most recent work experience and wages. As a
result, an average of 13 to 25 weeks' pay is disregarded in eligibility
determinations. Base period calculations disqualify not only those with
limited work histories, but even those who work consistently but who
cannot qualify without having their most recent wages counted. The
impact of this method for determining eligibility falls
disproportionately on low-wage workers. This group also includes many
women who have recently left welfare for work, but who are among the
first to lose their jobs during downturns.
Second, in the majority of states (around 30), unemployed workers
seeking part-time employment are not eligible for benefits. Again, this
exclusion falls most heavily on women, who are 70 percent of all part-
time workers. Millions of workers who seek part-time jobs do so in
order to accommodate family caregiving and other responsibilities. For
many single mothers, a part-time job is the family's sole source of
income. Individuals seeking part-time work should not be penalized with
a denial of UI benefits simply because they are unable to work full-
time.
Finally, UI benefits are too low. Nationally, UI benefits replace
somewhere between 33 percent and 39 percent of recipients' former
wages. Average weekly UI benefits range from $157 in Mississippi to
$269 in Massachusetts, but these amounts do not take into account the
reduction resulting from federal taxation. Estimates of the income
needed to meet basic family needs dramatically underscore the
inadequacy of UI benefits. A single parent family with two children in
Biloxi needs $1153 a month to meet basic needs; average benefits equal
only slightly more than half that amount.
In part to address these systemic failings, a multi-year
``stakeholder'' process produced a set of consensus UI reform proposals
less than two years ago, which offered substantial improvements over
the status quo for all participants: employers, workers, state UI
administrators, and the Federal Government. The ``stakeholder''
consensus proposal did not contain every reform to the UI and ES
systems sought by participants, including worker advocates. It omitted
many crucial improvements, such as lowering earnings thresholds,
increasing the federal taxable wage base, eliminating the federal
taxation of UI benefits, expanding coverage of workers who separate
from employment due to compelling personal circumstances, eliminating
non-monetary disqualifications, and prohibiting states from tying laid-
off workers to their former temporary help agencies. Nonetheless, the
consensus proposal offered a road-map to a fair, balanced compromise
that would improve the UI and ES systems in many ways. It promised
eligibility reforms that would benefit millions of low-wage and part-
time workers. It guaranteed states adequate funding by moving
administrative financing to the mandatory side of the budget and
applying a formula to reward states for running good programs. And it
repealed the 0.2 percent FUTA surtax and reduced paperwork requirements
for employers. Employer representatives, however, walked away from the
proposal before Congress could enact the reform package.
The Administration's UI Proposal Fails Unemployed Workers
In contrast, the Bush Administration's proposal preempts the
consensus process and proposes changes that offer employers a
substantial tax cut but largely ignore workers' needs. For employers,
the President proposes to phase out 75% of the Federal Unemployment Tax
(FUTA), which finances administration of the UI system and helps insure
program stability. Under the Administration's proposal, states would
have to raise the funds for UI administration on their own, with the
federal financial role eliminated due to the proposed FUTA repeal.
The Bush proposal contains no reforms to ensure that the UI system
meets the needs of today's working families. There are no benefit
increases, no coverage for part-time and low-wage workers, and no
alternative base periods for determining eligibility and benefits. The
Administration proposes to lower the extended benefits (EB) trigger,
but this change will provide no assistance to workers currently unable
to access the UI system--a major worker priority. In addition, few
workers will benefit from the modest proposed reform of lowering the EB
trigger from an Insured Unemployment Rate (IUR) of 5 percent to an IUR
of 4 percent. In the 1990's recession, only 10 states triggered on to
the permanent federal Extended Benefits program; under the Bush
proposal, only 15 states would have been able to use this program,
which would remain an inadequate response to national economic
recessions.
As the Members of the subcommittee well know, the national UI
system is already failing to provide adequate wage replacements for
most workers and preventing many laid-off workers from accessing
benefits at all. The Administration proposal will exacerbate this
problem. By eliminating the ``firewall'' between UI benefit payments
(determined by states) and UI administration (financed with federal
grants), the Bush plan would create a competition that would force many
states to cut worker benefits or reduce access to the UI system in
order to pay for administrative costs. Under the current needs-based
allocation system, states with higher recipiency rates (those that pay
benefits to a higher percentage of their workforce) receive a higher
percentage of administrative dollars than those with lower recipiency
rates. When states have to rely on their own employer tax base,
employer interests will put pressure on these states to reduce their
recipiency rates or cut benefits in order to avoid tax increases and
keep administrative costs down.
It is not mere speculation to forecast further reductions in state
benefits as a consequence of saddling states with additional financial
responsibilities for the UI system. During the economic expansion of
the 1990s, far too few states acted to modernize their UI systems,
increase benefits, or cover more workers. On the contrary, many states
reduced employer taxes and failed to build up prudent trust fund
surpluses during the boom years that would have been available during
the current recession.
Nor would the promise of a sizable Reed Act distribution, as
contemplated under the President's plan, ensure that states enact
legislation to treat low wage and part-time workers more fairly. In a
recent survey by the National Association of State Workforce Agencies,
a majority of states said they would not use funds from a Reed Act
distribution to expand coverage to low-wage and part-time workers, even
though these are the workers at greatest risk of being laid-off. In
many states, these workers are now paying for a UI system from which
they cannot benefit, since they have already had unemployment insurance
taxes withheld from their wages (like any other payroll tax, workers
pay in the form of reduced wages; employers simply write the check).
The UI System Will be Weakened and State Governments Will Suffer
Over the past decades, state governments have repeatedly called
attention to the fact that the Federal Government has been underfunding
UI and ES administration, to little avail. The ``stakeholder''
consensus proposal would have provided guaranteed ``mandatory'' federal
funding for state administrative costs. In contrast, the Administration
proposal does not solve the problem of administrative funding and
offers a bad deal for many of the states. Although the Administration
proposes transferring $14 billion from the Federal trust fund into
state trust funds during the five-year transition period, there will be
no federal administrative funding after that.
States would have to raise over $3.5 billion annually in new state
revenue simply to make up for the loss in federal funding. The
Administration promises employers a 75 percent FUTA tax cut (from 0.8%
to 0.2% of the first $7,000 earned by each employee), but remains
silent about the amount that states will be able to raise through
corresponding state tax increases levied on employers to pay for
administrative costs. Employers cannot be expected to complacently
accept a dollar-for-dollar restoration of the federal tax on the state
level; in fact, employers have already ``claimed'' the first 0.2
percent reduction in the FUTA tax as a permanent elimination of the
temporary 0.2 percent FUTA surtax. States would therefore have the
potential of raising taxes on employers by only 0.4 percent (half the
current FUTA rate), and will face constant employer pressure against
the necessary taxes to pay for administration. For instance, California
currently receives $459 million in annual federal grants to pay for
administration costs, and it would have received $598 million under the
stakeholder proposal. California employers currently pay $814 million
in FUTA taxes, and thus, the most the state would likely be able to
collect under the Administration's proposal is $407 million. To make up
the administrative financing shortfall, the state would either have to
cut benefits or raise taxes above the level employers expect to pay.
Many other states would face similar prospects.
Worse yet, many states with higher recipiency rates fare better
under the existing financing mechanism than they would under the
Administration's proposal, while conversely, those with lower
recipiency rates often stand to benefit from the Administration's plan,
assuming they impose a 0.4 percent tax on employers. (See Attachment
1). Almost without exception, states with above-average recipiency
rates would fare better under the stakeholder proposal than under the
Administration's plan. For example, Texas, Oklahoma, Florida and
Alabama have recipiency rates of less than 30 percent, and all would
fare better under the Administration's plan (assuming they impose a 0.4
percent tax). On the other hand, Connecticut and Massachusetts, with
recipiency rates of 73 percent and 71 percent, respectively, would fall
millions of dollars short of the funding they need.
