COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel  SUBCOMMITTEE ON HUMAN RESOURCES WALLY HERGER, California, Chairman
NANCY L. JOHNSON, Connecticut WES WATKINS, Oklahoma SCOTT MCINNIS, Colorado JIM MCCRERY, Louisiana DAVE CAMP, Michigan PHIL ENGLISH, Pennsylvania RON LEWIS, Kentucky	BENJAMIN L. CARDIN, Maryland FORTNEY PETE STARK, California SANDER M. LEVIN, Michigan JIM MCDERMOTT, Washington LLOYD DOGGETT, Texas
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

Advisory of February 26, 2002, announcing the hearing

WITNESSES

U.S. Department of Labor, Hon. Emily Stover DeRocco, Assistant Secretary, Employment and Training Administration

American Federation of Labor and Congress of Industrial Organizations, Christine Owens

National Association of State Workforce Agencies, and Oklahoma Employment Security Commission, Jon Brock

National Federation of Independent Business, Dan Blankenburg

UWC - Strategic Services on Unemployment & Workers' Compensation, and Tyson Foods, Inc., Chuck Yarbrough

SUBMISSION FOR THE RECORD

American Federation of State, County and Municipal Employees, AFL-CIO, statement

 PRESIDENT'S UNEMPLOYMENT ADMINISTRATIVE
FINANCING REFORM INITIATIVE

Tuesday, March 5, 2002

House of Representatives,
Committee on Ways and Means,
Subcommittee on Human Resources,
Washington, DC.

The Subcommittee met, pursuant to notice, at 12:00 p.m., in room B-318 Rayburn House Office Building, Hon. Wally Herger [Chairman of the Subcommittee] presiding.

[The advisory announcing the hearing follows:]

Chairman HERGER. The Committee on Ways and Means, Subcommittee on Human Resources, will come to order. Good afternoon and welcome to our hearing. Today's hearing is on the Administration's proposal to improve the administrative funding of our Nation's unemployment insurance system. The unemployment insurance (UI) program provides relief to millions of hard-working Americans, particularly in tough economic times. This Subcommittee has spent several years considering whether to reformulize administrative funding and if so, how. Organizations representing workers, employers, States, and now two separate Administrations have devoted considerable time and effort to exploring that question. Here is a major reason why.

Let us say an employer pays $1 in Federal unemployment taxes. Washington is supposed to send most of that dollar back to the States to administer the UI programs. This money pays for costs of providing unemployment checks, supports anti-fraud efforts, and helps workers find new jobs. But here is what actually is sent back to the State and for the record, I have 46 cents here. Forty-six cents is what actually reaches the States, less than half.

Literally, billions of dollars each year remains in Washington accounts instead of serving workers and employers as intended. That is just not right. Under the current program rules, employers pay too much in taxes, workers give up too much in wages, and jobless workers get too little help finding new jobs because too many tax dollars sit unused in Washington accounts.

To his credit, President Bush has proposed a serious plan for reform. The Administration's plan is ambitious. It would reduce Federal unemployment taxes by 75-percent overtime. States would fill in some of the difference, but it is reasonable to assume that overall, taxes can fall while still providing better service to workers given the 54 cents out of every program dollar that sits idle today. And lower taxes mean more jobs, which is the UI's program's goals. States would also get $14 billion in special transition funds as well as additional funds for smaller States.

More extended UI benefits would be available in States with higher unemployment rates, making permanent a change that already has passed the House in our most recent economic stimulus bill. Federal responsibilities such as providing loans to States in need would continue. All the while, today's large Federal unemployment balances would continue to grow. Joining us today to review this plan are experts representing Federal and State governments, businesses and workers, who all have a stake in this debate. We look forward to everyone's testimony, which will help guide us as we consider the details of the President's proposal and the next steps we would take.

[The opening statement of Chairman Herger follows:]

Chairman HERGER. Without objection, each Member will have the opportunity to submit a written statement and have it included in the record at this point. Mr. Cardin, would you like to make an opening statement?

Mr. CARDIN. Thank you, Mr. Chairman, and thank you for holding this hearing today. Holding up the dollar, I thought we were going to do one of those ads for the long distance carrier. I was going to grab it because I know the value of the dollar. I think I should point out, though, that the whole concept of the Federal Government's participation in unemployment insurance is to create a reserve to use during recessionary times. And your 46 cents may speak to what we have been doing.

But if we extend the 13 weeks of additional unemployment benefits, the States will actually be getting back a dollar and a half for every dollar that we collect in Federal Unemployment Tax Act (FUTA) taxes. And the reason for that is because we are in a recession, and that is why we are trying to accumulate some funds in order to be able to respond to that recession. That is the partnership between the Federal Government and our States to make sure there are adequate resources to meet the unemployment insurance needs in all regions of our country, those particularly the most hardest hit as a result of the economic activities.

I guess, though, Mr. Chairman, my major concern is that we are holding this hearing today under a very dark cloud because we have not acted to deal with the extended benefits. The United  States Senate has passed the 13-week extension. We have not seen fit to pass a clean 13-week extension bill. I regret that. Every week we wait, 80,000 more Americans exhaust their unemployment insurance benefits. We shouldn't be mixing that issue with other controversial issues that divide us. We should look for ways that we can work together in order to deal with the people who are hurting out there, the people, through no fault of their own, cannot find employment because of the economy.

Regarding the Administration's long-term proposals on administrative funding for the unemployment insurance system, I am concerned the plan would begin to dismantle the current Federal-State partnership in responding to unemployment. The proposal would eliminate payments now sent by the Federal Government to the States for administrative costs for the UI programs, and would eliminate three-quarters of the Federal FUTA tax, which finance extended unemployment benefits and loans to the States in addition to the administrative ground.

The Administration's plans leaves States with three options to make up for the loss of administrative payments they now receive from the Federal Government. They could raise taxes. That is certainly not a very pleasant option. They could cut benefits. That is not a very pleasant option, or they could reduce the solvency of their UI trust fund. That is also not a very pretty option. So none of these options are particularly attractive.

In addition, by draining money of Federal UI accounts and by eliminating the Federal authority to disburse grants, the plan may reduce the Federal Government's ability to respond to rising unemployment during recessions. I am very troubled that the Administration's proposal ignores one of the biggest problems of the UI system, the lack of coverage for many low wage and part-time workers. And we have had several discussions about that.

The U.S. General Accounting Office has informed us that low wage workers are only one half as likely to receive UI benefits compared to higher wage workers even when employed for similar periods of time. This inequity not only hurts many workers, but also has troubling implications for our welfare reform efforts. Congress and the States spent considerable time, money and efforts in attempting to break the cycle of dependency on welfare, but the UI system forces too many low wage workers back onto the welfare rolls when they are let off.

Let me conclude by urging both this Committee and the Administration to review the consensus proposal developed 18 months ago by the major stakeholders in the UI system. The plan would have guaranteed States mandatory spending for their administrative grants, but have eliminated one quarter of the FUTA tax on employers and would have improved UI coverage for low wage workers and would have allowed more people to collect unemployment insurance by using the most recent wage quarter.

Mr. Chairman, we could have passed those recommendations a year ago and have them in place for this current recession. I stated that in a previous hearing that we had. It was a major accomplishment to get the stakeholders to reach an agreement. We should have moved on those proposals well before now in the midst of a recession. In my opinion, such a balanced proposal has a better chance of achieving bipartisan support and eventual enactment, and I urge us to consider that proposal. Thank you, Mr. Chairman.

[The opening statement of Mr. Cardin follows:]

Chairman HERGER. I thank the Ranking Member.

Before recognizing the Honorable Emily DeRocco, Assistant Secretary of Employment and Training Administration at the U.S. Department of Labor, I would like to remind everyone that not only did this Congress pass extended benefits of 13 weeks once, we passed it twice, once in December 2001; again in February 2002; and we may very well do that again today, and that is in addition to the stimulus bill that we passed in October 2001. We were working on this, but we do need some help from our good friends in the Senate as well.

Mr. CARDIN. Would the gentleman yield on that point?

Chairman HERGER. I will.

Mr. CARDIN. I appreciate you yielding. The problem is that the package that we passed cost over $100 billion? It was included in a huge stimulus package which has controversy. The unemployment provisions don't have controversy. Why can't we bring out the extension of the 12 weeks as the Senate did by, I believe, a unanimous vote, and just pass that? We can get that done.

Mr. MCCRERY. Will the Chairman yield?

Chairman HERGER. The gentleman from Louisiana.

Mr. MCCRERY. I am always impressed by Mr. Cardin's remarks.

Mr. CARDIN. Thank you. I appreciate the Chairman yielding.

Mr. MCCRERY. And I would hope that the gentleman from Maryland would be consistent in his reasoning. It seems to me that there is not much controversy about the fact that States don't get enough money back from the Federal Government for administrative funding. And yet the gentleman, on the one hand, says we shouldn't mix something controversial with something that is taken for granted, and yet that is exactly what he is suggesting to do when those of us who want to get that money out to the States so they can provide employment services and get people back to work, you want to mix it up with controversial things like covering part-time workers, low wage workers, all those things that you know are controversial. I would hope that the gentleman would take a look at the Administration's proposal, and maybe, at least, pass it and then we can go onto some of those --

Chairman HERGER. I think we should press on at this point. The Honorable Assistant Secretary DeRocco, if you would proceed with your testimony, please.

STATEMENT OF THE HON. EMILY STOVER DEROCCO, ASSISTANT SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S. DEPARTMENT OF LABOR

Ms. DEROCCO. Mr. Chairman and distinguished Members of the Subcommittee, I appreciate the opportunity to appear before you today to outline the President's Employment Security Reform Act of 2002. And I have slides to help along the way with my presentation. This proposal will reform the unemployment insurance and employment service programs, and it represents a new balance.

The Administration proposes short- and long-term strategies to strengthen UI and Employment Service (ES) for America's workers and businesses, encourage flexibility and promote economic growth. Our short-term strategy includes a temporary Federal extension of UI benefits for up to 13 weeks in all States and distribution of $9.2 billion in special Reed Act funds to States for expansion of benefits, better reemployment services, shoring up trust fund reserves, and/or cutting employer payroll taxes.

The Administration's long-term vision includes allowing States to finance UI and ES administration while providing a very responsible transition, reforming extended benefits, and reducing FUTA taxes. A key component of the proposal is the transfer of funding authority from the Federal to the State level, which would be phased in over several years to give States sufficient time to make necessary administrative and legislative changes.

As shown in the next two slides, in fiscal years 2003 and 2004, there would be full Federal appropriations supporting the Administration. In 2005 and 2006, States would receive partial Federal funding, and full State funding would commence in 2007. Federal appropriations would be made throughout the transition period, fiscal years 2002 through 2006, and Reed Act distributions would be made in fiscal years 2002, 2004, and 2005.

