59

The Coalition for U.C.

ATT
‘Acordia of Ohio

‘American Automobile Manufacturers Assoc.
‘American Iron and Stee! Institute

‘American Payroll Association

‘Ames Department Stores, Inc.

‘Armes, Ine.

‘Associated Builders and Contractors, In.
‘Associated Industries of Flotida

‘Associated Industries of Kentucky

‘Associated Industries of Massachusetts
‘Associated Industries of Missour

‘Associated Industries of Vermont

BF Goodrich Company

Bank of America

Bamard Insurance Company

Bamett Associates, Inc

Barry Trucking, Ine

Bee industries, inc

Betz Laboratories, nc

Business & Industry Assoc. of New Hampshire
C&M Services, Inc.

C.& S. Development, In,

‘CBI industries, Inc

Califomia Association of Hospitals and Heath Systems
California Taxpayers! Association

‘Camochan & Felton Gardiner

Casper Housing Authority

Caterpillar, Ine

Clay's Electrical Service, Ine

Clorox Company

CoGe's Co,

‘Connecticut Business & Industry Association
‘Council of State Chambers of Commerce
‘Ceystal Flash Petroleum

DYR Ine,

Delaware State Manufacturers Association
Digital Equipment Corporation

E& S Services

El, DuPont de Nemours and Company

East Alco

Eastman Kodak Company

Employer's Unemployment Compensation Task Force
Employer's Unempioyment Compensation Council
Employers Group

Employers Service Corporation

Employers Unity, In.

Federated Department Stores

Food Marketing Institute

Frank Gates Service Company

Georg

Gibbens Company

Grainger Manufacturing

Gulf Copper Manufacturing Corp.
Hair Works

Harrington Services

Heat Transfer Equipment Company
Heiss, Gibbons & Company, Ine
Herbruck Poultry Ranch, Inc.

inois Manufacturers Association
Miinois State Chamber of Commerce
Indiana Manufacturers Association
Towa Association of Business & Industry
3C Penney

Jarvis F. Windom & Assoc

John Deere & Company

Kyysor Industrial Corporation
Laurdan Associates, In.

Tax Reform

Liberty Murua! Group
Louisiana Assn. of Business & Industry
M.A. Hanna Company

MS Manufacturers Assn

Management Assoc. of Hlinois

Mazzion Intemational, inc.

Martin Boyer Company, Ine.

Maryland Benefit Advisors, Inc.
Maryland Chamber of Commerce

Masco Corporation

May Department Stores

Meredith Corporation

Met Life Insurance

MI Health & Hospital Assn. Service Corp.
Michigan Manufacturers Association
Mississippi Hospital Association
Mississippi Manufacturers Association
Missouri Merchants & Manufacturer's Ass,
Monsanto Company

Nat! Assn. of Professional Employee Orgs.
[National Association of Manufacturers
[Nat Federation of Independent Business
[New Jersey Business & Industry Assn
NM Association of Commerce & Industry
Ohio Chamber of Commerce

Ohio Manufacturers’ Association
‘Oklahoma State Chamber

Oneida Lid

PA Chamber of Business and Industry
PPG Industries, Inc.

Paradise Valley Golf Cub, In.
Pennsylvania Manufactures Association
Pfizer, Inc

Pratt & Lambert United

Procter & Gamble Company

Rockwell International Corporation
Ryder Systems, Inc

Sears

Sherwin-Williams Company

Society for Human Resources Management
‘Sukup Mansfacturing Company

‘Sun Company, Inc

‘Sybron Intemational Corporation

TRW, Ine

‘Texas Association of Business

Toyota Motor Manufacturing USA Inc.
US. Chamber of Commerce

US. Stee! Group

UBA, Inc

USX Corporation

Updike Brothers, Ine.

Varian Associates

‘Vermeer Mfg. Company

‘Walt Disney Company

‘Washington State Hospital Association
Wellington Sears Company

WestPoint Stevens, Inc.