By severely curtailing the federal role in the UI system, the Bush
plan would damage the counter-cyclical and national risk-sharing
elements of the national federal-state partnership. The Administration
would sever the connection between administrative funding and workload
needs, since federal grants are currently allocated among the states
according to their workload, and the Federal Government automatically
releases additional administrative funding if national unemployment
rises above certain levels and the state's number of claimants rise.
Individual states would not be able to replicate this national
financing mechanism effectively. Furthermore, some states have
mismanaged their trust funds by failing to build up adequate reserves
and choosing instead to give their employers tax cuts. Most notable are
New York and Texas, which will be borrowing $1.5 billion from the
Federal Government because their benefit trust funds are running out of
money. Unless the states build adequate reserves during economic
expansions, they will not be able to increase their administrative
resources easily when claims surge during recessions, instead borrowing
from the Federal loan fund with interest and unnecessarily increasing
the cost of their operations.
Finally, the Bush plan undercuts the primary enforcement mechanism
for Federal protections. With the Federal Government's authority to
award administrative grants eliminated, the justification for federal
involvement in administrative matters will become extremely weak since
no federal money will be involved in state operations. There will be
irreparable damage to the Federal Government's ability to maintain and
enforce core national standards relating to state administration of
their programs, including requirements to maintain proper and efficient
administration, pay benefits accurately and promptly ``when due,'' and
provide a fair and impartial hearing process.
Conclusion
For the foregoing reasons, the AFL-CIO opposes the Administration's
proposal to repeal virtually all of the employer FUTA tax and to turn
over the responsibility for administrative financing to the states. We
believe that such an approach abrogates a critical federal role and
makes it less, rather than more likely that unemployed workers will
collect benefits in the future. We encourage the committee to advance
real, comprehensive UI and ES reform that provides a national economic
safety net for all unemployed workers and an effective path to re-
employment, while enhancing administrative financing for states and
easing employer burdens. The touchstone for reform, however, should be
enhancing protections for workers, and in this regard, the
Administration's plan fails completely.
______
Attachment 1
STATES WITH EFFECTIVE UI PROGRAMS LOSE MILLIONS UNDERTHE BUSH UI REFORM PROPOSAL
(Millions of dollars)
----------------------------------------------------------------------------------------------------------------
0.4%
Maximum Stakeholder Recipiency
State 2001 Tax Proposal Rates
Grants Employees Workload (CY'00)
will Pay Formula
----------------------------------------------------------------------------------------------------------------
CONNECTICUT.................................................... 57 44 73 73
MASSACHUSETTS.................................................. 82 84 106 71
RHODE ISLAND................................................... 18 12 23 60
ALASKA......................................................... 30 7 39 59
NEW JERSEY..................................................... 113 105 146 54
PENNSYLVANIA................................................... 163 147 209 54
WISCONSIN...................................................... 74 72 93 51
VERMONT........................................................ 10 7 12 50
NEVADA......................................................... 30 29 38 49
IOWA........................................................... 28 36 38 48
OREGON......................................................... 54 43 68 48
WASHINGTON..................................................... 94 73 118 46
MICHIGAN....................................................... 132 127 169 44
ARKANSAS....................................................... 30 28 38 44
MISSOURI....................................................... 57 70 73 42
CALIFORNIA..................................................... 459 407 598 41
TENNESSEE...................................................... 47 70 61 39
NORTH DAKOTA................................................... 14 7 17 39
IDAHO.......................................................... 23 14 30 39
NORTH CAROLINA................................................. 73 104 93 38
PUERTO RICO.................................................... 28 21 37 38
ILLINOIS....................................................... 150 163 196 38
US AVERAGE RECIPIENCY 38
MAINE.......................................................... 19 14 24 37
DIST. OF COLUMBIA.............................................. 15 11 18 37
DELAWARE....................................................... 10 11 15 36
NEW YORK....................................................... 208 213 270 36
SOUTH CAROLINA................................................. 41 47 52 36
MINNESOTA...................................................... 51 71 67 35
MONTANA........................................................ 14 8 18 34
HAWAII......................................................... 16 13 22 34
INDIANA........................................................ 54 75 70 32
KENTUCKY....................................................... 34 45 45 32
WEST VIRGINIA.................................................. 20 16 26 31
OHIO........................................................... 106 149 135 31
KANSAS......................................................... 25 34 33 30
UTAH........................................................... 34 27 42 30
ALABAMA........................................................ 45 48 58 30
VIRGINIA....................................................... 54 1 70 29
WYOMING........................................................ 10 5 14 28
MARYLAND....................................................... 63 62 82 27
FLORIDA........................................................ 107 194 141 27
NEBRASKA....................................................... 20 21 25 27
MISSISSIPPI.................................................... 26 28 35 26
TEXAS.......................................................... 167 257 218 25
OKLAHOMA....................................................... 29 35 37 25
COLORADO....................................................... 44 62 57 25
NEW MEXICO..................................................... 20 17 26 24
SOUTH DAKOTA................................................... 10 8 14 24
ARIZONA........................................................ 42 62 55 23
GEORGIA........................................................ 70 108 92 23
LOUISIANA...................................................... 35 45 47 22
NEW HAMPSHIRE.................................................. 12 17 16 16
VIRGIN ISLANDS................................................. 4 93 5 N/A
TOTALS....................................................... 3171 3467 4104
----------------------------------------------------------------------------------------------------------------
Chairman Herger. Thank you very much, Ms. Owens.
Now we will hear from Dan Blankenburg, Manager, Legislative
Affairs, National Federation of Independent Business, NFIB. Mr.
Blankenburg.
STATEMENT OF DAN BLANKENBURG, MANAGER, LEGISLATIVE AFFAIRS,
NATIONAL FEDERATION OF INDEPENDENT BUSINESS
Mr. Blankenburg. Thank you, Mr. Chairman. It is a pleasure
to be here today. On behalf of the 600,000 members of the
National Federation of Independent Business, I appreciate the
opportunity to testify and present the views of small
businessowners on the subject of reforming the Nation's
unemployment system.
The NFIB represents small employers. Our typical member
employs five people and reports gross sales of around $350,000
per year. Our average member's net income is about $40,000 to
$50,000 annually, so they are pretty small guys out there.
We believe it is important to distinguish the type and size
of small business that NFIB represents, because too often
Federal policymakers view the business community as one
monolithic enterprise that is capable of passing taxes and
regulatory costs on to consumers without suffering negative
consequences.
For small businesses, this is not the case. The NFIB
members are not publicly traded corporations. They are
independently owned and operated. They don't have tax
departments or payroll departments or attorneys on staff. They
are responsible for taking out the garbage and inventory and
hiring employees.
So for small businesses, the current system presents
several problems. First, the tax rate is too high. We often
hear from critics that cutting the tax will do little for small
businessowners, since the cost per employee is only $56 per
year.
I would ask the Committee to consider that the average NFIB
member has five employees, and we have 600,000 members
nationally in our association alone. Reducing the FUTA tax as
the Administration proposes would result in $126 million
remaining in the hands of entrepreneurs.
While the difference between an .8 percent tax and a .2
percent tax sounds small, our average member would save $210 a
year.
Second, the unemployment system, under the current system,
employers are required to pay two unemployment taxes to the
State and the Federal Government. It is twice the forms, twice
the complexity and twice the collection point. It is too many
forms for them to handle when you consider some of the other
forms and payroll taxes they must deal with.
Third, the taxes raised for UI programs are rated or used
for deficit reduction, and this fact perhaps more than any
other infuriates small business owners. They would like to be
taxed honestly and have their money spent on what Congress says
they are being taxed for. As an overall package, we are pleased
with the Administration's proposal, and NFIB strongly supports
the proposal to cut the unemployment tax by 75 percent through
2007.