The next slide speaks to the impact on the Federal unemployment trust fund accounts. There would be adequate balances in the Federal unemployment trust fund accounts to fund a temporary 13-week extension of extended benefits as well as transfer of over $14 billion to the States during the transition period. Under current economic assumptions, Federal account balances would continue to build during this transition period, and the reserves would be available to fund extended benefits and loans in future recessions. As you can see, even with the Reed Act distributions and the proposed tax cut to two-tenths percent, the accounts reach their current balance of $39 billion, again by 2008.

We are proposing two important changes to the extended benefits program. The insured unemployment rate trigger would be reduced from 5 to 4 percent. With this action, extended benefits would be available faster in recessions, more workers would get up to 13 weeks of extra benefits, and extended benefits would be more responsive as an economic stabilizer.

The chart to your right illustrates how the change would help more States and more workers. In addition to the insured unemployment rate change, the special Federal rules concerning eligibility would be repealed. States would use their existing eligibility requirements, and this would make extended benefits easier and less costly for States to administer.

In terms of the proposed Federal unemployment tax reduction, we are proposing a significant reduction. The rate would be reduced from eight-tenths to six-tenths in 2003, eliminating that two-tenths surcharge we heard much about in past years.

The rate would be further reduced to four-tenths in 2005, two-tenths in 2007, for a total tax reduction of 75 percent from the current level. The Federal tax savings for employers over a 10-year period would be $36.5 billion.

In terms of the advantages of this proposal, we firmly believe that the Administration's proposal has advantages for all major stakeholders. For States, the distribution of $14 billion in excess Federal funds would improve solvency, would cushion the administrative funding shift, and would be available for States to expand eligibility for, or levels of, benefits. The small States supplemental funding would assure good services and no tax increases in small States, and States would be able to determine administrative funding levels and target them where most needed.

For workers, eligible jobless workers would get an immediate 13-week temporary extension of UI benefits. The lower trigger and repeal of restrictive Federal requirements would make extended benefits (EB) available earlier in more States and to more workers in future recessions. And adequate funding would surely produce better services for workers.

For businesses, FUTA taxes would be reduced significantly. The shifting of administrative funding would not require a net unemployment tax increase in any State and streamlining quarterly filing of FUTA tax forms would save businesses valuable time.

I want to emphasize this proposal continues to recognize the national interest and the important Federal role in unemployment insurance and employment service programs. Specifically, the Federal Government would supplement funding for small States and fund Federal activities through State grants on an ongoing basis. We would continue to pay 50 percent of extended benefits in the permanent EB program. We would make loans available to States, if needed, for benefits or for administration. The Federal Government would continue to ensure State conformity and compliance with Federal requirements. Examples of these include prompt and proper payment of benefits, fair hearings, broad coverage for workers and a new requirement that States provide a public labor exchange service. The Federal Government would continue to monitor State performance against Federal standards.

Mr. Chairman and Members of the Subcommittee, we believe the States can do a better job of funding these programs and that the transfer of funding can be accomplished with no net tax increases and no State losers. Improved funding means better services to workers and businesses and a stronger unemployment insurance and employment service system.

While the proposal shifts funding responsibility to States, it keeps a strong Federal-State system. We look forward to working with this Committee and with the stakeholders as we move forward. I appreciate the opportunity to speak with you this morning, and I will be pleased to answer any questions you might have.

[The prepared statement of Ms. DeRocco follows:]

Chairman HERGER. I thank you, Madam Assistant Secretary, and now we will turn to questions. I would like to remind the Members that they each have 5 minutes for witness questioning, and with that, would the gentleman from Louisiana, Mr. McCrery like to inquire?

Mr. MCCRERY. Yes. Thank you, Mr. Chairman.

Ms. DeRocco, let us talk about the need for administrative financing reforms. I said in my little conversation with Mr. Cardin that it is apparent to any of us who have looked at this, that the States are not getting back from the Federal Government sufficient funding for administrative purposes of the program, and some States like mine have had to exact additional taxes in order to fund administrative expenses because we are getting, I think, back 41 cents on the dollar for administrative expenses.

So I think that is apparent. But in your proposal, you shift really the responsibility to the States for collecting those taxes and using them for either administrative funding or increases in benefits or any of the other things they can use the money for. Some people say that this would destroy the safety net of the unemployment insurance system. How would you respond to that complaint?

Ms. DEROCCO. I think States have both the responsibility and the capability to ensure a strong safety net program for their workers and businesses. They have a tremendous incentive to continue a strong unemployment insurance program, because UI benefit payments enable workers who are temporarily unemployed to maintain their opportunities to look for new jobs, maintain their families, maintain stable communities at the same time stronger employment services could more readily move unemployed workers back to work into productive employment and livable wages. This UI and ES system is a critical component of every State's economic development agenda, and it is critically important for their employers as well. I spoke about the requirements that we would continue to impose on the States to maintain a quality unemployment insurance program, and we would do so by not changing the offset credit mechanism that is currently in place.

Employers would not want their State to lose the offset credit against the Federal tax and therefore, there would be tremendous interest and pressure on State legislators and governors to ensure that the safety net program was strong in the State.

Mr. MCCRERY. So in other words, the safety net won't be gone under the Administration proposal. There will be Federal regulations that States will have to comply with. Is there any penalty under the Administration's proposal for States failing to comply with Federal regulations?

Ms. DEROCCO. Again, failure to comply jeopardizes the employer's offset credit (i.e., 5.4 percent). Although we talk about a reduction in the Federal unemployment tax to two-tenths, in fact the tax would be set at a rate which allows the employers in each State, which are adequately funding and supporting an unemployment insurance and employment system, to achieve that offset credit.

Mr. MCCRERY. Is the penalty for failure to comply with Federal regulations any different under your proposal than it is under current law?

Ms. DEROCCO. No, sir, it is not.

Mr. MCCRERY. And you talked about what employees or former employees would lose because of lack of administrative financing. They would lose access to good employment services. What about employers? If the State doesn't have an adequate employment services administration, what do the employers lose?

Ms. DEROCCO. As you know, I worked for 10 years under the State unemployment insurance and employment service system, and employers support a very, very strong system and an effective labor exchange. It is their source for new employees. It is a service that they need for their continued growth as they create jobs; they turn to the employment service for new employees, for a productive workforce, and they are most interested in a stronger employment service and the Federal Government has allowed them to maintain it through the return on their investment.

Mr. MCCRERY. What about their tax rate? Is it affected by poor employment services?

Ms. DEROCCO. Under our proposal?

Mr. MCCRERY. Under current law or your proposal.

Ms. DEROCCO. Actually, the employment service would be much stronger under the proposal.

Mr. MCCRERY. Are employers experienced rated?

Ms. DEROCCO. Yes.

Mr. MCCRERY. If they have laid off employees that get jobs more quickly it affects their tax rate?

Ms. DEROCCO. Absolutely.

Mr. MCCRERY. Both workers and employers have an interest in strong employment services?

Ms. DEROCCO. Absolutely they do.

Mr. MCCRERY. Unfortunately, Mr. Chairman my time has expired.

Chairman HERGER. I thank the gentleman. Now we will turn to the gentleman from Maryland, Mr. Cardin, to inquire.

Mr. CARDIN. Thank you, Mr. Chairman. First, let me say that last year, we were given certain projections on the state of our economy and what we thought was going to happen with the projected surplus, and Congress and our Committee, the Committee on Ways and Means, took definitive action based upon projections. So excuse me for being a little bit concerned about some of the projections that are currently being made.

You showed a chart on the impact on the Federal accounts based upon the enactment of the recommendations, and although the chart was difficult to read at the quick review, it looked like a healthy line for the reserves that were being held in case of need at the national level for a recession. Do you know how much you assume would be consumed during that period of time by the Federal Government on extended benefits shared with the States?

Ms. DEROCCO. For the 13-week extended benefits?

Mr. CARDIN. Not the 13 weeks of new benefits, the current extended benefit program that is in law with the easier trigger. How much are you projecting that the Federal Government FUTA taxes will be used or consumed during that period of time in that chart on the Federal share of the extended benefits of current law, not the 13 weeks additional?

Ms. DEROCCO. One-point-seventy-five billion dollars, which is on the far right on this chart. The cost that is under the proposal, for 2 years.

Mr. CARDIN. I am asking you how much do you assume during the next 5 years in your chart. Not that chart.

Ms. DEROCCO. You are talking about the --

Mr. CARDIN. You had a 5-year projection where you showed the Federal FUTA funds staying healthy, and I guess if you could make available to our Committee how much you assume will be used for extended benefits and/or loans to the States in order to meet the needs during the next 5 years, I think that would be helpful.

I am concerned that you are taking a very rosy projection, and in fact, are not being realistic as to the need of that fund if our economy does not perform as well as you think it is going to perform, which was the case we saw a year ago. My second question deals with why is the Administration ignoring or walking away from the stakeholders' agreement of 18 months ago? I mean, that agreement dealt with the administrative costs. I agree with the gentleman from Louisiana. I think we have to do something about the administrative costs and predictability.

The stakeholders' agreement provided predictable financing. It reduced the surtax and the FUTA tax, and it also dealt with some issues that my friend thinks is controversial, but quite frankly the elimination of the surtax in some quarters is considered to be controversial but dealt with the fact that so few people unemployed receive unemployment benefits today -- less than half. So it dealt with the part-time and dealt with more recent wage quarters. Why?

I mean, here you have people with different views who are the stakeholders in the system at last coming to an agreement, and the Administration walks away from it.

Ms. DEROCCO. This Administration was not part of the deliberations on that agreement, but let me give you two failings of that agreement. I think incredibly good work was done, in fact, hundreds of proposals were looked at by the stakeholders who eventually developed that particular proposal in 2000. But there are two principal problems from this Administration's standpoint. One, we stand on the principle of the unemployment insurance system as it was originally designed, which leaves to the States responsibility for determining eligibility for benefits and benefit levels.

We continue to believe that is a State prerogative and should remain a matter of State law, and we believe that the national association representing the States in this matter believe that as well.

Secondarily, that proposal for an administrative financing fix essentially moved to a very, very robust workload type formula, and then moved it to the mandatory side of the Federal budget. And both the Administration and many, many Members of Congress have essentially told us that they would not consider putting administrative funding on the mandatory side of the budget as an entitlement program. So those were the two principal failings in that proposal.

Mr. CARDIN. I am glad you didn't mention the expansion -- well you did mention flexibility. I regret that. Let me ask one more question for the record, because my time is expiring, and the Chairman is very strict on the clock. If you could make available for our Committee how many States you think would actually reduce their funding for the administrative side, assuming the Federal Government uses the .2 for the Federal functions which is what you are assuming. I think the States would have to impose a .4 in order to stay about equal on their administrative support. How many States you project would actually have less funds available to deal with the more complicated administrative side of the UI system?

Ms. DEROCCO. We have done that analysis, and I will be glad to provide it for the Committee.

