[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
UNEMPLOYMENT COMPENSATION REFORM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HUMAN RESOURCES
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
FEBRUARY 29, 2000
__________
Serial 106-97
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
70-276 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Human Resources
NANCY L. JOHNSON, Connecticut, Chairman
PHILIP S. ENGLISH, Pennsylvania BENJAMIN L. CARDIN, Maryland
WES WATKINS, Oklahoma FORTNEY PETE STARK, California
RON LEWIS, Kentucky ROBERT T. MATSUI, California
MARK FOLEY, Florida WILLIAM J. COYNE, Pennsylvania
SCOTT McINNIS, Colorado WILLIAM J. JEFFERSON, Louisiana
JIM McCRERY, Louisiana
DAVE CAMP, Michigan
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
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C O N T E N T S
__________
Page
Advisory of February 22, 2000, announcing the hearing............ 2
WITNESSES
U.S. Department of Labor, Hon. Raymond J. Uhalde, Deputy
Assistant Secretary, Employment and Training Administration.... 24
______
American Federation of Labor and Congress of Industrial
Organizations, David A. Smith.................................. 59
Arizona, State of, Hon. Jane Dee Hull, Governor.................. 16
Committee for Economic Development, Van Doorn Ooms............... 70
English, Hon. Philip S., a Representative in Congress from the
State of Pennsylvania.......................................... 8
Interstate Conference of Employment Security Agencies, and Utah
Department of Workforce Services, Robert C. Gross.............. 44
Levin, Hon. Sander M., a Representative in Congress from the
State of Michigan.............................................. 4
Louisiana Department of Labor, Hon. Garey Forster, Secretary..... 67
UWC-Strategic Services on Unemployment and Workers' Compensation
and Tyson Foods, Inc., Chuck Yarbrough......................... 50
Wilson, Mark, Heritage Foundation................................ 64
SUBMISSIONS FOR THE RECORD
American Federation of State, County and Municipal Employees,
AFL-CIO, statement............................................. 85
Ohio, State of, Hon. Bob Taft, Governor, statement and
attachments.................................................... 88
Society for Human Resource Management, Alexandria, VA, statement. 92
Washington, State of, Hon. Gary Locke, Governor, statement....... 94
Western Governors' Association, Denver, CO, statement and
attachment..................................................... 98
UNEMPLOYMENT COMPENSATION REFORM
----------
TUESDAY, FEBRUARY 29, 2000
House of Representatives,
Committee on Ways and Means,
Subcommittee on Human Resources,
Washington, DC.
The Subcommittee met, pursuant to notice, at 1:34 p.m., in
room B-318, Rayburn Building, Hon. Nancy L. Johnson (Chairman
of 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 22, 2000
No. HR-16
Johnson Announces Hearing on
Unemployment Compensation Reform
Congressman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Human Resources of the Committee on Ways and Means, today announced
that the Subcommittee will hold a hearing on unemployment compensation
reform. The hearing will take place on Tuesday, February 29, 2000, in
room B-318 Rayburn House Office Building, beginning at 1:30 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 Governor Jane Dee Hull of Arizona and Governor
Bob Taft of Ohio, Members of Congress, and a representative of the U.S.
Department of Labor. Additional witnesses will include representatives
of employers, labor, State administrators, and scholars. 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 system is a Federal-State program
that provides benefits to unemployed workers with a history of labor
force attachment. Every State designs its own benefit program, within a
broad framework provided by Federal law, and levies taxes on employers
to pay for regular unemployment benefits. The Federal Government also
imposes a tax on employers, based on their number of employees, that
pays for the Federal parts of the system. These parts include payments
for State and Federal administration, funds for the U.S. Employment
Services which helps unemployed workers reenter the labor market, funds
for loans to States with bankrupt programs, and funds for half of
extended unemployment benefits for workers in States with exceptionally
high levels of unemployment. All funds, both those for regular State
benefits and for the Federal parts of the system, are kept in Federal
accounts that, like Social Security funds, are part of the unified
Federal budget.
In the last three years, several proposals for reforming the
Unemployment Compensation program have been discussed. Several of these
proposals have appeared in proposed legislation. Some of the major
legislative proposals would:
--eliminate the 0.2 percent surtax placed on employers in 1976 and
was extended most recently through 2007 by the Balanced Budget Act of
1997;
--change the base period employment requirements to qualify for
unemployment benefits and thereby allow more workers to qualify;
--shift some Federal responsibilities, including control over the
taxes that support them, to the States;
--provide incentives for States to improve the solvency of their
benefit accounts;
--make the extended benefits program more accessible; and
--increase access to unemployment benefits for laid-off workers
seeking part-time work.
A working group of the Administration, labor, business, and various
entities with an interest in Unemployment Compensation has been meeting
for nearly two years in the attempt to reach a compromise proposal that
could draw support from across the political spectrum.
In announcing the hearing, Chairman Johnson stated: ``The nation's
unemployment program provides critical services to out-of-work
Americans. As we move into the 21st Century, it is important that we
improve and strengthen the system so we can meet the increasingly
complex needs of the changing workforce. This hearing will give us an
opportunity to review a variety of proposals developed to meet this
goal.''
FOCUS OF THE HEARING:
The hearing will focus on the various reforms now under discussion.
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and hearing date noted on a label, by the close of business, Tuesday,
March 14, 2000 , to A.L. Singleton, Chief of Staff, Committee on Ways
and Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Human Resources office, room B-317
Rayburn House Office Building, by close of business the day before the
hearing.
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noted above.
Chairman Johnson. We are going to delay our opening
statements and move right to Congressman Levin and hopefully
Congressman English so that they have full opportunity to give
their testimony and answer questions before the Governor
arrives at 2. We will adjust our activities according to the
needs of those who are testifying. And so with that, Sandy, I
would really like to welcome you.
Mr. Levin. Thank you.
Chairman Johnson. You have been a long and active Member of
this Subcommittee of many years and I appreciate your
testifying. And if then Ben would like to open.
Mr. Cardin. My opening statement was devoted to the great
career that Congressman Levin has had as Ranking Member of this
Committee, but I will defer all those comments and just welcome
our colleague to the Committee.
STATEMENT OF HON. SANDER M. LEVIN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MICHIGAN
Mr. Levin. Well, thank you. And to the two of you and to
Jim McCrery, I very much appreciate the chance to testify
today. You have my written statement and I will refer to it.
Chairman Johnson. And it will be entered in----
Mr. Levin. Good.
Chairman Johnson.--its entirety in the record.
Mr. Levin. As you know, this is a vital issue. I was
thinking about it yesterday and the only way it would not be
absolutely important would be if anybody thinks there will
never be another recession. And none of us like to think that
there ever will be. But I think the likelihood is there will be
some kind of a downturn at some point in the future.
And that is why I think it is so wise to Congresswoman
Johnson and to you, Mr. Cardin, and, Mr. McCrery, that you are
taking the time to look at this issue. And as I look at the
various proposals, I would like all of you to consider the
clear need for a continuing Federal role in this matter.
History has taught us that states cannot always address
unemployment singlehandedly, and that as a nation we should
save resources during good times to prepare for less fortunate
circumstances.
And as I was reading that over, it struck me, I think more
and more there is some agreement across party lines that, as
they say now in a trite way, we should fix a roof when the sun
is shining. And I think that very much applies to Unemployment
Compensation. And I fear that advocates of eliminating the
current Federal-State partnership on unemployment have failed
to accept these two lessons.
And let me give you, if I might, one example. It is from my
own home state. And this is a reference to 1982, the last
recession of the early `nineties. I did not look up the figures
for the even more severe recession in the `eighties, but my
guess is the figures would be even more dramatic.
In 1992, 188 million in Federal unemployment taxes were
paid in my home state of Michigan. But the Federal Government
spent $719 million that same year in Michigan for
administrative costs and emergency unemployment benefits. I
understand the Governor of Ohio was not--is not able to be here
today.
Chairman Johnson. Unfortunately.
Mr. Levin. I do remember at a hearing of the Subcommittee a
few years ago when he was here, I raised this issue relative to
Ohio and presented figures showing, in a particular year, how
much was paid in and how much was paid out. And while the
figures were not quite as striking as those from Michigan, I
thought they were rather dramatic. And I think that so-called
devolution proposals, including H.R. 3174, would eliminate or
seriously erode this Federal backstop protection during
economic downturns.
The major impetus behind proposals to eliminate the Federal
collection of unemployment taxes is the concern that states
have expressed regarding inadequate administrative funding
being provided by the Federal Government. And let me say
unequivocally that this is a legitimate concern which should be
addressed. And 3174 shines a spotlight on that issue, though it
goes much beyond it.
However, we do not need to eliminate the Federal role in
helping unemployed workers to achieve that goal. In the
legislation that I have introduced with Representative English,
who is next to me, administrative funding--additional funding
would be provided to those states that make an even modest
improvement in the solvency of their state UI trust funds.
And I would like to point out, according to the Labor
Department, 20 states currently have insufficient reserves in
their unemployment trust funds to weather a severe recession.
Encouraging them to save for the future is certainly consistent
with common sense.
I also understand that a working group on unemployment
issues, which represents employers, workers, the states, and
the administration, have discussed the advantages of making UI
administrative funding mandatory, rather than discretionary.
This proposal warrants some attention, particularly concerning
the recent trend in the Appropriations Committee.
In fact, the shortfall between funding provided by the
Appropriations Committee and the level of financial need in the
states to administer the UI systems has grown considerably
since 1994. And I point that out to--in part because that is
the fact and, in part, because I do think that everybody who
wants to flirt with the idea of devolution should look at what
the record is.
Because from 1995 to 198, a shortfall between
administrative funding and financial need increased from three
percent to more than 13 percent. Continually cutting
appropriations for UI and employment services and the claiming
that reduction makes the case for devolution, seems a bit
disingenuous.
There are two other issues the Subcommittee should
consider, I think, when reviewing proposed reforms for the UC
system. First, during the last recession, the Extended Benefits
Program did not trigger on appropriately, meaning Congress was
forced to pass an Emergency Unemployment Compensation program
at $28.5 billion dollars as I remember it. And I think that all
of you were on the Subcommittee during at least some of those
years. And I was. And the difficult task we had in terms of
providing for emergency funding.
And the legislation introduced by Mr. English and myself
proposes an alternative trigger for the EB program to ensure
that it works as intended. This approach, which assesses the
total number rather than the insured number of unemployed
workers, is consistent with the recommendations of the Advisory
Committee on Unemployment Compensation.
And, second, some low-income workers are being denied UI
benefits because their most recent earnings are not considered
by many states when eligibility decisions are made. To address
this situation, H.R. 1830 would provide funds to help states
voluntarily implement--and I emphasize voluntarily implement--
so-called Alternative Base Periods, which calculate the last
four quarters of earnings, rather than the first four out of
five. This change represents one way to begin to reverse the
long-term trend of fewer unemployed Americans receiving UI
benefits.
And I do say to all of you, as colleagues, if we asked our
constituents what percentage--just give us a rough
approximation--of unemployed people are eligible for
Unemployment Compensation, I doubt if anybody would come any
close to as low a figure as one-third. There is something
wrong.
And it seems to me--for example, people who have moved from
Welfare to work who would be vulnerable in a recession, I just
think for those and others, there has to be some answer. And
the notion that only a third of the unemployed workers, people
who are working are eligible these days for unemployment--a
historic low--I think is contradictory to what we believe in
the value of work.
In closing, let me say that I hope this Subcommittee is
guided by one overriding concern when considering reforms to
our Nation's Unemployment Comp system--the well-being of
workers without employment. We need a system capable of
providing them with temporary wage replacement, and I would
add, with permanent re-employment--a system that is dependable
on both good times and bad. Thanks very much.
[The prepared statement follows:]
Statement of Hon. Sander M. Levin, a Representative in Congress from
the State of Michigan
Madame Chairwoman, I would like to thank you for allowing
me to testify today on a very important issue--our Nation's
response to unemployment. It is a pleasure to return to the
Human Resources Subcommittee, if only for a day.
As you consider various proposals to reform the
unemployment compensation system, I urge you to consider the
clear need for a Federal role in addressing a National issue.
History has taught us that States cannot always address
unemployment single-handedly, and that as a Nation, we should
save resources during good times to prepare for less fortunate
circumstances. I fear that advocates of eliminating the current
Federal-State partnership on unemployment have failed to learn
these two lessons.
Let me give you one example of this issue. During the last
recession in 1992, $188 million in Federal unemployment taxes
were paid in my home state of Michigan. But the Federal
government spent $719 million that same year in Michigan for UI
administration costs and emergency unemployment benefits. So-
called devolution proposals, including HR 3174, would eliminate
this Federal backstop protection during economic downturns.
The major impetus behind proposals to eliminate the Federal
collection of unemployment taxes is the concern States have
expressed regarding inadequate administrative funding being
provided by the Federal government. Let me say unequivocally
this is a legitimate concern which should be addressed.
However, we do not need to eliminate the Federal role in
helping unemployed workers to achieve that goal. In the
legislation I have introduced with Representative English (HR
1830), additional administrative funding would be provided to
those States that make even modest improvements in the solvency
of their State UI Trust Funds.
I should say that, according to the Department of Labor, 20
States currently have insufficient reserves in their
unemployment trust funds to weather a severe recession.
Encouraging them to save for the future is certainly consistent
with commonsense.
I also understand that a working group on unemployment
issues, which represents employers, workers, the States and the
Administration, have discussed the advantages of making UI
administrative funding mandatory, rather than discretionary.
This proposal warrants some attention, particularly considering
the recent trend in the Appropriations Committee.
In fact, the shortfall between funding provided by the
Appropriations Committee and the level of financial need in the
States to administer their UI systems has grown considerably
since my friends who advocate on behalf of devolution assumed
majority status in Congress. From 1995 to 1998, this shortfall
between administrative funding and financial need increased
from 3% to more than 13%. Continually cutting appropriations
for UI and employment services, and then claiming that
reduction makes the case for devolution, may seem a little
disingenuous to a neutral observer.
There are two other issues the Subcommittee should consider
when reviewing proposed reforms for the Unemployment
Compensation system. First, during the last recession, the
Extended Benefits Program did not trigger on appropriately,
meaning Congress was forced to pass an Emergency Unemployment
Compensation program. My legislation proposes an alternative
trigger for the EB program to ensure that it works as intended.
This approach, which assesses the total number rather than the
insured number of unemployed workers, is consistent with the
recommendations of the Advisory Committee on Unemployment
Compensation.
And second, some low-income workers are being denied UI
benefits because their most recent earnings are not considered
by many States when eligibility decisions are made. To address
this situation, HR 1830 would provide funds to help States
voluntarily implement so-called Alternative Base Periods, which
calculate the last four quarters of earnings, rather than the
first four out of five. This change represents one way to begin
to reverse the long-term trend of fewer unemployed Americans
receiving UI benefits.
In closing, let me say that I hope this Subcommittee is
guided by one overriding concern when considering reforms to
our Nation's unemployment compensation system--the well-being
of workers without employment. We need a system capable of
providing them with temporary wage replacement and permanent
re-employment--a system that is dependable in both good times
and bad.
Thank you.
Chairman Johnson. Thanks very much, Congressman Levin. And,
Congressman English, a pleasure to welcome you before the
Committee. It has been a great help to me to have you on my
right hand and I am delighted to have you----
Mr. English. Thank you, Madam Chair. That is----
Chairman Johnson.--testify in support of your legislation.
STATEMENT OF HON. PHILIP S. ENGLISH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. English. That is high praise. And I want to, first of
all, thank you for the opportunity to testify. Second of all,
say that I would like to associate myself with remarks of the
distinguished gentleman from Michigan and it is a privilege for
me to be the prime cosponsor of his legislation, which, I
believe, has the support of the administration.
I would like to kind of condense the remarks I had intended
to deliver here today, but simply make the point that there is
a real problem in our system of unemployment insurance. The
safety net is badly tattered and there are many holes that the
public is largely unaware of. I think we need to move to
address that.
Second of all, the time to act is now. The fact that we are
in a period of comparatively low unemployment and comparatively
low utilization of the program, means that it is a perfect time
to try to address this problem because of cost factors. We need
to move now, not when we are next in a recession.
And, third, I want to caution the Subcommittee against the
dangers of vulcanizing [ph] unemployment insurance in America.
I believe we need to have a strong national system of
unemployment insurance that can guarantee that people can
receive like treatment in states across the country and that
states will have a comparable fiscal capacity to deal with
problems.
When I began to deal with this issue, I was a young staffer
working for the State Senate Labor Committee in Pennsylvania
and our experience was that Pennsylvania was going afresh into
a recession. And, in fact, our state had been plagued with high
employment for a long period of time. I fear that if we tamper
with the Federal nature of the unemployment insurance system,
we run the risk of putting states who had--go through longer
spells of unemployment at a comparative disadvantage dealing
with their problem because they are forced to raise taxes and
ultimately make themselves a less attractive place for
investment.
Lake last year, in addition to the legislation that I have
cosponsored with Mr. Levin, I introduced legislation designed
to empower states to meet the needs of the long-term
unemployed. The current unemployment insurance system was
created to help states combat short-term unemployment.
Unfortunately, workers who are laid off from their jobs now are
less likely to return to their previous jobs as in the past,
even in the situation where we are running and it--through a
period of extended growth.
Unemployment is hard enough on families without the worry
that benefits will not be available because of the structure of
the system. H.R. 3167, the legislation which I have introduced,
will make several important changes to the current system.
One, it will make it easier for states to provide extended
unemployment benefits to workers who have been unemployed for
long periods by broadening the trigger states can use to access
benefits.
Research has shown that the combination of the reduction in
the Insured Unemployment Rate and the increase in the trigger
level during the recession of the early `nineties, resulted in
the failure of the Extended Benefits program to trigger on as
unemployment continued to rise.
As a result, Congress found it necessary to pass a series
of emergency extensions of UC benefits. Put simply, no state
was able to tap into Extended Benefits during the most recent
recession. THat is a signal that the system is broken.
Two, my legislation would encourage states to maintain
sufficient unemployment trust fund balances to cover the needs
of unemployed workers in the event of a recession. States that
maintain adequate reserves, based on their own experience, to
cover expenses in future recessions would receive slightly
increased interest earnings on the part of their trust fund;
states that fall short would receive slightly reduced interest
earnings. This would provide an incentive for states to be good
trustees of the system.
Third, it would allow interest-free cash-flow Federal loans
only for states that have sufficient trust fund reserves to
last through a future recession.
Fourth, it would allow states to collect the Federal share
of unemployment insurance taxes from employers, allowing
employers to fill out one form and write one check, not two,
one of the benefits attributed to some of the devolution plans
that this Subcommittee will also consider.
It would also, fifth, require states to distribute
information packets explaining unemployment insurance
eligibility conditions to unemployed individuals.
All of these provisions are based on recommendations from
the Advisory Counsel on Unemployment Compensation. The findings
from the Advisory Counsel, which was established in 1991, have
been out there for a number of years and my legislation freely
was modeled on them. I--the process of drafting H.R. 3167
allowed me to utilize my experience when considering the
effects each recommendation would have on the unemployment
insurance system.
And, finally, Madam Chair, I would also hope that the
Subcommittee would consider the pernicious effects of the
current Tax Code on the unemployment insurance system.
Specifically for the--we now, unlike in the early eighties, tax
unemployment insurance benefits as income. This has put many
people who go through an extended period of unemployment and
collecting benefits at a big disadvantage in the following year
when they are forced to pay taxes. This is the cruelest tax of
all.
The tax on Unemployment Compensation kicks workers when
they are down. Unemployment benefits are intended to stabilize
the income of individuals and families in the face of layoffs.
Yet someone who experiences lengthy unemployment, a situation
that depletes the financial reserves of most middle class
families, will face a large, and usually unexpected, tax
liability the next year. That is unfair and I would hope we
would move to address that at some point in the future.
I thank you for the opportunity to testify and for the fact
that you have been willing to take the Subcommittee and focus
on this very important issue in this important system.
[The prepared statement follows:]
STATEMENT OF HON. PHILIP S. ENGLISH,
A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA
Madame Chairwoman and fellow Members of the Subcommittee, I
want to thank you for holding this important hearing and for
allowing me to address my colleagues and everyone in attendance
today on unemployment reform. As most of you may know, before
being elected to Congress, I was the Research Director for the
Senate of Pennsylvania Labor and Industry Committee. During my
tenure, I dealt with many of the issues being discussed today
and I can tell you from my own hands-on experience that the
current unemployment insurance (UI) system is badly in need of
reform. States are not equipped to tackle unemployment as we
begin the new millennium with a UI system that has changed very
little since its inception and cannot deal effectively with the
changing nature of unemployment. I will discuss several changes
to the system I am proposing as well as the unfair taxation of
benefits during my testimony today.
Late last year, I introduced legislation designed to
empower states to meet the needs of the long term unemployed.
The current unemployment insurance system was created to help
states combat short-term unemployment. Unfortunately, workers
who are laid off from their jobs now are less likely to return
to their previous jobs as in the past--and long-term
unemployment is increasing. The current system cannot
adequately address long-term unemployment.
Unemployment is hard enough on families, without the worry
that benefits will not be available because of the arcane
structure of the system. H.R. 3167, the legislation which I
have introduced will make several important changes to the
current system:
1.) Make it easier for states to provide extended
unemployment benefits to workers who have been unemployed for
long periods by broadening the trigger states can use to access
benefits.
Research has shown that the combination of the reduction in
the Insured Unemployment Rate and the increase in the Trigger
level during the recession of the 1980's resulted in the
failure of the Extended Benefits program to trigger ``on'' as
unemployment continued to rise. As a result, Congress found it
necessary to pass a series of emergency extensions of UI
benefits. Put simply, no state was able to tap into Extended
Benefits during the most recent recession. Therefore, it is
absolutely necessary to reform the program prior to the onset
of the next recession. Emergency extensions of benefits are a
Jerry-Built policy prescription neither well-timed nor well-
targeted.
2.) Encourage states to maintain sufficient unemployment
trust fund balances to cover the needs of unemployed workers in
the event of a recession. States that maintain adequate
reserves (based on their own experience) to cover expenses in
future recessions would receive slightly increased interest
earnings on part of their trust funds; states that fall short
would receive slightly reduced interest earnings.
3.) Allow interest-free, cash-flow federal loans only for
states that have sufficient trust fund reserves to last through
a future recession.
4.) Allow states to collect the federal share of
unemployment insurance taxes from employers, allowing employers
to fill out one form and write one check, not two.
5.) Require states to distribute information packets
explaining unemployment insurance eligibility conditions to
unemployed individuals.
All of these provisions are based on the Advisory Council
on Unemployment Compensation's Collected Findings and
Recommendations for 1994-1996. As most of you know, the
Advisory Council was established under the Emergency
Unemployment Compensation Act of 1991. That law instructs the
Council to evaluate the unemployment compensation program and
make recommendations for improvement. The process of drafting
H.R. 3167 allowed me to utilize my experience when considering
the effects each recommendation would have on the UI system. I
have concluded that if the recommendation were enacted into
law, as I propose in H.R. 3167, states (like Pennsylvania)
would have the tools to assist workers faced with the long-term
unemployment.
Another important issue I would like to address is the
current tax on unemployment compensation (UC) benefits. Before
1979, UC benefits were excluded from inclusion in income tax
purposes. UC benefits are currently fully subject to tax. This
tax treatment, in place since 1987, puts UC benefits on par
with wages and other ordinary income in regard to income
taxation. Last year, I introduced legislation, H.R. 3169, the
``Unemployment Tax Repeal Act,'' to gain exclude UC benefits
from inclusion in gross income for tax purposes. The pre-1979
exclusion was upheld by Internal Revenue Service rulings based
on three arguments: 1.) the law did not explicitly require
taxation of UC, 2.) the benefits were viewed as part of the
social welfare system and not regarded as wages, and 3.)
taxation would undercut UC's income support objectives. I feel
the final justification is particularly true. The UC tax is not
a tax on income; it is a tax on benefits--benefits received
during one of the most difficult times in a person's life. The
UC tax hurts the economic security of workers throughout
America. Our system should be structured to provide benefits to
taxpayers, not dump penalties on the unemployed.
Madame Chairwoman I have talked to literally dozens of
people in Western Pennsylvania who have collected unemployment
benefits--and then paid taxes on the benefits as normal income.
Their experiences highlight now grossly unfair tax is.
The tax on unemployment compensation kicks workers when
they are down. Unemployment benefits are intended to stabilize
the income of individuals and families in the face of layoffs.
Yet someone who experiences lengthy unemployment--a situation
which depletes the financial reserves of most middle class
families--will face a large (and usually unexpected) tax
liability the next year. For many who have struggled to survive
a layoff, this tax bill is the last straw.
Simply allowing tax withholding on these benefits is no
solution: it merely depletes the value of compensation that is
already merely adequate. I would argue that however this tax is
administered, it is fundamentally inequitable and perversely
burdensome to a beleaguered middle class.
Madame Chairwoman, I will conclude by emphasizing my strong
support for reforming our unemployment system. It is my hope
that our Committee will give its strongest consideration to
developing legislation that will encompass may of the
suggestions heard here today. Following through on these
recommendations will result in a more manageable system and a
more secure U.S. workforce.
Thank you for the opportunity to testify today.
Chairman Johnson. Thank you. I appreciate you both
providing us with a very thoughtful introduction to this
hearing. And I am going to yield to Mr. McCrery to question
first since we are short of time.
Mr. McCrery. Thank you, Madam Chairman. Gentlemen, thank
you for your testimony today and for your thoughtfulness in
looking at our unemployment insurance system and the system of
benefits for the unemployed. And you bring up some very good
questions that we ought to take a look at.
However, I am puzzled by your reluctance to promote a
repeal of the .2 percent surtax. The point--the revenue from
the .2 percent surtax is overflowing. It is causing our cups,
our various funds, to overflow and we have continually jiggered
the caps and created other funds that they could--excesses
could flow into. It is a really bizarre, almost Byzantine--here
is a chart showing all the funds that we now let over excess
funds flow into.
And really, the only reason we have been doing that is not
for the benefit of the unemployed. It is for the--it has been
for the benefit of the deficit. It was to hide the deficit. It
was just to bring revenues into the Federal Government that
mask the true size of our deficit. And now that we don't have a
deficit, how can you justify not promoting, in your bills or in
any bill addressing the UI system, repealing this burdensome,
unnecessary tax on employers?
Mr. Levin. Go ahead.
Mr. English. I may have a different answer than some others
might. My opposition to it at this stage is purely tactical
rather than philosophical. I would like to see us deal with all
of the problems in the UC system, or, at least, look for ways
of improving the UC system overall. As part of doing that, I am
perfectly willing to entertain the repeal of the .2 percent
surtax. I think your criticism of the surtax has considerable
merit.
My concern is that, in the process of going forward to
repeal it, we not also forget some of the other things that
need to be fixed in the UC system, like the Extended Benefits
Program. I would point out to the gentleman that fixing the
Extended Benefits Program would be a very inexpensive thing to
do in the big picture. And if we were to do that and several
other reforms and also repeal the .2 percent surtax, you would
see it as a win-win for workers and for small business. And I
thank the chair----
Mr. McCrery. Thank you.
Mr. Levin. And, Mr. McCrery, my response is not so
different. I think it is a mistake to take one piece of this.
We should look at the larger picture. And I think the Advisory
Committee--or there is a working group that is doing just that.
And I would think we should encourage it.
I looked at the figures for various states and it is true
that there is a major discrepancy between what is paid in and
what is paid out in administrative costs. For example--and the
Governors will be here for Arizona--and I didn't copy down the
year--45 million paid--no, 112 million paid in and 45 million
paid back. But the percentage of unemployed who receive
insurance in Arizona is 21 percent.
And I mention your state because I think you will be
unsatisfied--dissatisfied with the figure. You paid in with
both figures 92 million and received back 38 in administrative.
But your--the rate of coverage in Louisiana is 26 percent.
Now, there is something wrong with the system that leaves
only a fifth or a quarter coverage. So, in a word, I favor
looking at all of these issues, the Extended Benefit Program,
the coverage problem, as well as the two percent--the .2
percent.
Mr. McCrery. Well, Mr. Levin, I think you make a legitimate
point in urging us to look at the reasons for such a low rate
of coverage across the board. However, imagine what the states
would have to be doing if their workloads were any higher than
they are in terms of their administrative expenses, which they
are being shorted on and have been shorted on for the last
number of years. So----
Mr. Levin. But they would be receiving more in
administrative costs if they had a higher rate of coverage.
Mr. McCrery. Well, it--I mean, I am not sure of that. That
the----
Mr. Levin. I see. I see.
Mr. McCrery.--the appropriate is up to the Congress. And we
have been the ones that have been shorting that appropriation
year after year, making the formulas work to fit the
appropriation. So I am not sure that you are accurate in saying
that states would necessarily get more. And that is why in my
bill I make it a mandatory spending item and then the states
could draw down what they need for their administrative
expenses.
So I think that is a superior approach to this method that
we have been using for a number of years that have shorted the
states. So I don't mind looking at the rationale for the low
rate of coverage. But I would urge you to look at the fact that
we have been short-changing the states for years now on their
administrative costs. And the tax was designed to cover those
and we have not been fulfilling the promise of that tax.
Mr. Levin. Could I just add briefly? The fact there is a
surplus is also a reason for us to go to the Appropriations
Committee and urge that they provide adequate funding for
administrative costs.
Mr. McCrery. Well, in my bill we wouldn't have to do that.
They would be relieved of that burden. Thank you, Madam
Chairman.
Chairman Johnson. Thank you. Mr. Cardin.
Mr. Cardin. I thank you, Madam Chair. Let me agree with Mr.
McCrery in regards that the--our budget systems shouldn't force
us into a conclusion. We should have--we should do what is the
right policy here. And I agree with the essence of your point
that we have done it--we have kept the FUTA tax in place
because of the budget considerations, not because of the need
for the funds, and it should be considered on its own merits.
Having said that, let me just concur in the comments of
both Mr. Levin and Mr. English. I thought both of you made
very, very effective points which I concur in. And I think it
was very important that we hold these hearings now to try to
look at our unemployment insurance system and strengthen it.
And the points that both of you raised about having a fair way
to compensate the states for their administrative costs and to
have incentives in the program to strengthen the solvency of
the state funds are things that we need certainly to improve
upon.
One concern I have is that we are also looking at other
fundamental changes. Mr. McCrery has some legislation that
would devolve a good part of this to the states. I guess one of
my concerns is that we are enjoying a very robust economy right
now, very low unemployment rates. We are all very optimistic.
But I remember a special session in the State of Maryland when
we had a slight recession that nearly caused panic in our
states about providing unemployment extended benefits to--and
emergency benefits to our workers.
So I am concerned that we might be lulled into a sense of
security here, that we can make changes and allow the states to
have more control over their own unemployment system, not
recognizing the fact that when a recession hits, it doesn't hit
evenly among all states. Certain sectors are--certain
geographical areas are hit much more--have much more difficult
problems than others. And that is our responsibility to make
sure that we have a national unemployment system--unemployment
insurance system that protects those regions, those areas, and
helps them deal with the problems of a recession so they don't
have to impose new taxes when it is the worst time in the world
to impose those taxes.
I just appreciate your testimony. Do you want to respond to
that----
Mr. Levin. Mr. Cardin, just briefly, I could not agree with
you more. The recessions in the 'eighties, and it was also true
in the 'nineties, hit regions--it was not national in its
immediate impact. The largest newspaper sales in Michigan in
the 'eighties was the newspaper from Texas, people looking for
jobs outside of the State of Michigan.
And I think we need to be sure that we have a national
Unemployment Compensation system. Otherwise, we are going to
rely on states coming here and regions coming here asking for
Federal funds in massive amounts. That is what happened in the
'eighties when we did not have an effective trigger on extended
benefits. So we went through the difficult process of trying to
convince people from one region, people all over the country,
to essentially chip in.
And then when the recession moved from the midwest,
Pennsylvania, Michigan, and Ohio were terribly hit. Then down
to the southwest. Then that process started all over again. And
unemployed people move from place to place. We need a national
system. And the problem with devolution proposals is that they
fly in the face of the fact that unemployment can be, and
almost always is, ultimately a national problem that requires
some action on a community--an American community basis.
Mr. Cardin. Another issue that would concern me is that the
Extended Benefit Program has a funding--national funding source
for part of the cost. And if we repeal that funding source, it
wouldn't take too long in a recession for us to exhaust our
funds nationally and have a difficult time meeting any Federal
responsibility for extended benefits.
Mr. Levin. Absolutely.
Mr. Cardin. Thank you, Madam Chair.
Chairman Johnson. I want to put on the record--I was going
to do this in my opening statement, but I think it is really
important to do it right now. Unemployment Compensation has
been seen in Congress by members of both parties and, I
believe, by the administration as a very partisan issue. I
think your testimony demonstrates, and Mr. McCrery's bill
demonstrates, that it is not a partisan issue. We have a system
that was built for an entirely different era, when people were
to be sustained until they were recalled to their jobs.
And as we have changed our work force reinvestment, et al.,
our job training moneys and everything, I think we should be
looking at how do we fix this system so it better serves the
people?
Sandy and I were both on the Committee when we struggled
through those periods in the eighties. No matter what we did,
we never were able to trigger and target in a way that New
Britain, Connecticut benefited because we made bearings and
machine tools and we had very high unemployment. The state
generally didn't. And no matter what we did in Washington, we
couldn't fix it.
So I do think we need to look at the issues that you have
pointed to. I am very pleased with the specificity of the ideas
in both of your legislative initiative and I am very grateful
for Mr. McCrery's hard work on this issue.
The states, as you will hear later, need money because they
are focused now on re-employment. They are not focused on
sustaining people until they are rehired by their former
employer. And they are doing a phenomenally better job than
they were in the `eighties. And so they need some of this money
for that.
And we do have a system in which some states have 122
months worth of benefits stored up; others only seven. So not
only should we be concerned about the covered population, but
we ought to be concerned about states that are stockpiling
dollars they need to improve the quality of their program and
to move people into jobs. So there are a lot of issues here and
you have raised a number of them.
And I would just hope that business and organized labor
could lay aside the belief that this is somehow a divisive
issue. It is as important to people's lives as fuel assistance,
you know. And we ought to look at it in that way. Every bill
that has come out of this Committee has been nonpartisan. And I
personally have not taken a stand on any of the legislation.
And I know, from working with Members of the Committee, that
they are very substantively oriented.
And I would just hope that we would all work together in
this realm to see what we could do about the problems that are
plaguing this system and the bizarre nature of the tax revenue
and how it is used because it is really bizarre.
Let me just conclude. We do have Governor Hull here. But I
want to throw out for the two of you, and I want to throw out
for the audience, you know, Unemployment Compensation doesn't
require you to do anything but receive. If you are on Welfare,
you are required to search for a job. You are required to
participate in job training.
Are we in an era any more where we can allow people to be
unemployed, receive benefits, and not participate in developing
computer skills and thinking about their career and changing
their jobs and lives? Don't answer, because I don't want you on
the record on this one. But I think we have to think about
those things. And I think everyone in this room has to think
about those things because, in the end, unemployment systems
are to create re-employment. They are not a permanent support
system.
Mr. Levin. Could I just say quickly? As you know, the
states, I think, in every case, have a looking-for-work
requirement.
Chairman Johnson. It doesn't work, though, Sandy. It
doesn't work.