The tax reduction will be particularly gratifying to small
businessowners, because as had been testified before, the tax
was supposed to be a temporary tax in 1976, and the Congress
promised to remove it once the loan was paid back to the
Federal fund. And since then--well, in 1987 the loan was paid
off and the taxes remained, and it has been extended five
times.
We are very pleased to see an effort to reduce the
complexity of Form 940 in the Administration's proposal by
eliminating many of the information requests and calculations.
However, we think the Administration proposal could go one step
further. Small businessowners know that a great deal of time is
wasted by having to provide the same information on different
forms to Federal and State agencies. We would urge the
Administration and the Congress and this panel to consider
eliminating all of the overlap between the State and Federal
forms and simply coordinate the filings in a combined form that
only needs to be filed once.
With regard to the Reed Act transfer, NFIB believes
returning these dollars to the State employment offices is a
very positive decision. As mentioned, the money has been
misappropriated for years, and we also understand the
Administration's proposal reduces the trigger for extended
benefits and eligibility and would allow States to determine
extended benefits as they would apply. This change will
increase the number of people that will qualify for benefits,
resulting in higher demand on the program in an economic
downturn.
While we are not comfortable with these provisions
entirely, we view this in the context of the compromise and we
would be willing to accept them if the Congress chose to move
in that direction.
So those are our main points, and I would be happy to take
any questions.
[The prepared statement of Mr. Blankenburg follows:]
Statement of Dan Blankenburg, Manager, Legislative Affairs, National
Federation of Independent Business
On behalf of the 600,000 members of the National Federation of
Independent Business (NFIB), I appreciate the opportunity to present
the views of small business owners on the subject of reforming the
nation's unemployment system.
NFIB represents small employers. Our typical member has five
employees and reports gross sales of around $350,000 per year. Our
average member nets $40,000 to $50,000 annually. While there is no
benchmark used to define a small business, our membership is very much
a reflection of American small business when compared to data compiled
by the United States Census Bureau.
We believe it is important to distinguish the type and size of
businesses NFIB represents. Too often, federal policy makers view the
business community as one monolithic enterprise that is capable of
passing taxes and regulatory costs onto consumers, without suffering
negative consequences. For small business this is not the case. NFIB
members are not publicly traded corporations; they are independently
owned and operated. They do not have payroll departments, tax
departments and attorneys on staff. Being a small business owner means,
more times than not, you are responsible for everything--taking out the
garbage, ordering inventory, hiring employees, and dealing with the
mandates imposed upon your business by the federal, state and local
governments. That is why simple government programs, particularly when
it comes to the tax code, are so important. The less time our members
spend with ``government overhead,'' the more they can spend growing
their business and employing more people.
Growing businesses lead to job creation, which is one of the major
roles small business plays in our national economy. Small business is
the leader in job creation because it is the embodiment of the
entrepreneurial spirit. Small firms with fewer than 500 employees
employ 52 percent of the non-farm private sector workforce as of 1998,
and are responsible for 51 percent of the private sector business share
of the nation's gross domestic product. From 1994 to 1998, about 11.1
million new jobs were added to the economy. Small businesses with 1-4
employees generated 60.2 percent of the net new jobs over this period
and firms with 5-19 employees created another 18.3 percent. It is
because small businesses have such deep impact on employment and the
national economy that we feel it is critical that the policies you
shape account for the impact the law will have on small business.
Year after year, NFIB researchers have found that the two biggest
challenges facing small businesses are health care and taxes. Our
members are overwhelmed by the complexity of the tax code and their
responsibilities, not just for income taxes, but also for the variety
of federal and state payroll tax filings--including federal and state
UI. They very much want to comply with the law, but its sheer size
makes understanding the law nearly impossible for the average business
owner. NFIB strongly supports efforts to simplify and cut taxes for our
small business owners, and that is why we are pleased to testify on the
Administration's proposals in this area. In our opinion, the federal
unemployment system is ripe for reform.
The Current System
The Unemployment Insurance (UI) system is a joint state-federal
program, created with the passage of the Social Security Act of 1935.
The Federal Unemployment Tax Act (FUTA), contained within the U.S.
Internal Revenue Code, effectively mandates that the states maintain an
unemployment insurance program in conformity with certain federal
requirements. The UI system is financed by two taxes levied on
employers--one state and one federal. The state UI tax is used to fund
unemployment compensation benefits. The State tax is experience rated,
meaning that an employer's tax rate is based upon past incidence of
successful unemployment claims by his or her employees. The federal tax
is a flat-rated tax, levied on a $7,000 taxable wage base. The federal
tax is used to fund: (1) state and federal administration of the
system; (2) the 50% federal share of extended benefit costs; and (3)
loans made available to states when their trust funds are depleted.
Both state and federal UI taxes are housed in the federal
Unemployment Trust Fund, which is part of the unified federal budget.
Each state has its own account in the federal trust fund into which
state taxes are deposited and out of which state benefits are paid.
State unemployment compensation benefits are an entitlement and are
not subject to the appropriations process, but administrative funds are
appropriated by Congress and distributed to states through grants from
the Department of Labor. For many years state UI agencies have
complained that the Congress is under funding administration of the
program in order to mask the size of the federal deficit or to spend
the dollars through the appropriations process. States have responded
to this funding shortfall by reducing services to claimants, and in
many cases enacting separate new taxes on employers to fund
administration of the program.
For small business, FUTA presents several problems. First, the rate
is too high. Often we hear from critics that cutting this tax will do
little for small business owners since the cost per employee is ``only
$56 per year.'' I would ask the Committee to consider that the average
NFIB member has five employees and that we have 600,000 members
nationally. In our association alone, reducing the FUTA tax, as the
Administration proposes, would result in over $126 million that would
remain in the hands of entrepreneurs. While the difference between a
.8% tax and .2% tax sounds small, our average member (with an annual
income of $40,000-$50,000, five employees) would save $210 annually
under this proposal. I would further point out that there are
approximately 17 million full-time, self employed people in the country
today. If they were all average NFIB members with five employees, this
tax savings would represent roughly $3.57 billion annually.
Second, under the current system, employers are required to pay two
unemployment taxes--the federal tax and the state tax. That means twice
the collection points, twice the payments, and twice the complexity.
Payroll taxes were listed as the most costly tax in an NFIB tax survey,
just ahead of personal income taxes. And 53 percent of those surveyed
said payroll taxes are less fair or much less fair than business income
taxes.
Third, the taxes raised for UI programs are raided for deficit
reduction or spent on other Federal Government endeavors other than UI
programming. This fact, perhaps more than any other, infuriates small
business owners. Like the American consumers' desire to see gas tax
revenues spent on transportation, NFIB members desire all UI taxes to
be spent on UI programs or be sent back to them to use in their
business.
Finally, when considering the cost and impact of the FUTA tax, it
is important to remember that the federal FUTA tax is not the only tax
on payroll for which small business owners are responsible. In addition
to federal FUTA taxes, the business owner is paying State FUTA taxes
and federal Social Security and Medicare taxes. In addition the
business owner is responsible for the cost of filing quarterly state
and federal payroll tax forms, making scheduled federal and state
payroll tax deposits, making regular federal and state unemployment tax
deposits in addition to filing the appropriate forms. These are real
costs of hiring employees, that an individual who has never had to make
a payroll takes for granted, but that involve real costs to small
business owners and that add up to real dollars for a small business
owner.
The Administration's Proposal
As an overall package, we are pleased with the Administration's
proposal and have included specific comments on some of its the key
components:
FUTA Tax Cut
NFIB strongly supports the proposal to cut the federal unemployment
tax by 75% through January 2007. Today the federal tax is .8% and under
the proposal the tax will be reduced to .2% by 2007. This tax reduction
would be particularly gratifying to small business owners because .2%
of this .8% was imposed in 1976 as a temporary surtax. Congress
promised to remove this temporary tax once the loan from the federal
trust fund to the States was repaid. In 1987, the loan was paid off,
but the tax remained. Since then, the Congress has extended this tax
five times. Last year, this extension resulted in a $1.75 billion tax
burden on the nations' employers.
