Statement of Christine Owens, Director, Public Policy,
American Federation of Labor and Congress of Industrial Organizations

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

Chairman Herger, Ranking Member Cardin, and distinguished members of the Human Resources Subcommittee, on behalf of the 13 million working men and women of the AFL-CIO, I appreciate the opportunity to join you today to present our views on the Administration’s proposals for changing the nation’s unemployment insurance (UI) and employment services (ES) system.

The AFL-CIO believes that legislative debate about how best to fix the nation’s unemployment system is long overdue.  The only recent debate concerns extending benefits for workers who have exhausted their regular UI benefits.  While such relief is critical, especially now, when 11,000 workers are exhausting their UI benefits daily, it is no substitute for a careful and thoughtful examination of the ways in which the program should be changed to meet its intended purposes, while providing greater certainty of funding and more flexibility for states and reducing some burdens for employers. 

Regrettably, however, the Administration’s proposal – which gradually cuts employer federal unemployment taxes 75 percent and transfers the responsibility for administrative financing to the states – falls short of these goals.  The Administration's flawed approach would unravel a careful balance that has served national, state and individual interests for over 60 years.  The proposal puts worker benefits in direct competition with UI administration, placing both at risk.  The plan turns over to the states a primary federal responsibility, the administrative financing of state operations.  It would significantly reduce employer premiums but fails to address the long-term decline in coverage of unemployed workers, and, in fact, may exacerbate the problem.  In short, instead of strengthening this important economic security system, the President's proposal could weaken it further.

The Unemployment System Fails to Meet the Needs of Today’s Working Families

The UI and ES systems are in substantial need of repair and reform.  Too few of today’s unemployed workers receive too little in benefits for too short a time with too little help in securing new employment.  In most states, UI eligibility rules mirror decades-old labor market conditions, when most workers were men in full-time manufacturing jobs.  But the workforce has changed dramatically over the past thirty years, with more women, more “contingent” workers and more part-time workers than ever before.  The current UI system fails many of today’s workers for three main reasons. 

First, most states do not use the “alternative base period” for determining UI eligibility and instead, continue to count only the first four of the last five completed quarters of employment, thus excluding a worker’s most recent work experience and wages.  As a result, an average of 13 to 25 weeks’ pay is disregarded in eligibility determinations.  Base period calculations disqualify not only those with limited work histories, but even those who work consistently but who cannot qualify without having their most recent wages counted.  The impact of this method for determining eligibility falls disproportionately on low-wage workers.  This group also includes many women who have recently left welfare for work, but who are among the first to lose their jobs during downturns. 

Second, in the majority of states (around 30), unemployed workers seeking part-time employment are not eligible for benefits.  Again, this exclusion falls most heavily on women, who are 70 percent of all part-time workers.  Millions of workers who seek part-time jobs do so in order to accommodate family caregiving and other responsibilities. For many single mothers, a part-time job is the family's sole source of income.  Individuals seeking part-time work should not be penalized with a denial of UI benefits simply because they are unable to work full-time.

Finally, UI benefits are too low.  Nationally, UI benefits replace somewhere between 33 percent and 39 percent of recipients’ former wages.  Average weekly UI benefits range from $157 in Mississippi to $269 in Massachusetts, but these amounts do not take into account the reduction resulting from federal taxation.  Estimates of the income needed to meet basic family needs dramatically underscore the inadequacy of UI benefits.  A single parent family with two children in Biloxi needs $1153 a month to meet basic needs; average benefits equal only slightly more than half that amount.

