Statement of the Hon. Emily Stover DeRocco, Assistant
Secretary,
Employment and Training Administration, U.S. Department of Labor
Testimony Before the Subcommittee on Human Resources
of the House Committee on Ways and Means
Hearing on the President's Unemployment Administrative Financing Reform Initiative
March 5, 2002
Mr. Chairman and distinguished Members of the Subcommittee, I appreciate the opportunity to appear before you today to outline the President’s Employment Security Reform Act of 2002.
This proposal for reform of the unemployment insurance (UI) and the employment service (ES) programs represents a New Balance. It addresses short-term needs and provides long-term changes to assist economic growth, promote flexibility, and strengthen the critical services that states provide to America’s workers and businesses. Together, the UI and ES programs represent core elements of the public workforce system. UI is key to the economic security of our nation, acting as a stabilizer during economic downturns by being the primary source of temporary, partial wage replacement for workers who have been laid off and are seeking jobs. ES helps unemployed workers find jobs and employers find new workers; it is the backbone of the One-Stop service delivery system established under the Workforce Investment Act of 1998.
Background
Over the past several years, all major stakeholders involved with the UI and ES programs have expressed dissatisfaction with some aspects of the present system.
In response to these concerns, the President is proposing actions and reforms that would continue the federal-state partnership that has been responsible for these programs for nearly 70 years, but would strike a New Balance between the federal and state governments, empowering states to manage funds and direct policy with greater flexibility and freedom.
Short-Term Actions
Short-term actions are designed to meet the present needs of unemployed workers during the current economic slowdown. The Administration’s proposal includes a temporary extension of unemployment benefits and an immediate distribution of excess federal unemployment funds (commonly called a Reed Act distribution).
Temporary Extended Unemployment Compensation (TEUC)
To aid unemployed workers who have exhausted regular state UI benefits during the economic downturn that began last March and to promote recovery, we are proposing a temporary extension of unemployment benefits. TEUC would be payable under agreements between the Secretary of Labor and states and would be in effect for weeks of unemployment beginning after the date of agreement and ending before January 1, 2003. There would be no state triggers under TEUC; benefits would be payable in all states. The program would be entirely federally financed, almost all from the federal Unemployment Trust Fund (UTF) accounts. Generally, benefits would be payable to individuals who filed an initial claim for regular compensation on or after the week including March 15, 2001, and have exhausted regular benefits. Eligible individuals would receive 50 percent of their regular compensation up to a maximum of 13 weeks as long as they meet the continuing eligibility conditions of state law.
Reed Act Distribution
Current levels of unemployment, exacerbated by the terrorist attacks on September 11, have strained the capacity of states to provide needed benefits and services. In response, we propose to distribute to states about $9.24 billion in excess federal unemployment trust funds, some of which are otherwise scheduled to be distributed on October 1, 2002. These funds could be used to enhance services to businesses and reemployment services to unemployed workers through One-Stop Career Centers, shore up low reserves in state trust funds accounts, allow a cut in state unemployment payroll taxes, or expand benefits. The funds would be distributed by the current-law formula, i.e., based on the state’s share of federal taxable wages.
Long-Term Reforms
Consistent with these immediate actions, the Administration is proposing a long-term vision that would make UI and ES programs more responsive to the needs of workers and business by:
Administrative Funding
To address state concerns about inadequate federal funds for UI and ES services, we are proposing to transfer the administrative funding of UI and ES programs to states. Under current law, the federal government collects a federal unemployment tax, holds some of the revenue in reserve, and sends the rest back to states to operate their UI and ES programs. States have long complained that inadequate funds were returned to provide the services needed by employers and workers with ES levels basically “frozen” since 1984 and with UI levels falling 10 percent or more below need in the 1990’s, even though plenty of money was available in the UTF. States already collect state unemployment taxes to fund benefits, so it makes sense to give the states responsibility for and control of administrative costs as well.
A question has been raised whether this could cause states to cut benefits and services to workers to achieve lower taxes for employers. States, under current law, already have the responsibility to determine UI eligibility for benefits and to set and collect experience-rated taxes, which will total about $30 billion for fiscal year 2003, for financing these benefits. Our proposal shifts administrative funding responsibility of about $3.5 billion to the states while also shifting a federal payroll tax cut of over $5.5 billion to their employers. We believe that the states have sufficient incentives to adequately fund the UI and ES benefits and services that assist workers and employers, and therefore, that the transfer of responsibility will have absolutely no negative effect on such benefits and services.