We also applaud the reduction to the total FUTA tax beyond the
surtax because the FUTA collects far more than it needs. FUTA raised
$6.1 billion in 1998, but only $3.5 billion was spent on FUTA-related
expenses. The balance was used to pay for non-related government
programs.
Streamlined Filing of FUTA Tax Forms
We are very pleased to see an effort to reduce the complexity of
Form 940 in the Administration proposal by eliminating a many of the
information requests and calculations in Part II that is already
reported on the state UI forms. Federal paperwork complaints ranked
eighth in NFIB's ``Problems and Priorities'' survey. The majority of
paperwork coming from the Federal Government is tax-related, so any
effort to streamline or eliminate forms or steps on forms would be
welcomed with open arms.
However, we think the Administration proposal could go one step
further. Small business owners know that a great deal of time is wasted
by having to provide the same information in different form to federal
and state agencies. We would urge the Administration and the Congress
to consider eliminating all of the overlap between the federal and
state forms and simply and coordinate the filings into a combined
federal state form that must only be filed once.
Reed Act Transfer
The Administration's budget has proposed 13 weeks of additional
temporary federal extensions of unemployment insurance be provided to
workers. The Federal Government would fund this benefit. They have also
proposed returning $9.2 billion in ``Reed Act'' funds to the states for
expansion of benefits, or enhancements in reemployment services,
shoring up trust funds or cutting employer payroll taxes.
NFIB believes returning these dollars to the State employment
offices is a positive decision. As mentioned above, the Congress has
failed to spend this money on its stated purposes in the past and we do
not believe this is likely to occur in the future. This
misappropriation of funds has lead to a degradation of employment
programs and inefficiencies that have resulted in tax increases in some
states. We believe the taxes raised for unemployment programs should be
used solely to fund unemployment programs. In the event that the taxes
raise more dollars than is needed to run the unemployment programs, the
taxpayers should be refunded their dollars. Neither the Congress nor a
State Legislature should spend the surplus dollars on other programs.
Temporary 13-Week Extension
NFIB does not have a position on the 13 weeks of additional
unemployment insurance. We do believe that the temporary nature of this
benefit is appropriate and that it would only become a concern if the
proposal became a permanent benefit that NFIB members would be required
to finance.
Triggers and State Eligibility
We also understand the Administration's proposal reduces the
``trigger'' for extended benefits eligibility and would allow States to
determine when extended benefits would apply. This change will increase
the number of individuals that will qualify for benefits, resulting in
a higher demand on the programs in an economic downturn. While we are
not completely comfortable with these provisions, they are acceptable
when viewed together with the reduction of taxes and the increased
responsibilities of the State governments. We feel that the respective
State governments know their workforces best, and that they will be
able to react quickly and efficiently to the demands of their workers.
Empowering the States will move the unemployed back to work quicker,
result in less demand on the system and ultimately eliminate future
need to impose higher UI taxes on employers.
Conclusion
In conclusion, NFIB believes that the proposal advanced by the FY
2003 Administration budget is positive. The current system is too
expensive, too complex and too unfair. It is time we pink slip the
current unemployment tax system and pass this sweeping reform plan,
which will ease the tax burden on Main Street and restore some
integrity to the system. Thank you, Chairman Herger and Ranking Member
Cardin, for soliciting the views of NFIB on this matter. We look
forward to working with the Congress and the Administration on these
important reforms in the coming months.
Chairman Herger. I thank you, Mr. Blankenburg, and each of
you, and now we will turn to our panel for questions. First to
inquire is the gentleman from Louisiana, Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman. Mr. Cardin spoke
about the stakeholders that got together a couple of years ago
and worked out a deal, and why didn't--why can't the
Administration support that? Well, I was involved very much in
the discussions at the time trying to put together something
that we could pass, and unfortunately, at least it was my
impression, at the end of the whole thing we did not have an
agreement among all of the stakeholders. I thought, by the way,
that organized labor, AFL-CIO, and the business community both
acted in good faith and worked hard to come up with an
agreement in which everybody got something and nobody got
everything, and I thought that was a good description, Ms.
Owens.
But the fact is at the end of the deliberations, we did not
have an agreement among all of the stakeholders. Mr. Yarbrough,
I know you were around during that. Isn't that your impression
that we did not have agreement among all the stakeholders?
Mr. Yarbrough. I served as the business representative with
UWC on that, and although we had maybe a total overall program,
we didn't really support all the things, just like other people
that were in there didn't support everything that we had in it.
I think what came to this Committee to be considered had some
different formula things and that, and we did not, I guess,
line up to support that. We had something that we had done
earlier that we gave to them, and then there were some other
minor changes in the funding----
Mr. McCrery. Mr. Blankenburg, NFIB didn't support the final
draft?
Mr. Blankenburg. Yes, I am glad you brought this up----
Mr. McCrery. I have got limited time.
Mr. Blankenburg. We did not.
Mr. McCrery. And there were other groups that didn't
support it. So as much as I would have liked to have gotten an
agreement among all the stakeholders, we just didn't do it. So
the Administration is trying to come up with something, I
think, that bridges the gap among the various disparate
interests and at least addresses some of the fundamental
questions, or shortcomings I should say, of the current system.
Ms. Owens, you talk about if the Administration's proposal
were to go into effect, there would be this competition between
tax revenue for benefits and tax revenue for administrative
funding. Isn't that the case right now?
Ms. Owens. Well, there is a firewall now, because the
benefits are set by the States. The administrative funding
comes from the Federal Government and grants, and let me just
back up and say we don't disagree that the State UI and ES
services are badly underfunded and that Congress should
appropriate more resources for those programs. I don't think
there is any disagreement in this, and we certainly don't
disagree with that, but we do think that the firewall that
exists between administrative funding that comes from the
Federal Government in the form of grants as opposed to benefits
that are at the State level provides a degree of insulation and
protection that would be eliminated were administrative
financing turned over to the States, especially if ultimately
it is turned over to the States down the road without
resources.
Mr. McCrery. But the firewall does little good if the
States are getting insufficient funding for the administrative
purposes and they have to look to their employer community as
my State has done for increased taxes to fund administrative
expenses rather than doing some of the things you would like to
do for benefits, perhaps part-time workers, most recent quarter
earnings, all of those things. The State can't do that because
they are having to raise taxes to pay for the administrative
funding. So you have already got that competition. That is all
I am trying to say. And, yes, it would still exist, but it
exists now.
And just for fun, I would like to examine one other part of
your testimony. In your testimony----
Ms. Owens. I hope I enjoy it as much as you.
Mr. McCrery. Oh, I am sure you will. In your testimony, you
talk about how--and I think you are referring to part-time
workers particularly--how some workers are now paying for a UI
system that they get no benefit from. What do you mean by
paying workers that are paying for the system? How are they
paying--they don't pay taxes for UI, do they?
Ms. Owens. Well, I mean, I think actually Members of this
Committee and certainly the Labor Department in some of its
publications that I have read have taken--have argued that the
premiums that are paid for unemployment----for the unemployment
insurance programs in the States actually reflect lost wages to
workers.
Mr. McCrery. But it is the employer that is--the tax is
exacted against the employer. Is that right?
Ms. Owens. Sends them a check. That is right.
Mr. McCrery. So it is not an explicit tax on the employee?
Ms. Owens. It is not taken out of the employee's check.
Mr. McCrery. But because the employer has to pay it, I
mean, the theory is it comes out of the pockets of the
employees?
Ms. Owens. Right.
Mr. McCrery. Well, wouldn't the theory hold true for, say,
corporate income taxes?
Ms. Owens. Is that the topic of today's hearing?
Chairman Herger. The time is expired.
Mr. McCrery. I just told you I was just having some fun.
Ms. Owens. It was fun.