[The information follows:]

It is in a state’s best interest to provide good service to its citizens, so they have motivation to properly fund administration of the Unemployment Insurance (UI) and Employment Service (ES) Programs. Combining that observation with the fact that administrative funding has not kept pace with the cost increases since at least the middle 1990s for UI and the middle 1980s for ES, it is not clear that any state would reduce funding for administration.

If states had to rely on the revenue equivalent of 0.4% on a $7,000 wage base, 26 states would not have generated enough revenue in 2001 to cover the grants they received from the FY 2001 appropriation. However, 14 of those states are “small” states which would be given supplemental funds under the proposal. While all 26 states would need to increase taxes above the 0.4% level, only 12 would do so without any supplemental funding from the federal government.

Chairman HERGER. I thank the gentleman. I just might note for the record that my understanding is that currently we have 14 States that have special State taxes to pay for the administration because the average is only 46 cents out of the dollar that they are receiving. Those States include Alabama, California, Colorado, Georgia, Idaho, Kentucky, Louisiana, Minnesota, Montana, North Carolina, New York, South Carolina, and Washington.

So it would seem to me that if we go ahead with this, those States will be able to lower, if not eliminate, those extra taxes that they already have. With that, I turn to the gentlelady from Connecticut, Mrs. Johnson to inquire.

Mrs. JOHNSON. Thank you and welcome. This is a very important subject and has received a lot of attention both in the private sector and by this Committee over a number of years now, and so I welcome your work in this area. The States, however, have raised a number of questions, which I am sure you must have seen about your proposal. Would you like to comment on any of them? Are you familiar?

Ms. DEROCCO. I am aware that they have a list of questions. I don't have them in front of me.

Mrs. JOHNSON. I thought maybe you might have seen them because they are substantial, and one of them does go to this issue of whether the funds -- you know, how they would do over time under this funding change. And I think all of us will need to understand that.

Ms. DEROCCO. Is the question related specifically to the small States? I know there was a misunderstanding that the commitment to supplementing the small State funding was only for a 10-year period, and that was a misunderstanding. We have a commitment to continue the grants to small States to ensure that they are not in a position of having to have tax increases.

Mrs. JOHNSON. And while I appreciate your comments about part-time employees and feeling that States should be setting those standards, we do have a number of States that have been covering part-time employees. And I would hope that, and I would ask that you do some research on what might be the definition of permanent part-time employee. I personally think it is extremely important that we allow, for example, a parent who is working part-time, desperately needs to work because one salary is no longer enough. But by working part-time, can adjust the schedule, so that the couple together do not have babysitting or day care costs.

You know that is better for the children. It is far more economical, and it is the only way that a lot of young families are surviving. So if you get laid off from your part-time job to be required as a condition of receiving compensation to be available for full-time work is counter effective to many of society's long-term goals.

So I would hope that you would begin looking at, do any States provide special benefits to someone who has small children or a disabled person at home. There are definable circumstances, at the very least, that I think if the Federal Government helped define, we could make progress on it. We could determine whether that should be mandatory or voluntary, but at least we need better criteria.

And I wonder on your work in unemployment compensation, you have done any review of how effective State standards are in overseeing whether people are really looking for work? Given our experience now with welfare reform, we have much better ways of helping people into the workforce, overseeing their progress in the workforce. And I know when I look at the new information management system that my Commissioner of Labor in Connecticut wants to put together. I mean, he has got it integrated in his computer, and it is going to cost $4 million. He could do a much better job in helping people in any situation into the workforce and then moving up the wage ladder.

I think that is an aspect of this whole system that your proposal doesn't focus on and that I think any reform needs to focus on. So while we may want to step back, I think there are standards that we need to begin to think about for States that will address the kind of workforce development that we need in the future. We don't just need unemployment compensation. We need workforce development. And so to make this big a change without any mandate on the States, so to speak, for which we are going to hold them accountable, is, in my estimation, not adequate to the future.

Ms. DEROCCO. If I may comment, Mrs. Johnson, on two points. One, I believe the State commissioners of Labor and the governors have a very, very strong interest in taking a system-wide approach to serving workers and businesses in their States. And our proposal, in fact, provides to the States a greater opportunity to integrate and work through both the Workforce Investment Act and the unemployment insurance, and employment services to build an integrated service system that speaks to the very issues you are speaking to.

Mrs. JOHNSON. Does it, in any way, strengthen that mandate in the law? Does it change wordings because I think that is what you need to get back to us on.

Ms. DEROCCO. Absolutely. We are proposing to make the employment services a conformity issue. We are continuing all the requirements of the Social Security Act, vis-à-vis the workers that are covered by unemployment insurance, and we are continuing the strong Federal role of oversight, national standards, and moving to a much more fully integrated system on behalf of businesses and workers in the country.

I think you will find that under this proposal, Connecticut and your Labor Department would take a very, very strong role in that integrated service, and in better recognizing the demographics of your worker population and better serving those workers who have family requirements or challenges be they physical or otherwise among the disabled community. We are cognizant of all of those and we are eager to work with the States to move to a much more integrated and effective system.

Chairman HERGER. Thank you very much. I thank the gentlelady from Connecticut. Now the gentleman from Michigan, Mr. Levin, to inquire.

Mr. LEVIN. Thank you. By the way, Mrs. Johnson, I very much agree with your statement about the need for unemployment comp to have a broader focus. But let me ask you this, who controls the expenditures for administrative expenses now, the Congress?

Ms. DEROCCO. Yes.

Mr. LEVIN. Now if the Congress wanted to appropriate adequate funds, it could do so, right?

Ms. DEROCCO. I assume it could, yes.

Mr. LEVIN. So one alternative is for you to come here and say to Congress, spend trust fund moneys the way they were supposed to for administrative expenses, right?

Ms. DEROCCO. I think every administration makes a request for administrative dollars for the system.

Mr. LEVIN. You can do that without talking about devolution, right?

Ms. DEROCCO. I don't believe I am talking about devolution now, but yes.

Mr. LEVIN. So essentially, it has been the failure of Congress to appropriate adequate funds, right?

Ms. DEROCCO. I think there has been a shared responsibility of the Administration and the Congress to make a determination on the amount of money that is returned to the States from this payroll tax.

Mr. LEVIN. Well, you have the irony that a lot of those who had responsibility for appropriating adequate funds in this Congress are now suggesting that we do something else instead of appropriating adequate funds. We don't need to change the system to appropriate adequate funds, do we? We just appropriate them.

Ms. DEROCCO. Well, I don't envy you the budget pressures that you have to deal with every year.

Mr. LEVIN. So, the answer is avoid the budget pressures and simply let the States do it?

Ms. DEROCCO. I believe the answer is let the States be the taxing authority on their employers and keep their payroll taxes from their employers at home.

Mr. LEVIN. So that is your basic assumption, and I am glad you stated that boldly. Now what happens when there is a recession nationally and there is a need for very substantial funding from one State to another? Let me just give you an example, and I use Michigan. In 1992, the Federal unemployment taxes were $188 million. The Federal -- this is during the last recession -- spent $719 million. That is in 1 year. Now if we have a serious recession, where is the funding going to come from federally to help the States?

Ms. DEROCCO. We are proposing to maintain the unemployment trust fund, which is what you saw on the slide; it continues to grow even at a two-tenths FUTA tax; we retain the Federal unemployment account, which Congress created in order to make loans available to States when they ran into difficulties and deep recessions.

Mr. LEVIN. And this is Mr. Cardin's question. We need a very, very clear-cut answer. You are saying now we are taxing 8 percent, we can reduce it to 2 percent and that will have enough money in it to handle all of the functions including unemployment comp extension. We are now talking about a federally-funded unemployment extension, a redone, extended benefit structure that with two-tenths of 1 percent that you can say to this Congress for the next 5 to 10 years that we are going to have adequate moneys?

Ms. DEROCCO. That is presently what our actuaries have reported to us.

Mr. LEVIN. You should give us all of the assumptions.

Ms. DEROCCO. We will do that.

Mr. LEVIN. Do you have them here?

Ms. DEROCCO. I will be more than glad to.

Mr. LEVIN. Have you made them part of your presentation?

Ms. DEROCCO. They were represented by one slide, yes.

Mr. LEVIN. It just stated the conclusion.

Ms. DEROCCO. It illustrated by a bar chart, the level of the unemployment trust funds federally held through, I believe 2012.

Mr. LEVIN. Let me ask you this in terms of leaving it to the States. On the average today, what percentage of the unemployed people that become employed are covered for unemployment comp under State standards?

Ms. DEROCCO. Nationally -- we have another chart that illustrates this. The number of job losers who are those, as you know, who are eligible for unemployment insurance, 83 percent in UI claimants.

Mr. LEVIN. No. But those who become unemployed, what percentage receive unemployment compensation?

Ms. DEROCCO. That is the figure that I believe someone heard used that was in the neighborhood of 40 percent, but that is really a misrepresentation of the unemployment insurance system which was designed as temporary wage replacement for individuals who are in the "covered" workforce; how many of those individuals are eligible for unemployment insurance.

Mr. LEVIN. So you are saying it is irrelevant that on average nationally, 40 percent for those --

Ms. DEROCCO. Forty-nine percent.

Mr. LEVIN. I am not sure. There is dispute about that. But that is the latest. It has been low, as low as 40 percent, has it not? You say it is irrelevant that 40 percent, or now 49 percent of the people who become unemployed, are covered with unemployment compensation?

Ms. DEROCCO. I am not saying it is irrelevant at all. I am saying that job leavers, people who leave their jobs, new entrants who don't have work attachment, the unemployment insurance system was not designed to cover that, never has been. And if there is a different design sought for an unemployment insurance system that would cover even a new entrant that spends a couple of weeks on the job and decides to leave and look for a different kind of job, that is not what the unemployment insurance system is all about.

Chairman HERGER. The gentleman's time has expired. Again, I want to thank you. I think the purpose of this hearing is to show and emphasize how inefficient the current system is. For example, the gentleman who was just inquiring in his State of Michigan of every dollar that is paid in unemployment taxes, only 50 cents is returned to your State.

Mr. LEVIN. Will the gentleman yield? What was the percentage in 1992?

Chairman HERGER. I don't know that, but we can certainly find out?

Mr. LEVIN. Is it relevant? Yes. And I will ask Ms. DeRocco, what is your hunch in 1992, what percentage of the dollars sent in from Michigan was returned to the State?

Ms. DEROCCO. I am sorry --

Mr. LEVIN. It would be several hundred percents, wouldn't it?

Chairman HERGER. Reclaiming my time, in my own State of California, we don't get as much back. Only 46 cents.

Mr. LEVIN. When California was in a recession in 1991, 1992, what percentage --

Chairman HERGER. Again reclaiming my time, the point is the system is not working. It should not be that only 46 cents out of a dollar is returned on average to a State, and that we actually have 14 States who were forced to put in their own tax and make up the difference -- to be able to implement their unemployment programs. It shows that we have a major problem. And Ms. DeRocco, I would like to ask a question if I could, the President's plan calls for reducing Federal unemployment taxes. These Federal unemployment taxes are payroll taxes, which means they tax and thus discourage employment.