Mr. Levin. Well, but that is--but there is that
requirement. But, second, I believe fervently that we need to
look at our training and retraining programs and our
Unemployment Comp programs and figure out how to mesh them. We
do not intervene early enough in this country, compared to----
Chairman Johnson. Right.
Mr. Levin.--Canada and many other places----
Chairman Johnson. That is all--that is only----
Mr. Levin.--where people are going to be laid off.
Mr. Cardin. Would you yield just for one moment?
Chairman Johnson. That is the only issue I am raising. Yes,
sir.
Mr. Cardin. And I appreciate the way that you phrased the
dilemma. I must tell you, I have met many people who collect
unemployment insurance who would love to have a job. It depends
on the economy. It depends on the circumstances within the
community. And there are people, I am sure, who are collecting
unemployment insurance who could be working.
But, by and large, the unemployment--and the people who are
insured and are collecting unemployment insurance, want work.
The problem is that their company has downsized or industry has
left or their skills are no longer needed in the work force.
And I agree with you, one of our focuses need to be to make
sure that people are trained for the opportunities that are
there, which is part of our system, and we need to make sure
this is properly coordinated with any change we make in the
unemployment insurance system. And I appreciate you yielding.
Chairman Johnson. The reason I wanted to bring it up is, I
think when you rethink a program that was established as long
ago as our Unemployment Compensation program was established,
and you look at the extraordinary pace of change in our economy
now, the likelihood that that pace is going to accelerate, not
diminish, that the nature of jobs people will be moving to will
change more rapidly, not less rapidly, I think if we are going
to look at how we deal with--how we provide people with
security during periods of job change, we need to think of it
at every level.
And so I am happy to have your input and I want you to help
us raise the questions at the biggest level. My goal,
ultimately, is to address the personal security needs of people
who lose their job through no fault of their own. That was
always the purpose of the Unemployment Compensation system and
it is an extraordinarily important purpose. And if we don't
meet it better, it is not just the individual workers who will
be the worse off, it will be the nation, because we are going
to increasingly have a labor shortage as we move into the
future.
So it is incumbent upon us to develop a system that far
better supports individual development of individual resources
to create one's own best opportunity in life. And so I
welcome----
Mr. Levin. Thank you.
Chairman Johnson.--this opportunity and I thank Mr. McCrery
for his hard work to make this hearing possible. I would like
to now welcome Governor Jane Hull of the great State of
Arizona. I regret that at the last Bob Taft, of Ohio, was
unable to join us and I very much appreciate, Governor Hull,
your willingness to be here with us. This is an extremely
important issue that states have a great stake in. And so we
thank you for being with us.
STATEMENT OF HON. JANE DEE HULL, GOVERNOR, STATE OF ARIZONA
Governor Hull. Good afternoon, Chairman Johnson, and I am
glad to be here, Mr. Cardin.
Chairman Johnson. It is a tradition that your total
statement will be inserted in the record and you could either
adhere to it or not. But we welcome you.
Governor Hull. Thank you.
Chairman Johnson. Oh. Sorry.
Governor Hull. Mr. Cardin----
Chairman Johnson. Wait a minute. Excuse me. One moment,
please. I didn't realize we had been joined----
Governor Hull. Yes. We have got company.
Chairman Johnson.--by an esteemed Member of the Ways and
Means Committee from your very own state--Mr. Hayworth.
Mr. Hayworth. Madam Chairman, thank you. And I shall not
force the Governor to interrupt her testimony other than to
thank her for coming all the way from our beautiful state,
where spring training is starting, to be here in Washington and
the National Governors' Association and also to spend time here
in front of the Subcommittee. So on behalf of the entire Ways
and Means Committee, Governor, thank you for coming and we look
forward to your testimony. And, thank you, Madam Chairman.
Chairman Johnson. I thank you.
Governor Hull. Thank you.
Chairman Johnson. Good to see you.
Governor Hull. And, again, it is nice to be here and I
appreciate your taking time to hear my testimony. As you have
noted, Governor Taft was called back to Ohio, so you will get
briefer testimony than if you had had both of us. I am sure
some days it is probably a good idea for you.
I am Governor Jane Dee Hull from the State of Arizona. And,
again, I do truly appreciate the opportunity to appear before
you. This issue, Mr. McCrery's bill, is of great significance
to the economic future of the State of Arizona, as well as many
other states. What I am representing is a shared bipartisan
position that has been adopted by the Western Governors'
Association and, today, by the Southern Governors' Association.
The issue is reforming the National Employment Security System
and repealing the Federal Unemployment Tax Act (FUTA) surtax
begun in 1976.
My state, like many others, is enjoying unbelievable and
unprecedented economic growth. The prosperity has been aided by
sound state and national policy decisions. We are going to
continue to enjoy those benefits. We have got record increases
in education spending and in our other priorities. We have the
highest, depending on the day--between Nevada and Arizona, one
of us is first in growth of population. We have low
unemployment. We have a greatly increased per capita income,
which, as Arizona is a low income state, we are very proud of
that.
We have to continue to make wise decisions based on this
new economy that the Governors have all just spent so much time
talking about and all Governors spend a lot of time talking
about. The Western Governors and the Southern Governors, as of
this morning, have joined me to support the repeal of the FUTA
surtax and reform of the Employment Security System. It is
administered, as you know, in partnership between the state and
the Federal Government.
As Governors, we share the challenge to maintain a solid,
economic foundation upon which to build future prosperity.
Members of the Subcommittee, I know, from your comments, Madam
Chairman, all share the same concern. In Arizona, we minimize
government interference in our economy. We maximize the
effectiveness of the state's limited role by fostering
reasonable growth and quality job creation. We cannot address
these issues without your help.
The reason I am here supporting legislation repealing the
temporary FUTA surtax and to urge you to return these funds to
the businesses in each of our states. Arizona business leaders,
both small and large, have one clear top priority--work force
development. We need to identify and supply a well-educated and
a skilled work force.
Washington is collecting a surtax that is being used to
offset the Federal surplus, that $1.5 billion is something that
if were turned to the states, we believe that we could provide
better employment services, and also reducing the financial
burden on businesses who employ our people.
The money is being doled out to the state in ever
decreasing amounts. Arizona right now is getting about 45 cents
on the dollar. We are in the lower third of those states. And,
again, we could do better with the return of those dollars. It
is making it increasingly difficult for us to administer the
unemployment services that we believe we need to be
administering in order to get people into the work force.
We share the commitment to use these funds in the
administration of employment services to truly help our
citizens who are seeking better jobs, seeking re-employment, or
who are seeking to enter the work force for the first time.
Likewise, you hear, from the same employers, who are
begging for quality employees, so they can meet the
opportunities and demands that our growing economy is creating
for them. The funds are being collected by the Federal
Government today, but they are not being used to address the
need.
As you well know, the temporary FUTA tax--surtax is padding
the Federal budget surplus. It is not helping us take advantage
of the potentially unique opportunity to get people into
quality jobs that they need for themselves and for their
families.
Under the reform proposal that you are considering,
Representative McCrery's bill, my state could see an increase
of $36 million a year in funds available for quality jobs, to
help our employers, and to serve the unemployed.
We have worked out an innovative programs--several
innovative programs in Arizona that meet the employment needs
of our private sector as well as the needs of those who need to
find jobs. It will be another chance for you to devolve to the
states the opportunity of helping our people join the work
force of tomorrow. It would allow Arizona to participate more
effectively in the employment services programs with the
Federal Government.
The effectiveness would also extend the benefits to include
utilizing a portion of the repealed temporary surtax to better
ensure the quality of jobs in my state.
I would respectfully ask that you would have included in
the record the comments of Governor Taft too--as he has been
called back to Ohio, the WGA, the Western Governors'
Association resolution of yesterday, and the Southern
Governors' Association of today. And I know that you do have my
comments which I have tried to greatly shorten knowing that
your time is limited and that you are all very capable of
reading them yourselves. With that, I want to thank all of you
for the opportunity to appear before the Subcommittee today on
this issue of importance to the workers, citizens and employers
in the State of Arizona. I welcome the chance to work with you
to help move this proposal through Congress.
[The prepared statement follows:]
Statement of Hon. Jane Dee Hull, Governor, State of Arizona
Good afternoon Chairman Johnson and members of the
Subcommittee. I am Jane Dee Hull, Governor of the State of
Arizona. I appreciate the opportunity to appear before the
Subcommittee today is discuss an issue of significance to the
economic future of my state. I also come before you to present
the shared, bi-partisan position adopted by the Western
Governors Association in support of the issue under
consideration here today--reforming the National Employment
Security System and repealing the Federal Unemployment Tax Act
(FUTA) surtax.
The State of Arizona, like many other states across the
country, has been enjoying unprecedented economic growth over
the past decade. In addition to the hard work and ingenuity of
the American people, I believe this prosperity has been aided
by the sound policy decisions of elected leaders at the state
and national level. If we are going to continue to enjoy the
benefits of this success, which in my state has led to record
increases in education spending and other important public
priorities, then we must continue to make wise decisions on
those matters impacting our economy.
That is why my fellow Western Governors joined me several
weeks ago in adopting a policy position supporting the repeal
of the FUTA surtax and reform of the employment security system
administered in partnership between the state and federal
governments. (A copy of the Western Governors Association
Resolution 99-029 on Employments Security is attached.) As
Governors, we share of ensuring that we maintain a solid
economic foundation upon which to build further prosperity and
opportunity in each of our states in the new century ahead of
us. I know the members of the Subcommittee have the same
concern.
In Arizona, we are building that foundation with a common
commitment among state leaders to minimize the level of
government interference in our economy while maximizing the
effectiveness of the state's limited role by developing sound
policies that foster reasonable growth and quality job
creation. My fellow Western Governors share this view, and we
have spent considerable time discussing how we can sustain the
prosperity in our region, which has even outpaced the nation's
success in many areas.
Clearly we cannot address these challenges without your
help. It is for the reason that I am here to ask for your
support of legislation repealing the ``temporary'' FUTA surtax
and urge you to return these funds to the businesses in the
states where they have been collected. In anticipation of a
possible repeal, there has been considerable discussion of how
these funds might then be best used--by the businesses and the
states--to achieve the economic policy objectives I mentioned
earlier.
Specifically, through regular meetings with Arizona
business leaders, both small and large, I have heard one clear
message about their top priority. Without exception, the number
one issue facing Arizona businesses today is workforce
development. Like many states, Arizona needs to meet the
challenge of helping identify and supply a well-educated and
skilled workforce.
Frankly, we are constrained in our ability to address this
challenge when a fund in Washington is continuing to grow by
collecting a surtax that is padding the federal surplus, but
not helping provide employment services or reducing the
financial burden on the businesses that want to employ our
citizens. However, the money is being doled out to the states
in ever-decreasing amounts that make the employment services of
states increasingly difficult to maintain at a time when these
efforts could be their most effective by getting more of our
people into the workforce.
Let me restate that point, perhaps a little more directly.
I know you share the commitment of Governors, like myself, who
want to use these funds and the administration of employment
services to truly help our citizens who are seeking better
jobs, seeking reemployment, or who are seeking to enter the
workforce for the first time. Likewise, you hear from the same
employers who are begging for quality employees so they can
meet the opportunities and demands that our growing economy is
creating for them.
The funds to meet these vital public and business needs are
being collected by the federal government today, but they are
not being used to address the needs. As you well know, the
``temporary'' FUTA surtax is flowing into one of the many
federal trust funds that are padding the federal budget
surplus. The surtax is not helping us take advantage of the
important, and potentially unique, opportunity to sustain our
prosperity and ensure that our people are getting into the
quality into the quality jobs they need for themselves and
their families.
More specifically, under the reform proposal you are
considering in Representative McCrery's bill, my state could
see an increase of $18 million in a year in funds available to
help provide quality jobs, help our employers and serve the
unemployed. At the same time employers in my state would see a
tax reduction of $28 million--a portion of which they would
like to commit to further workforce development. Finally, even
without the FUTA surtax, the trust fund would continue to
collect $4.23 billion a year for the administration of these
services.
Should you succeed in returning these funds to the states
and businesses paying bills surtax, we have worked out an
innovative program in Arizona that meets the employment needs
of both the public and private sector. As with other programs
and policies that the Congress has devolved to the states, this
would allow Arizona to participate in a more effective
employment services program with the federal government.
Again, thank you for the opportunity to appear before the
Subcommittee today on this issue of importance to the
workforce, citizens and employers in the State of Arizona. I
welcome the change to work with you to help move this proposal
through Congress.
Chairman Johnson. Yield to Mr. McCrery of Louisiana to
question first.
Governor Hull. Yes.
Mr. McCrery. Thank you, Madam Chair. And, Governor Hull,
thank you for coming to Washington and sharing with us your
views on the state of affairs in our unemployment insurance
system. And your testimony speaks for itself, but I want to
make--let you make it clear that you and your Western
Governors' Association are supporting the bill that I have
introduced on the House side, 3174. Is that right?
Governor Hull. Yes. Absolutely. The Western Governors--and
this is a, again, bipartisan group--have all endorsed the
proposal strongly as have the Southern Governors.
Mr. McCrery. Now, while it is commendable, in my view, that
Governors are concerned about the employer community in their
states and want to cut taxes--and I think certainly it is a tax
that was imposed for a good reason, but that reason has gone
away and so we ought to repeal that tax, as you have stated--
but certainly another factor in your support of my legislation
is the ever-increasing demand on states to assist in finding
people jobs.
With Welfare reform, with recent Federal legislation, it is
more and more incumbent on the states to provide services to
people to find jobs, to get training, get education, to get
into worthwhile jobs. Is that a fair statement?
Governor Hull. Absolutely. And I appreciate it.
Mr. McCrery. And right now, you are basically being
shortchanged. Are you not?
Governor Hull. Absolutely. We are.
Mr. McCrery. By the Federal Government.
Governor Hull. And as--I think as you have looked at the
list that we have looked at, say, we are at 45 cents, we can't
provide the services that we need and want to be able to
provide. It would be just a boon to our economy to be able to
do a better job with job services.
Mr. McCrery. And when you say you are getting 45 cents,
what you are saying is that you are sending $1 to Washington--
--
Governor Hull. That is right.
Mr. McCrery.--in the form of payroll taxes that were
designed to provide the administrative expenses to states for
administering the unemployment insurance company--unemployment
insurance program and you are only getting 45 cents out of that
dollar back for the purposes for which the tax was imposed.
Governor Hull. Yes. Absolutely. If they--when you get the
Governors together we talk about whether we are donor states or
donee states. And I am very aware, and you have compensated for
it in your legislation, the fact that there are smaller states
that are doing--are getting more than that and appropriately
should be. I am----
Mr. McCrery. Right.
Governor Hull. I am aware of that.
Mr. McCrery. Yeah. And that is taken care of in my
legislation. Now, to be fair, I want to point out that of that
federally imposed payroll tax that is collected from employers,
sent to Washington, and then sent back to the states, actually
20 percent of that is intended to go into the Extended Benefits
Program. So really only 80 percent of that payroll tax is, on
paper, designed to go back to the states for administrative
expenses.
So I want to make that clear. Where--it is accurate to say
you are only getting 45 cents back of every dollar you send,
but perhaps it is more accurate to say you are getting maybe 65
percent of what you were intended to get when the tax was
imposed. Either way, you are getting shortchanged and you are
having to come up, are you not, with funds from other sources
to cover your expenses in administering this program?
Governor Hull. Yes. We have to juggle--and, you know,
again, I think we could do a much better job if it was
adequately funded.
Mr. McCrery. Well, again, thank you very much for coming
here on behalf of Arizona and also bringing us the news of the
Western Governors' Association endorsement of my legislation.
Thank you very much.
Governor Hull. Uh-huh.
Chairman Johnson. Mr. Cardin.
Mr. Cardin. Thank you, Madam Chair. And, Governor, it is a
real pleasure to have you before our Committee. Let me start
off by saying that I do have certain concerns about this
legislation. But let me ask you a specific question. If I
understand H.R. 3174, it would allow the states to collect and
keep most of the Federal FUTA tax, 96 percent of it.
My question is, why should we have a Federal tax then?
Wouldn't it be just more efficient for the--to allow the states
to impose whatever tax they want to impose which they currently
can do? Why have a Federal unemployment tax?
Governor Hull. Madam Chairman, and, Mr. Cardin, that is the
way you all have designed it and that is the way we accepted
it. And I think you are looking at kind of reforming the whole
system. I believe there is certainly a place for you and that
it should not be entirely our system. But I think what we would
like to do is--as things are devolving to the states, that we
would like to be able to do a better job of running our share
of the program.
Let me just comment, too, because I realize that when you
get into the unemployment issues, there is always the concern
whether we are underbenefited or are we overcharged. And we
have certainly faced that in the State of Arizona over the last
few years. In the late 'eighties, Arizona was in a major
recession. And I certainly--you know, we looked at those funds
as something that we used a lot. We now have a work force that
is largely employed.
But we have been able in the--last couple of years ago, we
basically, again, cut our own employers unemployment insurance
and raised benefits too. So we have had statewide experience as
to what we can do.
Mr. Cardin. Yes. Now, I guess my concern is that if the
revenues are more than you need, but we are imposing the tax,
if we let you impose your own tax, you wouldn't have to worry
about that. But let me--if I might say, your state has the
distinction--this might be--I don't know how to look at it, but
you have the distinction of having the lowest percentage of
unemployed people who are receiving unemployment insurance--21
percent.
I guess my question to you is, one of the things that
Arizona does that two-thirds of states are in a similar
situation, is that you deny unemployment benefits to part-time
workers. That is, people who have become qualified for
unemployment insurance who are part-time employees, many of
whom are women who can only work part time because of their
family commitments. They get laid off. They are seeking part-
time employment, but they are unable to collect unemployment
insurance because of your state's requirement that the person
be ready for full-time employment, even though they qualified
for their insured benefits by part-time employment. Is that
fair?
Governor Hull. Madam Chair, and, Mr. Cardin, we have--
again, we have a very successful unemployment program and I
would contend, having been in the State Legislature for many
years and being active in it, probably one of the reasons it
has been appropriately funded and, I believe, appropriately
benefits is because it was always a discussion between the
employers and the employees. The legislature rarely comes in
and changes things.
So obviously what you are talking about is something that
has been negotiated through state terms with employers and
employees. And I think it is fair. I think we talk about full-
time employment and not part-time employment. And, again, you
have to look at Arizona as a state that has much seasonal
employment.
Mr. Cardin. Well, I would just urge you to perhaps take
this back to your coalition of employers and employee groups.
We all want to be more family friendly these days and we
certainly don't want to discriminate against a family where
they need income, but cannot work full time because of the
needs of their family.
Particularly, in the times, when you were having large
surpluses and the percentage of your unemployed population
receiving insurance benefits is at a historic low--21 percent.
And historically, nationwide, we have been at 50 percent or
more.
Governor Hull. Yes.
Mr. Cardin. So it seems to me that you need to sort of
evaluate what are you trying to accomplish by your unemployment
insurance system. And I would urge you to take another look at
that. And, Madam Chair, thank you very much for your courtesy.
Chairman Johnson. Governor, I am going to have to leave for
just a couple of minutes----
Governor Hull. Okay.
Chairman Johnson.--to testify at another Committee on
behalf of the cleaning up of Long Island Sound, which is very
important to my district. But just before I leave, in your
discussion with the Governors who support this bill, did you
discuss at all the problem of extended benefits? And do you
think there would be opposition to retaining at the Federal
level enough of the tax stream to fund an extended benefits
program so that when it was triggered in, there would be money
there to redistribute among the states? I mean, that is really
what the Extended Benefits Program does.
Governor Hull. Yes.
Chairman Johnson. It redistributes money from the gross
national product to states where there is a high unemployment
for a temporary period. Do you think that reserving some of the
current system to fund that kind of program would be a problem
for the Governors?
Governor Hull. Madam Chairman, the Governors actually did
not discuss it. We discussed really this surtax and that was
the extent of it. On my own side speaking for myself, no, I
don't think it would be.
Chairman Johnson. Uh-huh.
Mr. McCrery. Madam----
Chairman Johnson. Thank you. Yes. Mr. McCrery.
Mr. McCrery. Madam Chair, if I could respond to that before
you go so you could hear it?
Chairman Johnson. Okay.
Mr. McCrery. In my legislation we do preserve an Extended
Benefits Program. There is now in the Extended Benefit Trust
Fund--well, the cap is about $16 billion, I think. So Congress
has decided, through legislation, that that cap, which is .5
percent of covered wages, is sufficient to meet the needs of an
Extended Benefit Program in a recession.
My bill would reduce that to $14.4 billion or .25 percent
of covered wages, whichever is higher. So I would maintain a
very healthy balance, roughly twice what we have experienced we
have needed in past recessions to take care of extended
benefits. I think the legitimate point that could be made is if
we do have a recession and we deplete that fund or even cut it
in half, there is nothing in my bill that would replenish the
fund. And I think that may be a shortcoming in my legislation
and I am willing to work with other Members of the
Subcommittee----
Chairman Johnson. Well, thank you.
Mr. McCrery.--the Governors to cure that. But----
Chairman Johnson. Well, I thank you.
Mr. McCrery.--my bill does not ignore the Extended Benefits
Program at all.
Chairman Johnson. No. My concern more has been the
replenishment. And I think it is a small issue----
Mr. McCrery. It is a legitimate point.
Chairman Johnson.--that can be discussed in more time. And
I would like to ask you to come take the chair while I am gone,
Mr. McCrery, and recognize Mr. Foley of Florida.
Mr. Foley. Thank you very much. Governor, we are honored to
have your presence today testifying before the Committee on
this important on this important issue, and to particularly
have Mr. Hayworth, who is such a capable representative not
only of your state, but, in particular, Native Americans. And
that is an issue I would like to discuss today. And it is an
issue, if you will, of fairness.
Mr. Shadegg, from your delegation, has brought to light an
issue that I wanted to explore quickly with you, if I may. As
you know, we recognize tribal governments as sovereign nations,
yet we also do not exempt them as we do exempt state
governments from paying the Federal Unemployment Tax. Given the
importance of tribes in your state, do you think this
Subcommittee should explore providing that exemption as a
matter of fairness?
Governor Hull. Mr. Chairman, Mr. Foley, this was something
that was just brought to my attention and I appreciate your
bringing it to my attention and I appreciate the Congressman
and my own Congressman, Mr. Shadegg, having legislation
regarding it. Yes. As I said, I did not actually know there was
a difference and I think it is a very good idea and I would be
very supportive of it.
Mr. Foley. Thank you. And I also wanted to obviously share
the credit with Mr. Hayworth. He has, as I said earlier, and as
a prestigious Member of the Ways and Means Committee, been a
strong vocal advocate not only for your state, but for Native
Americans. And many of these issues we are considering
obviously have to be brought forward in the light of fairness.
Governor Hull. Absolutely.
Mr. Foley. And I think in order to make equity particularly
as it relates to their business and their tribal issues, that
we would like to see this. And I commend the now Chair, whose
bill we are debating to work with myself and Mr. Shadegg to
look at this issue and see if we can define in such a way to
provide a provision in your bill to allow for a fairness, if
you will. And I yield back.
Chairman McCrery. Does any other Member of the Subcommittee
or Member of the Full Committee have questions for the
Governor? If not, Governor Hull, once again, thank you very
much----
Governor Hull. Thank you, gentlemen.
Chairman McCrery.--for sharing your views with us and we
would welcome you back anytime.
Governor Hull. Thank you. I appreciate it. I will catch a
plane back to Phoenix.
Chairman McCrery. And now the Subcommittee would call Hon.
Raymond J. Uhalde, Deputy Assistant Secretary, Employment and
Training Administration, United States Department of Labor.
Mr. Uhalde, your written testimony will be entered into the
record without objection and you are free to summarize those
remarks as you please in the timeframe roughly equivalent to 5
minutes.
STATEMENT OF HON. RAYMOND J. UHALDE, DEPUTY ASSISTANT
SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S.
DEPARTMENT OF LABOR
Mr. Uhalde. Thank you, Mr. Chairman, and Members of the
Subcommittee. Thank you for the opportunity to testify on the
unemployment insurance program. With me today is Grace Kilbane,
who is the administrator of the Office of Work force Security.
As this is our first time for testifying on this program
under the leadership of the Madam Chairwoman, I am hopeful that
today's hearing is as meaningful a step as changes we have had
in the employment and training system because of passage on a
bipartisan basis of the Work force Investment Act. Today's
hearing, I hope, proves to be an important step toward
reforming and strengthening unemployment insurance and the one-
stop Employment Service programs, known collectively as the
employment security system. I will address the employment
security reform initiative first.
Extensive research by the Advisory Council on Unemployment
Compensation, a large national dialog for reform and other
activities, have laid the groundwork for UI/ES reform. Based on
a large part on what we have learned, the President committed
in the Fiscal Year 2000 budget proposal to work with our
partners and stakeholders toward developing a comprehensive
bipartisan legislative proposal centered on five principles--
expand eligibility for benefits, streamline filing and reduce
employer taxes where possible, put people back to work sooner,
combat fraud and abuse, and improve administrative funding.
To accomplish this considerable task, a work group
comprised of partners and stakeholders, specifically employers
and worker representatives, state agency officials, and
Department of Labor officials, was convened. Discussions of
this group have been very open and creative and more than 70
ideas for reform were addressed.
I especially want to thank the Interstate Conference of
Employment Security Agencies, ICESA, for organizing the work
group and chairing the meetings. At this time, I would like to
address some of the work group's suggestions for a
comprehensive reform proposal organized around the five
principles. In the interest of time, I will be brief. My
written statement provides more detail.
First principle, to expand eligibility, the work group
suggests that we examine, first, fixing the Extended Benefit
Program now in this good economy so that it can respond more
effectively to any future economic downturns.
Second, to expand benefits to part-time and low wage
workers who are laid off. Employers already pay taxes on the
wages of these workers, but in many cases they are not eligible
for benefits.
Third, allow victims of domestic violence, who are forced
to flee work for safety reasons, to qualify for benefits while
seeking new employment.
To streamline filing and reduce employer taxes where
possible, the work group suggests accelerating the termination
of the 0.2 percent FUTA surcharge, and, second, streamlining
the filing of the FUTA tax by making minor, largely technical
changes to Federal law.
To put people back to work sooner, we should amend the
Social Security Act to require states to provide job search
assistance to those identified as likely to exhaust
unemployment benefits under state profiling systems. Even in
this super hot economy, workers exhausting their benefits
remain high at about 31 percent for 1999, and duration is 14\1/
2\ weeks, higher than it should be by as much as maybe \1/4\
weeks, according to a recent study. Jobs search assistance
would put people back to work sooner.
Now, also I am pleased to note that the Fiscal Year 2001
budget continues the President's Universal Re-employment
initiative, which aims to serve all dislocated workers in need
of assistance. Specifically, the budget request includes $50
million for re-employment service grants to states for
providing re-employment services to unemployment insurance
claimants.
To combat fraud and abuse, the work group suggests we grant
states access to the National Directory of New Hires for
purposes of administering the UI program. A similar provision
allowing state UI agencies access to the new hire database was
included in the House passed Fathers Count bill thanks to
Chairman Johnson's leadership on this provision.
To improve administrative funding the work group believes
that the administrative costs of the UI and ES programs are
underfunded due to Federal budgetary rules and constraints.
Underfunding of UI is affecting the program as evidenced by the
reduction in benefit payment and appeals timeliness, by
increases in overpayments, and decline in employer tax/wage
reporting timeliness.
The work group also believes the best way to arrest this
program erosion caused by funding shortages is to move
administrative costs to the mandatory side of the budget so
funding better tracks workload.
At this point, I would like to ask for the Subcommittee's
support with the Appropriations Committee to achieve an interim
step toward improving administrative funding for state UI
programs. The Administration's Fiscal Year 2001 budget request
proposes to fund a larger proportion of each state's projected
total workload in the base grant at the beginning of the year.
This would give states additional funds to meet their
infrastructure costs, more certainly about funding for the
year, and an improved ability to plan utilization of resources.
In summary, we acknowledge the difficultly in creating a
comprehensive proposal since it must include features which, if
offered as free-standing items, would draw opposition from one
or more partners and stakeholders, including the Department of
Labor.
In fact, if a major area such as benefit expansion were
eliminated from any package, we would not be able to reach
agreement to include the termination of the FUTA 0.2 percent
surcharge in the package. I firmly believe that an opportunity
exists now to secure funding and program reform only if a
proposal which addresses the major concerns and garners broad
support can be developed.
Before addressing last year's legislative action, I would
like to recognize Representative Cardin for his efforts on
behalf of part-time workers. The bill he introduced today,
requiring the payment for certain part-time workers, is an
important aspect of reform. I am pleased that this inequity is
being addressed, both in the discussions with the reform work
group and by Mr. Cardin's bill.
I will address H.R. 1830. This legislation was based on the
administration's proposal, and represents an important step
toward ensuring that the UI program fulfills its mission in
today's changing economy. I want to thank Representatives Levin
and English and others who introduced this bill.
Key among the bill's provisions are providing incentive
grants to states to voluntary implement administrative changes,
which would take account of a claimant's more recent earnings,
making EB more readily available during recessions by using a
trigger based on total unemployment, and strengthening
administrative funding for UI by increasing the amounts
distributed under the Reed Act for Fiscal Years 2000 through
2002.
The significant reforms proposed by H.R. 1830 would result
in expanding eligibility, and improving administrative funding
of the UI program. Accordingly, we would fully support H.R.
1830 as a first step in comprehensive reform.
As to H.R. 1975, this bill would repeal the 0.2 percent
surcharge imposed under the FUTA. We strongly believe that any
repeal should only be considered as part of a comprehensive UI
reform package, which couples this relief to employers with
assistance to states which administer the program and the
workers who depend on it. Therefore, we would oppose H.R. 1975
and any stand-alone proposals to accelerate the termination of
the surcharge.
H.R. 3174, Mr. McCrery's bill. While I certainly agree that
the states should be fully funded to provide appropriate
services to UI claimants, other job seekers, and employers,
this proposal would make some very fundamental changes in
Federal laws governing the employment security system--changes,
which I believe compromise the Federal-State balance and erode
the system as a safety net for the nation's work force.
Significant among the bill's provisions are transferring
the collection of the FUTA tax from the Federal Government to
states, allowing states to retain 96 percent of the
collections, and shifting an additional 2 percent to small
states. In effect, the Federal Government would establish the
tax, but yield the authority to appropriate 98 percent of the
tax's revenue.
Under such a funding system, the FUTA revenue does not
necessarily track with the workload and there is no guarantee
the states would appropriate sufficient revenues either in good
times or in downturns. Transferring only 2 percent of the
congressional appropriation grossly underfunds the Federal
activities. While we agree the administrative funding mechanism
for employment security needs repair, we do not believe
transferring funding from the Congress to the states ensures
full funding. We, therefore, oppose H.R. 3174.
In closing, we have an excellent opportunity to use this
period of time in this good economy to move this successful New
Deal program to a successful new millennium program. Not only
is the economy right, but the time is right. The Administration
has made a commitment to change. This Subcommittee and the
various House Members have demonstrated their great interest in
reform. States, employers, organized labor advocates, and
Department of Labor staff have been diligently working on UI
reform. We are hopeful that this dedicated interest and
leadership can produce a comprehensive approach that would do
four things.
First, help part-time and low-wage workers receive the
benefits for which they have earned when they were laid off,
just as other workers do. The benefit ideas that are on the
table would produce equity among workers and assist
approximately an additional 850,000 workers a year.
Second, help employers by making it easier to file FUTA
taxes, cutting taxes, and providing more resources to help
workers get jobs faster to reduce their time on unemployment
benefits.
Third, help the economy by making sure the UI program meets
the needs of today's labor force and also is prepared for any
future economic downturns by making the Extended Benefit
program more responsive.
And, fourth, help with the Federal-State administration of
these programs by providing adequate funding, needed
flexibility, and new tools to prevent fraud and abuse and
promote re-employment.
This may seem like a tall order, but the groundwork has
been done and a chance of consensus is near, and with the
leadership of this Committee and that of this Subcommittee and
Madam Chairwoman, we could achieve great success.
This concludes my formal remarks. And, again, I appreciate
the opportunity to speak and look forward to your questions.
[The prepared statement follows:]
Statement of Raymond J. Uhalde, Deputy Assistant Secretary, Employment
and Training Administration, U.S. Department of Labor
Madam Chairwoman and Members of the Subcommittee:
Thank you for the opportunity to testify on the
unemployment insurance (UI) program. As this is our first time
testifying on this program under your leadership, I want to
recognize your efforts on behalf of the millions of people who
depend on the UI program each year. Just as the Congress and
interested parties successfully negotiated changes to the
employment and training system with the Workforce Investment
Act, I am hopeful that today's hearing is a meaningful step
toward reforming and strengthening the UI and one-stop/
Employment Service (ES) programs, known collectively as the
employment security system.
My testimony will focus on the development of the UI reform
initiative, what I hope will be a bi-partisan reform proposal,
and on several legislative proposals introduced last year.
With me is Grace Kilbane, Administrator of the Office of
Workforce Security.
BACKGROUND
I would like to begin by providing some background
information and current activities relevant to the UI program.
Enacted in the Social Security Act nearly 65 years ago as a
Federal-State partnership, UI is the primary source of
temporary, partial wage replacement for the nation's laid-off
workers who are seeking jobs. It is also the nation's leading
economic stabilizer during downturns, returning $2.15 to
national output for every $1.00 spent on UI benefits and
helping workers put food on the table. It was designed to be
administered in connection with the ES program which has helped
UI beneficiaries and others find jobs, and assisted employers
in finding new workers since 1933. Since the 1930s, the economy
has changed, the workforce has changed, and the way we work has
changed. Workers and businesses have all been affected.
Previously, this Subcommittee has heard testimony on the
Advisory Council on Unemployment Compensation's (ACUC's) final
report, issued in 1996. The findings of this group influenced
the legislation proposed by the Administration, which was first
introduced by Representatives Levin, English, and Rangel in
early 1998. This legislation was meant to be a first step to
further reform.
In mid-1998, the Department of Labor, in consideration of
the ACUC recommendations and other research, announced its plan
to conduct a broad dialogue on the UI and ES programs and
released a white paper to start that dialogue. The paper
focused on the effectiveness and design of the UI and ES
programs in today's economic environment. We requested comments
from all interested parties in such major areas as the
stabilization of the nation's economy, financing benefits, and
administrative funding. We convened 65 dialogue sessions
throughout the country to provide the public additional
opportunities to offer suggestions for reform and over 3,800
individuals participated. The intent of this effort was to
listen and learn from partners, stakeholders, and other
interested parties.
Based in large part on what we learned, the President
committed in the fiscal year 2000 budget proposal to work with
our partners and stakeholders toward developing a
comprehensive, bi-partisan legislative proposal centered on
five principles:
expand coverage and eligibility for benefits;
streamline filing and reduce tax burden where
possible;
emphasize reemployment;
combat fraud and abuse; and
improve administration.
Obviously, any legislative proposal resulting from this
process would need to be accomplished within the framework and
concepts established in the President's budget.
To accomplish this considerable task, a workgroup comprised
of partners and stakeholders--specifically, employer and worker
representatives, State agency officials, and Department of
Labor officials--was convened. The discussions of this group
have been very open and creative in identifying areas where
consensus for change is possible and discussing more than 70
ideas for reform. I especially want to thank the Interstate
Conference of Employment Security Agencies (ICESA) for
organizing the workgroup and chairing the meetings.