Mr. McCrery. Thank you, Mr. Chairman.
Chairman Herger. You are welcome. The Ranking Member from
Maryland, Mr. Cardin, to inquire.
Mr. Cardin. That is an interesting thought. I think,
though, the point is that we don't differentiate in law between
the premiums paid by part-time workers. Why do we differentiate
on the benefits that they are entitled to receive? I think that
is the point that many of us have been trying to make.
First of all, I appreciate all of your testimony. I think
all four of you have added to the record here, and I thank you
for that. I regret that I think we have really lost ground over
the last year. I thought a year ago we had more consensus than
we do today, and Mr. McCrery is absolutely correct. We have a
problem that we have to deal with, in that we impose--we were
collecting too much revenue at the Federal level for what we
are returning to the States, certainly on the administrative
side. There is no question about that. We tried to do something
about it.
What concerns me is I think we are using the wrong numbers
here. There is no disagreement that we should deal with the .2
percent. There is no disagreement about that. It is the .4
percent we seem to have a little different view as to what
impact that will have. If we follow what Mr. Brock is saying,
and I am trying to follow his testimony because you are the one
who is going to have the bottom line responsibility. If the
States impose that .4 percent--and I understand they may not be
able to because of constitutional restrictions or political
considerations, but if they impose the .4 percent then what Ms.
Owens is saying, some States are going to be worse off than
they are today under the current system as far as recouping
their administrative costs. It is going to be different per
State, and Mr. Blankenburg's concern about reducing the overall
tax by .6 percent is not going to happen. It is going to only
be a .2-percent reduction, which is nothing to be embarrassed
about. The $14 we save per employee is still important to be
done, and we should do it, but I think we should use the right
numbers, and I think it is $14, not the other numbers we are
using per employee, because we assume that the administrative
burdens are going to be met and the taxes are going to be
imposed locally in order to deal with it.
My concern is it might not be enough, and that is why I
come back to the stakeholders, and Mr. Yarbrough, I appreciate
your response to Mr. McCrery. You did a great job, and, of
course, the UWC was at the table and was part of the process,
as was the local government people, as was the AFL-CIO. I think
the NFIB came later in the stages in the process and never did
agree on the agreement. I accept that.
But there was an agreement reached by the stakeholders, and
it was not easy, because we had a history, a long history on UI
of not being able to even sit at a table let alone reach an
agreement on what we should do as far as Federal policy is
concerned, and I think, Ms. Owens, you expressed it correctly,
and so did Mr. Yarbrough. Nobody was totally happy with that
agreement. There was--you had a give and a take. That is what
usually happens on an agreement. You are not totally happy, but
we were able to get the permanent reduction of the tax, which
was important.
We were able to get the administrative costs funded so, Mr.
Brock, you knew how to--you are right. You need a reliable
funding source, and that is what the stakeholders' agreement
gave you, a reliable funding source. It is not reliable if you
have to wait every year for the appropriations of this
Congress, in all due respect. That is why there is risk in what
we do here. If you have it on the mandatory side, because we
are collecting the revenue, we have the money, it should be
mandatory spending. I disagree with the Administration. If we
collect the money for that purpose, we should return it to you
for that purpose and you should have the reliable funding, and
that was part of the stakeholders' agreement, which I thought,
by the way--Mr. McCrery thought was a pretty good idea at least
a year ago, that part of the overall agreement.
And of course we get to the issue that Mr. McCrery has
difficulty with, and that is trying to deal with people who are
trying to pay according to the rules. They are working. Many of
these people come off the welfare system, and many of these
people are low-wage workers. Many of these people don't have
the long wage history that more seasoned workers have had, and
now they are coming off the employment rolls because of a
recession, and they are not qualifying for unemployment
benefits. So we wanted to do something--and a large percentage
are women, and we wanted to do something about it. And the
stakeholders amazingly 18 months ago recognized that as an
issue, before we got into the recession as an issue, and we
were able to work out the politics between State flexibility
and national policy, and I applaud you for that.
I happen to believe in State flexibility, but I think this
is one area that we should act at the national level. So you
were able to reach an agreement. So I don't think it is fair to
say that we didn't have an agreement 18 months ago. We had an
agreement 18 months ago, and that agreement was brought to
Congress, and there were people who were unhappy with parts of
it, but collectively you said don't pull it apart. Keep it as a
unit, keep it together, and we will keep our coalition
together. And true, there were some elements that were opposed
to it, such as the NFIB, and you were. There is no question
about that. But the many groups within the business community
supported it, and my regret is that we have lost a year, and
now it looks like we may not get anything accomplished.
Chairman Herger. I thank the gentleman. Now would the
gentlelady from Connecticut, Mrs. Johnson, wish to inquire?
Mrs. Johnson. I think it is imperative that we get
something done, and I don't think we can let the perfect be the
enemy of the good. We need to do what we can get agreement on.
Mr. Blankenburg, one of the reasons that consensus of the
other group failed was because small business was not at the
table, and so there wasn't any ability by that group to talk
through some of the problems that have a unique and heavy
impact on small businesses. I mean, certainly the urgency of
the administrative reforms you point to were something we all
understand and can all agree to. I think the concerns about
whether the funding is going to be there through ups and downs
is something that we can address when we get additional
information back.
And I absolutely agree that States are going to continue to
set benefits and benefit levels, whether you like it or not. We
are not going to change that in this environment this year and
maybe not for a long time. We didn't change that under the
Democrats, and the likelihood of changing it now--so let us not
let that impede progress, but this issue of part-time
employment is something that is very important to small
business. You need smart, educated women who need to take time
off to raise their kids to be willing to work half-time and as
things get worse in the future in terms of the balance between
the number of workers and number of retirees, you are going to
need that even more. So we need to look at what is the criteria
for permanent part time. How long could it last? It doesn't
have to be mysterious, but if we could just do a demo, if we
could do something to encourage States so that we would get
better information. The States that have done this have not
seen an increase in cost.
So I think there are a couple of issues here that are
particularly relevant to contemporary society, to our goals as
a society of family strengthening, as well as to appropriate
compensation to people who are unemployed and unemployed under
certain circumstances for a good reason that we do need to
tackle.
And then I think the other thing--and I don't know--I was
just talking to the staff about this--there are terrible
jurisdictional problems here, because really the system was
constructed for a whole different era, and I think some of the
questions of my colleagues that pointed out what percentage of
those who are unemployed this system actually serves is a case
in point. But we are not going to change the fundamental
structure right now, but we could--we may be able to think of
some way that under this rubric we can remind States that in
administering we are looking not just for you to administer the
delivery of the check. For too long that was catastrophic in
the area of welfare. We need for you to deliver a check
accompanied by services, and those services have to be services
small employers can depend on, so you can depend on, if you are
getting something from the employment services, that it is
going to be valid.
One of the queer things that has happened, whether you like
it or whether you don't--and I think with all due respect, Ms.
Owens, your testimony doesn't necessarily take into account
what we have learned through the job placement programs we
developed under welfare. We have under that program developed a
much more responsive relationship between the job placers and
the employers, and the old unemployment system employers don't
even participate in. They don't trust them so they don't look
at their rosters, they use temporaries instead of. The growth
of temporary employment services is a terrible condemnation of
our old system.
So there are very big issues in how America helps people
who are unemployed and helps people who need to get reemployed
and small business has to be at the table, but I can't believe
that through this bill there isn't some way we couldn't
encourage States to integrate their unemployment services for
the unemployed and for people coming off of unemployment
lifestyles, like welfare or out of prison.
I mean, there is just so much to be done that we cannot
lose this opportunity to fix what we know is a problem, we know
is causing big trouble. And maybe to at least put in place some
demos or whatever we can do to move toward a system that
legitimately recognizes people who need to work part-time
because of their other responsibilities they carry or
disabilities they carry--we tried to do this in the Ticket to
Work bill. We tried to do that. It didn't work. We haven't got
that far. We need to look at the big issues and try not to get
ourselves snarled down and prevent a step forward.