What effect would you project reducing these payroll taxes might have on businesses and their ability to hire new workers? And I might mention, you had a graph up here a little earlier when you were testifying, and maybe we could put that back up.

Ms. DEROCCO. This is the extended benefits graph.

Chairman HERGER. Why don't we address the first question first.

Ms. DEROCCO. Clearly, and employers, as I know you will have represented on the next panel, will speak to their opportunities for job creation and job growth as payroll taxes on employers are lessened. And although we are shifting responsibility to the States for approximately $3.5 billion in administrative costs, that is about what it runs now, the payroll taxes we are reducing amounts to about $5.5 billion.

There is a lot of buffer in there for States to have the option of increasing extended benefits if, in fact, that is the State's decision or to further reduce the employer taxes, which gives to the employers the opportunity to expand production, to increase jobs and to be an economic development factor in their States. And I think that is an important opportunity that this proposal opens. Specifically, on the extended benefits chart you asked about, this depicts the number of States and workers that would be impacted by the proposal to lower the extended benefit trigger from 5 percent to 4 percent.

Chairman HERGER. Thank you. The gentlelady from Connecticut.

Mrs. JOHNSON. I just want to follow up on some information that it would be helpful if you got back to us. This chart that you have, impact on Federal accounts, that really needs to show what under current law the Federal Government would collect and what portion of what we would collect would automatically be returned to the States, because I think that goes to my colleague from Michigan's question. If collections are going to go up, but they will automatically go back out to the States under the Reed Act, then what is the remainder and what will be the impact of your tax reductions? And then you will be down to that bar chart. And then if you could further accommodate that bottom line below the bar chart for -- if there is a recession or, you know, various factors, at what point -- how much economic damage would we have to sustain before we would not only begin to touch the growing reserves which will continue to grow but deplete them? So I think that is where we -- because that is one of the big issues the States are asking you to know of. So thank you.

Chairman HERGER. I thank the gentlelady, and now the gentleman from Texas, Mr. Doggett, to inquire.

Mr. DOGGETT. Thank you so much and thank you for your testimony.

Do you share the general view of some that if unemployment and health care benefits for the unemployed are too generous it will discourage people from seeking employment?

Ms. DEROCCO. I know we have some studies that indicate more benefits or higher unemployment benefits tend to increase duration. But, however --

Mr. DOGGETT. You mean to increase the --

Ms. DEROCCO. Duration on unemployment. The extended benefit provision sometimes increases duration in unemployment. I would like to believe, however, that most people would much prefer a job.

Mr. DOGGETT. Can you forward those studies to the --

Ms. DEROCCO. Yes.

Mr. DOGGETT. Committee?

Ms. DEROCCO. Yes, sir, we will.

[The study is being retained in the Committee files.]

Mr. DOGGETT. Do you believe that it is prudent for a State to cut taxes during periods of prosperity and to double them during periods of recession on their unemployment tax?

Ms. DEROCCO. That is a very general question, and I do believe that States are competent administrators of their financial situation and that some choose to leave money in the economy to keep their businesses growing and create jobs. Others might choose to --

Mr. DOGGETT. It is actually intended to be a very Texas-specific question.

Ms. DEROCCO. I thought it might.

Mr. DOGGETT. And not general, and I guess you have answered the question, that you consider a program of cutting taxes, unemployment taxes at the State level, during periods of prosperity and doubling them during periods of recession, which appears to be what it is going to take in Texas, is an example of prudent administration of the State plan by the State?

Ms. DEROCCO. I am not aware that the State of Texas needs to double its taxes, but you are probably better --

Mr. DOGGETT. That is what is reported on Texas, but then just take it as a hypothetical. Do you think if a State cuts taxes on unemployment during periods of prosperity and doubles them during periods of recession that is an example of prudent administration?

Ms. DEROCCO. I think that, particularly as it relates to the State unemployment tax and the level of the State's reserve, that should be and has been a State decision. And if it was Texas' decision or New York's decision to keep money in their economy rather than to increase the taxes on businesses in order to keep their economy growing and then to take advantage of the fact that the Congress and the Administration created a loan account for the very purpose of those States who chose to seek a loan during periods when their reserves did not -- were not adequate to --

Mr. DOGGETT. Then you applaud the decision and cite it as an example of their competence?

Ms. DEROCCO. That is not the Employment and Training Administration's preferred approach to trust fund reserves. We do have guidance that indicates that there should be an average high-cost multiple in their reserves of 1.0. There are many States who do not maintain that.

Mr. DOGGETT. I believe that is true, and given the short time that I have, is it correct, then, that under the Administration plan, that in less than 5 years when States like Texas assume all the administrative cost, unless they choose to raid their trust fund, regardless of the economic conditions that exist in 2007 and beyond, that they will have a choice of either cutting benefits or raising taxes?

Ms. DEROCCO. No, I do not believe that. As I indicated earlier in answer to another question, we are shifting responsibility to the States for about $3.5 billion in administrative costs. Sixty-five percent of those administrative costs are not related to benefit levels. We are at the same time reducing the payroll tax at the Federal level by $5.5 billion. So there is ample opportunity for the States to adjust their tax level to ensure they can provide the same level of service.

Mr. DOGGETT. So you think basically a little like last year's budget proposal. They can have it all, they can keep taxes low, they can provide the same level of benefits and satisfy all of their administrative needs?

Ms. DEROCCO. I believe States have the fiscal capability and the administrative capability to manage administrative funding for this system.

Mr. DOGGETT. As to the point that Mr. Levin was just making, isn't it correct that taking a snapshot of a State's return on its unemployment tax dollars in a single year without regard to the economic conditions is not very insightful, since the entire purpose of having a Federal backstop involves the Federal Government sometimes providing hundreds of percent return on the Federal unemployment tax dollars and sometimes providing only a fraction of the return of the dollars, depending on economic conditions?

Ms. DEROCCO. I can only tell you that for 10 years of working with the States, specifically on their return on the dollars their employers are putting in the Federal Unemployment Trust Fund, that they have spoken for a decade about inadequate return of their payroll dollars.

Chairman HERGER. I thank the gentleman, and I can see why the gentleman from Texas is concerned. Currently the State of Texas is only receiving 32 cents out of every dollar of the FUTA taxes collected in Texas. So there would be money left over so that even if Texas was to begin collecting their own taxes there would still be a lot of money left over.

Mr. CARDIN. Would the gentleman yield?

Chairman HERGER. Yes.

Mr. CARDIN. I know you keep and will continue to mention the impact on each of one of our States. I would just ask that we have made available for the record the last 10 years, the last 20 years how much money has been returned to the States through these funds. If you pick 1 year where there has been very little use of the funds for dealing with a recessionary problem, obviously it is going to be impacted in a negative way.

Also I might say, Mr.  Chairman, many of us have been urging, including, I believe, the gentleman from Louisiana, that the Congress do the right thing on the administrative cost, and we haven't done the right thing on the administrative cost. One thing is clear, that if this proposal were to be enacted, it would mean a $16 to $18 billion loss of revenues at the Federal level.

The question whether the States will make that up or not is uncertain, and I know we can keep on talking about our individual States. Many of us are concerned that our individual States have enough administrative support, and we don't know what is going to happen. We know under current law the structure is in place. It has not worked the way it should, but I think it is just unfair to keep on mentioning 1 year we should have the historical number.

Mr. MCCRERY. Would the Chairman yield?

Chairman HERGER. Yes.

Mr. MCCRERY. I appreciate the gentleman's point, and I don't think anybody would deny you that information. However, I do believe it is irrelevant. The system is designed to provide States much more money during times of high unemployment. Extended benefits shouldn't be in the mission of administrative funding for the States. Year after year after year after year there is inadequate administrative funding for the States, and, yes, it is our fault, we the Congress, because we have not appropriated sufficient funds for them, but don't mix that up with the extended benefits program, which is designed to be Federally funded to the tune of 50 percent. So it is just mixing apples and oranges. So --

Mr. CARDIN. I agree.

Mr. MCCRERY. You all can keep making that point. It is irrelevant. I object.

Mr. CARDIN. I agree with you.

Chairman HERGER. I would like to request that information.

Ms. DEROCCO. Yes, sir.

[The information is being retained in the Committee files.]

Chairman HERGER. The fact that we do know is that these numbers are accurate now. They are numbers that would appear to be growing. It would appear that the trust fund, rather than becoming smaller, continues to grow, and with that, I will turn at this time to the gentleman from Michigan --

Mr. DOGGETT. Could I just inquire of you, Mr. Chairman, to broaden the request to include one other factor? And that is along with that,  in that same table, that she would give us for however many years you are going to do it, show as to each State how many of the people who are actually unemployed in that State are covered by the system. In Texas it is about one out of four, and since the administrative costs are related to the workload, one of the reasons we have such a low return is that we are covering so few people that are unemployed and it would be useful to have that --

Chairman HERGER. Again, reclaiming my time, that is the State's decision to make that. If we could just get the original question answered, we would appreciate it.

Again, now I turn to the gentleman from Michigan, Mr. Camp, to inquire.

Mr. CAMP. Thank you, Mr. Chairman. I have a question really that kind of follows up on Mr. McCrery's comments, and that is that the President's budget is making suggested changes in the administrative financing of the unemployment insurance program. Is there any discussion of changing the benefit levels involved?

Ms. DEROCCO. The weekly benefit levels? Again, we believe that is a matter of State law, has always been a matter of State law, and should continue to be a matter of State law.

Mr. CAMP. The only change would be then in changing the rate at which the extended benefits would be triggered. Is that correct?

Ms. DEROCCO. Correct. We do propose lowering the trigger rate for extended benefits.

Mr. CAMP. From 5 to 4 percent?

Ms. DEROCCO. Correct.

Mr. CAMP. And would that be a permanent change under the President's plan?

Ms. DEROCCO. Yes.

Mr. CAMP. So that would then incorporate the temporary extension of unemployment benefits that were in the House-passed stimulus bills in December and February?

Ms. DEROCCO. Yes. The President has supported the 13-week temporary extension of benefits as a short-term strategy. The long-term strategy envisioned is to lower the trigger rate so that more States trigger on in a recession, covering more workers.

Mr. CAMP. All right. Thank you very much. Thank you, Mr.  Chairman.

Chairman HERGER. I thank the gentleman from Michigan. The gentleman from Oklahoma, Mr. Watkins.

Mr. WATKINS. Mr.  Chairman, I don't have any questions. I will apologize to you and the panel and all. I just got here just a while ago on the airplane. I normally leave at a 3:00 a.m. flight out of -- I leave Stillwater about 3:00 a.m. and get to Oklahoma City, but this morning after the snow and ice I scraped a little bit of that before I left, and I left on the 5:00 a.m. something flight or a little later flight. So I apologize. I don't have any questions. Glad to be here, though.