A COMPREHENSIVE REFORM PROPOSAL
At this time I would like to address some of the
workgroup's suggestions for a comprehensive reform proposal. It
should be noted that in approaching their work, all parties in
the workgroup accepted the fact that, since they were
representatives of broader groups, any final package would need
to be ratified by additional parties. For example, the
participating States have been working through ICESA to brief
all States, and DOL would need to secure Administration
approval of any final package. For ease of discussion, the
proposal is organized by the five principles mentioned above.
Expand Coverage and Eligibility for Benefits. Many agree
that the UI program has not responded to changes in the
workplace (i.e., increases in part-time, temporary, and short-
term jobs) and is not always equitable to low wage workers. We
have seen the recipiency rate drop from an average 49 percent
in the 1950s to a low of 32 percent in 1993. A number of
factors have been identified as underlying the observed decline
in recipiency rates, although not all of the decline has been
explained. More restrictive eligibility requirements and
stricter penalties for disqualifications are part of the
reason. Research shows that the changing labor force also
contributed to the decline. Factors include the shift in
unemployment from geographical areas with traditionally high
recipiency rates to areas with lower rates; reduced growth in
industries with traditionally high claims, such as mining,
construction, and manufacturing; the decline in union
membership where members are usually well informed about UI
rights; and increases in new entrants to the labor force (e.g.
more women). Although there is not consensus on benefit
expansion, we are encouraged by the fact that the following
proposals have been part of the workgroup's discussions:
Fix the extended benefit (EB) program now in this
good economy, so that it can respond more effectively to any
future economic downturns.
Expand benefits to part-time workers and low wage
workers who are laid off. Employers already pay taxes on the
wages of these workers. Even so, part-time workers may not be
eligible for benefits even if they are seeking work equivalent
to the type they lost, and low-wage workers may not be eligible
due to low earnings even though they may have a stronger
attachment to the workforce than eligible higher-wage workers.
Allow victims of domestic violence who are forced
to flee work for safety reasons to qualify for benefits while
seeking new employment.
Streamline Filing and Reduce Tax Burden Where Possible.
Employers are concerned with complex tax forms, multiple tax
filings, and complex record keeping requirements. They are also
concerned about a tax burden which serves to build up Federal
UI account balances in the Federal budget beyond apparent need.
A comprehensive proposal could include:
Accelerate the termination of the ``temporary''
0.2 percent Federal Unemployment Tax Act (FUTA) surcharge.
Streamline the filing of the FUTA tax. The
workgroup has identified several largely technical changes to
Federal law which would simplify reporting for employers.
Emphasize Reemployment. The UI and ES programs could be
improved to greater facilitate the return to work of laid-off
workers. An early return to work means a reduction in the
duration of benefits and exhaustion levels--in other words,
overall economic improvement.
Require States to provide job search assistance to
those identified as likely to exhaust UI benefits under State
profiling systems.
I am pleased to note that the fiscal year 2001
budget continues the President's Universal Reemployment
initiative which aims to serve all dislocated workers in need
of assistance. Specifically, the budget request includes $50
million for Reemployment Service grants to States for providing
reemployment services to unemployment insurance claimants who
have been profiled as likely to exhaust their UI benefits.
Combat Fraud and Abuse. Although there are a number of
ongoing administrative fraud and abuse prevention activities
connected with the UI program, there remains a legislative
barrier which prevents more from being done.
Grant States access to the National Directory of
New Hires (NDNH) for purposes of administering the UI program;
the NDNH's primary use currently is for child support
enforcement. A similar provision allowing State UI agencies
access to the NDNH for purposes of the UI program was included
in the ``Fathers Count'' bill that was passed by the House last
year.
Improve Administration. The workgroup believes that the
administrative costs of the UI and ES programs are underfunded
due to Federal budgetary rules and constraints. Underfunding of
UI is affecting the program as evidenced by the reduction in
benefit payment and appeals timeliness, increase in
overpayments, and decline in employer tax/wage reporting
timeliness. For example, since 1995 the percent of intrastate
first payments made within 14 days (or 21 days for States with
a waiting week) declined from about 93 percent to about 90
percent in 1998, the last year for which data are available,
despite the fact that workload dropped from 7.8 million to 7.1
million intrastate first payments. With respect to
overpayments, while falling workloads would suggest that staff
would be able to devote more time to resolving issues and
ensuring accurate payments, the nonfraud overpayment rate
increased from 1.26 percent of benefits paid in 1995 to 1.43
percent in 1997 and 1.37 percent in 1998. Finally, in 1996 , 89
percent of employers filed tax and wage reports in a timely
manner and 98 percent of delinquent reports were resolved by
the end of the quarter in which they were due, while by 1998
there was a decline in these percentages to 86.9 and 97
percent, respectively. A continued erosion of program
performance will damage public confidence in the UI program and
result in losses to the unemployment trust fund. The workgroup
believes the best way to arrest this erosion caused by funding
shortages is to move administrative costs to the mandatory side
of the budget.
At this point, I would like to ask for the Subcommittee's
support with the Appropriations Committee to take an immediate
step toward improving administrative funding for State UI
programs. The fiscal year 2001 budget request proposes to fund
a larger portion of each State's projected total workload in
the base grant at the beginning of the year. This would give
States additional funds to meet their infrastructure costs,
more certainty about their funding for the year, and an
improved ability to plan the efficient utilization of
resources.
In summary, we acknowledge the difficulty in creating a
comprehensive proposal since it must include features which, if
offered as free-standing items, would draw opposition from one
or more of the partners and stakeholders, including the
Department of Labor. In developing the proposal, the members of
the workgroup are striving to achieve a comprehensive package
which contains elements that address all major concerns. In
fact, if a major area such as benefit expansion were
eliminated, we would not be able to reach agreement to include
the termination of the FUTA 0.2 percent surcharge in the
package. I firmly believe that an opportunity exists to secure
funding and program reform only if a proposal which addresses
the major concerns and garners broad support can be developed.
LEGISLATIVE PROPOSALS
Now I would like to turn to several bills which were
introduced during the first session of this Congress and affect
the Federal-State employment security system. They include:
H.R. 1830--Unemployment Compensation Amendments of
1999
H.R. 1975--Temporary Tax Termination Act of 1999
H.R. 3174--Employment Security Financing Act of
1999
H.R. 1830--Unemployment Compensation Amendments of 1999.
This legislation was based on the Administration's proposal and
represents an important step toward ensuring that the UI
program fulfills its mission in today's changing economy and
that it remains on a sound financial footing for the 21st
Century. I want to acknowledge Representatives Levin and
English for the introduction of this legislation.
First, the proposal would provide incentives to States to
implement administrative systems--commonly called alternative
base periods--that will make the program more accessible to new
entrants into the labor force who tend to be lower wage
workers. Specifically, it would provide $20 million in grants
to States in each of fiscal years 2000, 2001, and 2002 to
voluntarily implement a base period (for determining
eligibility for benefits) that takes into account the
claimant's more recent earnings.
Second, the proposal would make EB more readily available
during a recession. EB triggers would be based on total
unemployment rates that are more responsive to rising State
unemployment and more accurately reflect when it is most
difficult to find work.
Third, the proposal would encourage States to voluntarily
build adequate reserves in their unemployment trust fund
accounts and as a result avoid having to increase employer
taxes, reduce benefits, or borrow during a recession. More
precisely, it conditions receipt of a portion of funds
distributed under the Reed Act in fiscal year 2003 on State
trust fund accounts meeting or making acceptable progress
toward a solvency target.
Fourth, the proposal would strengthen funding of the States
for administration of the UI program by increasing the amounts
distributed under the Reed Act (which is on the mandatory side
of the budget) for fiscal years 2000 through 2002.
Finally, the proposal would clarify technical requirements
relating to short-time compensation programs, under which
employers that choose to participate reduce the workweek of
their employees in lieu of temporary layoffs, and the affected
employees receive partial UI.
In summary, the significant reforms proposed by H.R. 1830
would result in expanding eligibility and improving
administrative funding of the UI program. Accordingly, we fully
support H.R. 1830 as the first step in comprehensive UI reform.
H.R. 1975--Temporary Tax Termination Act of 1999. This
proposal would repeal the 0.2 percent surcharge imposed under
the FUTA.
Right now the Administration projects that Reed Act
distributions to the States of excess FUTA balances will occur
in 2003. Nonetheless, we believe the repeal of the 0.2 percent
surcharge prior to its expiration at the end of 2007 must be
accomplished within the framework of the President's budget.
Also, we strongly believe that any repeal should only be
considered as part of a comprehensive UI reform package, which
couples this relief to employers with assistance to the States
which administer the program and the workers who depend on it.
Therefore, we oppose H.R. 1975 and any stand-alone proposals to
accelerate termination of the surcharge.
H.R. 3174--Employment Security Financing Act of 1999. As
you know, this bill was developed by a coalition of State
officials and employer groups for the most compelling reason of
addressing administrative funding problems, as well as to
reduce the tax and streamline reporting under FUTA. While I
certainly agree that States should be fully funded to provide
appropriate services to UI claimants, other job seekers, and
employers, this proposal would make some very fundamental
changes in Federal laws governing the employment security
system--changes which I believe compromise the Federal-State
balance and erode the system as a safety net for the nation's
workforce. Of the many changes contained in H.R. 3174, I would
like to highlight several of particular concern.
This proposal would change the administrative funding
system by transferring the collection of the FUTA tax from the
Federal government to States, with the States retaining 96
percent of the collections. Another 2 percent would fund a
``supplemental'' account which would provide additional funds
to small States. The remaining 2 percent would be available to
the Congress to appropriate for Federal activities. The basic
question here is: What incentive does the Federal government
have to establish a Federal tax while yielding its authority to
appropriate 98 percent of the tax's revenue? That authority
would be transferred directly to States.
We believe that administrative funding for the employment
security system should be related to the number of claims filed
for UI benefits, the number of employers from whom taxes are
collected, and the number of unemployed workers and others
seeking job-finding assistance. These workload factors do not
necessarily track with FUTA revenues. Under a devolved system,
it is anticipated that small States would expend all their FUTA
revenue, while other States would have more than is needed for
administration.
There is no guarantee that States would appropriate
sufficient revenues. State legislatures could transfer their
FUTA proceeds to the benefit accounts, allowing for tax
reduction, rather than expending for administration. Also, most
State legislatures meet for only a portion of a year and six
meet on a biennial schedule. This might make it difficult for
States to respond quickly to changes in workload caused by an
unforeseen economic downturn.
The proposal would grossly underfund the Federal
administration of UI, ES, labor market information, Veterans
Employment and Training, and foreign labor certification
programs, which are currently funded out of FUTA proceeds.
Assuming that the proposal would have been applicable for
fiscal year 1999, the 2 percent of revenue that States would
have transferred for congressional appropriation would have
been less than half the amount the Congress appropriated for
Department of Labor activities for that year. I emphasize that
the Federal staff provide national leadership, policy
direction, and coordination for these programs. Key among the
many functions provided by Federal staff are:
Administering (through the Bureau of Labor
Statistics) statistical programs essential for development of
national statistical series, including core economic statistics
related to employment and unemployment.
Reviewing and certifying that State laws conform
with Federal law and State activities substantially comply with
the requirements of State and Federal law, and negotiating
resolution of issues.
With State partners, establishing standards,
policy, and programs to promote and appraise the effectiveness
and efficiency of the administration and operation of UI and ES
programs for performance management and facilitating the
sharing of best practices.
Assisting States in the establishment and
maintenance of actuarially sound systems of UI by providing
consultative and supportive services in the fields of actuarial
analyses and special studies.
Concerning State collection of FUTA, simplifying employer
tax reporting and filing is an important issue; however, the
mere collection of the tax by States does not alleviate the
current complex tax offset system, and could actually be
burdensome because the States would be working under two sets
of UI rules--State law and the Internal Revenue Code. Likewise,
employers would still have to comply with different
definitions. Additionally, there are questions concerning
enforcement, underpayments, and back-up systems. Further,
multi-State employers, who now report only to the Internal
Revenue Service (IRS), would have to report to many States. As
far as saving costs, a joint Treasury/Labor report indicated
that there would be no real cost saving without harmonizing
definitions of wages, employment, employee, etc.; the coalition
proposal does not propose to harmonize these definitions.
As an aside, I would like to mention the Simplified Tax and
Wage Reporting System (STAWRS) project which is an inter-
departmental initiative comprised of staff from the Department
of the Treasury, the IRS, the Social Security Administration,
and the Department of Labor. STAWRS is currently working on a
``Targeted Harmonized Wage Code'' that State UI agencies and
the IRS (and other taxing authorities) could adopt to reduce
employer burden caused by different definitions. Thirteen wage
components in 96 different laws have been identified for
harmonization. The STAWRS project office and the UI office have
entered into an agreement to conduct a joint study on the
impact of the Targeted Harmonized Wage Code on UI benefit
amounts. The study is scheduled to be completed in September,
2001.
Finally, and most significantly, this proposal would
effectively repeal important provisions of Federal UI law.
Currently, to receive administrative grants, States must meet
the requirements of Title III of the Social Security Act.
Although Title III is not repealed, there would be no effective
mechanism to enforce State compliance with its requirements
since the Federal government would no longer provide
administrative grants. Some of the significant requirements
which would be nullified are ``methods of administration''
assuring prompt and accurate payment of benefits ``when due,''
a fair hearing for all claimants whose claims are denied, and a
limitation restricting UI grant funds to expenditure for proper
and efficient administration of the UI program. For the same
reason, the proposal would effectively nullify the requirements
that State UI programs participate in the Income and
Eligibility Verification System and the Systematic Alien
Verification for Entitlement system, and cooperate with child
support enforcement agencies.
In summary, while we agree that the administrative funding
mechanism for the employment security system needs repair, we
do not believe that transferring funding from the Congress to
States ensures full funding. We oppose H.R. 3174. We believe a
reform bill must address the most fundamental principle of the
UI program--assurance of adequate benefits for a sufficiently
large number of unemployed job seekers so that the program is
an effective economic stabilizer. This has been and remains,
after all, the primary purpose of the UI program.
CONCLUSION
In closing, we have an excellent opportunity to use this
period of time, in this good economy, to move this successful
New Deal program to a successful new millennium program. Not
only is the economy right, but the time is right. The
Administration has made a commitment to change; this
Subcommittee and various House members have demonstrated an
interest in reform; and States, employers, organized labor
advocates, and Department of Labor staff have been diligently
working on UI reform in various forums. We are hopeful that
this dedicated interest and leadership can produce a
comprehensive approach that would:
Help part-time and low-wage workers receive the
benefits they have earned when they are laid off, just as other
workers do. The benefit ideas that are ``on the table'' would
produce equity among workers and assist approximately an
additional 850,000 mostly low-wage workers per year.
Help employers by making it easier to file FUTA
taxes; cutting taxes; and providing more resources to help
workers get jobs faster to reduce their time on unemployment
benefits.
Help the economy by making sure the UI program is
responsive today and also prepared for any future economic
downturns by changing the extended benefit program.
Help with the Federal-State administration of
these programs by providing adequate funding, needed
flexibility, and new tools to prevent fraud and abuse and
promote reemployment.
This may seem like a tall order, Madam Chairwoman, but the
groundwork has been done, a chance of consensus is near, and
with your leadership and that of this Subcommittee, we could
achieve success.
This concludes my formal remarks. Again, I appreciate the
opportunity afforded me to speak to the Subcommittee and look
forward to working with you, the States, and all other
stakeholders.
Chairman McCrery. Thank you, Mr. Uhalde. Before I begin
questioning Mr. Uhalde, I want to point out that in our effort
to get Governor Hull on, on time, we dispensed with opening
statements. At this time, I would tell any Member of the
Subcommittee if you have an opening statement, you may present
that and it will be included in the record. And I have one that
I have presented to the Subcommittee staff for inclusion in the
record and any other Member may do so without objection.
Mr. Cardin. Thank you, Mr. Chairman. It is my understanding
that the Chairman and I do have opening statements that we
would be ask made part of the record.
[The opening statements of Chairman Johnson, Mr. Cardin,
and Mr. McCrery follow:]
Opening Statement of Hon. Nancy L. Johnson, a Representative in
Congress from the State of Connecticut
Most of the issues that our Subcommittee has undertaken in
the last two years have been fundamentally bipartisan. Don't
get me wrong. We still found issues to argue about in child
support, child protection, Title XX, and welfare reform, but in
the end all of our legislation has enjoyed solid bipartisan
support. In fact, many of our bills have emerged from
Subcommittee on voice votes.
But now we come to the Unemployment Compensation system.
Although we all agree that the nation must have a strong, well-
funded program for unemployed workers with a history of labor
force attachment, there are lots of diverse views about how the
system should be strengthened. At the risk of over-
simplification, let me claim that there are three big issues
that we are trying to resolve.
First, the 0.2 percent FUTA surtax was imposed in 1976 when
the Unemployment Compensation system was in serious financial
trouble. Many businessmen and members of Congress thought that
there was an understanding that when the federal parts of the
system were back on firm financial footing, the surtax would be
dropped. That was almost a quarter of a century ago, and still
the surtax continues to impose additional taxes of over $1.7
billion each year on American businesses. Most Republicans want
to repeal the surtax; the Administration and most Democrats
would rather retain the money in federal accounts.
Second, under Mr. McCrery's leadership, a substantial group
of Republicans, joined by a few Democrats, are proposing to
simplify the collection of the state and federal taxes that
support the unemployment system and to provide states with
greater control over funding for state administration of the
program. Democrats seem to generally oppose this proposal
because, in their view, it weakens the federal commitment to
the program.
Third, Mr. Levin and Mr. English have introduced
legislation that would make unemployment benefits more
accessible to unemployed workers and strengthen the solvency of
state accounts. Most Republicans seem to oppose this bill,
however, because it could lead to increased unemployment taxes.
There is a fourth issue that is now brewing; namely,
whether unemployment benefits should be used to pay cash
benefits to parents who take family leave after having a baby
or adopting a child. Many Democrats and the Administration
support this proposal while Republicans generally oppose the
proposal because it seems to violate a long-standing tenet of
the unemployment system that benefits go to those who are
involuntarily unemployed. We have called a hearing next week to
deal with this issue in great detail.
Despite the seemingly partisan nature of these various
proposals, a remarkable bipartisan group of about 25
representatives from the Clinton Administration, workers,
business leaders, and state administrators has met seven times
over the past year to explore whether a compromise among these
various proposals might be possible. Although this group has
not reached a final compromise, it is my understanding that
they have reached agreement on many issues. We will hear more
about this important effort today.
For my part, I am not at all certain what if any action our
Subcommittee should take. I plan to listen carefully to our
distinguished witnesses today, to discuss these matters further
with my colleagues on both sides of the aisle, and then decide
whether there is enough agreement to move forward.
OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MARYLAND
Madame Chairwoman, reviewing proposals to reform our
Nation's unemployment system is an important and timely duty.
With unemployment at a 30-year low, we have a rare opportunity
to fix the roof while the sun is shining.
Before we evaluate various plans to modify the current
unemployment compensation system, we should first agree upon
what we want and expect from such a system. In this context,
let me quickly mention what should be three consensus
objectives: (1) providing a timely and reliable source of
partial wage replacement for unemployed Americans; (2)
stabilizing both the national and regional economies during
recessionary periods; and (3) linking individuals to re-
employment programs.
Measured against these goals, the so-called devolution
approach taken by HR 3174 falls short. The bill focuses too
much on dismantling the Federal role in combating unemployment,
and not enough on implementing reforms to improve the long-term
solvency and accessibility of our Nation's unemployment
compensation system.
Let me mention a few specific concerns about HR 3174.
First, the legislation would sever the link between
administrative funding and need. For States hitting a
recession, this would mean they could no longer expect a boost
in their administrative funds without raising taxes in the
middle of an economic downturn.
Second, by eliminating the ability of the Federal
government to disburse administrative funds, HR 3174 guts the
primary enforcement mechanism for Federal protections in the
unemployment system, such as assuring prompt and accurate
payment ``when due'' and providing a fair hearing for
individuals whose claim was denied.
Third, the bill undercuts the future solvency of the
Extended Benefits (EB) program by eliminating its funding
source (proceeds from the FUTA tax).
And fourth, the legislation ignores one of the primary
problems with the current Unemployment System--a declining
percentage of unemployed Americans receiving UI benefits. In
fact, because the bill breaks the connection between
administrative funding and UI workloads, HR 3174 would
disproportionately benefit those States with the lowest UI
recipiency rates among the unemployed.
This is not to say that we should remain unresponsive to
one of the major complaints that HR 3174 seeks to address,
namely inadequate Federal funds for the administration of the
unemployment compensation system.
Congressman Levin has introduced legislation to increase
administrative funding for States that make progress in
improving the solvency of their State UI Trust Funds.
Furthermore, the so-called working group on unemployment
compensation, which represents employers, unions, the
Administration, and the States, have discussed making UI
administrative funds mandatory, rather than discretionary.
And finally, the Administration has requested an increase
in funding for both UI administration and re-employment
services. All of these proposals deserve our attention.
As we consider these and other proposed reforms, I want to
highlight one issue that should be addressed in any
comprehensive package. Currently, unemployed, part-time workers
who meet monetary eligibility requirements are prohibited from
receiving Unemployment Insurance in two-thirds of the States
solely because they are seeking part-time rather than full-time
employment. This means that a laid-off parent can be denied
unemployment compensation simply because they are seeking to
continue to work part-time in order to care for a child.
Such a policy is neither family-friendly, nor fair to part-
time workers. Both the research-oriented Advisory Council on
Unemployment Compensation and the business-driven Committee for
Economic Development have recommended prohibiting this type of
discrimination against part-time workers.
To address this inequity, I introduced legislation today to
prohibit States from denying UI benefits for individuals who
otherwise qualify for unemployment compensation based on part-
time work. I believe the bill is particularly relevant for
unemployed women since they comprise roughly 70% of our
nation's part-time workforce.
Madame Chairwoman, I look forward to the testimony of our
distinguished guests today, particularly my friend Sandy Levin,
who is the former Ranking Member of this Subcommittee.
Thank you.
OPENING STATEMENT OF HON. JIM MCCRERY, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF LOUISIANA
Chairman Johnson, I want to thank you for scheduling this
hearing today on Unemployment Insurance administrative
financing reform. As you know, I have introduced legislation to
restore common sense to the administrative financing of the UI
system and look forward to working with you and the other
members of the Subcommittee to address this issue.
As you and the other members of the Subcommittee know, the
employment security system, established as a federal-state
partnership more than 60 years ago, is the system employers use
to provide unemployment insurance and a public labor exchange
for workers. Since its inception, major structural changes to
our country's economy have taken place as a result of rapid
technological advances and the growth of globalized trade and
investment. Adjusting to meet the demands of our changing
economy, our nation's labor market has fundamentally changed as
well. Therefore, the employment security system should be
reformed to meet the demands of the changing labor market and
to ensure that states are able to provide the services
necessary for employment and re-employment services aimed at
matching employers and qualified job-seekers.
Madam Chairman, a major focus of reform should be to
improve the efficiency of the current administrative financing
mechanism and to reduce the tax burden imposed on employers.
Unfortunately, states aren't receiving a proportionate
return on the FUTA tax dollars contributed by their employers.
Since 1990, less than 59 cents of every FUTA dollar has been
sent back to the states for the purpose of administering their
unemployment system, and the percentage is shrinking. Now less
than 52 cents is returned. As a result, states are being forced
to either make up for the shortfall from their own general
funds, impose new payroll taxes, or cut back on services
provided to workers.
Madam Chairman, to address this issue, I have introduced
H.R. 3174, the Employment Security Administrative Financing Act
of 1999. H.R. 3174 is designed to address the problems that the
current system continues to impose on the states and the FUTA
taxpayers, while preserving and strengthening protections for
workers.
Specifically, the bill would: reduce the tax burden on
large and small businesses by repealing the unnecessary,
``temporary'' 0.2% FUTA surtax imposed in the 1970's; eliminate
inefficiencies experienced by employers by transferring
responsibility for collection of the FUTA tax to the states;
strengthen administration of the system by ensuring that states
get a greater return on their employers' FUTA tax dollars and
by ensuring greater accountability for the use of these funds;
improve employment services with an emphasis on re-employing
dislocated workers; combat fraud and abuse in the present
system; and, increase state flexibility to administer their
unemployment insurance and employment services programs to
serve local needs.
Without these reforms, the current system will continue to
overtax and overburden employers, shortchange states, and, most
importantly, underserve those who need it most--the
involuntarily unemployed and those striving to move up the
career ladder.
Madam Chairman, I applaud you for scheduling this hearing
and look forward to working with you to bring about a much-
needed reform of the current system which will bring our
employment security system into the 21st Century.
Chairman McCrery. Without objection. Mr. Uhalde, to you,
and, Mr. Cardin, who have both questioned the efficacy or the
rationale behind a federally imposed tax basically being
shifted to the states for their use, we would point out to you
that is exactly what we do with the highway trust fund. We
federally impose a gasoline tax, we collect the money, and then
we ship it to the states and they may use it basically however
they like within the parameters that we set, which is exactly
what we propose to do in my legislation. And I don't hear
anybody from the administration here saying we need to change
the operation of the highway trust fund.
In your conclusion, you point out four goals, one of those
being to help employers by cutting taxes. And I am certainly
pleased that the administration supports repeal of the .2
percent surtax. However, isn't it so that if we federally
impose an expansion of benefits, that that will require the
states to increase taxes to cover the costs of those expanded
benefits?
Mr. Uhalde. Mr. Chairman, you are right, the administration
does support a repeal of the 0.2 percent FUTA surcharge earlier
than its scheduled time if, and only if, we have a more
comprehensive agreement and that agreement includes expansion
of benefits.
Chairman McCrery. Well, if I may interrupt?
Mr. Uhalde. Yes, sir.
Chairman McCrery. In fact, you said if legislation did not
contain expansion of benefits you would not support the repeal
of the 0.2 percent surtax.
Mr. Uhalde. That is correct.
Chairman McCrery. So it is--while I appreciate your call
for compressive reform, what you are really saying is you have
got to have expanded benefits or it is no deal. And that--
hence, my question, if we have expanded benefits, don't we have
to pay for them?
Mr. Uhalde. But the whole point of this exercise, as you
well know, is that the unemployment insurance fund, at this
point, does have a good balance. And if there is any time that
we are going to use the revenue that currently resides in the
trust fund, it is now to be able to expand benefits to workers.
The purpose of the trust fund is not just to collect
revenues and to keep them there. Having recipiency rates of 21
percent in states, I don't believe is necessarily a badge of
honor that we are not being able to pay benefits out to
individuals, individuals for whom UI taxes are being paid. The
part-time workers--taxes are being paid on the part-time
workers. They are laid off. They then are looking for part-time
work and they are denied benefits. It seems to me it is a
matter of equity and justice that these workers be able to
receive benefits.
Chairman McCrery. Well, so are you proposing that the
Federal Government finance the increased cost of providing
services from trust fund balances?
Mr. Uhalde. No. I believe in the discussions that we have
had and we have had some questions about how one would cover
any extensions of eligibility benefits, and I think there have
been some interesting discussions. There is not agreement on
that. But, you know, one obvious way is to cover it through the
states as it is--has been in the past.
Chairman McCrery. Which would necessitate an increase in
their taxes.
Mr. Uhalde. Well, if the states didn't have adequate
balances in their trust funds.
Chairman McCrery. And I would assume that they would
increase their payroll tax for employers. So what you give with
one hand, you would take back with the other.
Mr. Uhalde. Well, it is not clear to me that states are in
a position, certainly the vast majority of states, that would
necessitate tax increases.
Chairman McCrery. Well, Mr. Uhalde, you have mentioned that
you would favor an increased appropriation as a transition to
making the administrative expenses a mandatory Federal expense
rather than a discretionary public Federal expense. Is that
right?
Mr. Uhalde. Yes. That is correct.
Chairman McCrery. And do you--can you expound a little bit
on the structure of the mandatory regime once that is in place?
Mr. Uhalde. I am sorry. Could you repeat it?
Chairman McCrery. Could you expound a little bit on the
mandatory regime that you had put in place to ensure adequate
funding of administrative expenses?
Mr. Uhalde. Well, I think we have been at least discussing
as--amongst the work group, a couple of different mechanisms.
First of all, the advantage on the mandatory side is we are
trying to get the amount for administration to better match the
workload. And we think, since the benefits are on the mandatory
side, that the administrative dollars ought to be on the
mandatory side.
Regarding the mechanism for actually distributing funds to
the states, we have considered several options, one of which
would be by a formula driven by workload that would have some
floor for small states and be able to distribute resources to
states on an automatic basis.
The second option would be some sort of a matching grant
approach. Actually, this Committee is very familiar with this
approach, where states would appropriate some portion of the
money and then that would drive the distribution from the
Federal trust fund--say \25/75\ or something else.
Right now, we are looking at the advantages and
disadvantages of each of these approaches and other approaches.
And so there are different ways to actually distribute the
funds if it is on the mandatory side of the budget.
Chairman McCrery. Well, Mr. Uhalde, it is the Federal
Government that is imposing a tax rate on employers in the
various states. And we say to them that the purpose of exacting
that tax is to pay for the administrative expenses of
administering the unemployment insurance system. So how can we
justify having any mandatory program that falls short of
returning every penny of that back to the states minus whatever
expenses that we legitimately need for Federal administration?
Mr. Uhalde. Well, first of all, yes, there is Federal
adminstration. There is also, as was pointed out in discussion
before, Extended Benefits. But----
Chairman McCrery. But short of that----
Mr. Uhalde. Yes. Your question is, why has the Congress and
the administration collectively over the last several years,
not returned a higher proportion back to the states.
Chairman McCrery. Well, I know why we haven't done it over
in the past, because we have had a deficit. Now, we have a
surplus. And I am saying to you, I can't think of a rationale
now for--in fact, the rationale we did use wasn't a public
rationale; it was a hidden rationale. We all knew it and we all
kind of winked and went ahead with it. But now, we don't even
have the cover of the deficit. So how can we possibly justify
not putting in place a mandatory regime to ship back to the
states every penny based on this?
Mr. Uhalde. Well, first of all, as you well know, while we
may now have a surplus, we also have an overall Federal budget
strategy collectively with the Congress and the administration
that you have to develop this UI program policy in concert with
that entire overall policy. Currently revenues coming in from
the FUTA tax are, what, six-and-a-half--$6 billion? The
administration of the programs is currently funded at something
like $3.5 billion. And the question that is going to arise is,
what is going to happen in the overall Federal budget strategy
with that difference of $2.5 billion?
Now, the administration believes that there ought to be
more of that money devoted to administration of the
unemployment insurance program. I think it is an overall
strategy, budget and administration strategy, as to whether
that is every dime or not.
Chairman McCrery. Well, thank you. I appreciate the
administration moving in what I think is the right direction.
Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman, and thank you very
much for your testimony. We may have projected surpluses, but
we still have the same budget rules. And that makes it
difficult for us. And you give a very diplomatic response to
the Chairman's question. Maybe we can find a bipartisan way to
deal with the budget caps and deal with the size of a tax bill
and deal with this FUTA surcharge also. So maybe we can find a
bipartisan way to do it.
But until we do, we are stuck with the budget rules. We are
stuck with the appropriation process and their caps and your
stuck with whatever--you--I think you have been very clear that
you want to spend more of this money.
Mr. Uhalde. Absolutely.
Mr. Cardin. And the states need it.
Mr. Uhalde. Absolutely.
Mr. Cardin. So let's try to figure out a way that we can
get this done in a fair way to the states. And, Mr. Chairman,
let me point out--I thought I did in my question to Governor
Hull that my reasons for raising the issue of whether the
states should impose the tax that they collect, was not to
suggest that as a solution, but to just raise a question about
the bill that you filed. I certainly support the national
system with a national tax for unemployment.
And it gives us--and I stated this in my opening
statement--gives us the ability to have a framework for
unemployment insurance in this country, a way we can enforce
the states establishing certain standards and having the
Federal Government act as a backstop to deal with national
economic turns.
So I guess let me just ask a couple of questions, if I
might, about H.R. 3174 and try to get your response to some of
these issues. As I understand it, it would sever the link
between the administrative fundings of the states and their
needs so that some states would be getting a lot--do a lot
better, other states would do a lot worse as to their needs.
And it does not really have a relationship to the ability of
the state to deal with these additional burdens.
Mr. Uhalde. Well, while the principle reason for the
proposal is to address the adequacy of administrative funding,
there is no guarantee with state appropriations that
necessarily states are going to appropriate the adequate
amounts for administration. There is no guarantee that that
will happen when one enters a downturn and states are trying to
shepherd their resources as much as has been done in the
Federal Government through deficits. So there is no automatic
guarantee that that is going to happen at the local level.
Mr. Cardin. A second concern I have that is more
fundamental is that there would be no--I don't know of any way
that we could enforce standards if the states have all the
money and remit to us just that extra four percent of the total
amount. For example, let us say a state didn't have any
effective appeal mechanism for someone denied unemployment
insurance. What could you do to get the state to impose an
effective appeal process for that individual?
Mr. Uhalde. Well, there are currently two ways right now.
There is the sort of the big club, which is the offset credit.
Mr. Cardin. You would lose that though under H.R. 3174.
Mr. Uhalde. No. We would retain that. That assures state
laws are in conformity with Federal law. The second----
Mr. Cardin. Oh. OK. Correct.
Mr. Uhalde. And that is the big club. And it is when we
certify that states' laws are in conformity with Federal law
and our regulations. Then we certify the offset credit. But
that is a big deal. The second----
Mr. Cardin. But if you did do that you would be imposing
another five percent tax and save which is----
Mr. Uhalde. Absolutely. At 5.4 percent----
Mr. Cardin. Right.
Mr. Uhalde.--offset credit. The second and the one that is
an important lever in ensuring the types of issues that you
talked about, prompt appeals hearings, proper and efficient
administrative methods, is that we are making grants to states
conditioned on states applying proper methods of adminstration
that are laid out in the Title III of the Social Security Act.
If we are not making grants, as under a devolution
proposal, then, in fact, the Federal Government doesn't have
that mechanism for enforcement.
Mr. Cardin. Thank you. And just let me also thank you for
your comments about the part-time employee issue. And you
raised a very good point on that. This unemployment insurance
is an insurance program. Part-time employees insurance premium
or insurance is paid on their employment. They have to remit
the money under their state program, so the state is taking the
revenue without providing any uninsurance protection.
Mr. Uhalde. Well, exactly. I mean, the system as a whole is
essentially making a profit off of part-time workers who--in
many states, part-time workers who seek to return to work in a
part-time status. And increasingly, that is an important work
force component that employers who are scrambling to get
workers are putting together all sorts of benefit packages to
attract nontraditional pools of work. And part-time workers are
an important source for employers.
And having the ability to tell workers that they will be
treated like every other worker, as long as they earn the
qualifying amount of wages, I think, is important as both an
efficiency argument for employers as well as an equity
argument.
Mr. Cardin. Thank you. Thank you, Mr. Chairman.
Chairman McCrery. Mr. English.
Mr. English. Thank you, Mr. Chairman. Mr. Uhalde, my
formative experience with Unemployment Compensation came in the
Pennsylvania and state government in the early eighties, when
after a long period of maintaining relatively low unemployment
in the late 'sixties and early 'seventies, and relatively low
tax rates, Pennsylvania abruptly went into a recession and then
went into a series of recessions. And by the early eighties, we
had, as I recall, a trust fund negative balance approaching $3
billion, which, in the state government, is real money.