Now, solvency is a big issue, and I agree with that, but I
do ask you to all work with us to be sure we accomplish
something this year, because every year matters, and I don't
care who is the President or who is the majority. They are
going to be closely balanced for a number of years to come and
we are going to have take one step at a time to make real
progress in America for working people. So I just hope we will
all work together to get something done together this year on
this.
Thanks.
Chairman Herger. I thank the gentlelady. Now the gentleman
from Michigan, Mr. Levin, to inquire.
Mr. Levin. You know, in a sense I will pick up from where
Mrs. Johnson left off. I guess you noticed some impatience in
my questions, and I do have that. I was going to, Mr. Herger,
pull out $4, since you pulled out $1. I think is what Michigan
got back in 1999 for--let me do this first. This is what we got
back in 1992 for every dollar we put in, and I am very
skeptical that under this proposal we would have the funds to
do that. I just don't believe it, especially if we have an
extended benefit change and these other changes.
But let me just say something else, indicating my
impatience. I don't see a ghost of a chance that this proposal
can be adopted, the Administration proposal. If the decision is
to try to put it through the House, maybe you can do that. We
will have a huge debate, but there is no chance I would think
it can pass the Senate. And essentially what we are going to
say to you, especially those of you who support this or anybody
else, it is the status quo all over again. It is where we are
going to be, and it is sad. We have these trust fund monies.
There is agreement there has to be more put forth for
administrative expenses. Everybody agrees on that, and we are
going to be stuck right where we are. Nothing is going to
happen. And some of those who support this proposal, whatever
you want to call it, have been--that is not true of everybody
on this Committee--the major opponents of more appropriations.
It is not true of everybody on this Committee.
So the institution that would be considering this is the
institution that has helped to create this problem and that
could solve it by moving nonadministrative expenses. And I kind
of smile, Mr. Brock, when you say about the small State
supplement, could Congress and the Administration accept it as
mandatory spending? I mean, we haven't been willing to
appropriate moneys, and to talk about mandatory expending for a
piece of this I think is a dead end. So if we want another dead
end, we will follow this path. I think it is a terrible
mistake, and to Mr. Blankenburg, I don't know how much you have
lobbied this Congress to get moving on administrative expenses.
My guess is not much. I won't put you on the spot. I don't want
to put anybody on the spot.
Mr. Blankenburg. I will be happy to tell you. Two years. I
worked on the Hill for 6 years.
Mr. Levin. You worked on the Hill for 6 years? So--but I
don't want to put any organization on the spot. I don't know
how much NFIB has used its efforts to try to get this Congress
to use moneys that were set aside for a certain purpose. We
know that these trust fund moneys, like other trust fund
monies, were used for many years to hide a larger deficit, and
we need to face up to it.
And let me just say in terms of trusting the States, we are
going to get into a huge argument, because I think the record
of many States in terms of preserving moneys for unemployment
comp these last few years in many States has been miserable.
And now with a recession, they are coming here and saying
extend unemployment benefits when they have diminished the
funds available in some cases way below what is recommended by
the Labor Department, way, way below.
So we are going to end up having this deep argument about
this proposal, and administrative funding is going to stay just
where it is, and so I thought last year, Mr. McCrery, you and
others--I was less a participant--tried to move this ball
along. And now we are essentially changing the goal post
dramatically, and if anybody thinks this will lead to
legislation, I think they are wrong. So we need to decide, is
there another course, and I hope there is.
Chairman Herger. I thank the gentleman from Michigan. Now
the gentleman from Kentucky, Mr. Lewis, to inquire.
Mr. Lewis. Thanks, Mr. Chairman. Excuse me. Mr. Brock.
Mr. Brock. Yes, sir.
Mr. Lewis. What do job seekers lose today by there not
being adequate funding for the administration of UI benefits
and employment service programs, and how will this proposal
improve services for those laid off employees who are looking
for work?
Mr. Brock. Yes, sir. Job seekers--obviously I don't mean to
be trite or flippant--they are looking for a job. They are
wanting someplace where they can come, where employers have
listed their jobs, where there are individuals in fact working
with the employers in overall job development to be sure that
they get the qualified workers that they need.
Job seekers, right now I--this is very closely akin to it,
and I will refer to my own State here in this regard, but in
years past we talked about the long unemployment lines. Many of
our States, Oklahoma being one of them, have gone to telephone
call centers today so you don't see those lines, but what you
would see if you were looking closely, you would see people--
telephone lines that are clogged in many cases. Now, this isn't
true in every State, but by and large it is true in a lot of
them. You would see people that are out of work through no
fault of their own simply wanting to get benefits to get them
by as a bridge until they can get their next job, holding for
40, 50 minutes, whatever. And I realize--when we put ourselves
in their position, that is a very difficult position to be.
But overall with adequate funding of the administration of
this whole program, we would see the program working as it was
originally intended to work, that people would be off work for
far less time than they are today, we would be able to help
them get back quicker, we would be able to help employers get
the workers that they need much quicker. It would just be a
system that is operating the way that it was originally
intended.
Mr. Lewis. If the program was fully funded, would you be
satisfied with the system, how it works?
Mr. Brock. Well, generally speaking, I--and here again in
this case, I am speaking for the membership of the national
organization that I am the President of. I believe, yes,
basically we would be. I mean, obviously nothing is perfect,
but in general that is our greatest concern right now, is just
being able to keep up with the demand.
Again referring to Oklahoma, if you don't mind--I mean, I
am more familiar with these statistics--our initial claims for
unemployment were up 50 percent prior to September the 11th.
September the 11th has just dumped that additional load on us,
and we are trying to keep up. We are getting calls from our
local legislators and others asking ``how come I can't get
through to file my unemployment claim,'' and we try to get the
word out and let people know to be patient. No one has missed a
check yet, but it is just the inability to be able to keep up
with the demand, and I only see it getting worse.
Mr. Lewis. Thank you.
Chairman Herger. I thank the gentleman from Kentucky. Now
the gentleman from Michigan, Mr. Camp, to inquire.
Mr. Camp. Thank you, Mr. Chairman. Mr. Yarbrough, you
mentioned in your testimony that employers are overtaxed
because of some of the shortcomings in the unemployment
compensation system, and you mentioned the concept of quadruple
taxation. Can you tell me what you mean by that and what might
be an example of that?
Mr. Yarbrough. Well, I guess the first tax is obviously the
two-tenths. That is $14 that we are having to pay, which is not
being returned to the State for UI administrative funding. The
second tax is the fact that our State unemployment taxes are
increased because we do not receive enough UI administrative
funding from the government. The third tax is that we are now
paying temporary agencies to refer workers to us, because we
are not receiving enough referrals from our UI offices. The
fourth tax is that we have had to open up our own continued
employment centers to try and find enough workers.
So what has happened is we are having to go out and search
four different times, where in the late eighties, early
nineties, when the system was up and viable and fully funded, I
had liaison officers walking to me from the employment service
saying, these are the people that we have available, these are
the tax credits that you could take advantage of, and these are
the folks that we have ready to come to work for you.
And so since now the funding has been flat-lined out of
here, all those things and all those services have gone away.
The State UI offices are also no longer even certifying that
our workers are eligible to work. But, I just want to say that
there are four different levels of taxation.
Mr. Camp. Ms. Owens, you mentioned the lack of benefits for
workers who were formerly employed. And the States have the
option of providing people part-time workers' UI benefits at
this point, don't they?
Ms. Owens. Yes.
Mr. Camp. And I think several States do, as many as 15; is
that your understanding?
