Testimony Submitted for the Record
Hearing on the "Employment Security Financing Act of 1998" (HR 3684)
House Ways and Means Human Resources Subcommittee
June 23, 1998

The Coalition for Employment Security Financing Reform wishes to thank the Subcommittee for considering legislation to reform financing of the employment security system. In particular, the Coalition wishes to express its gratitude to Chairman Shaw for his leadership and his outstanding work to introduce the Employment Security Financing Act of 1998 (HR 3684). HR 3684 embodies the proposals suggested by the 27 states and over 75 business organizations that make up the Coalition. The Coalition is confident that HR 3684 is the best step Congress can take to remedy the inefficiencies and inequities that scar financing of the current system. The Coalition looks forward to working closely with the Subcommittee to ensure that any legislation that is enacted is in the best interest of employers and workers.

The Federal Unemployment Tax Act came into existence over 60 years ago to guarantee financing for a national employment security system. The idea was that employers would pay the cost of administering the new unemployment compensation system along with a national job placement system to help them recruit new workers and to get laid off workers and unemployment compensation claimants into new jobs as quickly as possible. But over the years, some problems have developed. The federal government is still collecting plenty of money from employers to pay for the system, but the dollars are not flowing back to the states that operate the system.

Since the Subcommittee has already received excellent written testimony in support of HR 3684 from representatives at Chrysler and USX and from state officials in Ohio and New Hampshire (all Coalition members), the Coalition will not repeat what they have submitted. Instead, the Coalition would like to take this opportunity to provide the Subcommittee with some analysis of specific issues and copies of documents developed by the Coalition and its individual members as they have worked on reforming administrative financing of the Employment Security System over the years.

1. Sufficiency of Administrative Funds

Under HR 3684, states will be required to immediately deposit Federal Unemployment Tax Act (FUTA) receipts into their State Administration Account. The deposit of these receipts in the account held by the U.S. Treasury is required because FUTA receipts will continue to be counted as revenue in the federal unified budget. Additionally, separate accounting for each state fund is required for the change in procedures authorizing state legislatures to make appropriations.

Similar to the current Employment Security Administration Account (ESAA), the amount available to each state through its State Administration Account will be capped at forty percent of the previous year's appropriation. Annual surpluses in a state's Administrative Account will flow directly to that state's benefit Trust Fund. Any surplus in the Federal Unemployment Account (FUA) account also will be transferred to the State Administrative Accounts based upon each state's relative share of FUTA taxable wages.

States with insolvent administrative accounts may borrow administrative funds from the FUA, similar to loans currently available for states with insolvent benefit accounts.

The Coalition believes that state legislatures will have a better perspective on the state's needs than the Congress. State legislators are more immediately aware of the impact of funding levels on service delivery to their constituents and more likely to understand the need for a strong service delivery structure for employment security programs. In many instances, states legislatures are already responsible for appropriating UI administrative trust fund dollars. Furthermore, state legislatures have the mechanisms in place to respond during emergencies, and those states with biennial legislatures have mechanisms in place for managing program dollars when their legislators are not in session. In considering the advisability of granting state legislators this appropriations authority, it should be noted that a major reason for the current funding crisis is that the federal government has not lived up to its responsibilities to appropriately provide funding to the states.

Even without the additional .2% surcharge the funding provided under HR 3684 would be sufficient during a bad recession. The distribution of balances in the ESAA to the states to fund transition to the new system, the availability of interest earnings on balances in the FUA, and the growth in FUTA collection over the years will provide the revenue needed for administration. The distribution of the EUCA balance to state trust funds will provide ample funding for benefit payout during serious economic downturns. Under the proposal, state legislators could appropriate up to 140% of the amount appropriated during the prior fiscal year. This is sufficient to meet any increased administrative cost associated with an increase in claims workload. Small states dependent on funding from the Supplemental Employment Security Administration Account would be provided with the necessary funding. The 2% Supplemental set-aside would provide ample funding for these states.
 

2. The Real Story Behind the Funding Crisis

The real issue behind the UI administrative funding crisis is not whether in some years states get back more than they pay, it's whether they get enough in ALL years. The present funding mechanism guarantees chronic underfunding, but HR 3684 solves this problem by giving state legislatures access to more of the FUTA revenues generated from their state's employers. It also should be noted that any analysis of the percentage of FUTA dollars returned to the states is misleading if it includes supplemental benefits paid under a temporary emergency program because these payments are not properly considered a FUTA obligation.