Chairman HERGER. I thank the gentleman from Oklahoma. Your participation is always appreciated. With that, we thank you, Assistant Secretary.

Mr. CARDIN. Mr. Chairman, I know you have been very generous of time. Could I just ask one more question today? Would that be possible?

Chairman HERGER. Yes, a quick question.

Mr. CARDIN. It will be a quick question. The question will be very quick. But my question is, if the House were to pass the exact same bill the Senate has passed on the 13-week extension, would the Administration sign it?

Ms. DEROCCO. I am sorry. I am not here to state the Administration position on the ultimate result of the economic security deliberations.

Chairman HERGER. Again, for the record we have passed it out of the House three times, almost four, and the Senate is yet to act. With that, I would like to excuse you and thank you for your testimony and ask our next panel to come to the witness table, please.

On the second panel this afternoon we will be hearing from Chuck Yarbrough, Chairman, Board of Directors of UWC - Strategic Services on Unemployment and Workers' Compensation; Christine Owens, Director of Public Policy, American Federation of Labor and Congress of Industrial Organizations, AFL-CIO; Dan Blankenburg, Manager, Legislative Affairs, National Federation of Independent Business; and we also, I understand, have a constituent of the gentleman from Oklahoma. Would you like to introduce the witness, Mr.  Watkins?

Mr. WATKINS. Mr.  Chairman, Members of the Committee, it is my honor, really very much so, to introduce the gentleman. He is our Executive Director of the Oklahoma Employment Security Commission, but Jon Brock is more than that this year. He is now President of the National Association of State Workforce Agencies. So I am very proud of the fact of his position and of the distinction there. I think it shows what credibility he has got and the reputation he has got with his colleagues in the workforce area.

So I am very pleased that he is with us today. Jon, I am glad that plane got down so I could get here.

Chairman HERGER. Thank you, Mr.  Watkins. With that we will begin the testimony with Mr. Yarbrough.

STATEMENT OF CHUCK YARBROUGH, DIRECTOR, CORPORATE HUMAN RESOURCES, TYSON FOODS, INC., SPRINGDALE, ARKANSAS, AND CHAIRMAN, BOARD OF DIRECTORS, UWC - STRATEGIC SERVICES ON UNEMPLOYMENT & WORKERS' COMPENSATION

Mr. YARBROUGH. Thank you, Mr.  Chairman, and members of the panel. I appreciate the opportunity to be here today.

My name is Chuck Yarbrough, and we were very pleased to learn that the Committee was having hearings today on President Bush's proposal on Administration finance reform.

We hope to acquaint you with some of the employer concerns, and as Chairman of UWC, I would like to first talk about a few things that we support. First of all, we do support a strong unemployment insurance and employment service system with a limited Federal role.

Second of all, we support a strong UI/ES system that provides fair and affordable benefits to the citizens of our State. UWC supports moving the FUTA trust fund monies to the States so that we can have more local control regarding how benefits are determined and taxes are assessed.

The UWC supports a two-tenths reduction in the FUTA tax rate. This two-tenths surtax has been in effect for more than 25 years and is due to expire in 2007. But UWC members are concerned that many States may increase their UI taxes to compensate for the six-tenths reduction in FUTA taxes contained in the Bush Administration proposal. The UWC wanted to amend the proposal to prohibit the States from increasing their UI taxes by more than $28 per year.

In general, we support the Administration's proposal to transfer the financial responsibility for administering the UI/ES system to the States. But we also believe that including any expansion of benefit eligibility in the proposal will threaten the solvency of State trust fund accounts. A risk of insolvency will create pressure to decrease benefits.

I am a member of the Governor's Workforce Agency Advisory Council at home, where it is made up of business and labor and public members. I have a letter of support from our Governor on the President's proposal. One issue that our State, Workforce Investment Agency, and employers have experienced is that while we have continued to pay a 25-percent surtax, our employment service staff has been reduced. We have seen our State UI agency lay people off in order to give other employees merit increases.

Employment offices are also no longer certifying that the workers they refer to us are eligible to work in the United States. We have seen continued limited monies for services, both for employees and employers who go to UI offices for help. We have had to open up our own Main Street recruitment offices to provide the labor and workforces that we need, while UI offices continue to reduce the number of their employees who could refer trained workers to us.

And again some employer communities have struggled with the employment verification process that has been delegated to us when the States could have definitely provided that service for us.

We also support allowing States access to the National Director of New Hires to prevent fraud. We feel like that would certainly help us, but also I would like to say if they could use -- the agency could use that, the wage history that is involved and the person's work history that has a claim and also add the basic pilot program from the Justice Department, then that would ensure that all workers referred by the Employment Security Department would be eligible to work in the United States. That would be a real plus for the Employment Service to be able to hang that banner outside. This means that all work being performed on government contracts would be done by workers who are eligible to work in the United States.

We have been here several times to talk about many different proposals in the last 10 years, from Shaw, to McCrery 1, to McCrery 2, to the current President's reform. All I can say, help. We are overtaxed. We are understaffed. We are underequipped. And 50 percent of our employment security employees will be retiring within the next 2 or 3 years. Some agencies haven't made hires in over 15 years, and they are not going to have anybody or any knowledge to carry on the system. We have got to cut some money loose.

We need to elevate the statewide services of first choice to refer trained workers coming out of the Workforce Investment Act of 1998. We need to be able to refer laid off workers as soon as possible as a first choice, and we need to be able to guarantee the eligibility of the workers that they refer.

Three things I want to leave with you: Universal agreement to reform administrative funding. Everyone agrees that needs to happen. Congress should take a strong look at the Administration's proposal, because it does bring a workable solution to this problem, as have many other things brought to this panel.

We have sought reform for 10 years, but don't let this Congress close without taking action on behalf of the workers and the business community, because we are waiting. Because my Governor said in his last paragraph to the Secretary this proposal is not only good for States but, more importantly, it is good for American workers and business.

As a debate on the reform for UI insurance and unemployment insurance proceeds, I hope that we can all work together to benefit America's workers and business. Thank you.

[The prepared statement of Mr. Yarbrough follows:]

Chairman HERGER. Thank you, Mr. Yarbrough. Now we will hear from Mr. Jon Brock, President, National Association of State Workforce Agencies. Mr. Brock.

STATEMENT OF JON BROCK, EXECUTIVE DIRECTOR, OKLAHOMA EMPLOYMENT SECURITY COMMISSION, AND PRESIDENT, NATIONAL ASSOCIATION OF STATE WORKFORCE AGENCIES

Mr. BROCK. Mr. Chairman, Members of the Subcommittee on Human Resources, I am Jon Brock, President of the National Association of State Workforce Agencies (NASWA) and Executive Director of the Oklahoma Employment Security Commission. Thank you for inviting me to testify today for NASWA and its members.

The NASWA represents 53-State and territorial workforce agencies in general, and the Unemployment Insurance and Employment Service programs in particular.

Most of our State members also administer the programs authorized under the Workforce Investment Act and welfare-to-work programs.

I thank the Chairman for scheduling a hearing on President Bush's New Balance proposal. The NASWA stands ready to begin work immediately on enacting reform legislation this year.

Mr. Chairman, NASWA believes there are five major problems that call for Unemployment Insurance and Employment Service reform legislation. First, the Federal Government has been overtaxing employers under the Federal Unemployment Tax Act.

Secondly, the Federal Government has been underfunding employment services, labor market information services, and unemployment insurance administration.

Thirdly, the permanent Federal-State Extended Benefits program barely works.

Fourth, States need certain technical amendments to Federal law.

And, fifth, worker representatives believe the unemployment insurance recipiency rates and wage replacement rates are too low in many States, and they want the Federal Government to expand eligibility and benefit levels.

In addressing these problems, NASWA believes in the following principles: That the Federal Government should collect only enough Federal unemployment tax revenue to fund the system and maintain solvent trust fund accounts. The NASWA strongly supports repeal of the temporary .2 percent Federal unemployment surtax.

Unemployment taxes should fund fully employment services, labor-market information services, unemployment insurance administration, and the Federal half of the Extended Benefits program. This funding should be stable, predictable, and equitable. States have been struggling to stay afloat in this system. In fiscal year 2001 alone, they added nearly $300 million to our system from their own funds.

Mr. Chairman, at this time I would like to ask permission to submit for the record a copy of the NASWA State supplemental funding survey which shows the contributions to this system made by each State in their own funds in fiscal year 2001.

Chairman HERGER. Without objection.

[The information follows:]

Mr. BROCK. Continuing with NASWA's principles, the Extended Benefits program should be reformed as proposed previously by NASWA and now President Bush. The Federal Government should enact technical amendments as proposed previously by NASWA and now President Bush. States, not the Federal Government, should make decisions about benefit eligibility and benefit levels.

The NASWA strongly supports an immediate extension of the unemployment insurance benefits for up to 13 weeks, and a $9.2 billion Reed Act distribution to the State accounts in the Unemployment Trust Fund.

Many of those who claimed unemployment insurance benefits in September or later are now beginning to exhaust their regular State benefits. They need additional help, and many States need additional help with funding State benefits and administrative costs of their programs.

Mr. Chairman, it is imperative that you enact the proposed Reed Act distribution. If the Federal Government enacts only the 13-week extension, it will consume projected Reed Act distributions for at least the next 2 years and make it very hard for the Federal Government to reform this system in the future.

Under the President's long-term reform, NASWA strongly supports many specific provisions, such as giving States access to the national directory of new-hires.

Now, with respect to the .4 percent cut in the Federal unemployment tax rate and administrative funding reform, our members have a number of questions. After the Federal unemployment tax rate is cut by .4 percent, will State law require States to enact new State unemployment taxes to fund the system? Will certain States such as California, Colorado, and Washington be required by their State Constitutions or laws to hold a voter referendum on the new State taxes to fund the system and can the Federal Government assure small States will receive the funding they need if the small State supplement is discretionary spending? Could the Administration and Congress accept treating the small State supplement as mandatory spending?

Mr. Chairman, on behalf of the State workforce agencies, we thank you for the opportunity to testify. The enactment of unemployment insurance and employment service reform is critical. We want to work with all interested groups in coming up with meaningful reform. Please do not let this vital Federal-State system wither any further. Please act now.

Thank you.

[The prepared statement of Mr. Brock follows:]

Chairman HERGER. Thank you very much, Mr.  Brock. And now we are pleased to hear from Ms. Christine Owens, Director of Public Policy, American Federation of Labor and Congress of Industrial Organizations, AFL-CIO.

STATEMENT OF CHRISTINE OWENS, DIRECTOR, PUBLIC POLICY, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

Ms. OWENS. Thank you, Mr.  Herger. It is good to be here today with this Subcommittee and the representative of my home State of Maryland, though I have spent plenty of time in Oklahoma and Louisiana just last week. So it is nice to be here with all of you.