I wonder, looking at the proposals that have been laid out
here, including the Levin bill, which I have cosponsored and
which the administration supports, my bill and Mr. McCrery's
bill, how would you assess their relative incentives for state
solvency? And do they provide--how do each provide for states
to maintain adequate balances even when we recognize state
officials frequently find it very difficult to focus on these
issues in the long-term and there is a tendency in state
government maybe to short some of these commitments and not
provide adequate funding?
Mr. Uhalde. Well, Mr. English, of course, I think your
bill--yours and Congressman Levin's bill--directly addresses
the solvency question. And I think it is a serious question
that we have to look at. This bill does it through a system of
incentives. I think there is criticism that the approach of
setting some de facto standard of 1 year of benefits is
arbitrary; but it is voluntary. And it uses an incentive
approach using distribution of funds from the Reed Act.
Why that is important? There is some significant number of
states, large states, that effectively have in their trust
funds--they are not quite on a pay-as-you-go basis, but they
have one quarter worth of resources there for any type of
recession.
Now, the question we have to ask in that kind of system is,
are we going to pay now or are we going to pay more later? And
the experience with Pennsylvania, the experience with Michigan,
and many other states through the eighties, was that through
the need to borrow, that they would end up paying more.
But the other thing is the timing. To repay substantial
amounts of borrowings and to sort of make the trust funds whole
after the recessions have happened is to either have to lower
benefits or raise taxes during a downturn--
Mr. English. Sure.
Mr. Uhalde.--or during a recovery.
Mr. English. Mr. Uhalde, I think we understand, you know,
broad-stroke----
Mr. Uhalde. Uh-huh.
Mr. English.--the need to move in the direction of
encouraging states to maintain their solvency. And I guess the
question I wanted to pose to you directly on the last point, on
Mr. McCrery's bill, do you have any concerns about the
incentives built into that bill that allows states to run
balances and then potentially, down the road, make some use of
them? Is--do you feel that there are adequate incentives in Mr.
McCrery's bill to provide long-term solvency at the state
level?
Mr. Uhalde. Well, I don't believe there is a direct
response to the solvency question in Mr. McCrery's bill. And
the question on the Extended Benefits was already addressed.
And I think there was a fair conversation on that where once
that pot was exhausted or whittled down, there is no mechanism
currently to replenish it.
Mr. English. Okay.
Mr. Uhalde. But, no, there isn't a direct response on that.
Mr. English. Okay.
Mr. Uhalde. And I am concerned that problems with
addressing unemployment insurance and adequately funding it at
the Federal level, would be repeated 50 times over at state
legislatures----
Mr. English. Sure.
Mr. Uhalde.--in trying to appropriate the----
Mr. English. Before my time runs out, I do have one last
question. And that is, you have talked about being willing to
be flexible as part of an overall package on the .2 percent
surtax. One of the tax issues that doesn't typically get
brought up in the context of tax reform is the fact that since
1986 or '87, we have been taxing UC benefits in a way that
substantially reduces their value to the workers.
Is the administration willing to consider taking the tax
off of Unemployment Compensation benefits as part of an overall
fix to this system? And is it the view of the Department of
Labor that taking the tax off of UC benefits would
substantially improve their value to the people that we are
trying to serve?
Mr. Uhalde. Well, clearly, the answer to the latter is,
yes, that taking the tax off would improve the value to
workers. I have not been involved in any Administration
discussion of taking the tax off. Again, we are caught in the
whole issue of the overall budget package. And there has been
discussion in the work group, frankly, to whether or not some
of those revenues from the tax ought to be targeted toward some
of the aspects of expansion, for example, in this.
Mr. English. Sure. Thank you. And, Mr. Chairman, I thank
your indulgence. Let me say, I hope that the administration
will take a look at the tax on UC benefits. I think this is an
extremely important issue. It is one that has been long
neglected and has needed a champion. The rollback of this tax
has never been proposed by the administration. I think the time
has come to take a look at this. I think this is one tax cut
that even the administration will concede is not tax cuts for
the rich. Thank you, Mr. Uhalde.
Chairman McCrery. Thank you, Mr. English. I thank you, Mr.
English. As to your point about incentives, I can--my
experience comes from the State of Louisiana with the
Unemployment Compensation system. And I can assure you that
that experience in the eighties has made us very much aware of
the need to prepare for downturns. We were hit very hard, as
was Michigan and a few other states. We had to borrow sizeable
amounts of money from the Federal Government and pay it back
with interest.
And, as a consequence, we had to increase, on a temporary
basis, a true temporary basis, I might add, the payroll taxes
on our state's employers, which was a heavy burden. But once we
paid off those sizeable loans that we got from the Federal
Government, we took the temporary surtax off, which should be a
lesson to Federal policy makers. Once the need for the
temporary tax is gone, you should do away with the temporary
tax. And, Ms. Johnson, do you have questions for Mr. Uhalde.
Chairman Johnson. I am sorry I had to miss your testimony,
but I do look forward to working with the Adminstration on this
issue. I don't see that anyone who has testified today can say
this is a program that is working. And when you listen and you
look at the chart that I was reading from, some states have
four or 6 months of benefits in reserve and others have 168
months. This is not a system that is healthy.
It is also true that there has been a dramatic change in
the kinds of services that unemployed people need. Really, a
radical change from 10 years ago. And the kinds of services
that states need to be able to provide are more expensive. They
are more technologically based. There are not just
transportation--they are doing a lot of different things. And
they need the resources and the flexibility. I don't see any
reason why we can't think this through in a way that gives
states better resources, since we all acknowledge that part of
this was deficit-driven, and, at the same time, guarantee that
the Extended Benefits program will not only be in place, but
will be funded.
I think the regular benefits program has always had the
backup only of Federal loans. And my state, as well as
Louisiana, was one that borrowed heavily, spent years paying
back the costs of recession, and then, when those costs were
gone, they did gradually lower the rate. Now, that can be done
at the local level. It is very hard to do that at the Federal
level. Once we get it in there--I mean, the FUTA surtax is 25
years old. That is my understanding--my recollection. Is that
correct? Twenty-five years? So, you know, it is not a temporary
tax.
So the degree to which we are able to really honestly
manage a program like this, it is not great. So if we focus our
interests and our expertise and our commitment to funding what
we need to fund, which is the Extended Benefits program,
because that really does require a redistribution, in a sense,
of wealth between states that are doing well and states that
aren't in a period of recession, then I think we have a chance
to reform and strengthen that program and, at the same time,
give states better resources to meet what is a very different
and very exciting and very positive demand. And the better the
states meet it, the better people getting unemployment benefits
will do getting back into the work force.
I don't see any reason why we can't do this in a way that
is a win-win for everybody. And I just hope the administration
will get back to us on sort of the key things that you are
concerned about. And I don't know whether we can open it up to
part-time people right now. We will look at every idea that is
brought up here today.
But I think we also need to look at what is the incentive
we provide for unemployed people to participate in job
training, because many are afraid of it. I mean, they don't
participate because, frankly, they have never seen a computer
and they are hoping like heck they will get a job that will
require the old skills. And I think we need to think also about
what help and what incentives do people need to change careers
and change their lives, because it isn't easy, but it does
work. So I thank you for your testimony and I look forward to
working with you.
Mr. Uhalde. Thank you, Madam Chairman.
Mr. McCrery. Thank you, Mr. Uhalde, very much for your
testimony and your patience in answering our questions. And
now, as Ms. Johnson and I have changed chairs, I would ask the
final panel to approach the witness table as Mr. Robert C.
Gross. Chuck Yarborough, David Smith, Mark Wilson, Hon. Gary
Forster, and Van Doorn Ooms.
Chairman Johnson. I would like to welcome this panel. You
may be aware that the Subcommittee has been doing some field
hearings, and those have generally brought us to visit some of
the one-stop centers that have developed at this end of the
country. And I would have to say I am very pleased to have with
us Mr. Robert Gross, who has developed a level of integrated
services at these one-stop centers that, frankly, I have not
had the privilege of visiting. So we look forward to the
panel's testimony. Feel free to stray from your written
testimony. We do include all of your statements in the record
of our Committee proceedings. So if you would like to summarize
your hearing and maybe address issues that have been raised,
that is always very helpful to us.
Mr. McCrery. Madam Chair.
Chairman Johnson. Oh, and I should mention, you know, the
light. It is red, yellow, and green. When you get to yellow,
you should recognize your 5 minutes is coming to a conclusion,
and then we will have more time for questions.
Mr. McCrery. Madam Chair.
Chairman Johnson. Yes, Mr. McCrery.
Mr. McCrery. If I might just take a minute to introduce a
colleague from the State of Louisiana, Mr. Garey Forster, who
is the Secretary of Labor in Louisiana, and comes to that
position with considerable experience from the legislative end.
He was a State Representative for many years, representing the
New Orleans area. So he comes to us with a great deal of
experience from both the policymaking side and the policy
enforcement side. So welcome, Mr. Forster, and thank you for
making the trip.
Mr. Forster. Thank you, Jim.
Chairman Johnson. Thank you, Mr. McCrery, and also for
pointing out his background because it is very useful to us to
have someone who has had your breadth of experience before us.
Let us start with Mr. Gross, Robert Gross, who is President of
the Interstate Conference of Employment Security Agencies and
Executive Director of Utah Department of Work force Services.
STATEMENT OF ROBERT C. GROSS, PRESIDENT, INTERSTATE CONFERENCE
OF EMPLOYMENT SECURITY AGENCIES, AND EXECUTIVE DIRECTOR, UTAH
DEPARTMENT OF WORKFORCE SERVICES
Mr. Gross. Thank you, Madam Chair and Members of the
Subcommittee. I am pleased to be here and certainly grateful
for the extension of your invitation to testify here. As you
indicated, Madam Chair, I wear a couple of different hats. In
fact, I am wearing several hats, although, I am here to testify
today on behalf of the Interstate Conference of Employment
Security Agencies. I am also a state administrator, and also
have had the privilege of chairing the work group to which Mr.
Uhalde and others have referred to during the course of the
past year, in which we have attempted to forge a comprehensive
and bipartisan approach to Unemployment Insurance and
Employment Service reform.
You have my written testimony, as was acknowledged. So I
will attempt to extrapolate five or six key points that we
think are important. And again, I would reiterate that while my
positions here--I will be articulating positions on behalf of
the Association and my 53 colleagues from the states and
territories, and not exclusively and obviously my feelings or
concerns about my own State of Utah.
Let me first address the point that has already been
addressed, and that is plain and simply, the Federal grants to
administer Unemployment Insurance and the Employment Service
systems need to be sufficient. They have been inappropriately
low for the past several years. In fact, Department of Labor
statistics indicate that the Unemployment Insurance
administration system has been under-funded by about 10 percent
per year for several years, and the employment service
purchasing power has been eroded by nearly 60 percent since the
early eighties.
Again, as you have heard in previous testimony, there is
almost uniform and unanimous consensus among work group members
that we need ways to better fund the system and, yet, adequate
funds seem to be inherent within the amounts collected from the
employees of this country. One of the things that we need, we
would encourage this Subcommittee to look at, of course, is
moving the funding of this from the discretionary side to the
mandatory side of the budget. We commend Mr. McCrery for his
approach. We think that offers one thoughtful approach for that
important budget consideration.
As you have also heard, there has been other testimony
today that there are other proposals that our work group has
looked at, including a formula approach and a matching grant
approach. We think there is good in each of those approaches,
and we would like to work--continue to work together as a work
group, but also work with this Subcommittee in finding a
solution.
Second, I would like to reiterate that we need to invest
more in the Employment Service and Reemployment Services for
claimants. Madam Chair, as you indicated, and as we had an
opportunity to talk earlier, states are in the vanguard of an
increasingly complex work force service--public work force
service delivery system. The system of Unemployment Insurance
and Employment Services that was provided for sixty years ago
is no longer a match for today's complex economic
circumstances.
My own state, for example, of Utah, is one of a handful of
states that is in this vanguard of looking at the comprehensive
array of services, and we deal with such diverse issues as
Public Assistance, food stamps, in addition to being the
administrators of the Employment Security System, Employment
Training, and so on.
The hallmark of our system and, increasingly, the system
that we see throughout the country, is a system that is built
on the need for adequate programs to deal with employment and
employability. And certainly, a hallmark of that is adequate
funding for the employment service. A recent Department of
Labor study found that job search has reduced the average
duration in the Unemployment Insurance by one-half to 4 weeks,
depending on states. And the government has saved $2 for every
dollar spent in Employment Service activities. It is, frankly,
a good investment, and one that we do not believe has been
sufficiently attended to in the past several years.
The third point I would like to make is that we obviously
believe that there needs to be a reduction in the tax burden,
and we need to minimize the tax filing burdens that are
currently imposed. ICESA, our organization, does support a
repeal of the two-tenths percent Federal unemployment tax for
many of the reasons which have been articulated here in
previous testimony. We question the accumulation of an $18
billion reserve in the Federal Unemployment account at a time
now when we have moved into a budget surplus. We also would
strongly urge the retention of quarterly tax depositing, rather
than a monthly system as proposed by the administration.
The fourth point I would make for my testimony is that we
also support efforts to reduce fraud and abuse by granting
State Unemployment Insurance programs to the National Directory
for New Hires. We commend the Congress for the approach that
was taken last year although it did not pass. Frankly, over 20
states are currently cross-matching their intrastate new hire
data with Unemployment Insurance Claim data, and the number is
growing.
In my own State of Utah, we believe that we have cut
Unemployment Insurance overpayment by nearly 50 percent as a
result of our ability and the consolidation of the services in
our agency, and the fact that our Employment Security programs
are also housed with the efforts in terms of the Directory
itself.
We need the access to this Directory, because new hires in
other states, claimants find jobs in other states, and the
intrastate new hires sometimes are reported under current
statute by multi-state employers to other states. We know a
concern that was expressed last year was over the
confidentiality and privacy in terms of the sharing of this
data. We, too, in the states, are just as concerned about the
confidentiality and privacy as are those of you in the Federal
Government. Since we are the ones to collect the data in the
first place, our rules need to be strict in order to protect
privacy and confidentiality.
A fifth point I would make is that we are in favor of
repealing the special eligibility requirements on the Extended
Benefit program. Again, the EB program has been previously
discussed. And finally, I would suggest that our association is
unanimous in indicating that we believe that we need to stop
the application of the Federal budget principle of budget
neutrality to self-financing Unemployment and Employment
Service programs. The Unemployment Insurance and Employment
Service systems have been under-funded and overtaxed as a
result of this principle, and this has been previously
testified. During these economic times, now is the time to
prepare for the next downturn or the next recession, and
correct these principles. As we have previously articulated
today, one of the ways that we believe insures this is moving
the funding of these programs to the mandatory side of the
budget.
[The prepared statement follows:]
STATEMENT OF ROBERT C. GROSS, PRESIDENT, INTERSTATE CONFERENCE OF
EMPLOYMENT SECURITY AGENCIES, AND EXECUTIVE DIRECTOR, UTAH DEPARTMENT
OF WORKFORCE SERVICES
Madame Chair and Members of the Subcommittee on Human
Resources, I am Robert C. Gross, President of the Interstate
Conference of Employment Security Agencies (ICESA) and
Executive Director of the Utah Department of Workforce
Services. Thank you for inviting me to testify today on behalf
of ICESA and its 53 state and territorial members. ICESA
represents state workforce agencies in general and the
Unemployment Insurance (UI) and Employment Service (ES)
programs in particular. Many of our state members also
administer welfare-to-work programs and some administer other
public assistance programs, such as TANF, under the
jurisdiction of the Subcommittee on Human Resources.
I want to thank and commend the Chair for scheduling a
hearing on UI and ES reform. It is not easy to gain attention
for this subject during a time of sustained economic growth and
low unemployment, but the system is in need of reform before we
experience another economic downturn.
In addition, I want to thank the U.S. Department of Labor
for its commitment to working on comprehensive UI and ES reform
with business, workers, and states.
During the past year, ICESA has sponsored seven meetings of
a UI and ES reform workgroup representing the state and federal
partners and business and worker stakeholders. We discussed
principles and options, and identified where we agree, where we
disagree, and where we hold out the possibility of compromise.
Although we have not agreed on a package, my testimony today
reflects the substantial progress we have made toward that end.
I want to emphasize that I wear multiple hats as I discuss
these issues with you. As executive director of the Utah
Department of Workforce Services, I have been one of the state
administrators who has supported the state-business coalition
approach to UI and ES reform as embodied in Mr. McCrery's bill.
As a state member of the UI-ES reform workgroup that has
labored over the past year, I recognize that our federal
partner in this critical safety net system feels very strongly
about expanding coverage and eligibility for benefits in any
comprehensive reform package. The state members of that
workgroup have been clear that worker advocates and business--
the principal stakeholders in the system--should agree on
components of a comprehensive reform package. Finally, as
President of ICESA, I represent 53 state and territorial
administrators with whom I must coordinate any official
organization position. In this statement I have attempted to be
clear on which reform principles we have an official position
and on which states have shown interest, or recognize others'
interests, but need to discuss further. Most importantly, the
state administrators want to work directly with you in
addressing UI and ES reform this year.
ADMINISTRATIVE FINANCING REFORM
ICESA believes grants to states for the administration of
state UI and ES programs have been inadequate. The U.S.
Department of Labor has estimated grants for administration of
the UI program have been under-funded each year by roughly 10
percent and the purchasing power of grants for administration
of the ES program has diminished by around 60 percent since the
early 1980s. In response, states have been forced to spend
their own funds just to maintain essential services.
Preliminary results from a recent ICESA survey show that states
spent nearly $320 million of their own funds on the
administration of the UI and ES programs. About one-third of
this sum was spent on UI administration and the remaining two-
thirds was allocated to the ES program.
ICESA believes the UI and ES programs must be funded
adequately. Members of the UI/ES reform workgroup have
concluded this cannot happen as long as the federal government
treats grants to states for administration of the UI and ES
programs as discretionary federal spending. These grants should
be on the mandatory side of the federal budget so that states
can receive sufficient funds to administer the UI program in a
proper and efficient manner and provide effective reemployment
services to unemployed workers. Mr. McCrery's bill takes this
approach and is one way to reform administrative funding.
Mr. McCrery's bill would authorize states to collect the
Federal Unemployment Tax and retain most of the funds for state
spending on administration of the UI and ES programs. Such
funds would remain in the federal unemployment trust fund in
new separate state administrative accounts, but would be
appropriated by states and treated as mandatory federal
spending. We don't know whether the Appropriations Committees,
Budget Committees, the U.S Treasury, or the Office of
Management and Budget (OMB) would agree to these unprecedented
changes, but many states and businesses are supporting this
approach.
The states participating in the reform workgroup find
another approach, a matching grant, worth exploring also
because it is used already for mandatory spending on
administration of such programs as child support enforcement
and child welfare, both of which are under the jurisdiction of
the Subcommittee on Human Resources. In this approach, the
Federal government would continue to collect the Federal
Unemployment Tax, but about one-fourth of the revenue would be
deposited into new state administrative accounts in the
unemployment trust fund to finance state matches to federal
funds for administration of the UI and ES programs. Although
this approach has not been developed fully by the UI/ES reform
workgroup, it holds promise because there are precedents in
other Human Resources programs for classifying such spending on
administration as mandatory.
ICESA does not know which approach best assures adequate
funding for UI and ES administration, but it believes states
are willing to accept additional responsibility in this system
and are willing to be held accountable by the public for
results. We would like to work with you and the Administration
to achieve this end.
REEMPLOYMENT
ICESA believes the federal government should invest more
funds in the Employment Service and reemployment services
because unemployed workers can return to work sooner, save
taxpayer dollars, and help employers find qualified workers to
produce their goods and services. We commend Mr. McCrery for
provisions in his bill establishing new mandatory spending for
providing job search and other employment services for UI
claimants. The potential return on this investment was
summarized in a recent USDOL report entitled, ``Evaluation of
Worker Profiling and Reemployment Services Policy Workgroup:
Final Report and Recommendations:''
(1) Individuals receiving job search assistance found new
employment one-half to 4 weeks sooner (depending upon the
state) than similar individuals who did not receive assistance.
(2) Savings to the government (savings in UI benefit
payments plus the increase in tax receipts due to faster
reemployment) averaged around $2 for every $1 invested in
targeted job search assistance.
(3) Individuals receiving job search assistance found jobs
with wage rates comparable to those found by individuals who
did not receive assistance.
TAX BURDEN AND TAX FILING BURDEN
ICESA believes the federal government should reduce federal
unemployment taxes by repealing the temporary 0.2 percent
federal unemployment surtax. The federal government has not
only been under funding the administration of UI and ES, but
also it has been overtaxing the taxpayers, apparently to fund
non-UI and non-ES federal activities. When the federal
government extended this tax in 1997, there was little or no
need for these additional funds in the UI program. The funds
were added to ``paper balances'' in the Federal Unemployment
Account and backed by a promise to make loans to insolvent
state programs in future recessions. Even though this account
shows these funds as ``reserves,'' the funds were used to
finance non-UI/ES spending when the federal budget was running
a deficit. Now that the federal budget is running a surplus,
these funds are being used for non-UI/ES debt retirement, non-
UI/ES tax cuts, or non-UI/ES spending. This practice should
stop. These funds should be used for UI and ES purposes as
needed and excess amounts should be returned to the taxpayers.
Many ICESA members are interested in a new idea discussed
by the reform workgroup--the possibility of repealing the
Federal Unemployment Account and distributing the ``reserves''
to the state accounts. In an ideal world for states,
distributing these ``reserves'' to state UI accounts could--at
individual state's option--increase the solvency of state UI
programs, fund coverage or eligibility expansions, or fund
state unemployment tax cuts. Employers, for example, might want
these funds to be used for tax cuts. Worker representatives and
the Clinton Administration might press for linking the
distribution of these funds to potential coverage and
eligibility expansions. Such expansions might include lowering
state minimum qualifying earnings for claimants, providing
benefits to workers who restrict their job search to part-time
work, taking into account recent earnings through the use of
``alternate base periods,'' and providing benefits to claimants
who left their jobs to avoid domestic violence. ICESA
understands that the Department of Labor might link FUA
distributions to such eligibility expansions, but it strongly
believes decisions about eligibility for state benefits should
be made by states, not the federal government.
ICESA is interested in reducing employer tax filing burden
through simplifying tax forms and consolidating wage and tax
reporting with states and would not preclude considering such a
proposal in a comprehensive reform package.
ICESA strongly supports quarterly (not monthly) tax
depositing and commends Mr. McCrery for including this
provision in his bill. The Clinton Administration proposal to
collect unemployment taxes on a monthly rather than quarterly
basis is another bad example of a budget gimmick proposed to
finance non-UI/ES expenditures at the expense of the integrity
of the system.
ICESA member states are likely to support Internal Revenue
Service (IRS) disclosure of information to states for the
purpose of combining state and federal employment tax reporting
and would not preclude considering such a proposal in a
comprehensive reform package. A recent federal law authorized
disclosure to the State of Montana for this purpose. Other
states are interested in working with IRS on combining
employment tax reporting, but they need legislation to proceed.
FRAUD AND ABUSE
ICESA supports reducing fraud and abuse in the UI program
by granting state UI programs access to the National Directory
of New Hires (NDNH) and commends the House Committee on Ways
and Means for including it in the ``Fathers Count'' bill it
reported last year. Individual states already contribute most
of the quarterly wage and new hire data in the NDNH, but this
national database is not shared with the states. As a result,
although states are able to cross match intrastate new hire
data with UI claims data, they are not able to run similar
cross matches with new hire data from other states. The
intrastate cross match enables states to cut overpayments to UI
claimants who obtain jobs within their states, but they cannot
catch UI claimants who have been reported as new hires in other
states. There are nearly one million UI claimants per year
nationwide who might be hired in one state while claiming
benefits in another state. In addition, there are countless
other UI claimants whose intra-state new hires are reported by
multi-state employers to other states, a practice explicitly
allowed under federal law to lessen employer reporting burden.
If the state paying benefits is not promptly informed that such
a UI claimant has been newly hired, substantial overpayments
occur. These overpayments can be substantially reduced. Utah,
for example, was able to cut its average UI overpayment nearly
in half by cross matching intra-state new hire data with UI
claimant data.
ICESA is aware that the provision granting access to the
NDNH was deleted from the ``Fathers Count'' bill last year
because of concerns about privacy and confidentiality. I assure
you that states are equally concerned about privacy and
confidentiality. In fact, states have strict rules about the
wage data and new hire data they submit to the NDNH and are
currently working on strict rules for sharing wage data among
themselves in the new interstate Wage Record Interchange System
(WRIS). We believe states are in a unique position as the
source of the NDNH data to protect these data and to use them
in an effective manner. Please work with us to grant state UI
agencies access to the NDNH. The integrity of the UI program
will be enhanced as a result.
ELIGIBILITY
In general, ICESA believes states should determine
eligibility for state UI programs, not the federal government.
However, a comprehensive reform that solves the problem of
inadequate funding, provides additional resources for
reemployment services, reduces unemployment tax burden and
employer tax filing burden, and combats fraud and abuse, and
requires or provides incentives for expanded eligibility, could
be attractive to some states.
ICESA believes applicants for Federal Unemployment
Compensation, such as benefits for ex-military service
personnel or ex-federal employees, should not be required under
the Personal Responsibility and Work Opportunity Reconciliation
Act (PRWORA) of 1996 to prove their citizenship or qualified
alien status in person. ICESA has filed its objections to this
policy with the Immigration and Naturalization Service (INS)
and is awaiting the final version of its proposed regulations
implementing this provision of PRWORA. Because inadequate
federal funding for UI and ES administration has forced states
to close many local offices and adopt remote claims taking via
telephone and the Internet, states no longer can verify
citizenship or qualified alien status in-person, which the
draft INS regulations seem to require. In addition, since
monetarily eligible UI claimants' citizenship or qualified
alien status is already supposed to be verified by the
employer, we see no reason to duplicate this effort when the
worker applies for unemployment benefits.
ICESA supports repeal of special eligibility requirements
under the Extended Benefits (EB) program. ICESA believes states
should have the authority to set eligibility requirements. In
addition, when these requirements differ from state
requirements, they impose an added administrative burden on
already overburdened states. These requirements include:
EB claimants must conduct ``systematic and
sustained'' work searches and provide tangible evidence of the
work searches.
EB claimants must accept any offer of suitable
work that they can perform.
EB claimants must have either worked 20 weeks or
earned an amount equivalent to either 40 times the weekly
benefit amount or 1.5 times the highest quarterly wages in the
base period.
EB claimants who are disqualified for voluntarily
leaving, misconduct or for refusing suitable work can receive
EB only if they perform work following the disqualification.
For interstate claims, individuals can only be
paid for two weeks of benefits if the state in which they
worked is activated on EB and the state where the individual
filed his claim is not activated on EB.
ICESA is interested in a proposal to increase the federal
share of Extended Benefits from 50 percent to 75 percent and
would not preclude considering such a proposal in a
comprehensive reform package. Coupled with some reform in the
trigger mechanism, such a change might help the federal
government avoid the need to enact an emergency federal program
during another recession. The last such emergency program in
the early 1990s cost the federal government about $28 billion.
BUDGET NEUTRALITY
Finally, ICESA strongly objects to the continuing
application of the federal budget principle of ``budget
neutrality'' to the self-financing UI and ES system. This has
led to the under-funding of administration of UI and ES and
over taxing of taxpayers in order to finance other federal
spending during deficit years and now the retirement of other
federal debt, spending on other federal programs, and cutting
of other federal taxes during surplus years. It is time
Congress corrected this problem. Our system, and the programs
under the jurisdiction of the Subcommittee on Human Resources,
should not have to cut services even more and impose even more
taxes for a problem that was largely created by the wrongful
application of this principle.
Madame Chair, ICESA, its federal partner, and business and
worker representatives have done much work in the last year on
UI and ES program reform. We are ready to work with you and the
Subcommittee to solve these problems this year. Time is short.
Let us begin.
Thank you.
Chairman Johnson. Thank you very much, Mr. Gross. And I do
appreciate your offer to continue working with us and with the
administration. It is very helpful that there has been a
working group. It is time that the working group realize that
we need to bring this to a substantive project.
Mr. Chuck Yarbrough, Chairman, Board of Directors, UWC-
Strategic Services on Unemployment and Workers' Compensation.
Mr. Yarbrough.
STATEMENT OF CHUCK YARBROUGH, CHAIRMAN, BOARD OF DIRECTORS,
UWC-STRATEGIC SERVICES ON UNEMPLOYMENT & WORKERS' COMPENSATION,
AND DIVISION PERSONNEL MANAGER, TYSON FOODS, INC., SPRINGDALE,
ARIZONA
Mr. Yarbrough. Thank you, Madam Chairman and Members of the
Committee. It seems only natural that we have an opportunity to
discuss FUTA on the 29th of February, a day that only comes
about in the year ending in double zeroes every 400 years.
I am a Division HR, Human Resource Manager in a 16-state
employer with 66,000 employees. I do serve as Chairman of UWC,
a group that is dedicated to look at the Workers' Compensation
as well as Unemployment Insurance issues. I am a volunteer and
a user in the system of Unemployment Insurance, Employment
Service, as well as Employment and Training for the past 25
years in doing my job.
With just 5 minutes to impress you about the need for true
and effective FUTA reform, I will try to do both, but that is a
lot of pressure. Should I spend my time discussing problems of
the past or the future? And so I am going to try to do a little
bit of both, so here goes. A couple of things on why I believe
3174 is important to us.
My company recently paid $18,000 to pay the building rent
on a Texas Employment Commission office just so that local
office could maintain and stay open. This provided East Texas
with service where the rural people in Texas were going to have
to drive 60 miles to get service. This helped us staff a local
plant as well as provide service to that geographical region.
We see many veterans lose their representatives out of their
local office.
And in Arkansas, we seen the layoff of permanent state
employees in a reduction of full-time offices to part-time
offices. Since 1980, in Arkansas, my home state, we have
experienced across-the-board economic industrial growth with
11-percent growth in population and 1998 Census estimate, a 22-
percent growth in the number of men and women in the work
force, and a 37-percent growth in the number of employers. But
yet, our permanent staffing in the Employment Security
Department has been reduced by 50 percent because of the lack
of funding.
These reductions, instituted by an employer fund service
provider are not based upon any business decision, nor are they
based on a technological enhancement, nor are they based upon
the decline for the desire of the services. These reductions in
personnel and service availability are based upon the fact that
the taxes being paid by Arkansas employers are not being
returned to the state but, yet, staying in Washington to pad
the surplus. These services which taxes are being collected for
which the citizens have a great need.
Many states have stopped providing I-nine certification,
which puts employers right in the middle of the Immigration
Naturalization Service and the Equal Employment Opportunity
Commission. Many employers have had to open up main street
recruitment and employment offices even though we are still
paying FUTA, and this is another way of us being taxed.
Many work force investment boards are concerned about the
money for their one-stops, and unless reform happens, there
will be no money. Job seekers are confused on where to go for
service. This is a system that is different from any other
system. A state agency whose funding comes from a Federal
Government, paid by the employers in that state, the budget
issues dealing with the dedicated trust fund that is counter-
cyclical by nature with discretionary funding by Congress but,
yet, is a mandated state system. Therefore, it should be
treated differently.
So what will 3174 do? For job seekers in their first
because of a labor shortage, it will truly provide a one-stop
no wrong door; more employment counselors to provide job
matching and better retention and better increased services for
the veterans; an effective UI system that will get them their
benefits in a timely manner. With proper funding and control,
the states could consider providing increased benefits and
expanded eligibility for UI for claimants that fits their local
state needs.
For the state agency, and they are in the middle because
they provide the labor exchange, proper funding would allow a
forward thinking approach as to what service are we going to
reduce next, deal with local elected officials to help them
improve their system, and provide long-range funding for one-
stops instead of worrying about what grant they are going to
receive. Provide employment services for all Federal work force
investment programs into one-stop, which is the future, and
still giving the veterans first choice.
For employers, because we are the long-term solution to
provide better retention and longer term careers, it improved
employment service and a better applicant flow in the time in
which the Unemployment rate is at its lowest. Access to state
elected officials for proper funding for the one-stop, a
reduction of FUTA by 25 percent, a reduction of $100 million
that the IRS collects for tax dollars, collect in the
distribution of FUTA. Single payment system collected
quarterly, state certified I-9's that would help us in our
employment group, and moneys to support the work force
investment boards, and refer those veterans who help us fulfill
our affirmative action plan requirements. Unemployment
Insurance system that seeks to prevent fraud in greater
integrity. This is a win-win-win for veteran job seekers, state
agencies and employers.
Thanks for your time, and please enact H.R. 3174 for all
the right reasons. I would like to say that I have served in
Region VI National Employer Council since 1992, an elected
representative of employers for the states of Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. I have also served
on the local PIC. I have also served in a job service advisory
council. I am a member of the IAPES, which is the association
which the people that work in the system belong to, and I have
spent 25 years working inside this system.
Although I am not going to receive a pension, I have
received a lot of excellent service from this group of people
and they have been tremendously beneficial in allowing me to
perform my job. Thank you.
[The prepared statement follows:]
STATEMENT OF CHUCK YARBROUGH, CHAIRMAN, BOARD OF DIRECTORS, UWC--
STRATEGIC SERVICES ON UNEMPLOYMENT & WORKERS' COMPENSATION, AND
DIVISION PERSONNEL MANAGER, TYSON FOODS, INC., SPRINGDALE, ARIZONA
Good afternoon, Madam Chairman and members of the
committee. My name is Chuck Yarbrough, and I am Division
Personnel Manager for Tyson Foods, Inc., the nation's leading
producer, processor and marketer of poultry and poultry based
food products, 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)
since 1992. 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.
UWC is business leader of the Coalition for Employment
Security Financing Reform, an informal coalition of business
organizations and states who support H.R. 3174, the Employment
Security Financing Reform Act.
H.R. 3174 was introduced by Rep. Jim McCrery with the
bipartisan support of 35 co-sponsors. Support for the proposal
is growing daily. UWC and the Coalition believe that the swift
enactment of H.R. 3174 is essential to strengthen the state
unemployment insurance and employment services (UI/ES) system
and the workers and employers whom it is designed to serve.
Unlike the Administration's proposals, the bipartisan
Employment Security Financing Reform Act will improve the
method by which FUTA taxes are collected and funds are provided
to administer the state UI and ES programs. The Employment
Security Financing Reform Act will fix serious problems with
the state UI and ES system resulting from the federal
government's failure to provide adequate funding and will also
provide funds needed to implement the Workforce Investment Act.
The Administration's proposals will not achieve these goals.
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.
Unfortunately, the present 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 collects 100% of Federal
Unemployment Tax Act (FUTA) receipts but returns only 50% to
the states.
Because of the chronic under-funding of UI/ES agencies,
workers in the midst of a labor shortage are collecting more
weeks of unemployment benefits--at employer expense--and states
are reaching into their own general revenues--and employer
pockets--by levying add-on taxes to make up for the shortfall
in FUTA funds coming back to the states.
The good news is that we have a historic opportunity to
enact H.R. 3174 and thereby improve efficiency and streamline
the system by fully covering UI/ES administrative costs. This
funding is necessary to improve services for jobless workers,
reduce taxes on employers, and alleviate the financial pinch on
state administrators. Now that's what I'd call a ``win-win-
win'' situation.