Western Sugar Company
Westinghouse Electric Corporation
‘Weyerhaeuser Company

Whirlpool Corporation

White and Associates

Wisconsin Manufacturers and Commerce
‘Wise Company, Inc

Wooderaft, ne

‘The Coalition for U.C. Tax Reform
1331 Pennsylvania Avenue, NW
Suite 1500 North Tower
‘Washington, DC 20004-1703,



128

Statement of the
National Employment Law Project
& the Employment Task Force to the
U.S. House of Representatives
Ways & Means Committee
Subcommittee on Human Resources

On behalf of the National Employment Law Project (NELP) and the Employment
Task Force (ETF), we are testifying in opposition to the bill sponsored by Congressman
Philip M. Crane (Congressional Record, dated July 11, 1996), to legislatively overrule the
decision in Pennington v. Didrickson, 22 F.3d 1376 (7th Cir. 1994), cert. denied, 115 S.Ct. 613
(1994) (Pennington J). Afier a decision on the merits by the district court, the Penningian case
is again before the U.S. Court of Appeals for the Seventh Circuit (Pennington If) as a result
of an appeal filed by the defendant, Director of the Illinois Department of Employment
Security.

NELP is a national advocacy organization and non-profit law firm that represents
the interests of low-wage workers, the working poor and the unemployed. For over 25,
years, NELP has been actively involved in federal and state policy advocacy and court
challenges to expand access to the unemployment compensation system. With respect to
state legistation specifically, NELP recently authored a report entitled, Women, Low- Wage
Workers and the Unemployment Compensation System: State Legislative Models for Change, and has
authored numerous published articles on the unemployment compensation program.
NELP also provides extensive technical assistance, advice and training to promote access
to the unemployment compensation system. The Employment Task Force (ETE) is a
national network of over 250 advocates who have a special expertise in the
unemployment compensation system representing low-wage and unemployed workers.

Based on our background in the operation of the unemployment program, and its
daily impact on the unemployed, we oppose any legislation to legislatively overrule the
Pennington I case for the following reasons:

+ The Pennington I Decision Upholds 60 Years of Established Law Interpreting the
Social Security Act to Prevent the Hardship Caused by Delayed Payment of
Benefits

+ ‘The Pennington Legislation, if Enacted, Would Continue the Dramatic Decline in
Workers’ Access Unemployment Benefits

+ Gounting Most Recent Earnings When Necessary, as Provided by the Movable
Base Period, Supports Low- Wage Workers, Construction Workers, and other
Neglected Goups

. Eight States Have Enacted a Movable Base Period, Establishing the Feasibility of
its Administration

+ The Movable Base Period Has Broad Bi-Partisan Support in the States

+ To Overrule the Pennington Case by Legislation, While the Appeal is Still Pending,
Would Undermine the Judicial Process


25

TESTIMONY
BEFORE THE HUMAN RESOURCES SUBCOMMITTEE,
HOUSE WAYS AND MEANS COMMITTEE,
BY
ALBERT R. MILLER, PRESIDENT,
PHOENIX CLOSURES, INC.

Suly 11, 1996

‘Thank you, Mr. Chairman and members of the Subcommittee. My name is Bert Miller.
1am the President and chief operating officer of Phoenix Closures. My company is located
in Naperville, Illinois and produces container caps for regional and national brand products,
both domestic and international, Our customers cover a wide array of markets, including
foods, household chemicals, cosmetics, health care products, industrial products and
pharmaceuticals. Phoenix Closures presently employs more than 200 workers and has been
an Illinois employer for over 100 years.

1am here today to express my strong support for the legislation Governor Edgar and
‘Comptroller Didrickson are seeking in connection with the Pennington case. I also have brief
observations regarding the devolution of the employment security system.