I think we all agree that fixing the UI system is long overdue, and recent discussions have focused in the past several months and today on extension of UI benefits for unemployed workers. With 80,000 workers exhausting their benefits every week, 1,600 a day, that action is crucial and should be taken immediately, but it is no substitute for a careful and thoughtful examination of how to change the program to better enable it to meet its intended goals of providing income support for jobless workers and job search service and helping to stabilize the national economy during times of economic downturn.

We fear that the Administration's proposal does none of these. The Administration's plan turns over to the States a primary Federal responsibility, which is the administrative financing of State operations. The upshot of this proposal could well be to place funding for benefits in competition with funding for administration at the State level, potentially imperiling both.

The plan would also significantly reduce Federal unemployment insurance premiums for employers, but does so without insuring any corresponding increases in coverage and benefits for workers.

I would like to elaborate on our concerns. First, as several members have addressed, too few of today's unemployed workers receive too little in UI benefits for too short a period of time. These system inadequacies reflect the failure of the system to modernize in order to keep up with changes in the economy and in the workforce and with technological changes that allow for up to date reporting of workers' tenure and wages. And it also reflects the pressures on States to cut taxes and to trim budgets. Consequently, nationally fewer than 4 in 10 unemployed workers receive UI benefits, and benefit levels replace only 33 to 39 percent of former earnings.

In part to address these shortcomings, the stakeholder process, which Mr.  Cardin has referred to several times, came up with a proposal which did not provide everything that every participant wanted, but it provided something of real value to every participant. For workers it provided a mechanism to extend coverage to low-wage workers and to women working part-time. For employers, it cut the FUTA tax by the .2 of a percent, and for States it transferred administrative financing to the mandatory side of the budget and created a formula which reflected need and recipiency rates and good performance at the State level.

The Administration's proposal walks away from this deal. In fact, the proposal will likely exacerbate the shortcomings in coverage and benefits for workers who are not currently covered. When States have to rely on their own employer tax base for administrative financing, as they will in 5 years, they will be pressured to either raise taxes or cut benefits.

The experience of the boom times of the 1990s, when we had nearly a full employment economy, indicate just how strong the pressures are to reduce taxes. Those pressures will grow in recessionary conditions.

We believe that the Administration's proposal ultimately undercuts States. We have attached a chart to our testimony which shows that a number of States, if we assume that States were to increase their own State tax by .4  of a percent to make up for the loss of the FUTA tax, that a number of States that have high recipiency rates will actually fare less well under the Administration's proposal than they currently fare or than they would have fared under the stakeholders' proposal.

Finally, we are concerned that by eliminating the Federal role, the Administration's plan would also damage the counter-cyclical and national risk sharing elements of the national Federal-State partnership. Now Federal grants are allocated among States according to workloads, and the Federal Government automatically releases additional administrative funding if national unemployment rises above certain levels and the State's number of claimants also rise. Individual States would not have the capacity to replicate this national funding scheme.

I will close now and be glad to answer questions later.

[The prepared statement of Ms. Owens follows:]

Chairman HERGER. Thank you very much, Ms. Owens.

Now we will hear from Dan Blankenburg, Manager, Legislative Affairs, National Federation of Independent Business, NFIB. Mr. Blankenburg.

Mr. BLANKENBURG. Thank you, Mr. Chairman. It is a pleasure to be here today. On behalf of the 600,000 members of the National Federation of Independent Business, I appreciate the opportunity to testify and present the views of small business owners on the subject of reforming the Nation's unemployment system.

The NFIB represents small employers. Our typical member employs five people and reports gross sales of around $350,000 per year. Our average member's net income is about $40,000 to $50,000 annually, so they are pretty small guys out there.

We believe it is important to distinguish the type and size of small business that NFIB represents, because too often Federal policymakers view the business community as one monolithic enterprise that is capable of passing taxes and regulatory costs on to consumers without suffering negative consequences.

For small businesses, this is not the case. The NFIB members are not publicly traded corporations. They are independently owned and operated. They don't have tax departments or payroll departments or attorneys on staff. They are responsible for taking out the garbage and inventory and hiring employees.

So for small businesses, the current system presents several problems. First, the tax rate is too high. We often hear from critics that cutting the tax will do little for small business owners, since the cost per employee is only $56 per year.

I would ask the Committee to consider that the average NFIB member has five employees, and we have 600,000 members nationally in our association alone. Reducing the FUTA tax as the Administration proposes would result in $126 million remaining in the hands of entrepreneurs.

While the difference between an .8 percent tax and a .2 percent tax sounds small, our average member would save $210 a year.

Second, the unemployment system,  under the current system, employers are required to pay two unemployment taxes to the State and the Federal Government. It is twice the forms, twice the complexity and twice the collection point. It is too many forms for them to handle when you consider some of the other forms and payroll taxes they must deal with.

Third, the taxes raised for UI programs are rated or used for deficit reduction, and this fact perhaps more than any other infuriates small business owners. They would like to be taxed honestly and have their money spent on what Congress says they are being taxed for. As an overall package, we are pleased with the Administration's proposal, and NFIB strongly supports the proposal to cut the unemployment tax by 75 percent through 2007.

The tax reduction will be particularly gratifying to small business owners, because as had been testified before, the tax was supposed to be a temporary tax in 1976, and the Congress promised to remove it once the loan was paid back to the Federal fund. And since then -- well, in 1987 the loan was paid off and the taxes remained, and it has been extended five times.

We are very pleased to see an effort to reduce the complexity of Form 940 in the Administration's proposal by eliminating many of the information requests and calculations. However, we think the Administration proposal could go one step further. Small business owners know that a great deal of time is wasted by having to provide the same information on different forms to Federal and State agencies. We would urge the Administration and the Congress and this panel to consider eliminating all of the overlap between the State and Federal forms and simply coordinate the filings in a combined form that only needs to be filed once.

With regard to the Reed Act transfer, NFIB believes returning these dollars to the State employment offices is a very positive decision. As mentioned, the money has been misappropriated for years, and we also understand the Administration's proposal reduces the trigger for extended benefits and eligibility and would allow States to determine extended benefits as they would apply. This change will increase the number of people that will qualify for benefits, resulting in higher demand on the program in an economic downturn.

While we are not comfortable with these provisions entirely, we view this in the context of the compromise and we would be willing to accept them if the Congress chose to move in that direction.

So those are our main points, and I would be happy to take any questions.

[The prepared statement of Mr. Blankenburg follows:]

Chairman HERGER. I thank you, Mr. Blankenburg, and each of you, and now we will turn to our panel for questions. First to inquire is the gentleman from Louisiana, Mr. McCrery.

Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Cardin spoke about the stakeholders that got together a couple of years ago and worked out a deal, and why didn't -- why can't the Administration support that? Well, I was involved very much in the discussions at the time trying to put together something that we could pass, and unfortunately, at least it was my impression, at the end of the whole thing we did not have an agreement among all of the stakeholders. I thought, by the way, that organized labor, AFL-CIO, and the business community both acted in good faith and worked hard to come up with an agreement in which everybody got something and nobody got everything, and I thought that was a good description, Ms. Owens.

But the fact is at the end of the deliberations, we did not have an agreement among all of the stakeholders. Mr. Yarbrough, I know you were around during that. Isn't that your impression that we did not have agreement among all the stakeholders?

Mr. YARBROUGH. I served as the business representative with UWC on that, and although we had maybe a total overall program, we didn't really support all the things, just like other people that were in there didn't support everything that we had in it. I think what came to this Committee to be considered had some different formula things and that, and we did not, I guess, line up to support that. We had something that we had done earlier that we gave to them, and then there were some other minor changes in the funding --

Mr. MCCRERY. Mr. Blankenburg, NFIB didn't support the final draft?

Mr. BLANKENBURG. Yes, I am glad you brought this up --

Mr. MCCRERY. I have got limited time.

Mr. BLANKENBURG. We did not.

Mr. MCCRERY. And there were other groups that didn't support it. So as much as I would have liked to have gotten an agreement among all the stakeholders, we just didn't do it. So the Administration is trying to come up with something, I think, that bridges the gap among the various disparate interests and at least addresses some of the fundamental questions, or shortcomings I should say, of the current system.

Ms. Owens, you talk about if the Administration's proposal were to go into effect, there would be this competition between tax revenue for benefits and tax revenue for administrative funding. Isn't that the case right now?

Ms. OWENS. Well, there is a firewall now, because the benefits are set by the States. The administrative funding comes from the Federal Government and grants, and let me just back up and say we don't disagree that the State UI and ES services are badly underfunded and that Congress should appropriate more resources for those programs. I don't think there is any disagreement in this, and we certainly don't disagree with that, but we do think that the firewall that exists between administrative funding that comes from the Federal Government in the form of grants as opposed to benefits that are at the State level provides a degree of insulation and protection that would be eliminated were administrative financing turned over to the States, especially if ultimately it is turned over to the States down the road without resources.

Mr. MCCRERY. But the firewall does little good if the States are getting insufficient funding for the administrative purposes and they have to look to their employer community as my State has done for increased taxes to fund administrative expenses rather than doing some of the things you would like to do for benefits, perhaps part-time workers, most recent quarter earnings, all of those things. The State can't do that because they are having to raise taxes to pay for the administrative funding. So you have already got that competition. That is all I am trying to say. And, yes, it would still exist, but it exists now.

And just for fun, I would like to examine one other part of your testimony. In your testimony --

Ms. OWENS. I hope I enjoy it as much as you.

Mr. MCCRERY. Oh, I am sure you will. In your testimony, you talk about how -- and I think you are referring to part-time workers particularly -- how some workers are now paying for a UI system that they get no benefit from. What do you mean by paying workers that are paying for the system? How are they paying -- they don't pay taxes for UI, do they?

Ms. OWENS. Well, I mean, I think actually Members of this Committee and certainly the Labor Department in some of its publications that I have read have taken -- have argued that the premiums that are paid for unemployment -- for the unemployment insurance programs in the States actually reflect lost wages to workers.

Mr. MCCRERY. But it is the employer that is -- the tax is exacted against the employer. Is that right?

Ms. OWENS. Sends them a check. That is right.

Mr. MCCRERY. So it is not an explicit tax on the employee?

Ms. OWENS. It is not taken out of the employee's check.

Mr. MCCRERY. But because the employer has to pay it, I mean, the theory is it comes out of the pockets of the employees?

Ms. OWENS. Right.

Mr. MCCRERY. Well, wouldn't the theory hold true for, say, corporate income taxes?

Ms. OWENS. Is that the topic of today's hearing?

Chairman HERGER. The time is expired.

Mr. MCCRERY. I just told you I was just having some fun.

Ms. OWENS. It was fun.

Mr. MCCRERY. Thank you, Mr. Chairman.

Chairman HERGER. You are welcome. The Ranking Member from Maryland, Mr.  Cardin, to inquire.

Mr. CARDIN. That is an interesting thought. I think, though, the point is that we don't differentiate in law between the premiums paid by part-time workers. Why do we differentiate on the benefits that they are entitled to receive? I think that is the point that many of us have been trying to make.