In evaluating legislative proposals to improve and simplify
UI/ES administrative financing reform, 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 as promised
2. Impose employer taxes to finance the system consistent
with sound UI operations rather than inflexible federal budget
rules
3. Maintain the FUTA tax at a level that is neither
excessive nor inadequate for UI/ES program needs.
These concepts are embodied in H.R. 3174, the Employment
Security Financing Act of 1999. Under H.R. 3174, the basic
framework of the federal-state UI partnership will remain
intact, and all benefits and legal protections for jobless
workers will be unchanged. Let me repeat: All worker
protections and benefits will remain in place or even be
strengthened.
In addition, under H.R. 3174 there will be no change in the
rules governing the state unemployment trust accounts used to
finance UI benefits. The 0.2% FUTA surtax will expire at the
end of this year rather than the year 2007. However, instead of
pooling all FUTA payments in a single federal UI/ES
administration account (ESAA), FUTA taxes paid by employers in
each state will be credited to a new administration account set
up for each state. Each state legislature, rather than
Congress, will determine how much it needs to administer its UI
program. A small amount will be transferred into a special
account to be used for additional grants to small states which
need additional funds to administer their program, and a small
amount will be set aside for U.S. Labor Department operations
related to UI. FUTA funds that are not needed for
administration--and excess FUTA funds that have already been
accumulated--will automatically flow into the state's UI
benefits account.
Under H.R. 3174, FUTA and state unemployment taxes will be
payable no more often than quarterly, and employers will no
longer have to fill out duplicative FUTA and state unemployment
tax forms. Instead, states will collect FUTA on the same form
used for state unemployment taxes. This approach will simplify
tax payment for employers and states, as well as the federal
government. It will also increase tax compliance, because
states are closer to the situation and in a better position to
detect under-payments of FUTA.
Finally, accountability for use of the money will be
enhanced by requiring each state agency to report annually to
its legislature and the public on services provided to UI
claimants.
Some specific advantages of H.R. 3174 are as follows:
Better service for UI claimants, jobseekers,
veterans and employers. States will have the necessary
resources and flexibility to provide needed services.
Funding to serve workers and employers in rural
areas. Cutbacks in FUTA grants have forced states to close
offices--this has been an acute problem for workers in rural
areas and others who are costly to serve. H.R. 3174 will
provide the funds needed to keep these lifelines open.
Greater oversight by state and local worker,
veterans, and employer groups. These groups will now have a
critically important role in assuring the state UI/ES system
delivers needed services effectively and efficiently.
More resources for administration of the UI
program. All states will be ``winners.'' With FUTA funds for
states currently getting lost in the federal budget process,
all states are being shortchanged.
Greater responsiveness to local needs and
circumstances. State legislatures, rather than federal
appropriations committees and DOL and Office of Management and
Budget (OMB) staff in Washington, D.C., will determine how much
is needed to run state UI programs. This will maximize
effectiveness by providing greater flexibility--and
accountability for state UI/ES agencies. States are responsible
for establishing benefit levels and eligibility, salaries of
state employees, and other factors that affect the cost of
administering the state programs.
Provide more resources to prevent and detect UI
fraud and abuse. Improper UI payments are a serious and costly
problem, and states will have the resources they need to
address them.
The elimination of unnecessary paperwork for
employers.Employers will complete and submit a single
unemployment tax form rather than two separate state and
federal unemployment tax forms.
Greater accuracy in the collection of the
administrative tax. Currently enforcement efforts relating to
the FUTA are a low priority, but states will be motivated and
have the ability to detect errors and delinquencies.
Savings to the Federal government. The cost of
having the U.S. Treasury Department collect FUTA taxes will be
substantially reduced.
Lower net taxes on employers/greater solvency of
state UI trust funds. Currently the federal government keeps
half of FUTA taxes paid by employers. If the additional revenue
flows into state benefit trust accounts, it will improve the
solvency of state UI benefits accounts (a DOL concern). Where
funds are not needed for benefits, employers will pay lower
state UI taxes, in some cases automatically, and in other cases
through reductions in state UI tax rates.
Greater employment opportunities. Because UI taxes
are based on payroll, a reduction in employment taxes will make
it easier for employers to hire additional workers--such as
individuals coming off of welfare rolls.
Elimination of the unnecessary 0.2% FUTA surtax.
This payroll tax cut will contribute to employment
opportunities by saving employers $1.5 billion or more a year.
Additional savings. These 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.
No reduction in legal rights or unemployment
benefits for workers. However, better service to UI claimants
will reduce the duration of UI claims, which has been growing
as a result of the squeeze on state UI agencies. An average
reduction of as little as one week will save another $1.5
billion a year for employers by reducing their state
unemployment tax. To many of our members, this is the element--
along with elimination of the 0.2% FUTA surtax--that offers the
greatest promise of future savings and associated job creation
opportunities.
Funds will be available for states to implement
the Workforce Investment Act and operate One-Stop Centers which
deliver UI benefits and coordinate employment services. Without
H.R. 3174, there will be no funding for states to deliver the
services mandated by DOL.
We recognize that today the UI program is not perceived to
in a ``crisis'' mode and therefore may not be high on the
agenda for immediate action by Congress. However, this is the
most propitious time to institute meaningful reforms that can
improve service for jobless workers, save money for the federal
government, free resources for the states, and reduce the tax
burden on employers.
ADMINISTRATION PROPOSALS
The Administration has asked Congress to consider several
UI proposals.
As it has done in previous years, the Treasury Department
has submitted a budget proposal for FY 2001 which again will
require employers to file FUTA and state unemployment taxes
monthly rather than quarterly. UWC and the Coalition are
staunchly opposed to such a requirement. Monthly filing is a
budget ``gimmick'' that will permanently triple the paperwork
for employers and state UI agencies, while raising virtually no
additional revenue (it would allow some revenue to be
``scored'' for budget purposes because a relatively small
amount of taxes would be received in an earlier fiscal year).
Conversely, H.R. 3174 will codify quarterly filing of
unemployment taxes.
DOL has asked Congress to enact its ``UI Safety Net''
proposal, H.R. 1830. The major provisions of H.R. 1830 will (1)
provide monetary rewards to states that meet or make progress
on new federal standards for state trust fund solvency; (2)
provide additional funds for UI/ES administration to states
which implement an alternative base period in place of (or in
addition to) the ``first 4 of the last 5 quarters'' test used
in most states; and (3) expand eligibility for extended
benefits.
We believe H.R. 1830 will take the UI program in the wrong
direction and will hurt the workers it is designed to help.
H.R. 3174 is a much more flexible, effective and efficient way
to improve the UI system.
The problems with H.R. 1830 are as follows:
1. A federal solvency standard for state UI programs is
inappropriate
Although UWC encourages states to exercise fiscal
responsibility by establishing taxes at the level reasonably
needed to fund benefit costs, and we believe that DOL has
performed a public service by calling attention to trust fund
balances, UWC does not advocate adoption of a federal solvency
standard for state unemployment trust accounts, either
directly, or indirectly by rewarding states that meet the
standard with the release of more FUTA funds. There are simply
too many differences among the states for a single federal
standard to make sense. UWC is a strong proponent of the
present requirement to pay interest on federal loans, which
must be levied separate from state unemployment taxes. The
existence of the interest requirement provides significant
incentive for states to act responsibly. Furthermore, many
states may reasonably choose more flexible funding approaches,
if their costs are lower through borrowing on the open market
rather than relying on interest-bearing federal advances.
The accumulation of large surpluses in periods of economic
prosperity can stimulate calls to liberalize benefit
eligibility and/or increase benefit levels, which would
increase the risk of insolvency. A one-size-fits-all standard
fails to take into account triggers under existing state laws,
which rapidly and automatically raise additional funds when the
balance drops below a given figure; if the trigger is only
slightly lower than the minimum funding level DOL recommends,
the state is still acting responsibly, but the standard would
treat the state as out of compliance. Finally, the DOL proposal
would rely on historical experience that may not be indicative
of future experience. During the past 20 years, there has been
a dramatic change in the American economy and work place
demographics. In many (if not most) states, using old figures
that are now obsolete will produce misleading results.
We reiterate our strong conviction that reducing the FUTA
rate rather than returning some excess FUTA funds with new
strings attached is a more sensible tax policy than the
solvency mechanism in H.R. 1830. H.R. 3174, by lowering the
FUTA rate and providing making more funds available to state
benefits trust accounts, is a more effective approach to
improve state solvency.
2. States should be free to determine the base period for
establishing UI benefit eligibility
The base period used to determine whether a worker has
sufficient wages to qualify for benefits is both a test of
attachment to work and a measure of efficiency of
administration. Using the first 4 of the last 5 quarters is the
more efficient approach, considering resources of state
agencies and employers, because this information has already
been reported. At one time, many states used the ``wage
request'' method, under which the employer is asked for wage
information only when a worker files a claim. However, the
federal government mandated submission of quarterly wage
reports for all employees--for reasons of efficiency. Now that
this costly change has been implemented, employers are opposed
to a federal mandate to use both wage request and wage report
systems, which is the most inefficient approach. Of course, the
limited amount of additional FUTA grants for states with
alternative base periods--which we do not believe would be
sufficient to offset the cost to states--does nothing to reduce
the added burden on employers.
Litigation attempting to interpret the FUTA as somehow
requiring states to adopt alternative base periods was
initiated in Illinois and California. In 1997, however,
Congress enacted legislation expressly amending FUTA to preempt
federal courts from misinterpreting the FUTA in this fashion.
H.R. 1830 appears to reverse this congressional determination,
and we believe it is ill-advised in this respect.
Although UWC opposes a federal mandate for state adoption
of alternative base periods, or an inducement in the form of
``greenmail'' (higher grants for states with alternative base
periods), we do not oppose the voluntary adoption of
alternative base periods by states. States should continue to
be free to consider alternative base periods, as a number have
already done. Unlike a unilateral federal mandate, states can
consider these proposals as part of a balanced examination of
its unemployment insurance statute, taking into account various
UI-related concerns of workers, employers, and the state
agency.
By making more funds available for state administration of
UI and employment services, H.R. 3174 is a more flexible and
permanent way to provide administrative resources for those
states which choose to use alternative base periods.
3. ``Trigger'' levels for extended benefits should not be
changed
The DOL proposal reflects its concern that the present
extended benefits (EB) triggers may be too difficult to satisfy
during economic downturns, leading to congressional
intervention that is more expensive than a more liberal EB law
would have been. We believe further study of EB triggers is
warranted, but also observe that Congress has a propensity to
mandate supplemental benefits as part of its response to an
economic downturn, regardless of EB trigger levels.
DOL and other supporters of benefits expansion cite state
UI ``recipiency'' rates, i.e., the percentage of all unemployed
workers who collect UI benefits to justify extending UI
eligibility to individuals with weak attachment to work or who
are not involuntarily unemployed because the employer does not
have suitable work available. Using the DOL formula, the
percentage of all unemployed individuals who now collect UI
benefits is lower than at previous times. However, while this
information is of interest, it does not justify the conclusion
that the UI program is not working as intended.
First, let me say that UI benefit recipiency should be low
during our present prosperous economic conditions. Jobs are
plentiful, and in most areas of the country workers who want to
work can easily find employment. In today's economy, workers
realize that a new position may be available almost immediately
and may not believe it is worth filing for UI benefits for the
brief time between jobs.
Furthermore, using the recipiency rate as a test of whether
UI is serving its intended purpose is misleading for several
reasons.
1. The recipiency rate counts as unemployed many people who
are not and should not be receiving UI:
Workers who are disqualified because they
voluntarily quit their jobs
Workers who are disqualified for misconduct or
fraud
UI claimants who have exhausted their benefits
New entrants or recent reentrants to the labor
force
Workers who do not qualify for UI because they
have a weak attachment to work
2. Many eligible UI claimants choose not to file for UI
benefits. In many cases, they have been discouraged from filing
for benefits because of the closure of state UI/ES offices due
to inadequate FUTA funding. Another important factor is the
fact that jobs currently are plentiful--many people do not file
a claim knowing they can quickly and easily return to work at
any time.
3. Statistics on the number of UI claimants and the
individuals who are considered in the total unemployment rate
use different geographic tests, leading to distortions in
computing the recipiency rate in areas of the country with
extensive numbers of workers who live in one state but work in
another.
4. Recipiency rates vary widely from state to state. Some
states which use expansive eligibility criteria have low
recipiency.
The federal government must fix the UI/ES problems it has
created
Employers, who finance the UI program through federal and
state payroll taxes, regard UI as an integral part of the array
of the employee benefits they provide. Because employers pay
for UI, UI costs are a part of business overhead. UWC believes
it is important to keep UI costs as low as possible consistent
with its basic goals: prompt return to suitable work by workers
with a strong work attachment who lose their jobs through no
fault of their own, as the result of action taken by their
employer in managing its workforce. By design, UI allows such
workers to collect benefits partially replacing wages during
short-term unemployment, while they are able to work and are
actively seeking suitable full-time employment. How much work
constitutes ``attachment,'' what percentage of lost income is
sufficient ``partial wage replacement,'' how long is ``short-
term,'' what makes unemployment ``involuntary,'' and which work
is ``suitable,'' are all key issues that bear on the cost of
the program to employers. We believe these questions are best
resolved by each state under its own UI statute, in light of
its own needs and economic circumstances.
During the past 20 years, many American businesses have
undergone a basic restructuring to achieve efficiencies
necessary for them to be competitive in the global economy.
This restructuring, while painful at times, has produced a
healthy economy in the United States, including a booming stock
market, a budget surplus, and the lowest unemployment rate in
more than 25 years. American workers have shared in this
prosperity.
UWC supports responsible funding for the UI system and
opposes over-taxation. Payroll taxes for UI should be at the
minimum level necessary to provide the protections promised,
because unnecessary taxes harm corporate competitiveness in the
United States. It is especially important for the counter-
cyclical UI program to be mindful of this principle, because
benefit improvements instituted during periods of low
unemployment could create damaging cost increases when the
economic cycle turns, as it eventually will.
The greatest problem most employers are experiencing with
the UI program--and according to Alan Greenspan, the greatest
threat to continued economic growth--is a labor shortage. The
tight labor market makes it important to avoid policies that
will increase utilization of transfer payments such as UI at a
time when employers are having difficulty finding applicants
for job openings.
We want to provide some additional specifics about employer
concerns with the present federal role in the UI system.
1. FUTA tax rate is too high
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 and which is now
being collected only because inclusion of the FUTA surpluses in
the unified federal budget allows the federal government to
meet budget targets for other spending programs. Federal law
expressly limits the use of FUTA funds to UI/ES functions
spelled out by statute. 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 in 1976 to pay for a
temporary federal program of supplemental benefits for workers
who had exhausted the 6 months of regular state UI and the 3
month extension under the permanent Extended Benefits (EB)
program. The deficit created by the supplemental program was
retired in 1987 but the surtax has been extended until 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 surplus to be
distributed into the state UI benefits accounts. However,
instead of making this disbursement, the Reed Act distribution
has been limited to $100 million a year. Consequently FUTA
funds are building up despite the statutory ceilings.
Let me make 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, even if EB triggers were lowered as
proposed by DOL in H.R. 1830.
Some proponents of an increased federal presence in the
state UI system and expansion of state UI benefits and
eligibility propose to hold the elimination of the unnecessary
FUTA surtax ``hostage'' to justify new federal mandates or
``incentives'' for states to expand their UI programs.
Similarly, in H.R. 1830 DOL has proposed that new ``strings''
be tied to the distribution of Reed Act funds by allowing the
funds to flow only to states that meet new DOL solvency. DOL
has also proposed that additional Reed Act distributions be
tied to state expansion of eligibility for benefits. However,
it is better unemployment insurance policy and tax policy to
lower the FUTA rate and let states continue to determine their
own reserve needs and benefits and eligibility standards.
2. State administrative grants are too low for efficient
administration
To effectively serve its customers, UI/ES agencies must be
efficiently administered. In recent years, this goal has been
frustrated because appropriations for state UI agencies have
been inadequate, leading to a reduction in claims services for
jobless workers that in turn results in indirect state tax
increases. This indirect tax comes about because the average
claim duration is longer (and thus cost is higher) than
necessary. Average claim duration is extraordinarily high for
the present period of low unemployment.
Although (as mentioned above) FUTA revenue is legally
dedicated to funding the operations of state UI administrative
agencies, in practice U.S. budget laws and the appropriations
process force state UI administration to compete for funding
against other social welfare programs that are funded from
general revenues. UWC believes that this process is fatally
flawed and that the funding decision for state UI agencies
should be handled at the state level. We recommend that each
state, rather than Congress, be given authority to control the
appropriation of FUTA funds paid by its own employers.
3. Employers are quadruple taxed
Employers pay more than enough in FUTA taxes to provide
proper funding for state UI and ES agencies, but because of
inadequate flat-line federal administrative grants for state
UI/ES agencies we've been asked to pay a second, third, and
fourth time--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 inadequate funding for fraud and
abuse and re-employment services results in workers collecting
additional weeks of UI benefits. DOL estimates that UI claims
on average now last 2 weeks longer than expected in this tight
labor market.
On top of paying higher state taxes, many
employers are forced to expend additional resources for
employment services we've already paid for through FUTA but
don't receive because states have been forced to close offices
and eliminate employment counselors and other services. For
example, 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-as proposed in H.R. 3174--will eliminate the need for
supplemental taxes and unnecessary direct expenses.
4. Ineffective work search enforcement and excessive amount of
improper payments
The UI system is designed so that claimants generally can
collect unemployment benefits only while they are actively
seeking work. However, lax enforcement of the work search test
continues to be a major weakness of the UI program, resulting
in more costly claims and higher taxes than necessary. We
recommend that state agencies be required to be publicly
accountable for their use of FUTA funds.
5. Unemployment taxes are too complicated
The present unemployment tax system is needlessly
complicated. Although the federal government holds all the
money, employers must file two separate federal and state
unemployment tax returns. This situation only doubles the
paperwork. Moreover, the Internal Revenue Service often pays
relatively little attention to small FUTA payments, which
causes inaccurate and inconsistent enforcement and is unfair to
honest, conscientious taxpayers. We advocate that states
collect FUTA on the same form used for filing state
unemployment taxes--cutting the paperwork in half, and
increasing accuracy.
6. Income tax on UI benefits should be repealed
Although we believe benefits adequacy determinations should
be made at the state level, there is one step UWC would support
at the federal level that will increase the purchasing power of
UI benefits. Under the present federal income tax, amounts
received as unemployment benefits are considered taxable
income. UI benefits are also taxable as income under state
income tax codes that ``piggyback'' onto federal income tax.
However, similar types of benefits that replace involuntary
loss of wages--workers' compensation, for example--are not
taxable. UWC believes this hidden tax on UI claimants should be
repealed, and we support H.R. 3169, the Unemployment Tax Repeal
Act, proposed legislation introduced by Rep. Phil English that
eliminates this unwarranted tax.
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 system 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. UWC has always
advocated that state law be responsible for basic
determinations of benefit levels, eligibility, and financing.
The federal ``partner'' now proposes to increase federal
involvement in areas traditionally left to the states, leading
to higher spending and higher payroll taxes on employers.
Considering that federal stewardship of program administration
has resulted in over-taxation of employers and under-financing
of administrative agencies, we believe that workers, employers,
and the public will be better served if instead of an expanded
federal presence, states are allowed greater control over FUTA
resources contributed by their own employers, as provided in
H.R. 3174.
Federal expansion of the UI program, as proposed in H.R.
1830 or other proposals, will take the program in the wrong
direction. Expanding the program through relaxed eligibility
rules and higher weekly benefits will ultimately weaken the
system and hurt those individuals it is designed to protect.
The UI system is designed for workers with strong attachment to
work who become involuntarily unemployed because their
employers no longer have suitable work available for them.
Federally mandate or financial incentives for state benefit
expansions will dilute the purposes of the UI program. They
will also increase federal spending and restore policies that
greatly contributed to the bankruptcy of the UI program in the
1970's and 1980's in many states. These policies will produce
the same result when the economic cycle turns by making the UI
program much more costly. Instead of sending more money to
Washington, UWC believes that it would far more sensible
instead to improve the system and direct funds where they are
needed, as provided in H.R. 3174.
I therefore urge that you actively work to enact H.R. 3174
on a bipartisan basis, while opposing the Administration's
proposals. H.R. 3174 is sound public and fiscal policy, and we
respectfully urge you to support its speedy enactment.
Chairman Johnson. Thank you very much, Mr. Yarbrough. Mr.
Smith, David Smith, Director of Public Policy Department, AFL-
CIO.
STATEMENT OF DAVID A. SMITH, DIRECTOR, DEPARTMENT OF PUBLIC
POLICY, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL
ORGANIZATIONS
Mr. Smith. Madam Chair, thank you. Members of the
Committee, I am delighted to be here on behalf of our almost 14
million members. You have my testimony so let me try to briefly
focus on a couple of issues.
Chairman Johnson. Excuse me. Mr. Smith, do we have your
testimony?
Mr. Smith. You should.
Chairman Johnson. Oh, thank you. Okay. Thanks.
Mr. Smith. It looks like you do, Madam Chair. As the
previous panelists have said and as you heard earlier today, we
have an enormous opportunity now to take advantage of the
expansion, to take advantage of the relatively burgeoning
coffers in the system to make some long needed reforms and
address the sort of absurdities, Mrs. Johnson, that you talked
about, the widely uneven levels of funding, the growing
disparity of benefits, and frankly, I think the increasing
fragmentation of the system.
Let me emphasize two things and then briefly touch on three
or four others that Mr. Yarbrough and others mentioned. This
system is out of date in important ways. It is out of sync with
the work force. It hasn't changed either to keep up with
changing patterns of employment or changes in the employment
relationship itself.
First, as more and more women have entered the workforce
and their attachment is not so regular. It is interrupted by
child-care and other reasons; and as more of us have contingent
or part-time relationships to the work force, the sort of
assumptions that underlie the structure of benefit provision
that assume all of us work full-time for an employer for most
of our lives and are only disrupted by cyclical movements in
the economy simply don't work. We need to change eligibility
rules to reflect those changes in the work force, and the
workplace.
You know, in over a dozen states today, less than 25
percent of workers who experience unemployment are eligible for
Unemployment benefits. There are a number of suggested
eligibility reforms that are talked about in my testimony. Let
me mention six of them briefly.
Most importantly, we need to move to an alternative base
period that captures the most recent period of employment. That
is the single largest cause of the enormous falloff in coverage
that I described. We need to lower the earnings threshold to
something on the order of 400 times the state's minimum wage.
And we ought to increase the taxable base. The FUTA base at the
moment, as you know, is only $7,000. It has been there for
almost two decades.
Several people have, and others will, commented on the
inequity out current funding. As all of you know well, the best
way to address inequity in funding is to broaden the base and
lower the rate. But with the base so low, it is very difficult
to think about that. As I think Mr. English mentioned, we
certainly need to address the extended benefits trigger, and we
ought to speak to the issue of taxation of benefits. Mr. Cardin
has been very interested in coverage of part-time workers and
eliminating the exclusion for those who wish to continue to
seek part-time work. He is absolutely right, we ought to do
that.
As both of the previous speakers have said, this is a
system that is badly underfunded. But I think we too quickly
come to the conclusion that devolution is the answer. First,
there are important administrative coherence reasons that Mr.
Uhalde talked about, which would suggest that too much
devolution will magnify the problems of our currently
fragmented system rather than fix them. But I would add
another.
Our labor market is no longer only a local labor market or
a metropolitan area labor market, it's a national labor market.
And the Employment Service system needs to have the same kind
of scope and reach that labor markets do in order to adequately
address both the Employment Service needs and the Unemployment
Compensation administrative needs.
I think I agree with what several of you have said, both my
colleagues have said, that the first place to start fixing the
administrative funding issue is that we ought to move it from
the discretionary to the mandatory side of the budget. There is
no reason to continue the current practice. And as we move it,
that will obviously require the development of a formula. There
are some principles that ought to guide the development of the
formula. We ought to hold states harmless against current
levels of funding. There should be adequate funding to support
both a technological and a personal infrastructure that is
appropriate. And we ought to consider building in some
flexibility between ES and UI functions.
Three concluding points, Madam Chair. You know, the
question of fraud is an interesting one. Now, clearly, none of
us are going to come out in favor of fraud, but as I think you
know, and as the Department of Labor has testified, the most
serious problem facing the system that might be described as
fraud is underpayment by employers, not overpayment to
employees. We think the resources devoted to going after
overpayment as opposed to those that go after underpayment by
employers ought to be looked at. We think they are upside down
at the moment.
Repeal of FUTA is not the answer. Surely, it should be
considered as part of a comprehensive reform as Mr. English
mentioned, but it ought not to be considered on its own. We
can't, on the one hand, sensibly talk about a system that is
badly underfunded and talk about repealing part of its revenue
base in a single isolated stroke. In a comprehensive reform
package that addresses the issues that we have raised and that
others have raised, we certainly ought to think about that. But
we ought not to begin with the assumption that the answer to
our problems is repeal of FUTA.
Lastly, a comment on the stakeholder process which Mr.
Gross has chaired and that many in this room have been involved
in. It hasn't reached a conclusion, Madam Chair, that can come
to you and your colleagues at the moment, but the effort is
moving in that direction. It is one we intend to continue to
participate in and we look forward to working with you to bring
us all to a conclusion that can address--take the opportunity
we now have to address some of these overwhelming problems.
Thank you.
[The prepared statement follows:]
STATEMENT OF DAVID A. SMITH, DIRECTOR, DEPARTMENT OF PUBLIC POLICY,
AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS
Madam Chair, and members of the Human Resources
Subcommittee, I would like to take this opportunity to thank
you for holding this hearing on the unemployment insurance and
employment services system, and for inviting the American
Federation of Labor and Congress of Industrial Organizations to
testify on behalf of the workers whom these programs were
intended to serve. Contrary to the views of others, we believe
that now--as the unprecedented economic expansion continues and
state trust funds fill with money--is the time to carefully
consider and craft reforms to this important system that
economically sustains workers during a particularly hard time
in their lives and links them to re-employment services,
including job training and a job search, and that operates to
enhance the economy's capacity to respond to downturns and
change. Certainly, the middle of a recession will be too late
to make the reforms we will mention in our testimony.
The union movement believes that the unemployment insurance
(UI) and employment services (ES) systems are in desperate need
of repair and reform. Currently, the UI and ES system is
failing to serve its three principle objectives: (1) providing
income replacement during periods of unemployment; (2)
improving the economy's counter-cyclical capacity; and (3)
serving as a gateway to re-employment. We believe that the
goals and interest of all who have an important stake in the UI
system--workers and their representatives, the Department of
Labor, states and employers--can be best accomplished with a
comprehensive proposal that addresses the concerns of all
interested parties.
In its 1994 Report and Recommendations, the Advisory
Council on Unemployment Compensation stated that the core
mission of the UI/ES system is to ``serve as the foundation of
economic security for millions of workers who are temporarily
laid off or permanently lose their jobs.'' What is best for the
working families the UI program serves and what is best for the
economy as a whole are dependent upon each other and lead to an
inevitable conclusion about the appropriate course of action:
Federal and state unemployment insurance reforms that
strengthen program capacity, expand eligibility, and improve
benefits for workers. These same considerations counsel against
major program changes, such as the devolution of administrative
financing, that will further fracture and fragment an already
highly decentralized system that already vests extensive
authority in the states.
THE UNEMPLOYMENT INSURANCE PROGRAM FAILS TO MEET NEEDS OF
TODAY'S WORKING FAMILIES.
The national UI system has fallen into a state of
disrepair. It pays too few of the unemployed too little in
benefits for too short a time with too little help in finding
re-employment. Falling wages, more women in the workforce,
declining manufacturing employment, the growth of
``contingent'' work, and reduced unionization have combined
with higher eligibility requirements and tougher penalties to
reduce access to benefits for the unemployed. States continue
to maintain eligibility standards for UI benefits that are
largely based on the concept of a workforce that is comprised
mostly of men who are their families' principal breadwinners
and who work on a full-time permanent basis in blue collar
manufacturing jobs. This conceptualization of the workforce no
longer fits:
Women comprise almost half of the workforce.
Sixty-five percent of the mothers of young children are working
for pay.
Over the last decade, ``non-standard'' or
``contingent'' work, such as part-time, temporary or contract
positions, has accounted for almost one-third of all jobs.
These positions are often not the ``choice'' of workers: many
employers only hire on a part-time basis, while other workers
are forced to take part-time work to care for a dependent
child, or elderly parent.
The share of workers earning the poverty level or
less rose from 24% in 1973 to 29% in 1997.
The failure of the states to change their eligibility rules
to reflect the realities of the workplace and work force have
resulted in ever increasing numbers of workers being excluded
from UI and ES benefits and services. More than a dozen states
(Kansas, Florida, Virginia, Utah, Texas, New Mexico, South
Dakota, New Hampshire, Colorado, Georgia, Arizona, Louisiana
and Oklahoma) pay benefits to 25% or less of their unemployed
workers. Of course, unemployed workers who do not receive
benefits have already had unemployment insurance taxes withheld
from their wages (like any other payroll tax, workers pay by
reduced wages; employers simply write the check) and as such,
are paying for a social insurance system that does not provide
them benefits.
Several UI reforms would address these eligibility problems
and, in the process, also make the UI/ES system run in a more
fair manner for all parties involved.
Alternative (Movable) Base Periods--States should be
required to count the most recent wages of a worker when
calculating minimum earning for UI eligibility. Failing to
count these wages disqualifies more workers from UI benefits
than any other eligibility rule. Six to eight percent of the
unemployed would gain access to benefits if states simply
counted their most recent earnings.
Lower the Earnings Threshold--The monetary eligibility
tests of UI were intended to measure attachment to the labor
force. As wages have fallen and work patterns are increasingly
irregular, state monetary requirements no longer accurately
account for a worker's commitment to work. The Advisory Council
on Unemployment Compensation recommended that earnings
requirements not exceed 800 times the state's minimum wage.
However, even this amount is too high given the growth of low-
wage and contingent work. Reducing the earnings threshold
further, to an amount equal to 400 times a state's minimum
wage, will allow more hardworking, low earning workers to
qualify for benefits.
Increase the Taxable Wage Base--The federal taxable wage
base has been fixed at $7,000 since 1983. This low base
violates a fundamental principle of equity in generating UI
revenue: it regressively taxes a larger portion of payroll for
lower wage employers than high wage employers. Raising the
taxable wage base will restore progressivity to the system,
generate needed resources , and reduce burdens on small
employers. Today, 41 states have taxable wage bases that exceed
the federal level.
UI Benefits Should not be Subject to Taxation--Currently
all UI benefits are taxed as income. This is a cruel tax on
individuals suffering economic hardship. As state benefits have
declined, unemployment insurance benefits now replace an
average of 46% of previous wages. The additional reduction of
benefits through taxation reduces the value of benefits for
individuals and limits the counter-cyclical impact of the UI
system.
The Extended Benefits Trigger Should be Fixed Before the
Next Recession--Due to reforms in the 1980s, the current
trigger does not accurately reflect labor market difficulties.
A lower trigger, tied to the state's total unemployment rate,
would be more responsive to recessionary conditions. Special
Extended Benefit eligibility requirements, which often mandate
an even-greater job search during a recession, should be
eliminated.
Coverage of part-time workers--As we previously stated,
part-time work is often not a ``choice'' for the worker. In
recognizing both the changing job market and workforce family
obligations, searching for part-time work should not disqualify
claimants.
Expanding Coverage for Personal Cause Reasons for
Separating From Employment--State laws vary in their treatment
of personal issues such as quitting work to move with a spouse,
domestic violence, child and elder care and part-time work
requirements. The union movement supports efforts to expand
personal cause exemptions as a valid response to new labor
market realities.
Tying Workers to Temporary Help Agencies--In some states, a
worker who loses a job which she obtained through a temporary
help firm must reapply to that temporary firm or be ruled
ineligible. These laws essentially lock unemployed workers into
temporary jobs by preventing them from seeking alternative
employment. The AFL-CIO opposes this effort to degrade the
employment opportunities of the unemployed.
Eliminating Non-Monetary Disqualifications--The use of
durational disqualifications--penalties which eliminate
eligibility during the entire period of unemployment instead of
reducing weeks of eligibility--has expanded to include a wide
range of both separation issues and continued eligibility
decisions. Re-qualification requirements have also increased,
forcing unemployed workers to find jobs and work extensively
before regaining eligibility for benefits. Regardless of the
cause of separation, at some point in the duration of an
unemployment spell, the initial cause of separation is no
longer the determining factor in individuals condition of
unemployment and that person should be eligible for benefits.
IMPROVEMENTS IN ADMINISTRATIVE FINANCING
By all accounts, the UI and ES systems have been badly
underfunded in recent years. Insufficient federal funding is
leading to harmful state responses. Recent efforts to devolve
administrative financing decisions entirely to states, however,
in response to this shortfall is a step in the wrong direction,
adding greater state authority to a system which already relies
too heavily on state discretion. Devolution will result in a
less responsive national system as the federal government loses
the ability to shift funds among states to match ability to pay
and need. A state-based financing system will also effectively
destroy federal oversight by eliminating the incentive which
the rebate of federal taxes provides. Devolution of
administrative financing will likely exacerbate competition and
the corresponding race to the bottom among states, as it
increases states' capacity to use their UI programs as lures to
attract business. Finally, the additional fracturing and
fragmenting of the federal-state UI program resulting from
devolution makes no sense in an economy that increasingly
operates nationally and competes internationally.
As states' reaction to the recent economic expansion has
shown, devolution will do nothing to address the UI systems'
problems for workers, though it very one-sidedly implies that
states will use their additional funding to shore up the system
for workers. As the economic expansion has resulted in ever-
increasing amounts in state trust funds, the end result has not
been an expansion of eligibility or an increase in benefit
levels. Instead states have fallen all over themselves to
provide tax break after tax break to employers. Devolution of
administrative financing will add even more fuel to this race
to lower employer taxes, resulting in continued downward
pressure on benefits.
We believe that the answer to the administrative financing
crisis is mandatory reclassification of administrative funding
for the Employment Security trust fund using a formula that
reflects need. To this end, the AFL-CIO has established
principles for guiding formulation of both the budget
formulation and an interstate distribution.
No state should receive less than it currently
receives.
There should be stable funding to support stable
infrastructure for both ES and UI, which is not affected by
economic fluctuations and which reflects state variations in
costs and policies.
While reflecting actual state needs, the base
budget also can and should reflect other policy goals and be
supplemented by additional resources to promote certain policy
objectives.
Consider flexibility of funding between ES and UI
functions.
Contingency funding should be continued.
While we continue to search for an effective solution to
the administrative financing problem, the AFL-CIO firmly
opposes proposals based on the concept of a state match. We
have yet to see administrative finance proposal based on a
state match that is workable. Under a state match financing
system, states determine how much money will be spent on their
UI/ES programs, no matter how inadequate. In a climate where
the UI system is highly politicized, Governors may attempt to
curry favor with business by proposing tax cuts rather than
benefit and coverage improvements. Given that the federal
government would have no control over the accounts states will
use to fund their share of the state match, there is nothing to
stop states from taking significant amounts from their general
revenue funds to pay for their match, even if these programs
are equally important to vulnerable populations. This becomes
especially problematic during a recession when additional funds
are needed for both UI and other programs.