Ms. Owens. That is about right. If I might interrupt just a
second. One of the things that I think was surprising to worker
advocates was that during the boom time of the nineties,
especially the last few years of the nineties when, as I said,
we had almost full employment and many of the State trust funds
were flush, States did very little to expand coverage or
increase benefits and, in fact, they cut taxes. And one of our
concerns is that once States have the obligation of covering
administrative financing costs as well as benefits, there will
be even less incentive to expand coverage. So this proposal
makes it that much less likely that States will on their own
initiatives make these changes.
Mr. Camp. About 15 States have elected to offer part-time
benefits; is that correct?
Ms. Owens. That is correct.
Mr. Camp. And no State withdrew that offer in the nineties.
Ms. Owens. No. Not that I am aware of.
Mr. Camp. That has been in the States' prerogatives since
the inception of the program, has it not, since the thirties?
Ms. Owens. I would assume that is the case.
Mr. Camp. And I am just asking, you are not suggesting in
your testimony that the Federal Government take over and tell
the States whom to cover, are you?
Ms. Owens. Not entirely. We probably disagree as to what
might be appropriate Federal standards versus State standards,
and we do think that while there are matters that certainly are
appropriately left to the States, that this is a national
economy and there are some more decisions the Federal
Government should make. Unlike most European nations that run
national unemployment systems, many decisions most important to
workers here are left solely to the States.
Mr. Camp. And I would like to hear from some of the other
representatives on that point. Mr. Yarbrough.
Mr. Yarbrough. I did want to add that several States have
enacted additional UI taxes to help compensate for the lack of
administrative funding they are receiving from the Federal
Government.
Mr. Camp. For the Federal Government to do that in some
sense, there would be a mandating of tax hikes on States to
provide benefits that aren't provided.
Mr. Yarbrough. Working on the Governor's advisory board at
home, labor and management sit down with the public and work
out these issues before we go to the legislatures with what we
need to be seeking and what we need to be doing. That way we
get good local support on what takes place. That is the
problem, we continue to come to this group and we have seen no
reform, no dollars come back. We brought several proposals.
Everybody says we have got to do something but everybody wants
to wring their hands, and we need the dollars back. People are
needing the service.
Mr. Camp. Thank you. Mr. Blankenburg, do you have any
comments?
Mr. Blankenburg. Following up on what Chuck said, these are
situations that are worked on at the State levels whether to
cover part-timers or not. And just to emphasize your point, by
having the Congress mandate it, you are throwing the whole
balance of the system out of whack.
Mr. Camp. Thank you. Thank you, Mr. Chairman. I see my time
has expired.
Chairman Herger. Thank you, Mr. Camp. Now the gentleman
from Oklahoma, Mr. Watkins, to inquire.
Mr. Watkins. Just kind of an editorial comment. I notice my
colleague, Mr. Levin, has left. But I would agree with him
about legislation going to a dead end because that other body
has become kind of a graveyard over there. We passed very
progressive steps to try to stimulate the economy three times,
and we moved out front on several other issues. All have fallen
by the wayside when it got over to the Senate. I want to
acknowledge that being an obstructionist, though, does not
provide much leadership. It is easy to do. You can always board
up the barn and head to the house and say--but that doesn't
solve the problem. And we have got to solve problems. And it
becomes a very discouraging situation sometimes when we try to
work through things and they are not resolved.
Let me just ask, in Oklahoma, I know--we all are kind of
short-changing the refunds to the States, so to speak, on
administrative costs, and I noticed that we have only been
getting about 41 percent back, and there are problems that can
come about, but some people say there are going to be certain
program purposes dropped. But let me ask you in the way of a
question, what is in jeopardy in Oklahoma if we don't--and what
can you do or what would you do if you got 100 percent? That is
a hypothetical question there.
Mr. Brock. Congressman, I am not aware of programs
particularly being dropped per se, at least nothing comes to my
mind at the moment. But the problem is that it just continues
to choke more and more the delivery of these services. For us,
for example, in Oklahoma, it would mean that we would have more
local offices that we are having to close and consolidate
offices just simply because it is a matter of the funding that
we receive.
One thing that Chuck mentioned earlier just brought to my
mind, our legislature, and rightfully so, for several years has
given pay increases to our State employees. These are State
employees but they are coming from a federally funded source.
We just have to eat that. Every time they give a 3, 4, 5
percent salary increase, that is just that many fewer people
out there.
Mr. Watkins. Is 100 percent of that increase picked up by
Federal?
Mr. Brock. We are 100 percent Federally funded except we
are one of those States, and the report that I gave to you a
few moments ago, that about $1.2 million or so from our penalty
and interest, we use that to pay about 20 salaries also. That
money is over and above what employers are already paying for.
Mr. Watkins. That is kind of a reverse mandate.
Mr. Brock. In essence, it is.
Mr. Watkins. The State says we are going to require the
feds to pay more money.
Mr. Brock. That is correct. And I suspect that the same
thing is true in all of the States that I represent and that
they have to make it up somewhere.
Mr. Watkins. We have 77 counties in Oklahoma. How many
offices do we have?
Mr. Brock. We have 40.
Mr. Watkins. Some people have to drive 50 miles or more if
they know----
Mr. Brock. And this is where we are trying to economize
through technology, for example. Taking unemployment insurance
claims by telephone as opposed to maybe 40 or 50 minutes
waiting on the telephone. That is better than having to drive
50 miles to file an unemployment claim. So there are some
economies as a result of technology and so forth. This is the
people business and we need to be able to lend people the
personal care and assistance that they need, not only in times
of crisis and job loss and what-have-you, but for those who
have a job but want a better job. We need to be able to help
them, too. And as a result, we just end up bottom fishing, if
you please. We just end up doing the bare minimum just to get
by from day to day.
Mr. Watkins. In Oklahoma, our per capita income is 20
percent of the national average, and unemployment benefits, I
guess, are likewise.
Mr. Brock. Well, I am not looking at it exactly that way.
We pay our unemployment benefits based on a percentage of our
average income in Oklahoma. So it is comparable. It fits our
specific situation. Now how that relates to the national
average as far as benefits are concerned, I would have to do a
little research on that.
Mr. Watkins. Well, I share a concern and look forward to
trying to find some solutions and look forward to working with
you and other States in trying to find some solutions. And I
thank you very much. I know it is a long trip up; I don't know
when you got to town but----
Mr. Brock. I got a better night's sleep than you did.
Mr. Watkins. Thank you so much for coming.
Chairman Herger. Thank you very much, Mr. Watkins. I want
to thank each of our panelists for very interesting and helpful
testimony. We seem to be unanimous in recognizing that we have
a very serious problem and I believe our constituents
throughout the Nation expect us to correct this. Certainly part
of the problem, and it was just brought out, I believe, by you,
Mr. Brock, is that the employer--going back to something we had
stated before, but with a visual of that--is paying a dollar.
The Federal Government is taking that dollar and putting on
average 54 cents into a trust fund that is not being used. On
average 46 cents--in your case, Mr. Brock, only 41 cents--is
actually getting back to the States. Some 14 States here
actually have had to inflict an additional tax to help meet
State costs. We can and should and must do better than this,
and hopefully we are going to do that.
Mr. Watkins. Jon, I am leaving after this year, and I am
going to become unemployed.
Mr. Brock. That is not through no fault of your own.
Chairman Herger. I want to thank everyone involved, and
thank you, Mr. Cardin, for a very informative hearing. Thank
you very much. This hearing stands adjourned.
[Whereupon, at 2:10 p.m., the hearing was adjourned.]
[A submission for the record follows:]
Statement of the American Federation of State, County and Municipal
Employees, AFL-CIO
The American Federation of State, County and Municipal Employees
(AFSCME) submits the following statement on President Bush's
Unemployment Administrative Financing Reform Initiative for the March
5, 2002 hearing record of the Human Resources Subcommittee of the House
Ways and Means Committee.