First of all, I appreciate all of your testimony. I think all four of you have added to the record here, and I thank you for that. I regret that I think we have really lost ground over the last year. I thought a year ago we had more consensus than we do today, and Mr.  McCrery is absolutely correct. We have a problem that we have to deal with, in that we impose -- we were collecting too much revenue at the Federal level for what we are returning to the States, certainly on the administrative side. There is no question about that. We tried to do something about it.

What concerns me is I think we are using the wrong numbers here. There is no disagreement that we should deal with the .2 percent. There is no disagreement about that. It is the .4 percent we seem to have a little different view as to what impact that will have. If we follow what Mr. Brock is saying, and I am trying to follow his testimony because you are the one who is going to have the bottom line responsibility. If the States impose that .4 percent -- and I understand they may not be able to because of constitutional restrictions or political considerations, but if they impose the .4 percent then what Ms. Owens is saying, some States are going to be worse off than they are today under the current system as far as recouping their administrative costs. It is going to be different per State, and Mr. Blankenburg's concern about reducing the overall tax by .6 percent is not going to happen. It is going to only be a .2 percent reduction, which is nothing to be embarrassed about. The $14 we save per employee is still important to be done, and we should do it, but I think we should use the right numbers, and I think it is $14, not the other numbers we are using per employee, because we assume that the administrative burdens are going to be met and the taxes are going to be imposed locally in order to deal with it.

My concern is it might not be enough, and that is why I come back to the stakeholders, and Mr. Yarbrough, I appreciate your response to Mr. McCrery. You did a great job, and, of course, the UWC was at the table and was part of the process, as was the local government people, as was the AFL-CIO. I think the NFIB came later in the stages in the process and never did agree on the agreement. I accept that.

But there was an agreement reached by the stakeholders, and it was not easy, because we had a history, a long history on UI of not being able to even sit at a table let alone reach an agreement on what we should do as far as Federal policy is concerned, and I think, Ms. Owens, you expressed it correctly, and so did Mr. Yarbrough. Nobody was totally happy with that agreement. There was -- you had a give and a take. That is what usually happens on an agreement. You are not totally happy, but we were able to get the permanent reduction of the tax, which was important.

We were able to get the administrative costs funded so, Mr. Brock, you knew how to -- you are right. You need a reliable funding source, and that is what the stakeholders' agreement gave you, a reliable funding source. It is not reliable if you have to wait every year for the appropriations of this Congress, in all due respect. That is why there is risk in what we do here. If you have it on the mandatory side, because we are collecting the revenue, we have the money, it should be mandatory spending. I disagree with the Administration. If we collect the money for that purpose, we should return it to you for that purpose and you should have the reliable funding, and that was part of the stakeholders' agreement, which I thought, by the way -- Mr. McCrery thought was a pretty good idea at least a year ago, that part of the overall agreement.

And of course we get to the issue that Mr. McCrery has difficulty with, and that is trying to deal with people who are trying to pay according to the rules. They are working. Many of these people come off the welfare system, and many of these people are low-wage workers. Many of these people don't have the long wage history that more seasoned workers have had, and now they are coming off the employment rolls because of a recession, and they are not qualifying for unemployment benefits. So we wanted to do something -- and a large percentage are women, and we wanted to do something about it. And the stakeholders amazingly 18 months ago recognized that as an issue, before we got into the recession as an issue, and we were able to work out the politics between State flexibility and national policy, and I applaud you for that.

I happen to believe in State flexibility, but I think this is one area that we should act at the national level. So you were able to reach an agreement. So I don't think it is fair to say that we didn't have an agreement 18 months ago. We had an agreement 18 months ago, and that agreement was brought to Congress, and there were people who were unhappy with parts of it, but collectively you said don't pull it apart. Keep it as a unit, keep it together, and we will keep our coalition together. And true, there were some elements that were opposed to it, such as the NFIB, and you were. There is no question about that. But the many groups within the business community supported it, and my regret is that we have lost a year, and now it looks like we may not get anything accomplished.

Chairman HERGER. I thank the gentleman. Now would the gentlelady from Connecticut, Mrs. Johnson, wish to inquire?

Mrs. JOHNSON. I think it is imperative that we get something done, and I don't think we can let the perfect be the enemy of the good. We need to do what we can get agreement on.

Mr. Blankenburg, one of the reasons that consensus of the other group failed was because small business was not at the table, and so there wasn't any ability by that group to talk through some of the problems that have a unique and heavy impact on small businesses. I mean, certainly the urgency of the administrative reforms you point to were something we all understand and can all agree to. I think the concerns about whether the funding is going to be there through ups and downs is something that we can address when we get additional information back.

And I absolutely agree that States are going to continue to set benefits and benefit levels, whether you like it or not. We are not going to change that in this environment this year and maybe not for a long time. We didn't change that under the Democrats, and the likelihood of changing it now -- so let us not let that impede progress, but this issue of part-time employment is something that is very important to small business. You need smart, educated women who need to take time off to raise their kids to be willing to work half-time and as things get worse in the future in terms of the balance between the number of workers and number of retirees, you are going to need that even more. So we need to look at what is the criteria for permanent part-time. How long could it last? It doesn't have to be mysterious, but if we could just do a demo, if we could do something to encourage States so that we would get better information. The States that have done this have not seen an increase in cost.

So I think there are a couple of issues here that are particularly relevant to contemporary society, to our goals as a society of family strengthening, as well as to appropriate compensation to people who are unemployed and unemployed under certain circumstances for a good reason that we do need to tackle.

And then I think the other thing -- and I don't know -- I was just talking to the staff about this -- there are terrible jurisdictional problems here, because really the system was constructed for a whole different era, and I think some of the questions of my colleagues that pointed out what percentage of those who are unemployed this system actually serves is a case in point. But we are not going to change the fundamental structure right now, but we could -- we may be able to think of some way that under this rubric we can remind States that in administering we are looking not just for you to administer the delivery of the check. For too long that was catastrophic in the area of welfare. We need for you to deliver a check accompanied by services, and those services have to be services small employers can depend on, so you can depend on, if you are getting something from the employment services, that it is going to be valid.

One of the queer things that has happened, whether you like it or whether you don't -- and I think with all due respect, Ms. Owens, your testimony doesn't necessarily take into account what we have learned through the job placement programs we developed under welfare. We have under that program developed a much more responsive relationship between the job placers and the employers, and the old unemployment system employers don't even participate in. They don't trust them so they don't look at their rosters, they use temporaries instead of. The growth of temporary employment services is a terrible condemnation of our old system.

So there are very big issues in how America helps people who are unemployed and helps people who need to get reemployed and small business has to be at the table, but I can't believe that through this bill there isn't some way we couldn't encourage States to integrate their unemployment services for the unemployed and for people coming off of unemployment lifestyles, like welfare or out of prison.

I mean, there is just so much to be done that we cannot lose this opportunity to fix what we know is a problem, we know is causing big trouble. And maybe to at least put in place some demos or whatever we can do to move toward a system that legitimately recognizes people who need to work part-time because of their other responsibilities they carry or disabilities they carry -- we tried to do this in the Ticket to Work bill. We tried to do that. It didn't work. We haven't got that far. We need to look at the big issues and try not to get ourselves snarled down and prevent a step forward.

Now, solvency is a big issue, and I agree with that, but I do ask you to all work with us to be sure we accomplish something this year, because every year matters, and I don't care who is the President or who is the majority. They are going to be closely balanced for a number of years to come and we are going to have take one step at a time to make real progress in America for working people. So I just hope we will all work together to get something done together this year on this.

Thanks.

Chairman HERGER. I thank the gentlelady. Now the gentleman from Michigan, Mr. Levin, to inquire.

Mr. LEVIN. You know, in a sense I will pick up from where Mrs. Johnson left off. I guess you noticed some impatience in my questions, and I do have that. I was going to, Mr. Herger, pull out $4, since you pulled out $1. I think is what Michigan got back in 1999 for -- let me do this first. This is what we got back in 1992 for every dollar we put in, and I am very skeptical that under this proposal we would have the funds to do that. I just don't believe it, especially if we have an extended benefit change and these other changes.

But let me just say something else, indicating my impatience. I don't see a ghost of a chance that this proposal can be adopted, the Administration proposal. If the decision is to try to put it through the House, maybe you can do that. We will have a huge debate, but there is no chance I would think it can pass the Senate. And essentially what we are going to say to you, especially those of you who support this or anybody else, it is the status quo all over again. It is where we are going to be, and it is sad. We have these trust fund monies. There is agreement there has to be more put forth for administrative expenses. Everybody agrees on that, and we are going to be stuck right where we are. Nothing is going to happen. And some of those who support this proposal, whatever you want to call it, have been -- that is not true of everybody on this Committee -- the major opponents of more appropriations. It is not true of everybody on this Committee.

So the institution that would be considering this is the institution that has helped to create this problem and that could solve it by moving nonadministrative expenses. And I kind of smile, Mr. Brock, when you say about the small State supplement, could Congress and the Administration accept it as mandatory spending? I mean, we haven't been willing to appropriate monies, and to talk about mandatory expending for a piece of this I think is a dead end. So if we want another dead end, we will follow this path. I think it is a terrible mistake, and to Mr. Blankenburg, I don't know how much you have lobbied this Congress to get moving on administrative expenses. My guess is not much. I won't put you on the spot. I don't want to put anybody on the spot.

Mr. BLANKENBURG. I will be happy to tell you. Two years. I worked on the Hill for 6 years.

Mr. LEVIN. You worked on the Hill for 6 years? So -- but I don't want to put any organization on the spot. I don't know how much NFIB has used its efforts to try to get this Congress to use monies that were set aside for a certain purpose. We know that these trust fund monies, like other trust fund monies, were used for many years to hide a larger deficit, and we need to face up to it.

And let me just say in terms of trusting the States, we are going to get into a huge argument, because I think the record of many States in terms of preserving monies for unemployment comp these last few years in many States has been miserable. And now with a recession, they are coming here and saying extend unemployment benefits when they have diminished the funds available in some cases way below what is recommended by the Labor Department, way, way below.

So we are going to end up having this deep argument about this proposal, and administrative funding is going to stay just where it is, and so I thought last year, Mr. McCrery, you and others -- I was less a participant -- tried to move this ball along. And now we are essentially changing the goal post dramatically, and if anybody thinks this will lead to legislation, I think they are wrong. So we need to decide, is there another course, and I hope there is.

Chairman HERGER. I thank the gentleman from Michigan. Now the gentleman from Kentucky, Mr. Lewis, to inquire.

Mr. LEWIS. Thanks, Mr. Chairman. Excuse me. Mr. Brock.

Mr. BROCK. Yes, sir.

Mr. LEWIS. What do job seekers lose today by there not being adequate funding for the administration of UI benefits and employment service programs, and how will this proposal improve services for those laid off employees who are looking for work?

