Committee on Ways and Means, Subcommittee on Human Resources, 3-5-02 Testimony

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

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

Good afternoon, Mr. Chairman and members of the committee. My name is Chuck Yarbrough, and I am Director of Corporate Human Resources for Tyson Foods, Inc., the nation's leading producer of protein consisting of poultry, beef and pork, as well as other convenience food products.

I am testifying on behalf of UWC - Strategic Services on Unemployment & Workers' Compensation. I am proud to serve as the Chairman of the UWC Board of Directors. UWC, which was founded in 1933, is the only business organization specializing exclusively in public policy advocacy on national unemployment insurance (UI) and workers' compensation issues. UWC is intimately acquainted with UI laws; our research arm, the National Foundation for Unemployment Compensation & Workers' Compensation, publishes numerous materials on UI, including the annual Highlights of State Unemployment Compensation Laws. I have also been a member of the National Employers Council (NEC). I served as NEC's elected representative for employers in the Department of Labor's Region VI (Arkansas, Louisiana, New Mexico, Oklahoma, and Texas). In this capacity, I represented employers before the Department of Labor (DOL) and state employment security administrators.

We are pleased that the Human Resources Subcommittee is holding these hearings today on the Bush Administration UI reform proposal. We appreciate the opportunity to acquaint you with the concerns of employers and provide our recommendations on how to maintain a sound UI and employment services system, especially relating to proposals for administrative financing reform.

UWC supports a strong UI/ES program through which employers provide fair and affordable insurance benefits for a temporary period of time to workers with a strong attachment to work who are temporarily and involuntarily jobless when suitable work is no longer available. UWC believes that a sound UI program is best embodied through the state UI/ES system, with a limited federal role where uniformity of state law is considered essential.

The principal federal role in the UI system is to provide administrative financing. Unfortunately, the present administrative financing system is not working effectively. Workers are under-served, employers are over-taxed, and state UI/ES agencies are under-funded. Under the current system the federal government holds 100% of Federal Unemployment Tax Act (FUTA) receipts but returns only 50% to the states.

Major employer concerns with the present federal role in the UI system can be summarized as follows:

The FUTA tax rate is excessive and resulting FUTA surpluses are not being returned to state UI trust accounts as required by the Reed Act.

Under current law, the Federal Unemployment Tax Act (FUTA) rate is 0.8%. This rate is 25% too high as the result of a 0.2% "temporary" surtax which is no longer needed. Although FUTA funds are held in a trust account and may be expended only for limited purposes spelled out by statute, the surtax is now being maintained only because inclusion of FUTA funds in the unified federal budget makes more money available to meet budget targets for other spending programs. The practice of counting FUTA funds for spending on other programs, leaving only an IOU and an accounting entry behind, is contrary to the very reason why Congress placed these funds in the Unemployment Trust Fund in the first place. In effect, the budget rules allow the misuse of FUTA funds for purposes unrelated to the UI/ES system.

Congress originally imposed the surtax more than 25 years ago to pay for a temporary federal program of supplemental unemployment benefits. The surtax was to expire upon the retirement of this deficit. The deficit was paid off in 1987 but the surtax has been extended 4 times and now expires at the end of 2007.

Despite the fact that the ceilings on the FUTA accounts in the Unemployment Trust Fund were doubled when the surtax was last extended, balances in these accounts now far exceed their statutory ceilings. When the FUTA accounts are all at their maximum, as they are today and into the foreseeable future, a law known as the "Reed Act" requires any amount above the ceiling to be distributed into the state UI benefits accounts. Last October DOL reported to Congress that over the next 10 years, Reed Act distributions will total $43 billion. While these projections have now been somewhat reduced, a substantial Reed Act distribution of $3.2 billion is projected for FY 2003. These Reed Act funds are urgently needed to replenish state UI benefits trust fund balances that have been drawn down in the aftermath of September 11 and the recession. Reed Act funds may also be used by states, upon state appropriation, to supplement state UI/ES administrative funding, eliminating or reducing the need for supplemental state UI taxes.

Let me repeat: The revenue from the FUTA surtax is not needed for the UI program. Only 50 cents out of every FUTA dollar is being spent as intended on administration of the UI program and state employment services. Furthermore, no additional accumulation of funds in the account used to pay the 50% federal share of extended benefits (EB) is necessary to meet foreseeable needs, including temporary extensions of UI duration that have recently passed the House and Senate.

State administrative grants are inadequate for efficient administration, resulting in quadruple taxation of employers.

To effectively serve their customers, UI/ES agencies must be efficiently administered. In recent years, this goal has been frustrated because federal appropriations for state UI agencies have been inadequate, leading to a reduction in services for jobless workers and employers. UI claimants in turn draw additional weeks of UI benefits. This situation results in higher state UI benefit costs and in turn, higher payroll taxes to finance the additional weeks claimed. Because state UI taxes and benefit payments are also included in the unified federal budget, inadequate funding for administration also increases federal outlays.