As to Pennington, there are problems both with the alternate base period itself and
the manner in which its proponents are trying to implement it. The Pennington alternate base
period would provide for the payment of unemployment benefits, financed exclusively by
‘employers, to individuals with no established connection to the workforce. To that extent, it
‘would tum the unemployment insurance system into a 100-percent employer-financed welfare
program - something well beyond what I understand to have been Congress’ intent and
something employers cannot afford

By increasing outlays from Ilinois’ Trust Fund account, the alternate base period
would also raise employer taxes. The greater the rise in outlays was, the higher the tax
increase would be. The lowest estimate I have seen is that the alternate base period would
increase outlays from Illinois’ account by 1.5 percent. An increase of that size would raise
‘employer taxes by nearly $70 million over the next eight years. There is a Labor Department
study that estimates an alternate base period can raise a state’s Trust Fund outlays by four to
six percent. A six-percent increase in outlays from Illinois’ account would raise taxes on
Illinois business by $350 million over the next eight years.

To put those numbers into context, permit me to discuss briefly my own company’s,
situation. Phoenix Closures’ sales for the year to date are up 30 percent over last year
However, rising materials costs have left the company's bottom line essentially unchanged.
In an environment where output has to improve by nearly a-third just for a business to stay
even, the prospect of any iax increase is daunting. The possibility of a $350-million tax
increase is absolutely staggering,

The alternate base period’s cost to employers, however, would not necessarily be
limited to higher taxes. I understand employers could also be faced with additional reporting
requirements, with penalties for noncompliance, to verify claimant earnings that had not yet
been reported and entered into the state's computers.

1 am also troubled by the potential impact on government - $12 million to $15 million
in start-up costs and $2.5 million in extra annual costs according to the Department of
Employment Security, with no identifiable source to cover those costs, I ant no apologist for
‘government. By and large, it needs to work a whole lot smarter and cheaper than it does right
now. However, we cannot realistically expect those results if we just keep giving it more
things to do. The alternate base period takes us further in the wrong direction in that it just
gives government one more thing to do.


149

benefits longer even when jobs were available. By basing the trigger for extended benefits on a
states' total unemployment rate versus a state's insured unemployment rate, Congress also
broadened considerably who can qualify for extended benefits. Those who argued for this
change claimed that basing benefits on the insured rate meant that many of the unemployed were
not receiving benefits and therefore the program was not working as intended. But, as pointed
out at that time by Labor Department officials, this gap between the number of people who were
unemployed and those collecting benefits is normal and an intended purpose of the program.'!

« Fund the Federal Unemployment Account (FUA) that is used to loan money to insolvent
state UI accounts with either general revenues or a state fee.

Funds in the FUA come from a portion of the FUTA payroll tax on jobs.'? The federal

government uses the FUA to provide loans to states that have depleted their UI accounts during
severe recessions. When the FUA is not being used for state loans, the surplus that builds up in
the account is essentially used to fund other goverment programs and amounts to a tax on jobs
to reduce the deficit. At the end of September 1995 there was a $5.9 billion surplus in the FUA.

+ Repeal the Disabled Veterans Outreach Program and the Local Veteran Employment
Representative Program and amend FUTA to incorporate the veteran preferences
already in Title 38 of the US code (Veterans Benefits).

The administrative efficiency of the ES offices could be significantly improved by repealing
barriers to the integration of veterans’ services with other employment services. As the Vice
President's National Performance Review noted in calling for the removal of barriers,’? DoL's
Veterans’ Employment and Training Service provides for state-employed, federally funded,
employment specialists to serve veterans in local state employment service offices. However,
these staff are legally prohibited from helping non-veterans." So, if a local office is crowded
with non-veterans," points out the NPR, "these specialists cannot help out--even if they have no
veterans to serve.” Employment Service staff would be used more efficiently and the public
better served by eliminating this requirement.

"" Benefits are generally paid to workers with substantial labor force attachment who have lost their jobs through
no fault of their own — not to workers who quit their jobs voluntarily, who were fired for cause, or who have had no
recent employment, such as those who are entering or reentering the labor force. The some of the difference
‘between the insured unemployment rate and the total employment rate is also due to the exclusion of self-employed,
certain agricultural labor and domestic service workers, railroad workers, and certain seasonal camp workers from
collecting UI benefits

"PUTA funds are indirectly deposited the FUA when the EUCA and Employment Security Administration
‘Account (ESAA) have reached their statutory limits. The ESAA is used for financing the administrative costs of the
employment security program and should be phased out. Funds in the ESAA should be allocated to the state Ul
accounts for the administration of their UI programs.