3. State Accountability

The Coalition believes that by renewing the State-Federal partnership through elimination of DOL micromanagement of the states that states will save money. To ensure that state programs are operating efficiently and effectively, HR 3684 builds in greater accountability by requiring outcomes reports from states. In addition, the political process of state appropriations will give business and labor a greater voice in seeing that money is spent wisely.

Under HR 3684 the Secretary of Labor continues to have broad authority in the oversight of the Employment Security System. Requirements for due process and "proper payments when due" along with authority to require reports positions the Secretary to carry out the important responsibilities of the department that ensure program integrity, nondiscrimination and the proper use of FUTA funds.

Neither the administration nor the Congress is precluded in any way from proposing and making changes or imposing requirements that will improve the program nationally or achieve an important national goal.

What HR 3684 does is prevent DOL from using funding allocations as a method to force states into changes that are part of the department's political agenda and unrelated to the day to day operations of the state program. It also prevents the Secretary from establishing federal conformity mandates upon states solely by regulation.

One of the underlying premises of the Coalition's proposal is that it is critical to preserve a national Employment Security System. The proposal does this in several ways.

The proposal preserves the core features of the unemployment insurance program, labor market information programs, and veterans employment programs. DOL continues to have the responsibility to ensure that state laws are in conformity and compliance with federal law, and would continue to certify whether states were in conformity and compliance with federal requirements. A state failing to meet federal requirements would be subject to losing the FUTA offset credit reduction for employers in the state. The proposal generally maintains DOL authority to interpret federal law. However, the proposal does provide that states would not be required to adopt methods of administration in state law as prescribed by DOL if such methods, such as quality control requirements, imposed additional burdens on the states without additional administrative funding.

The proposal would replace the United States Employment Service with the United States Employment Security Service responsible for performing the federal role related to employment security.

The primary change in the federal role relative to employment security core programs would be that the federal role relative to public employment services would become a role under which DOL would review state law and administration for specific conformity requirements under FUTA and titles III and IX of the Social Security Act rather than approving expenditures. Under the proposal, public employment services would be required to be made available to all job seekers and specifically provided to individuals claiming unemployment compensation. However, the states would be provided greater flexibility in the delivery of public employment services. The Coalition believes this actually strengthens the employment security system by providing a stronger link between public employment services and the Unemployment Insurance program.

4. Financing of Extended Benefits

The Unemployment Insurance program also includes the Extended Benefits (EB) program, which extends benefit payments beyond the regular 26-week benefit periods in states where unemployment is high. Extended Benefits are payable when a state reaches a "trigger" based on the state's level of unemployment. Benefit costs are shared equally between FUTA and state unemployment taxes. There are also special unemployment benefit programs for federal workers and recently separated military personnel.

HR 3684 requires that states maintain the EB program with the current trigger levels. However, states could choose to lower the trigger levels in their respective states as long as the federal requirements were met. The Federal Extended Unemployment Compensation Account (EUCA) balance would be distributed to the state unemployment compensation benefit accounts to provide funds to the states with which to pay for unemployment benefits. A proportional share of the balance in the EUCA account, which is projected to reach its statutory ceiling of approximately $14 billion in 1999, will be distributed to each state based upon the state's relative share of taxable wages under FUTA. The transfer of funds to state unemployment benefit accounts would be made within the Federal Unemployment Trust Fund so as not to increase outlays from the federal unified budget. The proposal also would provide that benefit eligibility with respect to state extended unemployment compensation, including work search requirements, be established under state rather than federal law.

Responsibility for administration of the extended benefits program would rest with the states, and FUTA funds would be available to the state to cover the costs of administration. The Coalition is not aware of any evidence indicating that the lack of "shared" funding for extended benefits across states as provided under HR 3684 would cause Congress to vote for more costly benefit extensions at state expense. In fact, Congress may be more reluctant to vote for extensions financed from payroll taxes when there are no federal funds involved. Furthermore, the Coalition believes that FUTA payroll taxes at any level should not pay for extensions beyond 39 weeks of regular benefits and EB, as Congress recognized by using general revenues rather than FUTA to finance the emergency supplemental benefit extension during the last recession.
5. Funding for Veteran's Programs

Services to veterans of the Armed Services are provided by Disabled Veterans' Outreach Program (DVOP) and Local Veterans' Employment Representatives (LVER) staff, who may only assist individuals who have served in the military and eligible spouses and dependents. By law, veterans also receive priority for services from the Employment Service program.