Handing this type of control to states is tantamount to
devolution Because the state match system leaves little control
over state behavior, there is no way to ensure that states will
contribute additional funding to their UI/ES systems during a
recession. Perhaps worst of all a state match will lead to a
``race to the bottom'' as states forgo good practices such as
keeping UI/ES open, depending less on telephone claims,
providing multilingual staff and materials and extending
benefits for training. A state match provides a perverse
incentive for states to cur investments in administrative
reforms that serve workers, while providing tax cuts to
employers, leading to further benefit cuts.
ADDRESSING FRAUD AND ABUSE
The AFL-CIO agrees that the UI/ES system should address
problems of fraud and abuse, whether perpetrated by recipients
or by employers. It is troubling, however, that many in
government, especially at the state level, focus largely on
overpayments to workers due to error (whether on the part of
the worker or the state) as fraud, while showing considerably
less concern about underpayments by employers. It is our
experience that most recipients who receive overpayments after
they have begun work at a new job often do not understand that
they are not entitled to the money, and do not understand that
states may seek recoupment in the near or distant future.
DOL reports that since the early 1990s, the number of
employer audits performed by the state Employment Services
agencies declined by 30 percent, indicating that it is
increasingly easy for employers to get away with cheating on
their UI taxes. As of last year, DOL states underpayment by
employers have cost the system far more money than overpayments
to workers. Administrative financing reform will allow states
and the federal government to target employers and industries
that routinely underpay taxes, and aggressively pursue taxes
that are owed the system. The AFL-CIO believes that
implementation of employer profiling would target those
employers who consistently underpay UI taxes. Employers in
certain industries, and those with a high use independent
contractors should be the focus of monitoring and collection
efforts. Employer profiling will create more equity among
employers and can have a positive effect overall on employer
tax rates.
RESPONDING TO EMPLOYER CONCERNS
For years, many of the most vocal of employer
representatives have declared devolution and repeal of .2
percent FUTA surtax as the panacea to their UI problems. In
truth, neither proposal really addresses employer's tax and
paperwork concerns. Consolidation and piggy-backing of
reporting requirements at the federal level (for example, FICA
and FUTA) would have the same effect of reducing employer
burdens without creating the problems devolution will spawn.
Technology advances will greatly alleviate employer paperwork
burdens, if only they were fully utilized. The Social Security
Administration requires that employers with 100 or more workers
file the W-2 forms electronically, and will accept voluntary
electronic filings from smaller employers. These types of
advances, rather than devolution, will save employers time and
money.
The AFL-CIO strongly opposes repeal of the .2% surtax
unless it is tied to a package of comprehensive UI/ES reform
that includes a solution to the administrative financing issue
and significantly expands eligibility for workers. Repeal of
the surtax without comprehensive reform amounts to taking a
significant amount of money out of the system, money that would
have been available in the case of an economic downturn, while
the problems left unsolved for workers compound. To separate
repeal of the surtax from comprehensive UI/ES reform is
irresponsible and unnecessary, and will serve only to further
fragment the parties involved in the system.
With the understanding that all parties, worker advocates,
DOL, state administrators and business have legitimate concerns
for a program that is not working, the AFL-CIO participated in
good faith for almost a year long effort to craft comprehensive
UI/ES reform. Clearly, because we do not have a comprehensive
reform package to present to you, the work of the stakeholder
group is not finished. However, we do view the efforts as more
than a mere exercise, perhaps the only means of fixing a system
that all parties admit is badly in need of repair. It is our
hope that the work of this group will continue and ultimately
culminate in reforms for a system that will truly serve as the
financial lifeline to workers who lose their jobs, the bridge
to successful re-employment, and a stabilizer for the economy.
In conclusion, we all must face the reality that the good
economic times will ultimately end, and in the past, efforts to
``fix'' the UI/ES system were hurried, leading to decisions
that we now know hurt, rather than help the situation of
unemployed workers. But worst of all, efforts to ``fix'' the
UI/ES system came far too late for working families seeking
assistance during economic hard times. Therefore, it is
essential that we reform the UI/ES system while there is time
and money, and work to strengthen the program to become the
national economic safety net for unemployed workers, and their
path to re-employment as it was created to be.
Chairman Johnson. Thank you. I do hope that one of the
things that will come out of this meeting is that there is some
urgency about that. And there are some things that we can do at
this time and there are some things we can't do. So maybe we
will get better parameters out of this.
Next I would like to recognize Mark Wilson from the
Heritage Foundation.
STATEMENT OF MARK WILSON, RESEARCH FELLOW, HERITAGE FOUNDATION
Mr. Wilson. Thank you, Madam Chairwoman, Members of the
Committee, for giving me this opportunity to testify before you
today. As the 106th Congress begins its debate over the
Unemployment Compensation system, I would like to encourage the
members to consider three important principles to ensure that
both workers and employers receive the greatest benefit from
any reform.
First, we need to reduce the record high tax burden on
American jobs. Second, we should consolidate to the greatest
extent possible the responsibility for the Unemployment
Compensation system to one level of government. And finally,
Unemployment Compensation benefits should be paid only to
individuals who are involuntarily out of work.
Members of the Committee, the third largest tax increase in
the Taxpayer Relief Act of 1997 was an extension of the
temporary FUTA surtax that was scheduled to expire at the end
of 1998. Ending the FUTA surtax would reduce the overtaxation
of American jobs and allow workers and employers to keep nearly
$8 billion more of their hard earned money over the next 5
years to spend and invest as they see fit.
Consolidating responsibility for the UC system at one level
of government is important. The taxing and spending authority
for the UC system should not be split between the Federal and
government states. In 1996, Congress passed Welfare reform that
provided states with greater flexibility while holding them
accountable for reducing Welfare caseloads.
In 1998, Congress passed the Work force Investment Act that
created one-stop career centers and gave states greater
responsibility for job training and employment service programs
while demanding more effective results. Instead of federalizing
Unemployment Insurance benefits, Congress should now do the
same for Unemployment Compensation. And a positive step in that
direction is H.R. 3174.
It would provide states with sufficient funding to deliver
UC services and maintain program integrity. It would reduce the
length of unemployment for many unemployed claimants. It would
provide a better capacity to provide job search assistance, and
the Employment Security system would help more claimants return
to work sooner, which is the primary function of the
Unemployment Compensation system. It would reduce employer tax
and paperwork burdens and would eliminate burdensome Federal
mandates that cause inefficiencies and impose increased costs.
When both the UC system and the Social Security program
were created in 1935, policymakers knew there would be
political pressure to use tax revenue that builds up in the
trust funds for other government programs. That is why they
placed limits on those funds. Now the Department of Labor is
rushing to remove those limits by regulatory fiat. Congress
should not allow the President to unilaterally convert the UC
program into a huge new government entitlement program
unrelated to unemployment.
I would like to talk a little bit about recipient rates.
There has been a number of percentages that have been thrown
around here, both at the state level and the national level.
And I think it is important to remember that when looking at
recipient rates, be it a third, be it 40 percent, be it 25
percent, depending on whether it is a national average or a
state average, that one use the appropriate denominator when
calculating this percentage. It is not total unemployed, it is
the number of job losers that is the appropriate denominator.
It is important to remember that over half of the people who
are currently unemployed either quit voluntarily, they recently
reentered the labor market, or they are new entrants. They are
not job losers. And when one uses the appropriate denominator
when calculating this percentage, the recipients rates look far
less onerous than they currently--some people would like to
have you believe.
Finally, I would like to strongly discourage you from
moving UI and the Unemployment Compensation program to the
mandatory side of the budget. The last thing we need is to put
another program on autopilot here and take it out of the reach
of Oversight or more careful, and direct, and thoughtful, and
deliberate, of Oversight by Congress. Thank you very much.
[The prepared statement follows:]
STATEMENT OF MARK WILSON, RESEARCH FELLOW, HERITAGE FOUNDATION
Madam Chairman, Members of the Committee, thank you for the
opportunity to testify before you today. The views I express in
this testimony are my own and should not be construed as
representing any official position of The Heritage Foundation.
As the 106th Congress begins its debate over the
Unemployment Compensation (UC) system, members should consider
three important principles to ensure that both workers and
employers receive the greatest benefit from any reform.
1. Lower the tax burden on American jobs.
The third-largest tax increase in the Taxpayer Relief Act
of 1997 was an extension of the temporary Federal Unemployment
Tax Act (FUTA) surtax that was scheduled to expire at the end
of 1998. The FUTA surtax was extended to December 2007 because
many Members thought they needed to increase tax revenues to
balance the budget. As a result, the tax burden on American
workers has hit a record post-World War II high. Moreover,
surplus unemployment taxes continue to be used for purposes
totally unrelated to the UC system. Surplus FUTA surtax revenue
that builds up in federal trust funds, like the Social Security
payroll tax, is converted to federal government bonds and spent
as general revenue or used to pay down publicly held debt.
Ending the FUTA surtax would reduce the overtaxation of
American jobs and allow workers and employers to keep $8.3
billion more of their hard-earned money over the next five
years to spend or invest as they see fit.
2. Consolidate responsibility for the UC system at one level of
government.
The taxing and spending authority for the UC system should
be at one level of government and not split between the federal
government and the states. Effective program accountability
requires the states to be responsible for both raising and
spending the revenue to run the UC system. Maintaining
bifurcated taxing and spending authorities diminishes direct
accountability.
In 1996, Congress passed welfare reform that provided
states with greater flexibility while holding them accountable
for reducing welfare caseloads. In 1998, Congress passed the
Workforce Investment Act that created one-stop career centers
and gave the states greater responsibility for job training and
employment service programs while demanding more effective
results. Congress should now do the same for the unemployment
compensation system and a positive step in that direction is
contained H.R. 3174 the Employment Security Financing Act of
1999.
H.R. 3174 would:
Provide states with sufficient funding to deliver
UC services and maintain program integrity.
Reduce the length of unemployment for many
unemployment claimants. With better capacity to provide job
search assistance, the Employment Security system will help
more claimants return to work sooner.
Reduce employer tax and paperwork burdens.
Employers will no longer pay the temporary FUTA surtax and they
will only have to deal with one tax collection agency--the
state, not the IRS.
And eliminate burdensome federal mandates that
cause inefficiencies and impose increased costs.
3. UC benefits should be paid only to individuals who are
involuntarily out of work.
When both UC and Social Security were created in 1935,
policymakers knew there would be political pressure to use the
tax revenue for other government programs. That is why they
placed limits on the use of those funds. Now the Department of
Labor is rushing to remove those limits by regulatory fiat.
Congress should not allow the President to unilaterally convert
the UC program into a huge new government entitlement program
unrelated to unemployment. Surplus UC tax revenue should be
returned to employers and workers and not used to expand the
program to cover family leave. Any new expansion of the program
to cover new parents would pit employees who voluntarily choose
(and in many instances can afford) to be out of work against
workers who involuntarily lose their jobs.
If Congress follows these three principles and
recommendations, Members would strengthen and improve the UC
system while reducing the record high tax burden on American
jobs. Thank you for your time and I will be happy to answer any
questions you may have.
Chairman Johnson. Mr. Forster, The Honorable Mr. Forster.
STATEMENT OF HON. GAREY FORSTER, SECRETARY, LOUISIANA
DEPARTMENT OF LABOR, BATON ROUGE, LOUISIANA
Mr. Forster. I am glad to be here today, not only on behalf
of the Louisiana Department of Labor, but on behalf of my boss,
Governor Mike Foster, who was going to be here, is the Second
Vice Chairman of the Southern Governors' Association,
introduced the resolution supporting Congressman McCrery's
bill. But unfortunately, we are having a few budget problems
back in Louisiana and he chose not to come to Washington at
this time.
As Congressman McCrery stated, I served for 15 years in the
Louisiana House, and that entire time served on the Labor
Committee and, in fact, was Chairman when the Governor asked me
to take over the Labor Department. So I am very familiar with
the issues. And when I arrived at the Department, I saw a
different side of what the Department of Labor was about, and
that was as a result of its budget being reduced over the last
ten to twelve years, $5 million going from around $26 million
down to $21 million, and the consumer price index over that
time going up about 40 percent. What the state had done is
closed ten local offices and consolidated five others. So where
we used to be in about 40 plus parishes, out of 64 parishes in
Louisiana, we are now down to about half of the parishes. So we
have gone from a presence of two-thirds of the state to around
half the state.
And why do I raise that issue? Chuck Yarbrough mentioned
it, and I don't know if it is as clear to everyone as it is to
me. And that is, when you close offices, Members of the
Committee, you don't close the big cities. You don't close the
office in Shreveport. You don't close New Orleans. You close
the little rural offices. And if you are worried about
services, and if you are worried about trying to achieve full
employment, and if you are worried about somebody who is laid
off and has to drive 60-70-80-100 miles to go and file a claim,
then you don't do that stupid thing. You don't close those
rural offices. And that is what all the states have been forced
to do. They are forced to economize. We serve the big cities
and we leave the rurals to, basically, to die.
What has happened in Louisiana is we have had to go find
funds and work with the employers to try to come up with a
temporary solution until, hopefully, the urgency of this
Chairman moves this bill to some kind of fruition where we
begin to stabilize funding. Let me tell you a little story,
quite briefly. My first day on the job, 30 months ago, we had a
major garment manufacturer, which as a result of NAFTA, laid
off over 4,000 employees. Now, they didn't do this in
Lafayette. They did it in St. Martinville, they did it in
Abbeville, the did it in Jeanerette, they did it in Port Barre.
Do you know what? We didn't have a labor office in any of
those small communities, in any of those small parishes. They
had to, at a tough time in their life, drive into Lafayette.
Now, the employer worked with us and we sent staff to the plant
site to try to help them. But I want you to understand the
reality of when something hits, and I would also like you to
know that that is not the only layoff in Louisiana. I carry
around with me, and have it updated bi-monthly, all the WARN
notice layoffs in the state. And they are not all in one city
and they are not all in one industry. They are all over the
state and those people need help.
And just to give you some idea of it, 230 people in LaPlace
getting laid off is a big deal; 130 in Braithwaite, a real big
deal; 94 in Jonesville; 138 in St. Martinville; 210 in Narco;
106 in Rayville, 160 in Gramercy; 308 in Tallulah; 177 in
Jennings. Those are real live people who congressman represent
who don't have offices around to solve their problems because
the staff has been cut and we have been forced to close those
offices.
And what I want you to understand is as we try to move in
the direction of full employment and the new Work force
Investment Act, and all the great things that my buddy, Ray
Uhalde, talked about, we didn't get ten extra cents to
implement this new legislation. We have to survive with what we
have been getting over the last few years with all of the cuts,
and try to reach out, reengineer an old system that was built
when unemployment was high and not looked at while the economy
has changed.
In summary, since I see I am running out of time, let me
just tell you that what is important is that Congressman
McCrery's bill, I believe, does have a comprehensive look at
why FUTA was implemented at a time of high unemployment and
hasn't been reengineered. Somebody is doing something, finally,
about that in a major way. And it looks at, I think, the
changes in the economy and the workplace. Employers, as well as
unemployed and underemployed individuals, demand different
services from the system than was thought at the inception of
FUTA legislation.
Therefore, my Governor, Mike Foster, and the Southern
Governors' Association support the bipartisan bill that
Congressman McCrery has introduced, which among other things,
repeals the temporary FUTA surtax, transfers the collection of
FUTA tax to the states, ensures that states get a greater
return on their employers' FUTA tax dollars, improves
Employment Services, combats fraud and abuse in the system, and
increases state flexibility to administer the Unemployment
Insurance and Employment Services program at a time we
desperately need it.
I implore the Committee to act as soon as possible to begin
to change a system that I think is broke. And it needs fixing,
and it needs fixing immediately. Thank you very much.
[The prepared statement follows:]
STATEMENT OF HON. GAREY FORSTER, SECRETARY, LOUISIANA DEPARTMENT OF
LABOR, BATON ROUGE, LOUISIANA
Good afternoon, Chairman Johnson and members of the
Subcommittee on Human Resources of the Committee on Ways and
Means. I am Garey Forster, Secretary of Labor for the Louisiana
Department of Labor, appearing on behalf of the Honorable M. J.
``Mike'' Foster, Governor of the state of Louisiana and Second
Vice Chairman of the Southern Governors' Association. For the
15 years prior to my appointment as Secretary, I served as a
member of the Louisiana House of Representatives and worked in
the private sector. During my entire tenure as a legislator, I
served on the House Committee on Labor and Industrial
Relations, serving as chairman for the two years immediately
preceding my appointment. I was the floor leader for the
business community and the Republican Administrations on
legislation regarding unemployment insurance, workers'
compensation, and job training reform. As a result, I bring to
you years of experience on unemployment insurance and
employment services from the viewpoint of a private sector
businessman, a legislative policy-maker, and now as an
administrator of the program. I am very familiar with the
administrative funding problems of the programs, and I look
forward to upcoming discussions on reforming the present
system.
When I arrived at the Louisiana Department of Labor
approximately 30 months ago, in August of 1997, the department
was near the breaking point resulting from many years of under-
funding. From Fiscal Year 1988 to FY 2000, administrative
funding for the Louisiana Department of Labor actually
decreased by $5 million, from $26 million to $21 million. At
the same time that administrative funding was decreasing, the
cost to the Department to provide the mandated services was
increasing. As a result of the decreased funding, the
department was forced to close ten local offices, and five
other offices were consolidated into two offices. The greatest
impact of these closures and consolidations was felt in the
rural areas. Unfortunately, it is the rural areas of a state
which usually have the highest rates of unemployment and house
residents who need the most intensive services to move into
employment. These closures were based on the fact that it is
more expensive, or less cost effective, to maintain an office
in a rural area since such offices serve fewer customers on a
daily basis.
On my first day on the job as Secretary, I was confronted
with the initial phase of a major layoff by a garment
manufacturer in our state. The layoff affected approximately
4,000 individuals at four facilities in four rural parishes,
only one of which had a local office. This experience exposed
me to the particular challenges presented to a local economy by
a major layoff in a rural area. Since transportation is a
significant issue in the rural areas, it is especially
important to deliver services in the immediate vicinity. It is
critical for the Department to be in a position to respond
timely and effectively to provide services to both employees
and businesses in order to mitigate and address the devastating
effect a major layoff can have on a rural economy.
The legislation proposed to reform the administrative
funding portion of the Federal Unemployment Tax Act will
alleviate many of the budget shortfalls experienced by state
labor departments in the past. Reform proposals introduced by
Congressman Jim McCrery and Senator DeWine along with numerous
co-sponsors represent a collaborative effort of many persons
with a stake in the system. These proposals could provide
resolutions to many problems currently faced by states. It has
long been recognized that the level of funding provided to the
states to administer the unemployment insurance and employment
services programs is inadequate. Since 1976, employers have
paid a surtax that was originally designated as a temporary tax
to fund a deficit in the employment security system. This
deficit has been extinguished, but the surtax remains as a
burden on employers. In addition, employers have paid
substantial amounts of employment taxes to the federal
government. Over time, less and less of these federal taxes
have been returned to the states for administrating state
unemployment taxes and claims and employment services.
Declining funding has resulted in inefficiencies in the
system and the inability of customers to receive adequate
services. With the national unemployment rate at the lowest
level that it has been in 30 years, labor departments are more
likely to see customers with multiple barriers to employment.
Typically, these individuals are harder and more expensive to
serve and require a more personal and ``hands-on'' approach.
More personal interaction means that agency workers spend more
time with each customer and will ultimately require additional
resources to provide an adequate level of service. We all
recognize that the days when offices were fully staffed are
gone and will never return. As new and innovative programs are
implemented with specific mandates on the provision of
employment services, such as the Workforce Investment Act,
additional resources become more critical. The work processes
of state labor department programs must be reengineered to meet
these new demands. Yet, the state's already under-funded system
did not receive any additional resources to accomplish this.
In conclusion, FUTA was implemented at a time of high
unemployment and has not been reengineered in many years to
adapt to changes in the economy and the workplace. Employers,
as well as unemployed and underemployed individuals, demand
different services from the system than was thought of at the
inception of the FUTA legislation. Therefore, my governor,
Governor Foster, and the Southern Governors Association support
FUTA reform which, among other things: (1) repeals the
temporary FUTA surtax; (2) transfers collection of the FUTA tax
to the states; (3) ensures that states get a greater return on
their employers' FUTA tax dollars; (4) improves employment
services; (5) combats fraud and abuse in the system; and (6)
increases state flexibility to administer the unemployment
insurance and employment services programs.
This concludes my comments, Chairman Johnson and members of
the Subcommittee; however, I would be pleased to answer any
questions that you may have. I would like my oral and written
comments to be made a part of the official record for today's
hearing.
Chairman Johnson. Thank you very much. Now, to conclude
then, Van Doorn Ooms, Senior Vice President and Director of
Research, Committee of Economic Development. Thank you, Mr.
Ooms.
STATEMENT OF VAN DOORN OOMS, SENIOR VICE PRESIDENT AND DIRECTOR
OF RESEARCH, COMMITTEE FOR ECONOMIC DEVELOPMENT
Mr. Ooms. Thank you, Madam Chairman. I am honored to accept
your invitation to testify on behalf of CED on Unemployment
Insurance.
CED is a nonprofit, nonpartisan, nonpolitical research and
policy organization of over 200 business and education leaders.
Its purpose is to recommend policies to promote economic
growth, higher living standards and equal opportunity for all
Americans. CED's policy positions are adopted by a vote of the
62 members of its Research and Policy Committee, who speak in
their individual capacities.
My testimony is going to be fairly narrowly focused,
because CED has not addressed directly a number of the
Unemployment Compensation reform proposals before you today
and, therefore, does not have an official policy position on
them. However, CED has considered and made recommendations on
certain aspects of the UI system, and in particular, the extent
to which it covers the American work force, and that is the
issue I wish to address in this testimony.
In summary, CED's view is that a number of longer term
trends and recent developments in the American economy have
significantly changed the nature of the American work force and
the nature of employment, as you noted earlier, Madam Chairman.
As is well known, one of the major results of this change is
that the proportion of unemployed workers that receives
Unemployment Compensation has fallen sharply, from roughly one-
half of the fifties to about one-third recently.
CED believes that the fundamental purposes of Unemployment
Compensation and the national economy would be served better by
somewhat broader UI eligibility and coverage. Consequently, CED
has supported several proposals to broaden eligibility among
certain low-wage, part-time and seasonal workers that were made
by the Advisory Council on Unemployment Compensation 4 years
ago.
The Committee, I am sure, is familiar with the Council's
report, so I will not describe its recommendations in detail,
but there are four, essentially. Two of them would remove
categorical prohibitions against eligibility--one with respect
to part-time workers, which Mr. Cardin mentioned earlier, and
one with respect to seasonal workers. To deal with the issue of
lower wage workers, CED believes that the earnings requirement
should be set at levels that better reflect the attachment to
the workforce of many low-wage workers that work many hours
but, nevertheless, have relatively small earnings.
Finally, we also believe that there should be an adjustment
of the base period where that is appropriate and necessary to
create the eligibility of workers who would be eligible if
their more recent earnings records were taken into account in
the calculation.
The reason for our position on these, Madam Chairman, has
to do with the profound changes in the economy over the last
few years that have made our UI system, which was created in a
very different world somewhat obsolete. Let me just note those
changes very briefly.
First of all, rapid technological change. In the process of
creative destruction, as new sectors, firms, and workers
advance, others decline. Downsizing and growth now often go
hand-in-hand. The transfer of resources required for this
process is not instantaneous and it is not smooth. And the
larger the resource transfers required, the larger the likely
temporary unemployment and the demands on the UI system.
There is evidence, although it is still preliminary, that
productivity growth is now accelerating and has been over the
last several years. At the moment, of course, the
extraordinarily strong demand for labor and the very tight
labor market masks the amount of resource transfer that is
going on. We don't observe what will happen when the labor
market slackens, which will be higher temporary unemployment.
The organization of work has also changed, and a major
result of those changes has been an increase in the importance
of temporary part-time and other irregular employment
arrangements, many of which are not covered under the current
UI system. In part, technological change has meant that skill
requirements have increased; as a result, the skill bias in the
system has widened the gap between the earnings of highly
skilled workers and less skilled workers. That means that
earnings have become a less reliable index of labor force
attachment, and we believe that needs to be taken into account
in addressing adequacy of the system.
Globalization is another important aspect of change. Like
technological change, globalization results both in great
benefits for the society as a whole and substantial adjustment
costs. We believe that to address the concerns about
globalization that were revealed most dramatically in Seattle,
we need to have safety net mechanisms that are seen as
equitably sharing those adjustment costs.
Finally, as you noted yourself, Madam Chairman, there are
two other major things that are going on at the present time.
One, the composition of the labor force has changed
dramatically over many years and is about to change even more
dramatically as the baby-boomers reach retirement age. When
that happens, either for reasons of preference or reasons of
requirement, many older workers will remain employed past the
ordinary retirement age. There is no doubt that part-time,
short-term and seasonal work arrangements will become more
important in that world.
Finally, on the subject of welfare reform, with which the
Subcommittee is also concerned, we are now engaged in a major
experiment in this country with respect to the integration of
several million low-income and typically low-skill single
parents into the mainstream of American life. The success of
that experiment is going to depend to a very large extent on
whether, when the economy slackens, those workers are forced
back into some kind of dependency or remain as part of the
American workforce. Some of the reforms that have been
mentioned today that would address part-time and low-wage work
would make it more likely that that very important experiment
succeed. Thank you, Madam Chairman.
[The prepared statement follows:]
STATEMENT OF VAN DOORN OOMS, SENIOR VICE PRESIDENT AND DIRECTOR OF
RESEARCH, COMMITTEE FOR ECONOMIC DEVELOPMENT
Madam Chairman and Members of the Committee:
My name is Van Doorn Ooms and I am the Senior Vice
President and Director of Research of the Committee for
Economic Development (CED).\1\ I am honored to accept your
invitation to testify on behalf of CED on the Unemployment
Insurance system (UI). Before joining CED in 1991, I served as
the Chief Economist for the Senate Budget Committee, the Office
of Management and Budget, and the House Budget Committee. My
curriculum vita is attached, as requested in your letter of
invitation.
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\1\ CED has a long-standing policy of neither seeking nor accepting
Federal government grants or contracts, and neither CED nor I
personally have received any such grants or contracts during the
current or preceding two fiscal years.
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CED is a nonprofit, nonpartisan, and nonpolitical research
and policy organization of over 200 business and education
leaders. Its purpose, pursued throughout its 58-year history,
is to recommend policies to promote economic growth, higher
living standards, and equal opportunity for all Americans.
CED's policy positions are adopted by a vote of the 62 members
of its Research and Policy Committee, who speak in their
individual capacities.
In line with these concerns about national economic growth
and equal opportunity, CED produced a number of policy
statements during the 1980s and 1990s recommending measures to
improve the functioning of our labor markets and to extend the
opportunities for all workers to participate in the nation's
growth and prosperity: Work and Change: Labor Market Adjustment
Policies in a Competitive World (1987); An America That Works:
The Life-Cycle Approach to a Competitive Work Force (1990);
American Workers and Economic Change (1996); New Opportunities
for Older Workers (1999); and the recently released Welfare
Reform and Beyond: Making Work Work (2000).
CED has not addressed directly some of the unemployment
compensation reform proposals before you today and therefore
does not have an official policy position on them. However, CED
has considered and made recommendations on certain aspects of
the UI system, and in particular the extent to which it covers
the American workforce. I will address that issue in this
testimony.
In summary, CED's view is that a number of longer-term
trends and recent developments in the American economy have
significantly changed the nature of the American workforce and
employment. As is well known, one important result of these
changes is that the proportion of unemployed workers that
receives unemployment compensation has fallen sharply, from
roughly one-half in the 1950s to about one-third recently. CED
believes that the fundamental purposes of unemployment
compensation, and the national economy, would be better served
by somewhat broader UI eligibility. Consequently, CED has
supported the proposals to broaden eligibility among certain
low-wage, part-time, and seasonal workers made by the Advisory
Council on Unemployment Compensation in 1996.
FUNCTIONS OF UNEMPLOYMENT COMPENSATION
CED believes there are at least three major functions to be
served by a well-functioning UI system. It should:
1. provide temporary, partial wage replacement for
involuntarily unemployed workers who are significantly attached
to the labor force and actively seeking work;
2. facilitate the dynamic economic change on which our
higher living standards depend by shifting some of the costs of
adjusting to that change to the larger society; and
3. help to stabilize the national economy by supporting
consumer purchasing power when unemployment rises.
ECONOMIC CHANGES AFFECTING THE UI SYSTEM
A number of major changes in the American economy have
affected, or soon will affect, the effectiveness with which the
UI system performs these functions. Some of these changes have
been ongoing for decades, while others await us in the future,
but all have important implications for unemployment
compensation.
Technological change New knowledge and its applications are
the major source of growth in our productivity, incomes, and
living standards. Productivity growth has accelerated in the
last 4-5 years, driven both by rapid technical change in
information technology and the investment boom associated with
it. But while the benefits of technological change are large,
they carry with them the costs of adjusting to that change. In
the process of ``creative destruction,'' as new sectors, firms,
and workers advance, others decline. ``Downsizing'' and growth
now often go hand-in-hand. The transfer of resources, including
labor, required for this process is neither instantaneous nor
smooth; the larger the resource transfers required, the larger
the likely temporary unemployment and demands on the UI system.
These effects, of course, remain in abeyance during periods of
very strong labor demand such as the present, but are likely to
appear when demand again slackens.
The organization of work Both rapid technical change and
the increasingly competitive structure of the U.S. economy have
brought major changes to the operations of American business
and the workplace. New structures of production, decentralized
operations, new relationships with suppliers, and increased
flexibility have characterized the last two decades in
particular. A major result of these changes has been an
increase in the importance of temporary, part-time, and other
``irregular'' employment arrangements. Our UI system, of
course, was designed with a more traditional model of
employment arrangements in mind, and does not always cover such
workers when unemployed.
Skill requirements and earnings During the last several
decades, the changes described above have increased the demand
for highly skilled workers relative to those with fewer skills.
This ``skill bias'' has produced a sharp increase in the wage
premium paid for skills and in the earnings differentials
between high-and low-wage workers. Indeed, the real earnings of
low-wage male workers declined absolutely and substantially
until very recently. As a result, earnings per se have become
less reliable indicators of employment and labor force
attachment. The UI system, of course, bases benefits
eligibility primarily on an earnings history. Given the large
population of low-wage workers potentially affected, a
reexamination of the minimum earnings required for UI
eligibility may be warranted.
Globalization Like technical change, the expansion of
international trade, investment, and immigration has produced
both large overall economic benefits and significant adjustment
costs that impact particular industries, workers, and
communities. While some of the reactions against globalization
recently displayed in Seattle reflect misunderstanding and
misplaced apprehension, those concerns must be addressed if
further progress is to be made in trade and investment
liberalization. This will require safety-net mechanisms that
equitably share adjustment costs. Trade-specific mechanisms
appear less promising in this respect than a UI system with
broad coverage that addresses economic adjustment generally.
Composition of the labor force In the last half-century,
female participation in the labor force has nearly doubled
(from 34 percent in 1950 to 60 percent today) and the need for
more flexible and ``family friendly'' work arrangements has
become apparent to many, if not most, employers. A new set of
changes lies just ahead, as the baby-boomers age and their
preferences or circumstances lead many of them to continue to
work past the traditional retirement age.\2\ While new models
of employment suited to both older workers and employers will
certainly evolve, there can be little doubt that part-time,
short-term, and seasonal work arrangements will become more
important than at present, and that our social insurance
systems will have to adapt to such change.
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\2\ See CED, New Opportunities for Older Workers (1999), Chapter 1.
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Welfare reform The U.S. is now engaged in a major economic,
social, and cultural experiment that attempts to integrate
several million low-income and typically low-skill single
parents into mainstream American economic life. Although
welfare reform, aided by an extraordinarily tight labor market,
has been more successful to date than many observers expected,
the experiment is far from over.\3\ Its ultimate success will
hinge on whether welfare-leavers can be incorporated into the
labor force on a permanent basis, rather than falling back into
dependency of one kind or another. An important test of this
will come when the labor market softens. A large proportion of
these workers are in part-time, temporary, or short-term jobs
that are categorically excluded from UI coverage in some states
or in jobs with earnings too low to meet UI eligibility
requirements. It is estimated that no more than 20 percent of
persons leaving welfare for work are likely to become eligible
for UI through their post-welfare employment.\4\
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\3\ CED, Welfare Reform and Beyond: Making Work Work (2000),
Chapter 2.
\4\ See Wayne Vroman, Effects of Welfare Reform on Unemployment
Insurance, (The Urban Institute, 1998) p. 2
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RECOMMENDATIONS
As a result of these considerations, CED supports four key
recommendations of the Advisory Council on Unemployment
Compensation that would extend UI eligibility to more low-wage,
part-time, and seasonal workers with significant labor force
attachment. A number of states already have policies that
accord with some or all of these recommendations, but CED urges
those that do not to adopt such policies.
The first two of these recommendations would remove the
categorical exclusion of part-time and seasonal workers who
would otherwise be eligible. Some states categorically exclude
workers applying for part-time work even though they have met
the state's monetary eligibility requirements. Fifteen states
permit workers in seasonal industries to collect benefits only
during the season in which that industry is active, and
thirteen states do not allow seasonal earnings to count towards
the earnings requirement even if the worker later works in a
non-seasonal job.
States should eliminate seasonal exclusions;
claimants who have worked in seasonal jobs should be subject to
the same eligibility requirements as all other unemployed
workers.
Workers who meet a state's monetary eligibility
requirements should not be precluded from receiving UI benefits
merely because they are seeking part-time, rather than full-
time, employment.
The third recommendation would reduce the number of workers
made ineligible by low wages. The base period and ``high
quarter'' minimum earnings requirements in 9 states would
exclude workers who worked two days per week for a full year
(about 800 hours) at the minimum wage, whereas workers earning
$8.00 per hour for the same employment would be eligible in all
states but one.
States should set their earnings requirements so
that a worker with 800 hours of work, evenly distributed over
the year, at the state's minimum hourly wage would be
monetarily eligible for benefits
Finally, a fourth recommendation would reduce the number of
workers made ineligible merely because their last completed
quarter of earnings was not used in the calculation of monetary
eligibility. Many states compute workers' monetary eligibility
on the basis of their earnings during the first four of the
last five completed quarters of work, a practice once required
by pre-computer technology. Some states now use a ``moveable
base period'' to allow the most recent four quarters to be used
as an alternative.
States should use a moveable base period in cases
in which its use would qualify a UI claimant to meet the
state's monetary eligibility requirements.
CED recognizes, in making these recommendations, that the
payroll taxes that finance UI are a tax on labor services that
may have a negative impact on employment, especially at low-
wage levels. It would be counterproductive to discourage the
employment of low-wage workers at the same time that we attempt
to facilitate both their labor force participation and their
employment by extending UI benefits to them. In addition, there
is evidence that, in the longer term, a substantial portion of
such taxes is borne by workers themselves in the form of lower
wages.
CED therefore also recommends that the federal and state
governments consider ways to support broader eligibility for
benefits with general revenues rather than higher UI payroll
taxes. Some degree of general revenue financing would also seem
to be indicated by the fact that the benefit extensions would
serve several broad social goals, such as the facilitation of
change and the success of welfare reform, in addition to
meeting the needs of individual firms and workers. One possible
approach would be to credit the UI trust fund with income taxes
paid on UI benefits, as is done with the Social Security and
Railroad Retirement trust funds. This arrangement would
generate at least $3.6 billion annually for the UI trust fund,
which would more than cover the estimated $2.0 billion dollar
cost of the four recommendations.