© From Red Tape to Results, p. 80.


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida

BILL THOMAS, California CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, JR., Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee
AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
JIM McCRERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas LF. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts
MAC COLLINS, Georgia MICHAEL R. MCNULTY, New York

ROB PORTMAN, Ohio
JIMMY HAYES, Louisiana
GREG LAUGHLIN, Texas
PHILIP S, ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PuiLup D. MOsELEY, Chief of Staff
JANICE Mavs, Minority Chief Counsel

SUBCOMMITTEE ON HUMAN RESOURCES
E. CLAY SHAW, JR., Florida, Chairman

DAVE CAMP, Michigan HAROLD E. FORD, Tennessee

JIM McCRERY, Louisiana BARBARA B. KENNELLY, Connecticut
MAC COLLINS, Georgia SANDER M. LEVIN, Michigan
PHILIP S. ENGLISH, Pennsylvania CHARLES B. RANGEL, New York
JIM NUSSLE, Iowa FORTNEY PETE STARK, California

JENNIFER DUNN, Washington
JOHN ENSIGN, Nevada

an


9

Congressman Bill Thomas, H.R. 3858. This bill would exempt
services performed by inmates who participate in the Joint
Venture Program and similar programs in other states from
unemployment taxes.

Inmates who work in the prison laundry or kitchen or cabinet
shop are already exempt from unemployment taxes under current
law. Congressman Thomas’ bill would merely extend that exemption
to inmates who work in these relatively new private sector
arrangements.

California voters have already issued a clear statement that
they do not want their tax dollars used to pay unemployment
benefits to inmates released from prison. I urge the
subcommittee to act quickly to resolve this issue by passing
Congressman Thomas’ bill when it considers unemployment insurance

reforms.


68

Mr. Curt. Well, you are really not in it now. The States collect
the taxes. The Federal Government collects the taxes, but the State
really distributes the money, handles all the administrative work
right now.

All I am proposing, at least to some extent, is that the excess
money that the Federal Government collects just stay in the States;
that the function of the Labor Department pretty much stay the
same as it is now, but the excess money stay in the States, and
the States pick up more of a responsibility, but not to wipe out the
whole system. I think it has been very successful.

Mr. RANGEL. Well, I just don’t see why we should be involved in
this if the States believe they can do a better job.

How about extended benefits? Is there a Federal role in that, or
could the States handle that, too, just collect the money?

Mr. BLUE. Well, the Extended Benefits Program which, by the
way, was supported by employers, just simply hasn’t worked ——

Mr. RANGEL. So we can drop it.

Mr. BLUE [continuing]. Because every time something happens,
Congress decides they are going to go ahead and do something in
addition to the Extended Benefits Program.

Mr. RANGEL. So we can drop that.

Mr. BLUE. So I think you could drop that.

Mr. RANGEL. All agree?

Mr. Buus. I think that could probably be dropped, yes.

Mr. RANGEL. So, really, after all the testimony is done, forgetting
what little we are doing, you can tell me what is it besides over-
sight and monitoring you. What would the sanctions be if you
didn’t, besides pay the money that you didn’t put up——

Mr. Curt. Well, I think the proposal would——

Mr. RANGEL [continuing]. Or pay the money that you lost be-
cause of a State recession, but besides being your insurance policy,
what could we do?

Mr. Curt. I think the proposal calls for leaving the trust fund
money still sort of in control of the Federal Government.

Mr. RANGEL. Why?

Mr. Curt. It is the safest place to put it, I would say.

Mr. RANGEL. You have to trust the States, and you have to trust
the—you don’t have deficits. We have them.