DVOP staff maximize employment opportunities primarily for disabled veterans, and help those who are about to leave military service by conducting Transition Assistance Program workshops.

LVERs provide job placement and supportive services to veterans, and ensure local office compliance with federal performance standards for veterans' services.

Veterans services provided by the Public Employment Service are all spelled out in Chapter 41 of Title 38 of the U.S. Code. HR 3684 makes no changes to Title 38. However, the Disabled Veteran Outreach Program (DVOP) and the Local Veteran Employment Representative Program (LVER) suffer the same problems as the Public Employment Service and the Unemployment Compensation Program, which are underfunding and micromanagement by the Department of Labor.

Just as the Secretary is required to fund the states for the proper and efficient operation of state unemployment laws, the Secretary is required to provide funding for state DVOP staffing "sufficient to support the appointment of one disabled veterans' outreach program specialist for each 6900 veterans of the Vietnam era and disabled veterans residing in the state" (38USC4103A(a)(I)), and funding "sufficient to support the appointment of 1600 full time local veteran' employment representatives..." (38USC4104(a)(I)).

The president's budget and the amounts appropriated by the Congress consistently underfund these requirements. According to a report by the Government Accounting Office (GAO), "Over a 10-year period, the appropriations for VETS, when adjusted for inflation, have declined by 11 percent. Moreover, since 1990, appropriations for the DVOP and LVER grants have not supported the number of positions authorized by the statutory funding formulas. States receive their DVOP and LVER grant funding from VETS through multiyear grants, and funding is estimated by figuring the amount required to support the number of statutorily determined staff positions. In allocating DVOP positions to states, the statutory formula provides one DVOP specialist for each 6,900 veterans in a state who are either Vietnam-era, post-Vietnam-era, or disabled veterans. The statutory LVER funding provides for a total of 1,600 full-time LVER staff, and allocation is primarily based on the number of LVER staff, as of January 1, 1987, in each state. When appropriations are not sufficient to support the number of positions authorized, VETS reduces each state's allocation proportionately." In FY 1997 the amount requested by the administration and appropriated by Congress funded 1446 (69%) of the 2081 DVOP positions required under Title 38. It funded 1273.5 (80%) of the LVER staff.

One of the primary purposes of HR 3684 is to increase funding available for all employment security programs including DVOPs and LVERs. Increased funding will lead to improved services for Veterans and provide dedicated Veteran staff in all public employment offices.

6. Funding for Bureau of Labor Statistics and Labor Market Information

Our nation's labor market information system provides essential information about employment and unemployment trends, jobs, and workers to a wide range of users. Most of this information is produced by SESAs in cooperation with the Bureau of Labor Statistics (BLS) and other federal agencies.

States collect, analyze, and disseminate data relating to employment, unemployment, and labor demand and supply, including monthly unemployment rates, quarterly wages, monthly estimates of total nonagricultural employment, average hourly and weekly wages, monthly estimates of the labor force, and occupational trends.

Labor market information is used by public policy makers, including the Federal Reserve, Congress and others at all levels of government, and by employers, students and counselors, job seekers, policy makers and analysts, economic developers, economists, planners and many others.

HR 3684 makes no changes in funding for BLS programs. Congress will appropriate funds from the Federal Administration Account for federal administration costs and for the Bureau of Labor Statistics programs currently funded from the ESAA. The current processes for allocating funds to states for the BLS programs will continue. Operations of labor market information activities other than Bureau of Labor Statistics programs will be funded through appropriations from the State Administration Accounts as made by each state's legislature from the State Administration Account. Since states will have access to more administrative dollars through their State Administration Accounts, the Coalition believes that states will put funding for labor market information in a better position than it is today.

7. Funding for U.S. DOL Functions

Beginning in FY 2004, the Secretary of Labor Administration Account will receive two percent of each state's annual FUTA collections. This fund will be available to Congress for appropriations for federal administration and for the Bureau of Labor Statistics programs currently funded from ESAA. This account will have a ceiling set at forty percent of the previous year's appropriation, with surpluses returning to the State Administrative Accounts. The Coalition believes that this is sufficient funding for U.S. DOL operations of employment security programs and has seen no evidence to indicate that the 2% set-aside will provide insufficient resources.