Mr. BROCK. Yes, sir. Job seekers -- obviously I don't mean to be trite or flippant -- they are looking for a job. They are wanting someplace where they can come, where employers have listed their jobs, where there are individuals in fact working with the employers in overall job development to be sure that they get the qualified workers that they need.

Job seekers, right now I -- this is very closely akin to it, and I will refer to my own State here in this regard, but in years past we talked about the long unemployment lines. Many of our States, Oklahoma being one of them, have gone to telephone call centers today so you don't see those lines, but what you would see if you were looking closely, you would see people -- telephone lines that are clogged in many cases. Now, this isn't true in every State, but by and large it is true in a lot of them. You would see people that are out of work through no fault of their own simply wanting to get benefits to get them by as a bridge until they can get their next job, holding for 40, 50 minutes, whatever. And I realize -- when we put ourselves in their position, that is a very difficult position to be.

But overall with adequate funding of the Administration of this whole program, we would see the program working as it was originally intended to work, that people would be off work for far less time than they are today, we would be able to help them get back quicker, we would be able to help employers get the workers that they need much quicker. It would just be a system that is operating the way that it was originally intended.

Mr. LEWIS. If the program was fully funded, would you be satisfied with the system, how it works?

Mr. BROCK. Well, generally speaking, I -- and here again in this case, I am speaking for the membership of the national organization that I am the President of. I believe, yes, basically we would be. I mean, obviously nothing is perfect, but in general that is our greatest concern right now, is just being able to keep up with the demand.

Again referring to Oklahoma, if you don't mind -- I mean, I am more familiar with these statistics -- our initial claims for unemployment were up 50 percent prior to September the 11th. September the 11th has just dumped that additional load on us, and we are trying to keep up. We are getting calls from our local legislators and others asking "how come I can't get through to file my unemployment claim," and we try to get the word out and let people know to be patient. No one has missed a check yet, but it is just  the inability to be able to keep up with the demand, and I only see it getting worse.

Mr. LEWIS. Thank you.

Chairman HERGER. I thank the gentleman from Kentucky. Now the gentleman from Michigan, Mr.  Camp, to inquire.

Mr. CAMP. Thank you, Mr. Chairman. Mr. Yarbrough, you mentioned in your testimony that employers are overtaxed because of some of the shortcomings in the unemployment compensation system, and you mentioned the concept of quadruple taxation. Can you tell me what you mean by that and what might be an example of that?

Mr. YARBROUGH. Well, I guess the first tax is obviously the two-tenths. That is $14 that we are having to pay, which is not being returned to the State for UI administrative funding. The second tax is the fact that our State unemployment taxes are increased because we do not receive enough UI administrative funding from the government. The third tax is that we are now paying temporary agencies to refer workers to us, because we are not receiving enough referrals from our UI offices. The fourth tax is that we have had to open up our own continued employment centers to try and find enough workers.

So what has happened is we are having to go out and search four different times, where in the late 1980s, early 1990s, when the system was up and viable and fully funded, I had liaison officers walking to me from the employment service saying, these are the people that we have available, these are the tax credits that you could take advantage of, and these are the folks that we have ready to come to work for you.

And so since now the funding has been flat-lined out of here, all those things and all those services have gone away. The State UI offices are also no longer even certifying that our workers are eligible to work. But, I just want to say that there are four different levels of taxation.

Mr. CAMP. Ms. Owens, you mentioned the lack of benefits for workers who were formerly employed. And the States have the option of providing people part-time workers' UI benefits at this point, don't they?

Ms. OWENS. Yes.

Mr. CAMP. And I think several States do, as many as 15; is that your understanding?

Ms. OWENS. That is about right. If I might interrupt just a second. One of the things that I think was surprising to worker advocates was that during the boom time of the 1990s, especially the last few years of the 1990s when, as I said, we had almost full employment and many of the State trust funds were flush, States did very little to expand coverage or increase benefits and, in fact, they cut taxes. And one of our concerns is that once States have the obligation of covering administrative financing costs as well as benefits, there will be even less incentive to expand coverage. So this proposal makes it that much less likely that States will on their own initiatives make these changes.

Mr. CAMP. About 15 States have elected to offer part-time benefits; is that correct?

Ms. OWENS. That is correct.

Mr. CAMP. And no State withdrew that offer in the 1990s.

Ms. OWENS. No. Not that I am aware of.

Mr. CAMP. That has been in the States' prerogatives since the inception of the program, has it not, since the 1930s?

Ms. OWENS. I would assume that is the case.

Mr. CAMP. And I am just asking, you are not suggesting in your testimony that the Federal Government take over and tell the States whom to cover, are you?

Ms. OWENS. Not entirely. We probably disagree as to what might be appropriate Federal standards versus State standards, and we do think that while there are matters that certainly are appropriately left to the States, that this is a national economy and there are some more decisions the Federal Government should make. Unlike most European nations that run national unemployment systems, many decisions most important to workers here are left solely to the States.

Mr. CAMP. And I would like to hear from some of the other representatives on that point. Mr. Yarbrough.

Mr. YARBROUGH. I did want to add that several States have enacted additional UI taxes to help compensate for the lack of administrative funding they are receiving from the Federal Government.

Mr. CAMP. For the Federal Government to do that in some sense, there would be a mandating of tax hikes on States to provide benefits that aren't provided.

Mr. YARBROUGH. Working on the Governor's advisory board at home, labor and management sit down with the public and work out these issues before we go to the legislatures with what we need to be seeking and what we need to be doing. That way we get good local support on what takes place. That is the problem, we continue to come to this group and we have seen no reform, no dollars come back. We brought several proposals. Everybody says we have got to do something but everybody wants to wring their hands, and we need the dollars back. People are needing the service.

Mr. CAMP. Thank you. Mr. Blankenburg, do you have any comments?

Mr. BLANKENBURG. Following up on what Chuck said, these are situations that are worked on at the State levels whether to cover part-timers or not. And just to emphasize your point, by having the Congress mandate it, you are throwing the whole balance of the system out of whack.

Mr. CAMP. Thank you. Thank you, Mr. Chairman. I see my time has expired.

Chairman HERGER. Thank you, Mr. Camp. Now the gentleman from Oklahoma, Mr. Watkins, to inquire.

Mr. WATKINS. Just kind of an editorial comment. I notice my colleague, Mr. Levin, has left. But I would agree with him about legislation going to a dead end because that other body has become kind of a graveyard over there. We passed very progressive steps to try to stimulate the economy three times, and we moved out front on several other issues. All have fallen by the wayside when it got over to the Senate. I want to acknowledge that being an obstructionist, though, does not provide much leadership. It is easy to do. You can always board up the barn and head to the house and say -- but that doesn't solve the problem. And we have got to solve problems. And it becomes a very discouraging situation sometimes when we try to work through things and they are not resolved.

Let me just ask, in Oklahoma, I know -- we all are kind of short-changing the refunds to the States, so to speak, on administrative costs, and I noticed that we have only been getting about 41 percent back, and there are problems that can come about, but some people say there are going to be certain program purposes dropped. But let me ask you in the way of a question, what is in jeopardy in Oklahoma if we don't -- and what can you do or what would you do if you got 100 percent? That is a hypothetical question there.

Mr. BROCK. Congressman, I am not aware of programs particularly being dropped per se, at least nothing comes to my mind at the moment. But the problem is that it just continues to choke more and more the delivery of these services. For us, for example, in Oklahoma, it would mean that we would have more local offices that we are having to close and consolidate offices just simply because it is a matter of the funding that we receive.

One thing that Chuck mentioned earlier just brought to my mind, our legislature, and rightfully so, for several years has given pay increases to our State employees. These are State employees but they are coming from a federally-funded source. We just have to eat that. Every time they give a 3, 4, 5 percent salary increase, that is just that many fewer people out there.

Mr. WATKINS. Is 100 percent of that increase picked up by Federal?

Mr. BROCK. We are 100 percent federally funded except we are one of those States, and the report that I gave to you a few moments ago, that about $1.2 million or so from our penalty and interest, we use that to pay about 20 salaries also. That money is over and above what employers are already paying for.

Mr. WATKINS. That is kind of a reverse mandate.

Mr. BROCK. In essence, it is.

Mr. WATKINS. The State says we are going to require the feds to pay more money.

Mr. BROCK. That is correct. And I suspect that the same thing is true in all of the States that I represent and that they have to make it up somewhere.

Mr. WATKINS. We have 77 counties in Oklahoma. How many offices do we have?

Mr. BROCK. We have 40.

Mr. WATKINS. Some people have to drive 50 miles or more if they know --

Mr. BROCK. And this is where we are trying to economize through technology, for example. Taking unemployment insurance claims by telephone as opposed to maybe 40 or 50 minutes waiting on the telephone. That is better than having to drive 50 miles to file an unemployment claim. So there are some economies as a result of technology and so forth. This is the people business and we need to be able to lend people the personal care and assistance that they need, not only in times of crisis and job loss and what-have-you, but for those who have a job but want a better job. We need to be able to help them, too. And as a result, we just end up bottom fishing, if you please. We just end up doing the bare minimum just to get by from day to day.

Mr. WATKINS. In Oklahoma, our per capita income is 20 percent of the national average, and unemployment benefits, I guess, are likewise.

Mr. BROCK. Well, I am not looking at it exactly that way. We pay our unemployment benefits based on a percentage of our average income in Oklahoma. So it is comparable. It fits our specific situation. Now how that relates to the national average as far as benefits are concerned, I would have to do a little research on that.

Mr. WATKINS. Well, I share a concern and look forward to trying to find some solutions and look forward to working with you and other States in trying to find some solutions. And I thank you very much. I know it is a long trip up ; I don't know when you got to town but --

Mr. BROCK. I got a better night's sleep than you did.

Mr. WATKINS. Thank you so much for coming.

Chairman HERGER. Thank you very much, Mr. Watkins. I want to thank each of our panelists for very interesting and helpful testimony. We seem to be unanimous in recognizing that we have a very serious problem and I believe our constituents throughout the Nation expect us to correct this. Certainly part of the problem, and it was just brought out, I believe, by you, Mr. Brock, is that the employer -- going back to something we had stated before, but with a visual of that -- is paying a dollar. The Federal Government is taking that dollar and putting on average 54 cents into a trust fund that is not being used. On average 46 cents -- in your case, Mr. Brock, only 41 cents -- is actually getting back to the States. Some 14 States here actually have had to inflict an additional tax to help meet State costs. We can and should and must do better than this, and hopefully we are going to do that.

Mr. WATKINS. Jon, I am leaving after this year, and I am going to become unemployed.

Mr. BROCK. That is not through no fault of your own.

Chairman HERGER. I want to thank everyone involved, and thank you, Mr. Cardin, for a very informative hearing. Thank you very much. This hearing stands adjourned.

[Whereupon, at 2:10 p.m., the hearing was adjourned.]
[A submission for the record follows:]

American Federation of State, County and Municipal Employees, AFL-CIO, statement