CED believes that the implementation of these
recommendations in all the states would substantially improve
the effectiveness of the Nation's unemployment compensation
system in performing its essential economic and social
functions.
Chairman Johnson. Thank you all very much for your
testimony. I am going to start with Mr. English. Unfortunately,
the Ways and Means Committee does have a meeting a little later
today, and we have been asked to conclude by 4. Whether we will
be able to do exactly that, I don't know, but it does shorten
our question period. Mr. English.
Mr. English. And Madam Chairman, I appreciate the
opportunity to question perhaps the best and most stimulating
panel I have heard on this subject in a long time. I note that
Mr. Smith and Mr. Yarbrough come at this issue from rather
different philosophical perspectives, but both of you have
concluded on one of my favorite topics, that there should be no
Federal taxation of Unemployment Compensation benefits. Would
the two of you like to very quickly elaborate on that?
Mr. Yarbrough. Go ahead, sir.
Mr. Smith. Let me do it very briefly, Mr. English. Folks
aren't getting Unemployment benefits because they are living
high off the hog. They have lost a job, it is an enormously
difficult time. Not only has eligibility for Unemployment
Compensation decreased, but the replacement value of the check
has decreased. This is one way to stretch those resources
further at a time of difficult adjustment for a lot of the
reasons that my friend from CED talked about.
So I think you were right when you said earlier this is a
tax cut that even some of us unexpected taxcutters could
support, although, we might set some limits on it.
Mr. English. Thank you. Mr. Yarbrough.
Mr. Yarbrough. Thank you, Mr. English. Yes, I think that
the employer community feels like that the taxation of the UI
benefits diminishes the benefits in which we are paying for.
You know, it is--and when people get reemployed and they get
the services and they come back, and then it rolls around again
in taxation time, they are having to spend more of their
additional income that they are trying to get back on their
feet and recover, you know, back to pay more taxes.
Mr. English. Mr. Yarbrough, on a couple of other points, I
am curious. You come out very strongly against establishing a
Federal solvency standard on the theory that there is
substantial differences among the states. Do you feel those
differences are so difficult to quantify that we can't
establish at least some Federal standard that establishes a
clear bench mark so we don't see the states reverting to the
situation that we had back in the `seventies and' eighties?
Mr. Yarbrough. Well, I think when it comes to, you know,
solvency issues, you know, and how each state, and whether or
not there should be a standard--let me also, I guess, look at
something that has just recently been passed, which is our Work
force Investment Act. And we have given that down to the local
level and given the local people the opportunity to decide how
they are going to do what they are going to do, when they are
going to do this. And it involved the employer community as
well as the state agencies to do this. So you know, anything
along those lines, I think, that forces it down and gives the
states the opportunity.
I am not necessarily--feel like different states probably
need different solvency levels just as they have different
requirements. You have some states that are benefit receivers
because they pay less than what they return. So you know, does
that change their solvency ratio any different than someone who
in the region that I serve in the National Employer Council who
receive an average of about 46 cents? So you know, I think
there is still a lot of variety that is----
Mr. English. I think you make a very good point, that there
is a lot of variety. It just seems to me that solvency is
something that is a little more easy to quantify than some
other things in public policy. And there ought to be some sort
of a Federal standard if there are going to be Federal tax
dollars.
Mr. Yarbrough. Let me say that if you return these dollars
back to the states and give them the opportunity to have, you
know, like control that money and provide local service and
things like that, that adds a lot of solvency back to their
general treasuries.
Mr. English. The point is well taken. Mr. Wilson, should
states raise taxes during a recession?
Mr. Wilson. No, of course not. They should try to maintain
as low a tax rate as possible. And when it comes to--I would
like to mention a few things about solvency.
Mr. English. Could I go----
Mr. Wilson. Sure, go ahead.
Mr. English. I appreciate it. But isn't the implication--
you have testified that, essentially, we should consolidate
Unemployment Compensation within one level of government, the
state government, and that the McCrery proposal is a--what you
view as a useful transition to that. May I ask, isn't the
implication of that, that states, individual states that might
have a protracted recession, would be more or less on their own
under the system you envision? And wouldn't they be required to
dramatically increase taxes if they don't have an adequate
solvency in their system, and they don't have Federal
standards, and they face a severe protracted recession?
Mr. Wilson. The H.R. 3174 allows and enables the states to
borrow from the Federal Government.
Mr. English. That is true.
Mr. Wilson. And currently--or for that matter, they have
the ability now to go to the private sector and borrow funds in
the private sector----
Mr. English. That is true.
Mr. Wilson.--and they should if their solvency levels--the
point I would like to make about solvency is there is no money
in the trust funds. These are bonds. These are government bonds
like Social Security in the trust funds. The Federal Government
is going to have to borrow that money. So what difference is it
whether the state borrows it from the private sector, or that
the state borrows it from the Federal Government, or when the
Federal Government turns around and has to borrow it from the
public sector again?
Somebody is going to have to borrow the money somewhere in
order to prevent taxes from rising during a recession because
neither the states nor the Federal Government are going to do
that, nor should they. So somebody is going to have to get the
money from somewhere. It is going to be borrowed somewhere,
whether it is borrowed at the state level, either in private
markets or from the Federal Government, as H.R. 3174 allows or
whether the Federal Government turns around and does it. It is
just six of one or half-dozen of the other.
Mr. English. It is very possible though. My time has
expired, but it is very possible for a state or a region to
experience a recession at a time when the Federal Government
and the nation as a whole is maybe doing rather better. You
look at the recent experience of Hawaii. I yield back my time.
Thank you.
Chairman Johnson. Thank you. Mr. Cardin.
Mr. Cardin.--the major difference here, when the Federal
Government borrows the money, it need not raise taxes to pay it
back. That is one of the aspects of the Federal budget system,
it has the capacity to respond to economic conditions and put
more money into the economy or less money into the economy. The
states aren't quite as--have the same flexibility. If they
don't have enough money in their Unemployment Insurance fund,
yes, they can borrow it from the Federal Government, but they
will be required to raise taxes in order to repay that money to
the Federal Government, and that is how the current system
operates.
So Mr. Yarbrough, I am somewhat puzzled by your position
that we shouldn't have national solvency standards. We have two
of the large states right now, California and Texas, that have,
I think, about 25 percent of what the recommended levels are.
And if we were to let that--and then when we go through a
recession, then we are going to be encouraging states raising
taxes during a recessionary period in order to deal with our
Unemployment Insurance needs, and that seems to me to be
counter-intuitive. So I don't quite understand your position of
allowing a system to evolve that could very well encourage
raising taxes during recessionary times.
Mr. Yarbrough. I believe the two-tenths was added during
recessionary times. Is that not a true statement?
Mr. Cardin. It was--I don't know the exact year----
Mr. Yarbrough. I mean, you know, you are answering your own
question from the standpoint that the two-tenths was added
during recessionary time.
Mr. Cardin. But the Federal Government has the opportunity
to make that judgement as to whether it needs the revenue. But
it can--the Federal Government is fully capable of responding
to a recession by pouring more money into an economy. It can do
that if it wishes to, and it has done that in the past, and it
has incurred more debt in doing that. The states can't do that.
Mr. Wilson. But it has to pay off that with interest at
some point in time.
Mr. Yarbrough. Absolutely. I mean, the Federal Government,
yes, maybe--there is no legal requirement. I mean, right now it
is politically fashionable to speak about retiring the entire
Federal debt. And based upon the strength of our current
economy, there are economists who say that may well be the
right thing to do. But if you talk to economists, they will
quickly point out that debt is useful to our economy at
different times. The states, on the other hand, have to run a
much more balanced operation.
I guess the point I am bringing up is if you believe in
Unemployment Insurance and you believe that the Federal
Government should develop a system that makes sure that during
recessionary times there is adequate income to people who
through no fault of their own have lost their jobs, then I am
somewhat puzzled by why you do not believe there should be an
adequate standard, national standard, to make sure that there
is adequate resources at the state level to deal with this.
And employers continue to be somewhat puzzled about why
there is not proper funding for the Employment Service and the
UI whenever the trust funds are at an all time high and an all
point level but, yet, we can't seem to come up here for 25
years and knock on the door, trying to help those local people
in the local community. You know, the work force investment
boards and what is out there, basically, what the statements
are made in here, we divested all this information and all of
this down to the local level but, yet, we are not willing to
fund them.
Mr. Cardin. I agree with you. And I think that one of the
matters that we may have to look at in this Committee is the
relationship to the appropriation process, because I am
somewhat amazed that there is not a more adequate funding
during this period of our economy to the Unemployment Insurance
accounts of the states. So it is something we need to take a
look at and it is a fair comment, something that is not within
the jurisdiction of this Committee, but something that,
clearly, we are very, very concerned about.
One last point if I might make. Mr. Smith, one thing that
concerns me, it seems to me under the current system where
interstate competition among the states drives states to use
the stingiest standards for accepting Unemployment Insurance
eligibility because of the competition among the states. And if
we pass a bill that devolves the revenues to the states, that
might just be exaggerated and worked to the disadvantage of
working people. I am just curious as to your assessment on
that.
Mr. Smith. Well, I think you are absolutely right. And the
two points that you have raised are related. If we don't set
Federal solvency standards, states can compete and will compete
with each in ways that reduce their solvency. The lesson of the
`eighties is unmistakably clear, and we forget it at our peril.
It is also true that we ought not to encourage states to
compete by lowering benefits for many of the reasons that you
talked about and that both Van Ooms and I talked about. This
work force has changed a lot. We need a different benefit
structure than we have had over the past five decades.
This is an opportunity to address both the solvency issue
and the benefit adequacy issue that is almost impossible to
address during recessionary times. But if we take the step now
of foregoing our opportunity to insist on solvency, to help
states assure solvency in some of the ways that Mr. English has
proposed, we will relive the `eighties a couple of months after
the next recession hits.
Mr. Cardin. Let me make just one last point. And I
appreciate the references that have been made to Welfare
reform. And it just seems to me, again, counter-intuitive that
if we are concerned about people leaving Welfare for permanent
employment, and we know that many of them will have low-paying
jobs and part-time jobs, and they are not going to be qualified
for Unemployment Insurance. That doesn't seem to me to be
consistent with our strategy to get people off of Welfare
permanently into the employment structure. I thank you for your
comments.
Chairman Johnson. Mr. McCrery.
Mr. McCrery. Well, thank you all for your testimony, for
bringing us your particular perspectives to this discussion
about our Unemployment Insurance system. Just at couple of
things I want to comment on: (1) The solvency issue. I am
looking at the list of states here and their trust fund
balances, and my State of Louisiana has about 8 years worth of
excess benefits in the trust fund. I hope we don't have an 8-
year recession. If we do, we are all in trouble.
There are very few states on this list that have what I
would consider to be low trust fund balances; there are a few,
and shame on them, I guess, if they get into a tight--because
we did that in Louisiana, as I pointed out before, and paid
through the nose for it. But we have recovered, and we have
reduced taxes, and we have a sufficient--more than sufficient--
trust fund balance for a rainy day. So I think all this talk
about solvency is perhaps a little overblown and maybe even a
red herring.
The fact is we have huge surpluses in our Unemployment
trusts funds at the Federal level. The only reason for that--it
has nothing to do with the workers, it has nothing to do with
taking care of people. The only reason is we were hiding our
deficit. We were masking the size of the Federal deficit. So I
am a little bit upset that we are talking about all these other
things, solvency, and increasing benefits, and all this stuff,
as a roadblock to doing what we should have done a long time
ago in being honest with the taxpayers and say we are not using
this money for the purpose for which we told you we were
collecting it and we are going to give it back to you. That is
point one. So to say--for the administration to say we will not
accept any bill that reduces the employment tax unless you
attach all these other reforms on it is really disingenuous, I
think.
In my bill we do exactly with the Unemployment system what
we have done with Welfare and had so much success with. And Mr.
Smith, I have not read your testimony, and I will, but you made
reference to, or you started to tell us why devolution was a
bad idea. But you only mentioned one thing, and that was some
vague reference to there being a national labor market now. I
don't understand that comment. What do you mean by that? What
is a national labor market? Why is that argument against
devolution? What do you mean by national labor market?
Mr. Smith. Well, Congressman, we have a much more
integrated national labor market than we did a few decades ago
and, certainly, than we did when the Social Security Act was
passed. We are more mobile. Not only do we move among jobs, but
we move among places. And the structure of the economy is now
evolving in much more rapid ways, partly due to technology,
partly due to telecommunications. The old assumptions about a
place and a worker no longer describe either the employment
relationship or the employment experience of most of us. And we
need to help people prepare for a labor market which isn't
defined in as simple geographic terms as it used to be.
Mr. McCrery. So in other words, the folks in South
Louisiana that lost their jobs recently, you would just tell
them to move?
Mr. Smith. Congressman, I didn't say that. You did. No, I
wouldn't just tell them to move, but I would want to make sure
that the system of employment assistance, the one-stop centers,
the way in which benefits are structured, encourage them to
have the same kind of flexibility and ability to move, and
information about opportunity, and access to national
information that employers have.
Mr. McCrery. Well, but surely, you are not suggesting that
conditions in Louisiana are the same as conditions in
California, or New York, or Michigan. Surely, you are not
suggesting that the people in my state who have lost their jobs
don't deserve at least the chance to find a job in their home
state and get serviced by an employment benefits office in
their home state?
Mr. Smith. They do, Congressman. And I think you and I
would agree that that is an argument the AFL-CIO has made with
great regularity. My point here is that it may not be true any
longer that the best and most promising opportunity for an
employee who loses their job in one parish is in that same
parish. You talk about 108 months of coverage, but your
colleague talked about closed offices. There is something wrong
with a system that creates both of those outcomes at the same
time. It is not at all clear----
Mr. McCrery. My bill would solve that.
Mr. Smith.--that your bill will solve that or that
devolution is the magic bullet here.
Mr. McCrery. Well, the reason that devolution works so
well, one reason that devolution works so well with Welfare
reform, is because different areas of the country have
different needs, have different resources, different assets.
The same thing holds true with employment. And therefore, I
think devolution makes a lot of sense in the area of Employment
Insurance as well. Louisiana knows its needs. They know where
they need to put offices. They know the kinds of jobs that
might be available to somebody who loses their job in a garment
factory. They are not necessarily going to be able to get a job
in Houston even at the shipyards where there might be jobs. But
they might be able to get a job in the timber industry right
next door because that is the kind of jobs that we have. We
know that. Ms. Johnson doesn't know that, Mr. Cardin doesn't
know that, people up here in Washington don't know that. Mr.
Forster does. It is his job. So I question your conclusion that
devolution is not possible because of the changing labor
market.
And I want to look at this alternative base period, because
I have to admit I am not as up to speed on this as I hope to
be. But it seems to me that you are talking about simply making
an effort to include more recent wages in the calculation of
benefits. Is that correct?
Mr. Smith. That is correct.
Mr. McCrery. So it is not any alternative. It is not some
alternative----
Mr. Smith. Right. It is an alternative to the current----
Mr. McCrery. It is really just capturing that data or most
recent wages and including that, which seems to be an eminently
reasonable thing. However, I want to ask the folks from the
private sector, and maybe Mr. Forster, does that involve a cost
to gather that data? Is it reasonable to get that data or is
there a problem with that?
Mr. Forster. Yes. I don't think that is a problem. I don't
think that data would be the problem, you know, assuming that
they are working for a contributing employer, then we have that
information.
Mr. Yarbrough. Even though I represent a large employer, my
dad is a small employer. And they pay taxes on a quarterly
basis, and they still use their accountant and their bookkeeper
to calculate, and estimate, and pay their taxes. And therefore,
if they did have a small shutdown or a layoff, some of that
information will not be as capturable in the small employer,
small segment, of the economy. Remember that small employers
have created more jobs and have created more opportunities for
folks than all of the Fortune 500 companies have in the last 5
years. So the small employer is the one who would be at risk in
trying to provide information on an alternate base period.
Mr. Smith. If I could just briefly, Congressman----
Mr. McCrery. Sure.
Mr. Smith. It might be more difficult for small employers
but, you know, this is an opportunity to take advantage of the
technology that is available to us that doesn't discriminate
based on size. This information is available. Just remember,
the alternative is a large number of hardworking men and women
who don't quality for Unemployment Insurance when they most
need it.
Mr. Yarbrough. One follow-up. We continue to try to
permanently expand coverages with a temporary tax.
Mr. McCrery. Are we talking about a month's worth of wages
or a quarter's worth of wages?
Mr. Smith. A quarter.
Mr. McCrery. A whole quarter's worth that are not
reflected----
Mr. Smith.--that are not counted in the current calculation
as to eligibility and benefit level.
Mr. McCrery. Well, Madam Chairman, thank you for allowing
me that time to question the witnesses, and thank you all for
appearing with us today.
Chairman Johnson. I am getting a sort of hook from behind
me here, because the Full Committee begins its proceedings in a
few minutes, but I did want to point out this. I think that the
comments that have been made here are very, very helpful, and
it helps me to see places that we could all agree, places that
we will clearly not be able to resolve in the context of a
session this year. But I think there is an urgency here that
merits our consideration of action, even though this isn't the
ideal session to make such significant changes.
But it is very disturbing to see how the system as it is
currently structured does disadvantage the most rural, the most
isolated workers. And that is an enormous concern and a very
clear insight that you brought to us. It is also true that as
we move into a global era, we absolutely have to have a better
way of responding to the substantial adjustments that have to
be made. And we have not been very successful at this in the
past. It is also true that our Trade Adjustment Assistance Act,
whose goal it was to deal with this, does have the merit of
allowing people to be trained while receiving some income.
So there are a number of issues that I think we need to
think further about here. There have been some very good
suggestions, I think, some very doable suggestions. But one
thing you haven't talked about much, and we don't have time to
talk about, so I am just going to talk about it and then you
can think about it and get back to me.
The strength of our workforce, the opportunity for welfare
recipients who are moving into the workforce to advance, and
the opportunity for people who are moving from one sector to
another to do well all depends on training. And I have been
very impressed with the extent to which some of my employers
who have had significant layoffs have been quite generous about
training. And I have had a number of people say to me, oh, yes,
I got a job offer, but I am going to finish this training
first. I haven't had this opportunity in my life. And that is
very important.
So I think we need to give some significant thought to the
difference between the Unemployment benefit for someone who is
getting training for reemployment and Unemployment benefits for
someone who isn't attending, in a sense, to the business of
future employment. I know this is hard. I am not intending that
we mandate it, but I am proposing that we at least think about
differential issues or freeing states to do that, because
education is so key.
Look at the difference between the rich/poor statistics of
every organization, and the one thing in which they are all in
agreement is that if you have less education, you earn less.
And the people who are sort of condemned to do poorly in life
are the people who didn't graduate from high school or now who
graduated from high school but who had no other additional
training. Mr. Forster.
Mr. Forster. Madam Chairman, you--and it was one of the
things that I left out and you just hit on it--and that is, as
this country and as our states move down to record low
unemployment, 3 percent, 4 percent, whatever it might be, those
people that are left, that you are talking about, they are the
ones that have the most barriers, need the most help, need the
most people help. You can't give them the Internet and say go
find a job.
So you do need training, you do need people, they do need
the help more than if--during a recession when unemployment is
up at 6, 7, 8 percent. Those people have work experience, they
have got work ethic, they can move back into the work force
much quicker than what the country is experiencing now, not
only with Welfare recipients but with people coming out of
jail, another critical group that we have to do something with
that the Department of Labor has really ignored, that those
people are coming out regardless, and they don't have any
training, and we give them $20 and we say good luck.
Chairman Johnson. And one of the reasons that welfare
reform has worked is because it has accepted part-time
employment and complemented that with a lower but still real
benefit. Now, you know, I think we have just got to look at
part-time employment and part-time training. What should be our
position as a support program to someone who wants to work
part-time so they can take this three, or four, or five, or 6-
month training program? We have got to really begin to think
about these things. It is really breaking away from the past
well beyond where these legislative proposals are, but
opportunity is so clearly a function of skill growth that I
think we cannot just be blind to that real fact. Mr. Smith.
Mr. Smith. You are surely right about that, Madam Chair,
and this country sinfully underinvests in training our workers,
not simply those who have lost their job. I would caution, as
you would expect me to, this is an insurance program. Workers
pay for it all of their life. Many of them are cyclically and
truly temporarily unemployed. The notion that we might treat
them differently than someone who was unemployed in a place
like some of the garment factories that Mr. Forster talked
about who really do need training, we need to be very careful
here.
This is an insurance program. Most economists, I think we
would all agree, one way or another, this it is paid for out of
the wage packet. We ought to spend more money on training for
each and every worker, with or without a job, but I am not sure
we want to think about turning this insurance program that
people rely on during temporary spells of unemployment as well
as more permanent, into a training program that is mandatory.
Mr. Yarbrough. Madam Chairman, I would like to mention that
in the Work force Investment Act, the 134 Federal programs that
were put down to four block grants, and that is an essential
part of the one-stop but, yet, we have not expanded the job
service side in order to help place these people who are now
being referred to those programs. And states by states, there
are states who exempt the job search requirement for people
that are going to training. Our company alone, we have GED
classes and additional training from outside voc-technical
schools that are conducted inside our plants and inside our
locations every day to help increase the skills of our current
work force. We have to continue to do that.
But the Employment Service side, what we are talking about
here is such a flat funded level that they are not going to be
able to refer people that are going to be coming out of these
Work force Investment Act training programs in the next couple
of years. Remember July 1, 2000, when that becomes mandatory
this year, you know, if we don't send some money their way,
they are not going to have the ability to deliver those folks
to the employers that are needing them in high skilled jobs and
medium skilled jobs that employers are looking for.
Chairman Johnson. I do appreciate the tremendous pressure
on our Unemployment services and how creative they have been,
and how remarkably different they are from 5 years ago. And I
think it is almost criminal to be holding a state with 161
months of benefits, which they will probably never use, and not
give them the resources for a much more vital employment
support system.
I was very interested in the low wage issue. I am, however,
concerned that, apparently, under the current system, if you
earn $7 an hour, which is above a number of states' minimum
wages--not that I support that, but I mean this is just a
fact--that you would have to work 4.5 out of every 13 weeks for
two quarters in order to qualify. In other words, you would
only have to work five-and-a-half weeks out of a quarter in two
successive quarters to qualify. So I mean I am interested in
following up on this because I do think--I am concerned about
the lack of eligibility of the low earners, but that is not a
very high threshold, five-and-a-half weeks out of thirteen
weeks, two quarters in a row.
So lets give that some thought. I welcome your follow-up
input and, you know, if we all recognize that nobody is going
to get everything they want, there is an opportunity to make a
very significant stride forward this year. And you know, if we
don't do it this year, we are going to have a new president. I
don't care what party, a new president will take a long time to
ever get down to an interest at this level of legislative
activity. Truthfully, there will always be big item issues that
will take precedence.
So this is nobody's favorite issue. That is why the system
is so grossly outdated. And we do have an opportunity here if
we can do something together that would be better for people
who are unemployed, better for state systems that have shown
extraordinary creativity in helping the least likely workers to
get into the work force and begin to advance. But my whole
view, as many of you have heard me say before, is that the
challenge to Welfare reform is now how do you help people move
up the career ladder and how do you help them earn more. Well,
that takes a different kind of unemployment system than we have
in place now.
And if we can use this opportunity to move forward an
employment service that not only helps you look for a job but
helps you keep in touch. Some of the one-step centers have gone
to actually keeping track of people and moving them into the
next higher level job and bringing some unemployed person into
the bottom level job. There is a lot of opportunity out there
for career advancement, for wage development. And I don't know
how much of that we can do from the Federal level or,
particularly, through this lever, but I do think we have an
opportunity. It would be unfortunate if we couldn't find some
agreement on a number of the very specific recommendations that
all of you have made. And I thank you for being here.
[Whereupon, at 4:25 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
STATEMENT OF AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL
EMPLOYEES
The American Federation of State, County and Municipal
Employees (AFSCME) submits the following statement for the
hearing record on legislative proposals to reform the
employment security system. AFSCME represents 1.3 million,
federal, state and local government employees and workers in
health care facilities and other private sector institutions,
including the employees of employment security agencies in 19
states.
Since its inception in the 1930s, the unemployment
insurance system has played a crucial role in stabilizing the
American economy during recessions and providing unemployed
workers with temporary wage replacement income when they lose
their jobs. However, dramatic structural changes in the
nation's economy and employment arrangements are making the
system increasingly less effective. In addition, persistent
underfunding of the state infrastructure is leaving the system
so weak that it is doubtful it could respond effectively and
efficiently to a surge in unemployment.
Today's employment security system needs to be
strengthened and modernized to make it work effectively in the
new economy. These reforms must address:
The changing nature of the workplace. Low-wage and
part-time employment continues to increase, as does contingent
work, which does not follow traditional employer-employee
relationships on which the unemployment insurance program is
based. This trend is due to a variety of developments,
including the growth of two-earner families and their desire
for more employment options; industry's interest in a more
flexible workforce; and rapid technological change. With few
exceptions, the states have failed to adjust their systems to
cover workers in these employment situations and continue to
use outdated measures of workforce attachment, which exclude
many workers in the new economy. They also have maintained
restrictive policies implemented in the 1980s when federal law
changed to require states to pay back federal loans with
interest. As a result, recipiency rates are at an all-time low,
with some states experiencing rates as low as 19-20 percent.
The decline in stable long-term employment with
one employer. The old model of lifetime employment with one
manufacturer and cyclical periods of unemployment has become
less common. As the information technology and service sectors
have grown and displaced the old industrial economy,
increasingly workers change employers and even occupations one
or more times in their lives. In order to minimize personal
hardship and promote national productivity, we need to make
these transitions as smooth as possible. The employment
security system is the natural gateway for income replacement
and reemployment services to workers who experience
dislocations and need retraining.
Deterioration of the system's infrastructure.
Chronic federal underfunding of the states' unemployment
insurance and employment services operations has reached a
critical stage. The employment service has lost half its staff
since the 1980s while most states have had to close offices.
New technology, such as America's Job Bank and America's Talent
Bank, can enhance the system's productivity, but states have
reacted to the funding shortfalls by relying heavily, if not
exclusively, on automated systems. For example, many now use
centralized telephone systems for taking unemployment insurance
claims. Telephone claims can provide added convenience and
increased efficiency, but it is not well suited to handling
mass layoffs or appeals of denied claims. In addition, highly
automated systems are likely to undermine the unemployment
insurance ``work test.'' Replacing local offices and personnel
with automated systems has created new access problems for
unemployed workers and can undermine their statutory rights to
a fair appeals process and to timely payments when due.
These problems result from both federal and state neglect
of this important safety net program. The solution, however, is
not for the federal government to withdraw from its small, but
critically important, role in the system as H.R. 3174 proposes,
or just to cut the federal unemployment tax as H.R. 1975
proposes. Instead, the solution lies in a comprehensive package
that addresses the issues of recipiency rates, solvency of
state trust funds, the adequacy of administrative funding, and
the correct level and structure of the federal unemployment
tax.
AFSCME opposes H.R. 3174 because it will result in a
maldistribution of administrative resources and undermine the
central national risk-pooling feature of the unemployment
insurance system. In doing so, it will create a new set of
incentives which may actually favor continued underfunding of
administrative costs and new employer tax cuts at the expense
of unemployed workers.
H.R. 3174 addresses the problem of federal underfunding of
state operations by giving states authority to set
administrative funding levels. It does this by creating 50
state administrative accounts, returning to the states the
percentage of Federal Unemployment Insurance Tax Act (FUTA)
revenues which their employers pay into the Federal Trust fund,
and empowering the state legislatures to set annual
administrative spending levels. This is in distinct contrast to
the current practice of pooling the FUTA revenues among the
states and then distributing the funds based on their actual
workload needs. It means that states with relatively large FUTA
payments but low recipiency rates will get a windfall, while
states which pay benefits to more workers will not.
Furthermore, H.R. 3174 is likely to encourage continued
underfunding of state operations. It requires that unused FUTA
administrative funds be transferred from each state's
administrative account into its benefit account thereby
eliminating the current separation between federally-funded
administrative accounts and state-funded benefit accounts.
Since states directly control the level of employer taxes and
revenues for the state benefit accounts, H.R. 3174 is likely to
create new pressures at the state level to transfer as much
federal FUTA revenue as possible to state benefit accounts in
order to hold down or reduce state employer taxes.
The pressures at the state level to create a ``business
friendly'' environment have been strongly evident in recent
years. Between 1992 and 1999, total yearly increases in state
trust fund balances overall averaged an unprecedented 85.62
percent as economic activity surged. Yet even as recipiency
rates and wage replacement rates were dropping nationally, at
least 25 states have cut their unemployment taxes over the last
few years, according to a recent analysis by the National
Employment Law Project. At least nine states, which adopted tax
cuts, had recipiency rates below the national average of 33S
percent, and three of these states were among the four states
with the lowest recipiency rates in the country. Three of the
states that awarded tax cuts did so despite the fact that their
trust funds are below the national average in terms of solvency
and could not withstand a serious recession.
There is no reason to expect this dynamic will be different
with respect to the administrative funding accounts. In the
end, pressures to cut state employer taxes will thwart the goal
of adequate administrative funding.
H.R. 3174 also will cripple the federal government's
ability to enforce federal accountability requirements. These
requirements include: 1) proper and efficient administration of
the program using state merit-staffed employees; 2) ``methods
of administration'' assuring prompt and accurate payment of
benefits; and 3) due process and fair hearing protections for
claimants who are denied benefits. These standards are critical
to ensuring strong accountability in the system and protecting
the rights of unemployed workers to fair treatment and prompt
action by state agencies.
AFSCME has participated in the stakeholder dialogue
meetings that began last spring. The stakeholder dialogue
process focused on three basic aspects of the system:
administrative funding, recipiency rates, and the federal
unemployment tax. We believe these meetings have been extremely
valuable in educating the participants about each others'
viewpoints and in identifying areas of potential consensus.
All of the stakeholders agree on the need to make the
financing of unemployment insurance and employment service
administrative costs mandatory in light of the failure of the
appropriations process to provide adequate infrastructure
funding. AFSCME supported and continues to support a workload
driven formula, which retains the current federal role in
pooling risk and resources and encourages states to respond to
demands of the national economy. We opposed and continue to
oppose the idea of a state match to draw down federal resources
which emerged as an alternative to full devolution.
As conceived to date, the state match proposal would return
to the states a certain percentage of their proportionate share
of FUTA taxes paid by employers in their states which they
would use to draw federal trust fund revenue. We oppose this
approach because it contains key elements of the full
devolution proposal. By basing the state share on FUTA tax
receipts, the proposal runs into the same distribution problems
inherent in full devolution. In addition, the state match
contains the same requirement to transfer unused administrative
funds to state benefit accounts, thereby undermining the
national insurance features of the present arrangement and
potentially encouraging states to use federal unemployment tax
revenue to help lower state unemployment taxes. And, finally
the proposal would create 50 state administrative accounts,
setting the stage for full devolution.
AFSCME strongly believes that federal FUTA resources should
be allocated based on state workload needs and that a formula
approach does this best. In addition, a formula has the
advantage of allowing the federal government to guide state
behavior from a national perspective in a way that the states
by themselves may not. For example, the Department of Labor
(DOL) has been instrumental in moving states to participate
fully in America's Job Bank, a highly successful endeavor. It
also has awarded technology grants to states to increase the
system's productivity, and federal law has made worker
profiling a national requirement.
True unemployment insurance reform, however, would be
seriously lacking if it were defined only as administrative
financing improvements. The administration's proposal,
introduced as H.R. 1830 by Reps. Sander Levin and Phil English,
represents a good first step by recognizing that the scope of
UI reform must be more comprehensive. It provides incentives
for states to implement alternative base periods that will help
more lower wage workers qualify for benefits; improves the
extended benefits trigger to make it more effective during
recessions; encourages states to improve the solvency of their
trust funds; and increases Trust Fund distributions to provide
some very modest interim administrative funding relief to the
states. However, we do not believe the legislation goes far
enough in either the area of benefit expansions or tax reform.
It should be a matter of major concern to anyone who
believes in the value of employment security as an economic
stabilizer that recipiency rates are as low as they are. The
system's ability to soften the economic effects of recession
will be seriously compromised if the percentage of unemployed
workers it reaches continues to decline. Furthermore, workers
on whose behalf employers pay unemployment taxes should not be
denied the income replacement they have earned because of
inequitable and outdated rules. A reform package that does not
improve recipiency rates in a meaningful way would not be true
reform at all. Accordingly, AFSCME strongly supports the
following measures to improve recipiency rates:
Alternate Base Period: There is no good reason for
states not to use an alternative based period now that
technology allows for speedier reporting and posting of wages.
Furthermore, mandating an alternate base period would allow
450,000 more workers to receive unemployment benefits.
Requiring states to use available technology in a way that
benefits unemployed workers is consistent with the federal duty
to ensure the ``proper and efficient'' administration of the
program and federal requirements for payments to be paid in a
timely fashion.
Part-time Workers: Workers seeking at least 20
hours of work per week should not be disqualified from
receiving unemployment benefits if they have met the earnings
requirements. Part-time employment has become a major component
of the economy and increasingly is recognized as an acceptable
option in a society in which workers face intense pressures in
balancing the demands of work and family. Furthermore,
employers often prefer to hire part-time workers in their
search for a more flexible workforce.
Lower or Replace Earnings Requirements: The
increase of low-wage and intermittent employment arrangements
has acted as a barrier to many workers, and many states have
been slow to adjust their earnings requirements in recognition
of these trends. Requiring or encouraging states to have an
earnings requirement of 400 times a state's minimum wage and
eliminating the high quarter earnings requirement would address
this problem. Alternatively, the federal government could award
technology grants to states to encourage them to establish
information systems that can replace earnings with hours worked
as the measure of labor force attachment. The technology is
available now, and such an approach would eliminate the current
discriminatory treatment of low wage earners.
Extended Benefits: AFSCME supports eliminating the
federal work search requirements so that the federal and state
rules are consistent. We also urge a lowering of the federal
trigger and the use of a trigger based on total, instead of
insured, unemployment.
Separations for Personal Cause: Workers may have
to leave work for personal reasons, such as domestic violence
or the transfer of a spouse by the employer to a different
state. While, in the very strictest sense, the decision to
leave work for these reasons may be viewed as ``voluntary,'' in
reality it rarely is. Some states have begun to recognize this
fact as evidenced by the recent adoption of new laws that
provide unemployment benefits to victims of domestic violence.
AFSCME supports encouraging state adoption of such policies.
Of the current proposals relating to taxes, AFSCME strongly
supports Rep. English's proposal in H.R. 3169 to repeal the
income tax on unemployment benefits. This tax was adopted to
increase revenue at a time of federal deficits and creates
undue hardship on many workers when they most need assistance.
With surpluses projected well into the future, the need for
this unfair tax no longer exists.
AFSCME opposes repealing the FUTA surtax before
comprehensive reform is considered. While amounting to only $14
per worker per year, the surtax raises 25 percent of current
FUTA revenues. Repealing the surtax before comprehensive reform
can be debated would distort congressional consideration of
broader reform and potentially jeopardize it.