In part to address these systemic failings, a multi-year “stakeholder” process produced a set of consensus UI reform proposals less than two years ago, which offered substantial improvements over the status quo for all participants:  employers, workers, state UI administrators, and the federal government.  The “stakeholder” consensus proposal did not contain every reform to the UI and ES systems sought by participants, including worker advocates.  It omitted many crucial improvements, such as lowering earnings thresholds, increasing the federal taxable wage base, eliminating the federal taxation of UI benefits, expanding coverage of workers who separate from employment due to compelling personal circumstances, eliminating non-monetary disqualifications, and prohibiting states from tying laid-off workers to their former temporary help agencies.  Nonetheless, the consensus proposal offered a road-map to a fair, balanced compromise that would improve the UI and ES systems in many ways.  It promised eligibility reforms that would benefit millions of low-wage and part-time workers.  It guaranteed states adequate funding by moving administrative financing to the mandatory side of the budget and applying a formula to reward states for running good programs.  And it repealed the 0.2 percent FUTA surtax and reduced paperwork requirements for employers.  Employer representatives, however, walked away from the proposal before Congress could enact the reform package.

The Administration’s UI Proposal Fails Unemployed Workers

In contrast, the Bush Administration’s proposal preempts the consensus process and proposes changes that offer employers a substantial tax cut but largely ignore workers’ needs.  For employers, the President proposes to phase out 75% of the Federal Unemployment Tax (FUTA), which finances administration of the UI system and helps insure program stability.  Under the Administration’s proposal, states would have to raise the funds for UI administration on their own, with the federal financial role eliminated due to the proposed FUTA repeal.

The Bush proposal contains no reforms to ensure that the UI system meets the needs of today’s working families.  There are no benefit increases, no coverage for part-time and low-wage workers, and no alternative base periods for determining eligibility and benefits.  The Administration proposes to lower the extended benefits (EB) trigger, but this change will provide no assistance to workers currently unable to access the UI system - a major worker priority.  In addition, few workers will benefit from the modest proposed reform of lowering the EB trigger from an Insured Unemployment Rate (IUR) of 5 percent to an IUR of 4 percent.  In the 1990’s recession, only 10 states triggered on to the permanent federal Extended Benefits program; under the Bush proposal, only 15 states would have been able to use this program, which would remain an inadequate response to national economic recessions.

As the Members of the subcommittee well know, the national UI system is already failing to provide adequate wage replacements for most workers and preventing many laid-off workers from accessing benefits at all.  The Administration proposal will exacerbate this problem.  By eliminating the “firewall” between UI benefit payments (determined by states) and UI administration (financed with federal grants), the Bush plan would create a competition that would force many states to cut worker benefits or reduce access to the UI system in order to pay for administrative costs.  Under the current needs-based allocation system, states with higher recipiency rates (those that pay benefits to a higher percentage of their workforce) receive a higher percentage of administrative dollars than those with lower recipiency rates.  When states have to rely on their own employer tax base, employer interests will put pressure on these states to reduce their recipiency rates or cut benefits in order to avoid tax increases and keep administrative costs down. 

It is not mere speculation to forecast further reductions in state benefits as a consequence of saddling states with additional financial responsibilities for the UI system.  During the economic expansion of the 1990s, far too few states acted to modernize their UI systems, increase benefits, or cover more workers.  On the contrary, many states reduced employer taxes and failed to build up prudent trust fund surpluses during the boom years that would have been available during the current recession. 

Nor would the promise of a sizable Reed Act distribution, as contemplated under the President’s plan, ensure that states enact legislation to treat low wage and part-time workers more fairly.  In a recent survey by the National Association of State Workforce Agencies, a majority of states said they would not use funds from a Reed Act distribution to expand coverage to low-wage and part-time workers, even though these are the workers at greatest risk of being laid-off.  In many states, these workers are now paying for a UI system from which they cannot benefit, since they have already had unemployment insurance taxes withheld from their wages (like any other payroll tax, workers pay in the form of reduced wages; employers simply write the check).

The UI System Will be Weakened and State Governments Will Suffer

Over the past decades, state governments have repeatedly called attention to the fact that the federal government has been underfunding UI and ES administration, to little avail.  The “stakeholder” consensus proposal would have provided guaranteed “mandatory” federal funding for state administrative costs.  In contrast, the Administration proposal does not solve the problem of administrative funding and offers a bad deal for many of the states.  Although the Administration proposes transferring $14 billion from the Federal trust fund into state trust funds during the five-year transition period, there will be no federal administrative funding after that. 