As a participant in the multi-year unemployment insurance (UI)
``stakeholder dialogue,'' AFSCME is deeply disappointed that the
current Administration has abandoned the fundamental premise of that
process: that unemployment insurance reform can best be achieved when
consensus is sought among the key stakeholders in the system. The
consensus reform plan reached in June 2000 represented a remarkable
achievement at the federal level. Although stakeholder negotiations
occur at the state level, never before had such a process occurred in
Washington, much less produced a consensus.
The stakeholder package was a fair and balanced compromise among
competing interests. It contained something of importance for each
party, but not every change sought by the participants. For workers, it
required that states implement an alternative base period and cover
part-time employees and provided federal funds to pay these benefits.
For states, workers and employers, it provided increased and dependable
funding for state unemployment insurance and employment service (ES)
operations. For employers, it repealed the federal unemployment
insurance (FUTA) surtax.
Unfortunately, opposition by some business groups at the end of the
106th Congress stopped consideration of this package. Now the
Administration has sent to Congress a one-sided plan that abandons the
progress made during the stakeholder process.
The Administration plan would phase down the federal FUTA tax by 75
percent in five years. It would shift the responsibility for UI and ES
administrative financing to the states over the five-year period,
leaving the federal government with responsibility only for the
federal-state extended benefits program and the loan account and
transferring to the states a new annual financial responsibility of
over $3.5 billion.
This devolution plan can in no way be regarded as a comprehensive
employment security reform. It gives employers a $36.5 billion tax cut
over 10 years, but it does nothing to address the need to expand the
percent of unemployed workers receiving unemployment benefits. In
calendar year 2000, this ``recipiency rate'' was only 38 percent
nationally and ranged from a high of 73 percent in Connecticut to a low
of 16 percent in New Hampshire.
The absence of any reforms to address recipiency rates is not just
disappointing. It also is alarming. The low percent of the unemployed
who receive benefits compromises the program's countercyclical
effectiveness and has rendered the federal extended benefits (EB)
program increasingly less relevant. Because the EB program is triggered
by the insured unemployment rate (IUR), which measures the number of
individuals who receive basic benefits, increasingly it fails to
reflect the nation's overall pattern of unemployment. Thus, reducing
the IUR from five percent to four percent, as proposed by the
Administration, is not a satisfactory solution to improving the
extended benefits program. State benefit policies also must be
modernized to reflect the changing composition of the workforce,
including the growth of low-wage, temporary and part-time employment.
Worse yet, we believe that the Administration's devolution plan
will harm workers and further weaken this important safety net program
in several ways.
First, it will create new downward pressure on state benefit
policies. This is because the proposal eliminates the current
``firewall'' between administrative financing, which is a federal
responsibility, and benefit financing, which is a state responsibility.
Currently, state policymakers balance two competing pressures,
those from employers to minimize taxes and those from worker advocates
to improve state benefit policy. The devolution plan will add a third
claim on state taxes and resources--the need for administrative
funding. Inevitably, employer pressure to keep taxes down, combined
with state needs to maintain an adequate administrative structure, will
lead to cuts in benefits or rejection of much needed worker
improvements.
There is very good reason to believe that state benefit policy will
be caught in this vise. Despite the 1990s economic expansion, states
failed to strengthen their benefit policies while employers reaped
substantial benefits. Between 1994 and 2000, for example, tax decreases
took over $47 billion out of the UI system while recipiency rates
hovered at an all-time low of about one-third of the unemployed.
The Bush devolution plan also undercuts the primary enforcement
mechanism for federal protections for workers. Currently, as a
condition of receiving federal administrative grants, states must
maintain proper and efficient administration, pay benefits accurately
and promptly ``when due'', and provide a fair and impartial hearing
process. Without any federal funding of state operations, the
appropriateness of federal standards for the use of state funds will
certainly be challenged. Furthermore, it is highly doubtful that the
federal government would raise employer taxes by eliminating the tax-
offset credit in nonconforming states as the Administration has
proposed.
AFSCME strongly believes that there is an administrative
underfunding crisis. Severe underfunding means workers do not get
benefits paid in a timely fashion and do not get the reemployment
services they want and need. Furthermore, underfunding has led states
increasingly to rely heavily, if not exclusively, on telephone claims
systems or other electronic methods, which do not adapt easily to
sudden surges in volume or to the complexity of disputed claims. In
addition, because states are not fully reimbursed for their workload,
it is possible that federal underfunding may constitute another
rationale for not improving state benefit policies to cover more
unemployed workers.
However, even as a solution to this problem, the devolution plan
falls short in our view.
In the first place, although the Administration intends to transfer
$14 billion from the federal trust fund into state trust funds during
the five-year transition period, there will be no federal
administrative funding after that. This means that states will have to
rise over $3.5 billion annually in new state revenue simply to make up
for the loss in federal funding.
The Administration maintains that, because federal FUTA taxes will
be reduced by six-tenths of a percent, states should be able to finance
their administrative costs without employers experiencing a tax
increase. There are several fallacies to this analysis.
Employers do not regard two-tenths of the six-tenths as a source of
revenue for the system at all because they consider it an outdated and
unnecessary surtax that should have expired long ago. As a result,
states could only be able to reclaim four-tenths without raising
employer taxes beyond what employers might be willing to accept.
In the aggregate, the four-tenths tax would have raised $3.5
billion in FY 2001. That is only about $300 million more than the FY
2001 federal appropriation, a level which the states have said is
inadequate. The amount is actually less than states have been receiving
during the current recession.
For individual states with high recipiency rates, the picture is
worse. For example, Connecticut's federal administrative grant was $57
million in FY 2001, while a four-tenths tax on its employers would have
raised only $44 million. Other states, such as Pennsylvania,
California, and Michigan, would be in the same situation.
The current administrative financing system more accurately
reflects state workload needs and is countercyclical in nature. It also
pools risk nationally. First, administrative funds are allocated among
the states according to their share of UI claimants and employer taxes
collected. Second, there is a federal mechanism that automatically
releases additional administrative funding if national unemployment
rises above expected levels and the number of claimants rise. Both of
these features would be eliminated if the federal administrative
financing responsibility ends. Individual states could not easily
replicate these features.
The fact that a four-tenths unemployment tax would not have yielded
as much as the current system has sent to the states during the current
recession graphically demonstrates the bind states in which may find
themselves. Unless the states build adequate reserves during economic
expansions, they will not be able to increase their administrative
resources easily when claims surge during recessions. That means they
may have to borrow from the federal loan fund at six percent interest
(or whatever the rate at the time might be), thus unnecessarily
increasing the cost of their operations.
The track record of the states does not inspire confidence that
they will handle this new financial responsibility prudently in all
cases. As noted earlier, states were much more eager to cut taxes than
strengthen their benefit systems even when a robust economy would have
made doing so much easier. Furthermore, some states have mismanaged
their benefit trust funds by failing to build up adequate reserves and
choosing instead to give their employers tax cuts. Most notable are New
York and Texas, which will be borrowing $1.5 billion from the federal
government because their benefit trust funds are running out of money.
The essence of the Administration's plan is to cut employer taxes
and to pass the responsibility for administrative funding off to the
states. While it may be a ``new balance,'' it is no meaningful solution
to the problem. A far better solution would be simply to request
additional appropriations for FY 2003. Even better would be a return to
the stakeholder framework, with its administrative funding mechanism
that would release adequate funds based on workload as a mandatory
expenditure. For FY 2003, it would guarantee states an additional $1
billion in federal appropriations, instead of giving them the
``opportunity'' to levy a four-tenths increase in state employer taxes
that would raise only $300 million more.
The release of $8 billion in Reed Act funds as part of the economic
stimulus bill has given states a unique opportunity to address the
administrative underfunding problem and weaknesses in state benefit
policies. The Reed Act money should give the states ample resources for
many years to come if they use it wisely. In our view, it obviates the
need for the Administration's misguided devolution plan. AFSCME
strongly urges the Committee to monitor closely how states use their
Reed Act funds and to refrain from considering the Administration's
proposed administrative financing proposal.