AFSCME believes that reforming the federal FUTA tax is a
much more complicated matter than simple repeal of the surtax.
The current federal wage base of $7,000 has not been updated
since 1983. At the time, the $7,000 wage base was roughly
equivalent to the federal minimum wage. (In 1939, the federal
FUTA tax was .30 percent on a taxable wage base of $3,000 which
was much closer to the average weekly wage than the minimum
wage of $.30 per hour or $624.) Since 1983, 41 states have
established state taxable wage bases that are higher than the
federal taxable wage base. They range from $8,000 all the way
up to $25,500.
A substantial increase in the federal wage base could allow
the FUTA tax rate to be adjusted downward in a way that could
relieve the tax burden on small employers with low wage
earners. For example, with a $19,000 wage base, it would be
possible to lower the FUTA tax rate from the current .8 percent
to .34 percent while still raising the same amount of revenue
currently raised. The tax on employers with workers earning a
wage equal to the new minimum wage just approved by the House
of Representatives would drop by $7.00 or half the $14 cut they
would enjoy under the surtax repeal.
While these figures could be adjusted to accommodate the
revenue needs of a comprehensive reform package, the example
serves to demonstrate a key point. Repealing the surtax is not
the most efficient way to provide small employers tax relief,
and it does not address the fact that they are carrying a
disproportionate burden of the FUTA tax. A better approach
would be to restructure the FUTA tax to achieve more
progresssivity and equity among employers. This could be done
in concert with a possible decrease in total revenue should
that be justified on the basis of a final package.
In closing, AFSCME believes that the current strength of
the economy and the broad concern about underfunding of state
administrative costs present a unique opportunity to enact the
most significant changes to the unemployment insurance system
since the early 1980s. H.R. 3174 looks to the past of the early
1930s, when the federal government had no meaningful role in
the nation's economy. Instead, we urge the committee to
transform the unemployment insurance system into a modern
employment security system by building on and strengthening the
federal-state partnership.
STATEMENT OF HON. BOB TAFT, GOVERNOR, STATE OF OHIO
Good afternoon, Madam Chairman, Congressman Cardin and
members of the Subcommittee. My name is Bob Taft, Governor of
Ohio. It is an honor and a pleasure to appear before the
Subcommittee today, to testify in favor of Congressman Jim
McCrery's legislation, H.R. 3174, the ``Employment Security
Financing Act.'' I would like to start by asking that my full
written statement be included in the hearing record.
You may recall I appeared before the full Ways and Means
Committee in June, 1999 to speak in favor of the concepts that
ultimately were included in the bill Congressman McCrery
introduced in October. Last June, I asked Congress and the
White House to embrace needed reforms to the Federal
Unemployment Tax system. I said FUTA reform is necessary to
eliminate a needless, 24-year old ``temporary'' surtax on the
nation's employers, and to allow state re-employment services
access to the dedicated revenue flow that helps them put the
unemployed into jobs, and helps place the under-employed into
better jobs.
Since my testimony last Summer, the FUTA system has not
improved. It still fails to serve the workers who need it and
employers who pay for it.
FUTA--A System in Need of Reform
Employers continue to be overtaxed. In 1976, Congress
enacted the FUTA surcharge to provide funds to reimburse
depleted trust fund accounts that have long since been
restored. The Tax Relief Act of 1997 extended this surcharge
much longer than necessary, through the year 2007. There is no
justification for the 30-year extension of this ``temporary''
surcharge.
Not only are employers being overtaxed, but appropriations
from this dedicated source of administrative funding also have
been reduced. In 1997, 48 of the 53 states and jurisdictions
receiving administrative funding for unemployment insurance and
employment service functions received less than the FUTA taxes
collected from employers in those states. Since 1990, less than
58 cents of every employer FUTA tax dollar has been returned in
administrative funding for states.
A comparison of the taxes paid by employers to
administrative funds provided to the states paints a dramatic
picture. From 1993 to 1998, annual FUTA tax collections
increased from $4.23 billion to $6.37 billion while
administrative funding was cut from $3.81 billion to $3.47
billion. I have provided several graphs demonstrating this
trend, which are appended to my statement. Although the latest
data are only available though 1998, the trend line has
continued in 1999 and 2000, rendering the return of employer
taxes to the states an increasingly smaller percentage each
year.
In Ohio, we receive 39 cents on the dollar. Inadequate
funding in recent years has forced us to close 22 local
offices, significantly reduce staff, and use State general
revenue to make up for cuts in federal funds that are being
maintained in trust, ostensibly to provide the very services
that have been cut through the federal appropriations process.
The differential between federal administrative funds
provided and actual costs continues to increase. In 1993, the
state deficit in federal funding compared to cost was $13.3
million. By 1998, the deficit had grown to $17.5 million.
We must do a better job of supporting state efforts to
ensure the ability of American families to adjust to the
demands of the workforce in this new century by providing
adequate funding for employment services for those who become
unemployed.
It is time for a change. We need a system that properly
provides sufficient funds to states for administration, and
minimizes the tax burden on the employers who pay for it.
Congressman McCrery's bill, and a similar measure
introduced by Senator Mike DeWine of Ohio, S.462, are carefully
crafted to reform a federal-state partnership that does not
adequately serve its state partners. We need Federal
Unemployment Tax reform that will do each of the following:
Repeal the 0.2 percent FUTA surcharge;
Provide adequate dedicated funds for
administration of the unemployment insurance program and public
employment services;
Increase flexibility on the use of funds as states
develop their integrated workforce development systems, as
Congress has mandated; and
Transfer responsibility for collection of the FUTA
tax to the states.
FUTA REFORM: A CATALYST FOR EFFECTIVE WORKFORCE DEVELOPMENT
FUTA reform no doubt has considerable fiscal significance
for states. But I believe the larger, more compelling story is
how important it is for meaningful, effective workforce
development. I view the McCrery and DeWine legislation as a key
tool with which to complement earlier reforms that were the
product of bipartisan cooperation between this Congress and the
White House. The ``Employment Security Financing Act'' really
completes the work on landmark successes such as Welfare Reform
and the Workforce Investment Act. I regard the ``Employment
Security Financing Act'' as a necessary next step toward
ensuring that more of our citizens and their families can enjoy
our booming economy, and thrive as members of an ever-changing
workforce.
Since 1997, when Congress enacted Welfare Reform, states
have risen to the challenge and have used their new flexibility
in ways that have guided more of our citizens toward self-
sufficiency. From a federal point of view, Welfare Reform
provided much-needed budgetary certainty, replacing an open-
ended federal entitlement with a capped entitlement in the form
of a block grant. Near-term efforts to balance the federal
budget clearly were aided by states' acceptance of the Welfare
Reform package crafted by Congress and the Administration.
States continue to invest heavily, and creatively, in those
areas which will empower more of our fellow citizens to break
the cycle of dependency through state-and local-based
strategies. We are investing great resources in our schools, in
health care and other areas to let more Americans participate
in the best social program ever devised--steady employment.
The nation's employers have been a key component to this
success story. As you know, many employers provide an array of
benefits to employees and their families that go beyond a
paycheck.
Now states and employers are wrestling with the next
challenge: Workforce Investment Act implementation. States face
tremendous challenges in the 21st Century to develop workforce
investment systems with the resources and the flexibility to
develop skilled workers and match them to employers' needs. The
enactment of H.R. 3174 will give states greater flexibility and
adequate resources to meet this challenge.
With the Workforce Investment Act of 1998 (WIA), Congress
and the President took an important step in requiring
coordination of workforce development activities at the state
and local level. The legislation, now being implemented across
the country, requires the participation of a number of agencies
involved in workforce development activities as part of a
coordinated state plan. Although WIA contemplates the
coordination of various workforce activities covering a number
of categorical programs as part of a one-stop system, funding
of core employment services to be available to a universal
population is not sufficient. The McCrery bill addresses the
need for adequate funding for critical public employment
services, which include: job search and placement services;
counseling; testing; occupational and labor market information;
assessment; and referral services.
Throughout the WIA implementation process, funding
flexibility has been identified as an absolute necessity for
effective workforce system development. Categorical funding
streams, each with specific limitations, create barriers to the
effective use of resources at the state and local level to
serve our worker and employer customers. H.R. 3174 eliminates
barriers by providing maximum flexibility for the use of
funding for unemployment insurance and public employment
services, with primary emphasis on returning unemployed
individuals to work.
We need this additional flexibility and funding to make the
link for individuals from welfare to work, from training to
work, and from unemployment to work. In this time of economic
boom and worker shortages, employers desperately need
assistance in finding skilled workers. Without the funding
necessary to develop an integrated, universal workforce
development system, our effectiveness in serving employers and
the full range of workers is limited.
Experience has taught Ohio that many of the same
populations most reliant on employment services are often the
people most in need of other support services. My state has
demonstrated its commitment to successful service integration
by merging our Department of Human Services with our Bureau of
Employment Services. The new agency will be the Ohio Department
of Job and Family Services. Besides making administrative
sense, I believe the title of the revamped agency underscores
the commonality of the missions it will serve.
Many employers, large and small, currently are having
difficulty locating workers as the nation's unemployment rate
hovers near a record low and the economy enters its ninth year
of expansion. All employers are burdened with the costs of
locating, training and retaining employees, when they should be
receiving these services through state and local workforce
development systems. Employers have a right to expect federal
and state governments to honor their commitment to construct
the integrated workforce development systems that are mandated
under the Workforce Investment Act and provide the employment
services for which employers pay nearly $7 billion in taxes
annually.
Businesses and workers deserve reliable re-employment
services, both in a booming economy, and when the economy
cools. States are the principle providers of those services,
and proper FUTA financing will give them the resources and
predictability that are missing from the current federal-state
partnership.
It is true that states now confront the task of finding
jobs for some of our hardest to place individuals. As
governors, we must be prepared to serve all of our citizens,
particularly those requiring extra assistance in joining the
workforce. To be successful, to the degree envisioned by
Congress and the President, we must have employment services
that are properly funded and have sufficient flexibility. That
will be true no matter what shape our economy is in.
As the federal government now has achieved an on-budget
surplus, the time is right to embrace reforms which will help
states meet their responsibilities to all workers and to the
employer community.
Since my testimony to the Full Committee last June, the
number of states that have embraced the FUTA reforms contained
in H.R. 3174 has grown to 32. Congressman McCrery now counts
some 40 cosponsors for his legislation.
Please join me in support of these necessary reforms, which
represent a logical next step to guaranteeing the other
historic reforms which Congress and the White House have
enacted during these past several years.
I urge your favorable consideration of H.R. 3174.
Thank you.
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STATEMENT OF SOCIETY FOR HUMAN RESOURCE MANAGEMENT, ALEXANDRIA,
VIRGINIA
Madam Chair and Members of the Subcommittee:
The Society for Human Resource Management (SHRM) is the
leading voice of the human resource profession. SHRM provides
education and information services, conferences and seminars,
government and media representation, online services and
publications to 130,000, professional and student members
throughout the world. The Society, the world's largest human
resource management association, is a founding member of the
North American Human Resource Management Association (NAHRMA)
and a founding member of the world federation of Personnel
Management Associations (WFPMA). On behalf of NAHRMA, SHRM also
serves as president of WFPMA.
SHRM urges the Subcommittee to support the swift enactment
of H.R. 3174, the bipartisan Employment Security Financing
Reform Act. H.R. 3174 is essential to strengthening the state
unemployment insurance and employment services (UI/ES) system
and the workers and employers whom it is designed to serve.
SHRM is a member of the Coalition for Employment Security
Financing Reform, an informal coalition of business
organizations and 32 states that support H.R. 3174. This
legislation would amend the Internal Revenue Code, the Social
Security Act, the Wagner-Peyser Act, and the Federal State
Extended Unemployment Compensation Act of 1970 to improve the
method by which Federal unemployment taxes are collected and to
improve the method by which funds are provided from Federal
unemployment tax revenue for employment security
administration. Specifically, the bill would:
repeal in the year 2004 the ``temporary''
unemployment surtax that employers have been paying since 1976;
increase the flow of dollars from the Federal
Unemployment Tax back to the states; and
streamline how the tax is collected.
H.R. 3174 was introduced by Rep. McCrery (R-LA) with the
bipartisan support of 35 co-sponsors. Unlike the
Administration's proposals and Rep. English's (R-PA) H.R. 1830,
the bipartisan Employment Security Financing Reform Act, H.R.
3174, will improve the method by which FUTA taxes are collected
and funds are provided to administer the state UI and ES
programs. The Employment Security Financing Reform Act will fix
serious problems with the state UI and ES system resulting from
the federal government's failure to provide adequate funding
and will also provide funds needed to implement the Workforce
Investment Act. The Administration's proposals will not achieve
these goals.
For more than 60 years, employers have paid payroll taxes
to fund programs collectively known as the Employment Security
System. The program is a Federal-State partnership that
provides four major programs:
--Employment Services,
--Unemployment Insurance,
--Veterans' Employment Services, and
--Labor Market Information
The programs are operated by State Employment Security
Agencies (SESAs) using federal grants financed from a federal
payroll tax on employers. In addition, states collect a
separate state payroll tax to finance unemployment insurance
benefit payments. The Federal government establishes the
overall legal framework, provides technical assistance,
collects and allocates funds for administration and provides
oversight. States provide services to customers and establish
laws for the collection of state unemployment taxes and payment
of benefits.
The Employment Security System is founded on a ``compact''
by employers, workers and the State and Federal government,
through which employers provide financing through payroll
taxes, and workers receive unemployment benefits along with re-
employment services to shorten their spells of unemployment.
Employers also receive services to assist them in meeting their
needs for skilled workers.
Although the federal budget is now described as balanced,
some of that balance has been achieved over the years by
offsetting balances in trust funds, including those within the
employment security system. Consequently, employer payroll
taxes are underwriting federal general revenue and providing
funds for domestic spending unrelated to employment security.
In 1976, Congress established the 0.2 percent ``temporary''
surtax to pay a debt arising from repeated supplemental
extensions of unemployment benefits. This ``temporary'' tax has
been extended numerous times and is now scheduled to continue
until December 31, 2007. SHRM has historically supported the
repeal of the FUTA 0.2 percent surtax and supports the
provision in H.R. 3174 and other pending legislation that would
quickly accomplish this important goal.
SHRM has historically supported the repeal of the FUTA 0.2
percent surtax and supports the provision in H.R. 3174 and
other pending legislation that would quickly accomplish this
important goal. On February 11, 2000, the SHRM Board of
Directors approved the following position statement on
Unemployment Expansion and Reform:
Changes are needed to improve efficiencies in the
Unemployment Insurance (UI) program. Unemployment Insurance
reform can be accomplished without taking away any legal
protections or benefits for workers under current law and
without creating unnecessary burdens on employers. Legislation
is crucial to reduce burdensome paperwork for employers,
promote efficiencies in returning UI claimants to work, weed
out fraud, and promote greater government accountability and
efficiency in the use of FUTA funds. Many of the tax dollars
that employers pay to finance the nation's Employment Security
System are being used to artificially offset the federal
deficit. For example, in 1997 alone, employers paid over $6
billion in FUTA taxes and only $3.5 billion came back to pay
for programs. The remaining $2.5 billion is being used to
artificially offset the federal deficit.
States should determine the circumstances under which
unemployed workers collect benefits under state Employment
Security programs and how much they receive. However, the
fundamental nature and purpose of the UI system should not be
changed to allow individuals who are not unemployed to collect
funds from the Unemployment Insurance Trust Fund. The UI Trust
Fund should be reserved for involuntarily unemployed
individuals who are able and available to work, and should not
be diverted for other purposes, regardless of the merits of
that purpose. Allowing states to divert funds away from
unemployed individuals is short sighted and would
inappropriately change the fundamental nature and purpose of
the UI system. Allowing the misdirection of unemployment
benefits for family and medical leave or other non-employment
benefit purposes will shred the safety net that the
unemployment insurance system is designed to provide to
workers.
SHRM supports proposals to allow for faster and more
efficient employment security services and to shift decision
making closer to home where unemployment services/training can
be customized to local conditions. SHRM supports the efficient
collection of employment taxes and opposes proposals to
accelerate FUTA and state unemployment tax collections due to
the unnecessary paperwork burdens that would be imposed.
Moreover, SHRM believes tax dollars that employers pay to
finance America's employment security system should not be used
to artificially offset the federal deficit.
SHRM opposes the extension of the 0.2 percent FUTA
surcharge because it represents a breach in the 1976
congressional commitments that the tax would be temporary. This
unnecessary increase will ultimately result in a tax increase
at the cost of job creation.
Consistent with the SHRM board approved position, SHRM
strongly supports the Employment Security Financing Reform Act,
H.R. 3174 and urges its speedy enactment.
The Administration has repeatedly proposed a provision in
its annual U.S. Treasury Department budget requests that would
accelerate FUTA and state unemployment tax collections from a
quarterly to a monthly basis. SHRM does not support the
Administration's proposals as presented in Unemployment
Compensation Amendments of 1999, H.R. 1830. H.R. 1830 would
continue the 0.2 percent FUTA surtax through calendar year 2007
and would permit the Secretary of the Treasury to collect FUTA
on a monthly or other basis.
H.R. 3174 will provide that FUTA and state unemployment
taxes will be payable no more often than quarterly, and
employers will no longer have to fill out duplicative FUTA and
state unemployment tax forms. Instead, states will collect FUTA
on the same form used for state unemployment taxes. This
approach will simplify tax payment for employers and states, as
well as the federal government. It will also increase tax
compliance, because states are closer to the situation and in a
better position to detect under-payments of FUTA.
Accountability for use of the money will be improved by
requiring each state agency to report annually to its
legislature and the public on services provided to UI
claimants. More resources will be provided to prevent and
detect UI fraud and abuse. Improper UI payments are a serious
and costly problem, and states will have the resources they
need to address them.
The greatest problem most employers are experiencing with
the UI program is a labor shortage. The tight labor market
makes it important to avoid policies that will increase
utilization of transfer payments such as UI at a time when
employers are having difficulty finding applicants for job
openings. With H.R. 3174, funds will be available for states to
implement the Workforce Investment Act and operate One-Stop
Centers, which deliver UI benefits and coordinate employment
services. Without H.R. 3174, there will be no funding for
states to deliver the services mandated by DOL.
Federal expansion of the UI program, as proposed by the
Administration and in H.R. 1830, will take the program in the
wrong direction and will hurt the workers it is designed to
help. Expanding the program through relaxed eligibility rules
and higher weekly benefits will ultimately weaken the system
and hurt those individuals it is designed to protect.
On a related issue, SHRM also urges the Subcommittee to
quickly hold hearings on and to pass legislation to stop the
Administration's proposed Birth and Adoption Unemployment
Compensation (BAA-UC) Rule (Federal Register, Vol. 64, No. 232/
Friday, December 3, 1999). The rule would allow states to use
their unemployment insurance trust funds to provide paid family
leave. The proposal would allow states to amend their state
``able and available'' requirements to include individuals on
temporary leave for birth or adoption. This proposal could be
finalized at any time.
SHRM strongly opposes the BAA-UC proposal on both policy
and process grounds. Allowing the misdirection of unemployment
benefits for family and medical leave or other non-employment
benefit purposes will shred the safety net that the
unemployment insurance system is designed to provide to
workers. While SHRM strongly agrees that paid leave is a
desirable benefit and encourages its members to provide a whole
host of work-life benefits to employees, including leave for
the birth or adoption of a child, we take strong exception to
the approach taken in the BAA-UC rule. We strongly disagree
with the President's May 23, 1999 statement that, through the
BAA-UC: ``We can do this in a way that preserves the soundness
of the unemployment insurance system and continues to promote
economic growth.'' May 23, 1999 Statement of President William
J. Clinton at Grambling State University.
The BAA-UC proposed rule violates the clear and unambiguous
intent of the letter and the spirit of both the Unemployment
Insurance and the Family and Medical Leave Act laws.
SHRM supports a strong Unemployment Insurance system and
believes that the present system needs reforms in order to
effectively improve services for jobless workers. H.R. 3174
will allow for greater responsiveness to local needs and
circumstances. State legislatures, rather than federal
appropriations committees and U.S. Department of Labor and
Office of Management and Budget (OMB) staff in Washington,
D.C., will determine how much is needed to run state UI
programs. This will maximize effectiveness by providing greater
flexibility--and accountability for state UI/ES agencies. H.R.
3174 provides more resources for administration of the UI
program. All states will be ``winners. With FUTA funds for
states currently lost in the federal budget process, all states
are being shortchanged.
SHRM commends the Subcommittee for holding this important
hearing on Unemployment Insurance reform. As we move into the
21st century, it is important that we strengthen the
unemployment insurance system so that it meets the increasingly
complex needs of the changing workforce. Therefore, SHRM urges
the members of the Subcommittee to actively work to enact H.R.
3174 on a bipartisan basis, while opposing the Administration's
proposals.
STATEMENT OF HON. GARY LOCKE, GOVERNOR, STATE OF WASHINGTON
Nearly 65 years ago, the Social Security Act forged a
partnership between the States and the Federal Government to
provide for the needs of unemployed workers. It blended a mix
of basic Federal requirements with State flexibility in
designing programs to meet local needs. The States financed the
actual benefits, while the Federal Government financed the
administrative costs. For the most part, the system has worked
well.
But, much has changed since the 1930s. The work world is a
dynamic one. What we produce, where we work and how we work now
would seem like science fiction to most workers in 1935.
Technology, too, has improved our services so we can do more
with less and serve our UI customers by telephone and computer.
All these changes have created new needs and new opportunities.
We need services for the unemployed and underemployed that
are relevant to the 21st century--not the early 20th century.
We need a comprehensive approach.
Recipiency rates need to improve. In some states, as few as
17% of all unemployed workers actually receive benefits. The
national average is too low--just over one-third of all workers
are eligible for benefits. Washington State, with a recipiency
rate of about 53%, has long been among the leaders in making
the UI Program accessible to a broad range of workers:
In 1977, our Legislature recognized the weaknesses
of conventional employment and earnings thresholds and
established Washington's unique 680 hours-worked test.
We've long had the alternate base year in place.
New workers who can't meet the standard hours-worked test
become eligible based on their most recent completed calendar
quarter of work.
Our state's injured workers are able to freeze
wage credits until they are again able to work and are seeking
work. Our Temporary Total Disability (TTD) program is an
unqualified success.
We were quick to recognize the benefits of short-
time compensation and enacted our Shared Work Program in the
early 1980's.
In some cases, Washington law allows good cause
for voluntarily quitting work to follow one's spouse to new
employment.
Due to continued underfunding even though federal
account balances were full, Washington State is one of several
that found it necessary to seek state money and enact state law
to finance reemployment services for UI claimants provided
through our Claimant Placement Program, and to use state
penalty and interest funds to detect and collect overpayments,
contributing to our efforts to combat fraud and abuse.
We are currently trying to address the needs of
our contingent workforce, and are especially hampered by
federal law that requires different standards for educational
employees in a labor market that has changed dramatically since
those federal laws were passed in the 1970's. We believe the
federal law is out of step with the current working conditions
of teachers and needs to be changed to allow benefits to
teachers between school years when they don't really have a
guaranteed job for the next term.
In Washington State, job search assistance,
monitoring and verification are important enough that our
Legislature specifies these activities in state statute. We
know from the Work Search Study in Tacoma, Washington, and a
more recent analysis in Maryland, that monitoring and
verification make a difference by reducing the length of time
unemployed, but the current federal funding formula doesn't
reward states to fully operate these components.
Wage replacement rates must increase. When the Social
Security Act was written, UI benefits were envisioned as
replacing half a worker's weekly wage. Today, only 13 states
replace at least half, the lowest state is at 32% and the
national average is about 46%. In Washington State the
replacement rate is 50%, just meeting the target and eighth
highest in the system. Clearly, there's room for improvement.
Worker retraining needs to be supported. For most
dislocated workers, retraining for new jobs is just hit or
miss, with support dependent on a hodgepodge of Federal grants
or targeted programs. Often, adequate financial support for
living expenses is missing.
We actively supported retraining and I just signed
legislation that provides up to 22 weeks of additional, state-
funded benefits to workers in approved retraining programs. In
some targeted industries up to 44 weeks of benefits are
available. This action recognizes that, although unemployment
is at its lowest point in generations, there are still
structural changes taking place and dislocated workers need new
or updated skills in order to find suitable work in our dynamic
labor market.
There are issues, however, with the effective use of state
and federal dollars for dislocated workers in training. When
silo-funded federal benefits programs like Trade Readjustment
Assistance (TRA) must be replaced by state-funded benefit
programs when available, other dislocated workers lose out. If
Washington had the flexibility to pay TRA benefits to certified
TRA workers, we have estimated that an additional $5-10 million
in state-funded retraining benefits would be available to other
dislocated workers who do not qualify for TRA.
There are financing issues, too.
States must maintain actuarially sound trust funds. Aside
from the obvious logic for a sound foundation for the UI
system, underfunding UI by some states puts other responsible
states at an economic disadvantage.
The 30-year temporary tax must be repealed.
To achieve and maintain the economic growth that Washington
and other states have had over the last decade, we urge you to
repeal the ``temporary'' FUTA surtax, returning those tax
dollars to the employers who paid them. In Washington State,
we've estimated that repeal would put an additional $34 million
dollars in the pockets of our employers. Nationally, possibly
$1.6 billion. This would go a long way to helping businesses to
continue to invest in their workforce and improve the economy.
A comprehensive proposal is needed.
In the past, we've supported H.R. 1830 as a good first step
toward a multi-faceted piece of legislation, expanding
eligibility and improving administrative funding. But there is
more that needs to be done.
With H.R. 1975, employers get relief of the temporary .2%
FUTA surcharge, but that legislation does not address reforms
needed in eligibility standards and administrative financing.
Repeal of the .2% FUTA surcharge should only occur as part of a
comprehensive proposal.
On the other hand, H.R. 3174 focuses all its energy toward
a revamp of the UI program's financing structure, without
addressing the other side of the equation--benefits, and in
fact may reward states that have low recipiency rates. We do
not believe this is the answer either.
H.R. 3167 would change extended benefits requirements,
offer incentives to states with healthy trust funds, allow
states to collect the federal portion of the FUTA tax, and
require states to fully inform UI claimants of their rights. It
is a mix of fixes, but incomplete.
The Administration's request for FY 2001 starts to address
one of our issues--under-funding of UI and ES activities--by
requesting an additional $50 million for the One Stop
Employment Service to provide targeted, staff-assisted
reemployment services to UI claimants identified as being at
risk of exhausting benefits. What is not evident is an expanded
investment in the technology solutions we need to serve the
unemployed.
These bills and budgets all have pieces of the solution,
but none provide the comprehensive reforms that we believe are
necessary. We are encouraged by the efforts of the ICESA State-
Federal UI/ES Reform Workgroup as it works toward consensus on
a proposal that combines broader access to benefits with
simplified tax collection, and administrative funding changes
while focusing on putting people back to work and combating
fraud and abuse. Our stakeholders, worker advocates and
businesses must agree on any comprehensive reform.
The Western Governors' Association passed a resolution in
December calling for reform of the National Employment Security
System. We felt the need to respond to continuing the
``temporary'' FUTA surtax, the use of FUTA funds to offset the
deficit rather than pay for employment services, and the long
term under-financing of the system that has caused us to close
offices. Taken together, these federal policies and laws have
reduced access to and lowered local levels of service.
Western states gave a substantial commitment to job trainin
gand workforce development. Resolution 99-029 supports a
comprehensive reform through federal legislation of the
financing and administration of the National Employment
Security System. This resolution was delivered to your
committee on February 29, 2000 by my colleague, Governor Jane
Dee Hull of Arizona.
The strength of a comprehensive and fully supported
proposal is that it will generate the support needed for the
more difficult components of reform like mandatory funding and
increased access to benefits. Such a proposal must solve
inadequate funding, provide additional dollars for
reemployment, reduce UI tax burdens and employer filing
burdens, combat fraud and abuse, and expand eligibility. We
believe this is possible.
We support
1. Moving UI and ES funding to the mandatory side of the
budget.
2. Fully funding the costs of administering UI and ES
Services, including:
the baseline technological infrastructure needed
to offer unemployment and reemployment services;
integrity activities such as collection/detection
of UI overpayments and finding fraudulent employers;
strengthening the administration of the system by
ensuring that states get a greater return on their employers'
FUTA tax dollars, with greater accountability for the use of
these funds;
a funding strategy that ensures that states with
small tax bases will have administrative funds to deliver the
employment security system.
Repealing the 0.2 percent FUTA surcharge, but only
as part of a comprehensive proposal.
Eliminating inefficiencies experienced by
employers by transferring responsibility for collecting the
FUTA taxes to the states. Simplifying the UI tax process and
employer reporting process.
Increasing the states' flexibility to administer
their UI and ES programs to serve the needs of their employers
and workers while providing incentives.
Improve employment services with an emphasis on
re-employing dislocated workers;.
Making it clear that job search and placement
services are to be provided UI claimants. States must have the
resources to ensure a strong link for UI recipients to the
employment services that will get them back to work. Current
federal funding formulas do not reward states to fully operate
these components;
Granting access to the National Directory of New
Hires to state UI overpayment detection programs--it would
provide access on hiring information from multi-state employers
in order to detect individuals who work while claiming UI
benefits;
Making the Directory of New Hires a more valuable
tool for Child Support Enforcement and UI Programs by including
the actual start-work date in reports required by employers;
Eliminating all extended benefit special
eligibility requirements including the complicated computations
for eligibility and the often-penalizing work search
requirements placed on these individuals during recessions;
Providing a higher federal share of extended
benefits during periods of high unemployment;
Correcting the triggers for extended benefits so
that they work;
Eliminating in-person citizenship verification on
federal UI claims;
Enabling states to implement alternative base
periods;
Repealing the federal income tax on UI benefits,
which would increase the purchasing power of UI benefits and
would treat UI benefits like other wage replacement benefits
such as workers' compensation;
Expanding coverage for part-time and contingent
workers. Part-time work is often not an individual's choice--
but ever more typical in the changing job market with increased
family obligations. Coverage for workers who are monetarily
eligible but who are seeking part-time work is a valid response
to current labor market realities;
Allowing more state flexibility for payments to
educational employees with a different labor market than in the
past. Federal law needs to be changed to allow benefits to
teachers between school years when they don't really have a
guaranteed job for the next term;
Providing effective use of federal dollars for
dislocated workers in training. Federal benefits programs like
Trade Readjustment Assistance (TRA) must be able to be used
even when state-funded benefit programs are available.
We can not support:
Requiring states to adopt 400 times the minimum
wage as the workforce attachment threshold. A minimum threshold
based on wages penalizes low-wage workers. Since 1977,
Washington State has used the best measure of workforce
attachment--hours worked. It is independent of wage level and
determines the amount of work--the true attachment to the labor
force. Oregon is also now using an hours threshold as an
alternative test for UI eligibility, following discussions with
Washington State on the effectiveness of using hours as a true
consideration of an individual's attachment to the labor force.
If there is a need to set a national threshold, set it at 400
hours of employment which would allow more hardworking, low
earning workers to qualify for benefits.
Shifting to monthly tax reporting. This would
triple the burden on employers and the administrative costs of
processing taxes.
Standalone repeal of FUTA surtax. This repeal is
important, but only as a part of a comprehensive reform.
We are still considering:
Offering incentives to states to maintain
recession-proof balances in their trust fund. In the event of
economic downturns, when states use their funds the most,
incentive-based funds would be non-existent since Average High
Cost Multiples would drop below targeted levels.
Our state has a strong interest in a strong UI program. Our
legislature has authorized several studies of the Unemployment
Insurance system in Washington State in the coming year. We are
ready for federal help with reforms that make will our system
more effective.
The time is right. The partners are at the table.
Comprehensive reform is possible. We agree with Chairman
Johnson that we must improve and strengthen the system to meet
the increasingly complex needs of our workforce. We look
forward to working with you and the Department of Labor, our
federal partners, as well as our stakeholders, to make informed
public policy that will guide the UI system into the 21st
century. Thank you for the opportunity to provide comment on
this important subject.
STATEMENT OF WESTERN GOVERNORS' ASSOCIATION, DENVER, COLORADO
A. BACKGROUND
1. The National Employment Security System has been
systematically under funded for over a decade as a result of
reduced Congressional appropriations and the impact of the
Budget Enforcement Act and prior budget reduction legislation.
2. In 1976, Congress enacted a 0.2 percent Federal
Unemployment Tax Act (FUTA) surtax as a temporary measure to
fund deficits in the employment security system. These deficits
were addressed long ago by this temporary measure.
3. A substantial portion of the employer-paid FUTA taxes
dedicated for the purpose of employment security administration
are now being collected and withheld by Congress to off-set the
Federal deficit rather than expending them for the purpose they
were intended.
4. Access to services and the level of services provided
have declined as a result of this under-financing of the
employment security system. For example, a number of states
have had to close employment services offices resulting in both
employers and workers not receiving the services they paid for
and need.
5. Inadequate administrative funding has hindered states'
abilities to provide job search assistance to help more
claimants return to work. This has resulted in additional
benefit payments to these claimants.
6. As a result, states have been forced to assume these
administrative costs in ways that essentially tax employers
twice for services that should be paid for from the FUTA
revenues already paid by employers.
7. Inadequate administrative funding has undermined the
ability of state administrators to fully maintain the integrity
of the system, leading to unnecessary program inefficiencies.
8. Employers are burdened by having to make separate
federal and state unemployment tax filings.
9. Western governors have made a substantial commitment to
job training and work force development within their states.
B. GOVERNORS' POLICY STATEMENT
1. Western governors support reforming through federal
legislation the financing and administration of the National
Employment Security System. These reforms should:
Reduce the tax burden placed on large and small
businesses by repealing the unnecessary and ``temporary'' 0.2
percent FUTA surtax, thereby cutting FUTA taxes to 0.6 percent.
Develop a funding strategy that utilizes the FUTA
tax dollars for their intended purpose and adequately funds the
employment security system.
Preserve the protections for workers and more
adequately address the needs of the workers.
Eliminate the inefficiencies experienced by
employers by transferring responsibility for collecting the
FUTA tax to the states.
Strengthen the administration of the system by
ensuring that states get a greater return on their employers'
FUTA tax dollars and ensure greater accountability for the use
of these funds.
Improve employment services with an emphasis on
re-employing dislocated workers.
Combat fraud and abuse in the present system.
Increase the states' flexibility to administer
their unemployment insurance and employment services programs
to serve the needs of their employers and workers.
Develop a funding strategy that ensures that
states with small tax bases will have administrative funds to
deliver the employment security system.
C. GOVERNORS' MANAGEMENT DIRECTIVE
1. The Western Governors' Association shall transmit a copy
of this resolution to the President, the Office of Management
and Budget, the Secretary of Labor and the chairman and ranking
minority member of the Senate Finance, Budget and Health,
Education, Labor and Pensions committees, and to the chairman
and ranking minority member of the House Ways and Means, Budget
and Education and Workforce committees.
Approval of a WGA resolution requires an affirmative vote
of two-thirds of the Board of the Directors present at the
meeting. Dissenting votes, if any, are indicated in the
resolution. The Board of Directors is comprised of the
governors of Alaska, American Samoa, Arizona, California,
Colorado, Guam, Hawaii, Idaho, Kansas, Montana, Nebraska,
Nevada, New Mexico, North Dakota, Northern Mariana Islands,
Oregon, South Dakota, Texas, Utah, Washington and Wyoming.