States would have to raise over $3.5 billion annually in new state revenue simply to make up for the loss in federal funding.  The Administration promises employers a 75 percent FUTA tax cut (from 0.8% to 0.2% of the first $7,000 earned by each employee), but remains silent about the amount that states will be able to raise through corresponding state tax increases levied on employers to pay for administrative costs.  Employers cannot be expected to complacently accept a dollar-for-dollar restoration of the federal tax on the state level; in fact, employers have already “claimed” the first 0.2 percent reduction in the FUTA tax as a permanent elimination of the temporary 0.2 percent FUTA surtax.  States would therefore have the potential of raising taxes on employers by only 0.4 percent (half the current FUTA rate), and will face constant employer pressure against the necessary taxes to pay for administration.  For instance, California currently receives $459 million in annual federal grants to pay for administration costs, and it would have received $598 million under the stakeholder proposal.  California employers currently pay $814 million in FUTA taxes, and thus, the most the state would likely be able to collect under the Administration’s proposal is $407 million.  To make up the administrative financing shortfall, the state would either have to cut benefits or raise taxes above the level employers expect to pay.  Many other states would face similar prospects.

Worse yet, many states with higher recipiency rates fare better under the existing financing mechanism than they would under the Administration’s proposal, while conversely, those with lower recipiency rates often stand to benefit from the Administration’s plan, assuming they impose a 0.4 percent tax on employers.  (See Attachment 1).  Almost without exception, states with above-average recipiency rates would fare better under the stakeholder proposal than under the Administration’s plan.  For example, Texas, Oklahoma, Florida and Alabama have recipiency rates of less than 30 percent, and all would fare better under the Administration’s plan (assuming they impose a 0.4 percent tax).  On the other hand, Connecticut and Massachusetts, with recipiency rates of 73 percent and 71 percent, respectively, would fall millions of dollars short of the funding they need. 

By severely curtailing the federal role in the UI system, the Bush plan would damage the counter-cyclical and national risk-sharing elements of the national federal-state partnership.  The Administration would sever the connection between administrative funding and workload needs, since federal grants are currently allocated among the states according to their workload, and the federal government automatically releases additional administrative funding if national unemployment rises above certain levels and the state’s number of claimants rise.  Individual states would not be able to replicate this national financing mechanism effectively.  Furthermore, some states have mismanaged their trust funds by failing to build up adequate reserves and choosing instead to give their employers tax cuts.  Most notable are New York and Texas, which will be borrowing $1.5 billion from the federal government because their benefit trust funds are running out of money.  Unless the states build adequate reserves during economic expansions, they will not be able to increase their administrative resources easily when claims surge during recessions, instead borrowing from the Federal loan fund with interest and unnecessarily increasing the cost of their operations. 

Finally, the Bush plan undercuts the primary enforcement mechanism for Federal protections.  With the federal government's authority to award administrative grants eliminated, the justification for federal involvement in administrative matters will become extremely weak since no federal money will be involved in state operations. There will be irreparable damage to the federal government's ability to maintain and enforce core national standards relating to state administration of their programs, including requirements to maintain proper and efficient administration, pay benefits accurately and promptly "when due," and provide a fair and impartial hearing process. 

Conclusion

For the foregoing reasons, the AFL-CIO opposes the Administration’s proposal to repeal virtually all of the employer FUTA tax and to turn over the responsibility for administrative financing to the states.  We believe that such an approach abrogates a critical federal role and makes it less, rather than more likely that unemployed workers will collect benefits in the future.  We encourage the committee to advance real, comprehensive UI and ES reform that provides a national economic safety net for all unemployed workers and an effective path to re-employment, while enhancing administrative financing for states and easing employer burdens.  The touchstone for reform, however, should be enhancing protections for workers, and in this regard, the Administration’s plan fails completely.

Attachment 1