The hidden consequences of inadequate administrative funding also results in more fraud and abuse. The latest Department of Labor statistics show that 9.5% of UI payments are estimated to be improper. Last year the Senate Government Affairs Committee issued a report called "Government at the Brink" that included UI fraud as one of "The Federal Government's Top 10 Worst Examples of Mismanagement."

Because of inadequate federal administrative grants for state UI/ES agencies, employers have been asked to pay a second, third, and fourth time for the same service for which FUTA taxes are assessed - amounting to quadruple taxation. The inadequate federal grants have directly increased the state tax burden on employers in several ways.

Many states have been forced to dip into their own general revenues or impose new add-on payroll taxes on employers -- above and beyond the state tax used to finance UI benefits -- to make up some of the shortfall in FUTA funding from Washington. Most of the additional tax burden directly or indirectly falls on employers.

In addition to the add-on taxes, basic state UI taxes are inflated because workers are collecting additional weeks of UI benefits. A recent estimate showed that the average duration was 2 weeks longer than expected at comparable levels of unemployment.

On top of paying higher state taxes, many employers are forced to expend additional resources for employment services they have already paid for through FUTA but don't receive because states have been forced to close offices and eliminate employment counselors and other services. This has been an acute problem for workers in rural areas and others who are costly to serve. My own company has actually paid the rent to keep the local employment service office open in Carthage, Texas.

Freeing FUTA funds already contributed by employers for the very purpose of providing efficient and effective UI and ES services will eliminate the need for supplemental taxes and unnecessary indirect expenses.

SOLUTIONS

To fix these problems, UWC has been a staunch advocate of reform of the administrative financing system for state UI and employment services (ES) agencies. This reform is urgently needed to strengthen the state unemployment insurance and employment services (UI/ES) system and deliver the services for which business has paid through our Federal Unemployment Taxes. Reform will also provide funds needed to implement the Workforce Investment Act.

Although there is great controversy regarding proposals for federal expansions of UI eligibility and benefit levels, there is a consensus in support of administrative financing reform. Reform will help jobless workers return to employment more quickly, reduce payroll taxes, and alleviate the financial pinch on state administrators. Now that's what I'd call a "win-win-win" situation.

However, while there is agreement on the need for administrative financing reform, a consensus regarding the right way to achieve it has not yet formed. There are several proposals to improve and simplify UI/ES administrative financing reform which recently have been under active consideration.

In evaluating these proposals, UWC believes there are 3 core ingredients:

Eliminate the unnecessary "temporary" 0.2% Federal Unemployment Tax Act (FUTA) surtax on employers, which should have expired in 1987.
Impose employer taxes to finance system administration consistent with sound UI operations needs rather than inflexible federal budget rules.
Financing for UI/ES administration is provided at adequate levels, avoiding both under-funding and excessive taxes.

Specific criteria which should be applied in implementing these principles are attached to this state.

One approach, on which we testified before this subcommittee on February 29, 2000, was introduced in the 105^th Congress and reintroduced in the 106^th by Rep. Jim McCrery, with bipartisan support. This approach had the support of an informal coalition of more than 100 business organizations and 34 states and is therefore known as the Coalition approach. UWC launched and served as the business leader of this coalition.

The McCrery bill eliminated the 0.2% FUTA surtax but preserved the remaining 0.6%. However, instead of pooling all FUTA payments in a single federal UI/ES administration account (ESAA), subject to Congressional appropriations and an allocation among the states theoretically based on workload, FUTA taxes paid by employers in each state are credited to a new administration account set up for each state. Each state legislature, rather than Congress, determines how much it needs to administer its own UI/ES program. A small amount is transferred into a special account to be used for supplemental grants to small states which need additional funds to administer their program, and a small amount is set aside for U.S. Labor Department operations related to UI. Under this approach, FUTA funds that are not needed for administration - and excess FUTA funds that have already been accumulated - automatically flow into the state's UI benefits account.

The Department of Labor (DOL) has now proposed another approach to administrative financing. We are looking forward to seeing the actual DOL proposal and all of its elements, but we can make some general comments about the DOL approach pending our review of bill language. DOL proposes to reduce the FUTA tax rate to 0.2% and states will be responsible, after a transition period, for raising the revenue needed for system administration.