To give states sufficient time to make any necessary administrative adjustments or law changes, the transfer of funding authority from the federal to the state level would be phased-in over several years. Special Reed Act distributions would be provided in fiscal years 2004 and 2005. Federal transition grants would be provided in fiscal years 2005 and 2006. Beginning in fiscal year 2007, states would be responsible for full funding of state UI and ES programs.
We understand that small states are concerned that the proposed FUTA tax savings for a small state’s employers may not equal the amount of the current federal UI and ES grants for such states. Our proposal would address these concerns by providing federal supplemental funding in such cases to states with a civilian labor force of fewer than 1,000,000. Currently 17 states meet this criteria. This funding would be available during the transition and thereafter.
Extended Benefit Program
We are also proposing two changes in the extended benefit (EB) program. The insured unemployment rate required to make EB available in states would be lowered from 5.0 percent to 4.0 percent. Also, the special federal EB eligibility requirements would be eliminated. State requirements for regular compensation would then apply, simplifying state administration and cutting “red tape” for workers. These changes combined would improve recession readiness and economic stabilization by making EB available sooner and to more workers in an economic downturn. Extending benefits when unemployment is high helps keep money flowing into local economies. Research shows that each $1.00 in benefits generates $2.15 in economic activity.
Federal Unemployment Tax Act (FUTA)
Employers have long complained that FUTA taxes are too high and too little of FUTA revenues are used for their intended purposes. Indeed, a 0.2 percent FUTA surcharge that was levied in 1977 fulfilled its purpose of repaying general revenue loans to the UTF in 1987. However, this “temporary” tax, which generates about $1.8 billion annually, has been extended through 2007. This has produced very healthy reserves in the UTF accounts of about $39 billion. These reserves would allow us to cut taxes without risking the availability of funds to make advances to states needing money to pay UI benefits or to pay the federal share of extended benefits.
The tax rate would be reduced to 0.6 percent in 2003, cutting taxes by 25 percent. The rate would be further reduced to 0.4 percent in 2005, and to 0.2 percent in 2007, and thereafter, for a federal unemployment tax cut of 75 percent from the current level. The 0.2 percent remaining FUTA tax would be used to make federal loans available to any state that runs out of funds to pay UI benefits or administrative costs, pay the federal share of extended benefits (EB), make state grants for, and pay for federal administration of, certain federal activities, and supplement administrative funding for “small states.” In addition to the tax reduction, FUTA forms and filing requirements would be streamlined through a technical change to federal law, and employers would be required to deposit unemployment taxes no more frequently than quarterly.
The Federal Role in the New Balance
At this point, I want to emphasize that the New Balance proposal continues to recognize the important national interest in the performance of these programs; they are critical to our economy, and the proposal maintains a strong role for the federal government in their oversight. Examples of federal requirements that would be retained are, for the UI program, prompt and proper payment of benefits, impartial hearings, and broad coverage for workers who are subject to involuntary unemployment. For the ES program, states would be required to administer a free public labor exchange and deliver employment services for the benefit of businesses and job seekers.
States would have to meet federal requirements for UI and ES in order for their businesses to qualify for a substantial credit against FUTA. Failure by a state to comply with the requirements would (after due process) result in employers in the state losing the tax credit. The potential for a large increase in employer rates is the current means by which many federal UI requirements are enforced. This proposal maintains this tax credit mechanism and extends it to the UI requirements currently applicable only to administrative grants and to the ES program. Specifically, the current total FUTA tax is 6.2 percent, the maximum credit is 5.4 percent, and the net tax is 0.8 percent. In 2007, the total tax and the net tax drop to 5.6 percent and 0.2 percent, respectively, but the maximum credit remains at 5.4 percent.
As noted previously, federal grants to states would continue for certain federal activities, such as federal unemployment claims, alien labor certification, various required reports, and to supplement small states.
Conclusion
Mr. Chairman, we hope that we can count on your support for these reforms that, with federal assistance and commitment, provide sufficient funding and give states the autonomy to customize programs that best serve their businesses and workers.
Thank you for the opportunity to testify today. I will be happy to answer any questions you may have about the New Balance proposal.