8. Helping Employers Meet the Challenge of a Global Economy

Decentralizing Unemployment Compensation administration and employment services, which are local not national functions, will further reduce business costs and help employers compete in the global economy. Washington already gives states more control in designing their welfare programs; therefore it is logical to allow states to tailor their employment services to the unique needs of their citizens, employers, and communities. The sad irony is that the average duration of unemployment insurance claims is higher than during previous periods of low unemployment. Despite a severe labor shortage, this has occurred because states lack resources needed to move workers off unemployment rolls. HR 3684 addresses this problem and helps foster a skilled workforce by providing more resources and flexibility for administration of state employment security programs.

The Coalition's proposal would amend the Wagner Peyser Act to specify the public employment services to be provided by the states as part of federal conformity and compliance requirements under the FUTA and the Social Security Act. The Wagner Peyser Act would no longer serve as the vehicle through which states would be authorized to spend FUTA funds for employment service activity. Instead the proposal would establish the United States Employment Security Service to assist in coordinating the employment security system and exercising oversight functions. States would be required to make public employment services available to job seekers in general and specifically to provide public employment services to individuals claiming unemployment benefits. This feature of the proposal provides a stronger link between UI claimants and employment services. In addition, states would have greater flexibility in choosing the methods to be used to deliver employment services. The end result will be that employers can link up with qualified workers, workers can find jobs that fit their skills and unemployed workers can get back to work quickly.

9. Validity of Allocations Based on State "Workload"

HR 3684 would change the treatment of UI administrative funding from discretionary spending to mandatory spending as defined by the federal budget rules. Currently, discretionary funds appropriated by Congress from the ESAA for the operation of Employment Security programs are allocated to states using various formulas. The most complex and controversial is the formula for the Unemployment Insurance program.

Funds for administration of the unemployment insurance program are allocated to the states by DOL using complex and controversial formulas based on state "workload. " Workload includes items such as the number of claims processed and the number of employer tax accounts administered. The formula also includes staff costs (average cost per position) and amount of staff time required to perform each workload item.

DOL determines the formula by first establishing a "budgeted national workload base" using assumptions about the expected level of unemployment. DOL then projects the workload for each state based on the workload the previous year and adjusting to the budgeted national workload base. The staff level required to process each state's projected workload is estimated, using the staff time per workload information. These staff-year estimates are multiplied by a designated cost per staff year to arrive at dollar funding levels. Finally, amounts are allocated for overhead.

This system has not worked fairly for a number of reasons. Congress has not appropriated enough funds to cover the total workload cost of all states, and the information in the workload formula is not current and accurate.

For many years, Congress has failed to provide enough funds to cover the total national workload. DOL has therefore revised the allocation process to reduce funding to each state across the board. For example, if the appropriation is 10 percent less than the amount needed to fund the total national workload, each state's allocation is reduced by 10 percent. Thus, every state is underfunded.

The staff effort information used in the formula has not been updated since the early 1980's. Thus, the funding formula does not recognize the shift in the cost structure of the programs which have taken place over the last two decades as states have greatly expanded their use of information technology and decreased the number of staff. Because the current allocation process is so arcane, the Coalition believes that any remnant of the current workload based system must be shelved and state legislatures should be given the discretion to determine the appropriate amount of funding.

10. Scope of HR 3684

HR 3684 is intentionally limited to dealing with one critical issue, namely administrative financing, which is widely acknowledged as a problem. The Coalition believes action on adequate funds for administration should not be held hostage to much more divisive political debate over issues such as recipiency rates, extended benefit triggers and solvency levels. In general, HR 3684 provides effective help with recipiency and recession readiness by putting more unemployment tax dollars to work. This means more services for the unemployed, more administrative funding and healthy state trust fund accounts that could be used to improve benefits.

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Thank you for the opportunity to submit this written testimony. In addition, we have attached the following documents: 1) letters of support from Governors and others,
2) press releases from the Coalition and others, 3) a table indicating how much FUTA revenue is returned to the states and a chart indicating funding shortfalls in Texas,
4) newspaper articles regarding the issue, 5) a one-page analysis of HR 3684, and 6) a comparison of HR 3684 and DOL's proposal. We hope the information provided in this statement and the attached materials will prove useful as the Congress continues deliberations on this legislation.