The DOL approach has the potential for significant benefit to the UI program. We are pleased that it includes a repeal of the FUTA surtax and believe it will provide the opportunity to improve funding needed for state UI/ES agencies. It is a great virtue that the DOL approach eliminates the fatally flawed federal appropriations mechanism. We believe adequate funding for administration is much more likely to occur using this approach, because state legislatures are of necessity closer to their own state agencies and UI programs than Congress, and because UI/ES administrative funding will no longer have to compete with other federal spending priorities. Additional savings are possible through the release of surpluses in FUTA receipts into state benefit accounts and through the repeal of state tax diversions and add-on taxes on employers, which will no longer be necessary. A reduction of as little as one week will save another $1.5 billion a year for employers by reducing their state unemployment tax.

There are two respects where we believe refinements to the DOL approach are necessary. While giving states the responsibility for administrative funding provides an opportunity for a net reduction in the total administrative cost burden on employers, it may also allow states to impose higher administrative taxes on some or all employers than under current law. For example, if states levy a new administrative tax using their existing wage base, many employers in states with a wage base over $7,000 could face a significant tax increase.

The DOL approach also leaves open the possibility of commingling UI benefits and administrative revenue. Such commingling could lead to the diversion of revenue needed for benefit payments and ultimately lead to higher benefits payroll taxes.

UWC will work with Congress to provide appropriate protections against net increases in administrative taxes and against commingling of benefits and administrative moneys.

CONCLUSION

UWC supports a strong UI system and the concept of a federal-state partnership, under which the UI system has been a general success. However, the present UI/ES administrative financing mechanism is not working effectively. The federal budget process as now applied to FUTA taxes and UI/ES administrative funding is detrimental to a sound, efficiently administered program. Considering that federal stewardship of program administration now over-taxes employers and yet under-finances UI/ES administrative agencies, we believe that workers, employers, and the public will be better served if states are allowed greater control over administrative funding. There are several different ways to accomplish this objective. The Department of Labor has made a significant proposal with potential to solve the problem, and UWC looks forward to working with the Bush Administration and Congress to enact positive administrative financing reform this year.

Attachment

UI/ES Administrative Financing Reform Policy
February 28, 2002

Proposals to reform the state unemployment compensation and employment services (UI/ES) administrative financing system have the potential for significant cost savings for employers while improving the integrity of the unemployment insurance (UI) system, which is also important to employers. To satisfy those objectives, administrative financing reform must be in accordance with the following principles:

The 0.2% FUTA surcharge is discontinued.
Employer taxes used to finance the UI system are imposed consistent with sound UI/ES operations needs rather than federal deficit reduction.Financing for UI/ES administration is provided at adequate levels, avoiding both under-funding and excessive taxes.

IMPLEMENTATION PRINCIPLES

Any new administrative financing system must include the following protections:

Federal law must continue to require that states maintain a UI program and a public employment service.
Federal requirements for due process, payments when due, etc., are retained.
States are required to continue responsibility for the interstate compact.
To the extent that states are responsible for imposing and collecting an employer payroll tax to finance their own administrative agencies
1. The tax should be collected as a line item on the state UI tax form.
2. To maintain the relative share of contributions from high-wage and low-wage employers, the state tax rate for this purpose, when applied to the taxable wage base, shall not generate an amount exceeding $28 per full-time employee/year.
3. States are required to reserve for future administrative needs but must have the right to borrow from federal general revenues (with interest) if necessary.
4. Funds for administration are not commingled with revenue used for benefits.
5. Dedicated funding must be maintained for essential federal UI/ES functions, such as Department of Labor oversight, the federal share of extended benefits (EB), and supplemental funding for small states. This amount could be collected by continuing a reduced FUTA tax which we estimate should not exceed .2% on the $7,000 FUTA wage base, or a comparable amount collected as a surcharge on state UI taxes.
To enhance the accountability of state UI agencies, states must provide to the state legislature, the U.S. Department of Labor, and the public annual data and reports on employment services provided to UI claimants. The initial report would be due within 90 days after completion of the first fiscal year in which the new administrative financing system is implemented, and then annually thereafter. UWC believes that rather than impose federal performance standards, it is preferable to give each state the maximum latitude to determine how best to serve its own claimants, while providing information on agency performance needed by employers and others interested in the UI program through these reports.
The full cost (including administrative costs) of Federal programs such as Trade Adjustment Assistance, emergency unemployment assistance, and UCFE and military programs should be funded by the federal government out of general revenues rather than FUTA revenue. Congress has recognized that benefits under these program should not be an employer financial responsibility and has provided general revenue funding. UWC believes that it is also inappropriate to tax private employers for the administrative costs of these programs.
There is no need for a pre-funded loan account. States may borrow from federal general revenues, subject to interest, or borrow from other sources.
The Reed Act should be maintained, allowing FUTA dollars exceeding an actuarially determined cap based on UI program needs to be returned to state UI benefits trust accounts.
UI taxes may be collected no more often than quarterly.