Mr. Curt. As far as I am concerned, in Virginia, I would be per-
fectly comfortable with you giving our portion back to Virginia.

Mr. RANGEL. Good. There is no one that objects to that.

Mr. Curt. But you were asking what sanctions. The proposal ba-
sically says the Federal Government could, if they needed to, access
that trust fund and withhold money or change the scope of the
money that was going to States that were not in line.

Mr. RANGEL. OK. Well, listen, the red light is on.

I hope you send to me, besides all of the things that you can do
better, the limited role that you do see the Federal Government can
and should be doing.

Mr. BuUE. And that is part of the proposal.

Mr. RANGEL. Because you would have to agree with me it is frus-
trating to get all of this money from Federal citizens and then turn
welfare over to them, Medicaid over to them, soon Medicare, what-
ever is left of it, and just have us in the role of oversight. Let us


79

Congressman Fred Upton's Opening Statement
H.R. 3430 - Poll Worker Unemployment Reform
July Il, 1996

"The 104th Congress is looking for as many ways as possible to relieve local
governments from unnecessary federal regulations. HR 3430 accomplishes this
goal by eliminating the requirement that States pay unemployment
compensation on the basis of services performed by election workers

“Under current law, cities in your district are responsible for paying
unemployment benefits for people who work as an election official, even if they
only work two days a year. An unemployment claim was filed against one city
in Michigan by an Election Inspector who worked the August Primary and
November General elections in 1994. Amazingly, the city is now responsible for
paying unemployment benefits to this worker.

"Recognizing this injustice, the Michigan State Legislature attempted to change
unemployment laws in Michigan . However, the U.S. Department of Labor was
quick to point out that this situation must first be corrected by amending the
Federal Unemployment Tax Act, known as FUTA. HR 3430 makes this
correction in FUTA and allows the States to provide this exemption, if they chose
to do so.

“The Congressional Budget Office has assured me that this bill is budget
neutral. HR 3430 simply gives the States the freedom to run their unemployment
compensation programs as they see fit

“Municipal budgets are already tightly stretched to provide your constituents
with the services that they need and deserve. | know of no opposition to this bill
and have received many letters of support from local governments from across
the country.

‘Please help get HR 3430 to the House Floor and help free local governments
from a costly and unnecessary requirement."


15

TESTIMONY
BEFORE THE HUMAN RESOURCES SUBCOMMITTEE,
HOUSE WAYS AND MEANS COMMITTEE,
BY
THE HONORABLE LOLETA A. DIDRICKSON,
COMPTROLLER OF THE STATE OF ILLINOIS,
ON BEHALF OF
THE HONORABLE JIM EDGAR,
GOVERNOR OF THE STATE OF ILLINOIS

July 11, 1996

‘Thank you, Mr. Chairman and members of the Subcommittee, for the opportunity to
testify before you today. I am here to ask for your help in passing legislation to overturn the
federal appellate court decision in Pennington v. Didrickson. That decision represents a 180-
degree departure from the manner in which both the federal government and states have
construed the Social Security Act, since that statute's enactment more than 60 years ago, It
also vests unelected federal judges with policy making authority that should properly be
reserved to elected officials. Left standing, it could soon have a costly impact upon employers
and state govemment in Hlinois and aggravate the federal deficit by hundred’s of million’s of
dollars. Its impact could ultimately be compounded across the nation

Background - State Base Period

Pennington is a class action lawsuit, challenging the provision of Mlinois law that
establishes the state’s “base period.” As you know, the base period is the period of time
‘examined to determine whether an individual has earned enough wages to be eligible for
unemployment insurance and, if so, the amount of the individual's weekly unemployment
check. The base period in Illinois is the first four of the last five completed calendar quarters
preceding the individual’s fling an initial claim. To qualify for unemployment insurance in
TMiinois, an individual must have been paid at least $1,600 in wages during his or her base
period, with at least $440 having been earned outside the quarter in which the individual's
wages were highest

Forty-nine other jurisdictions use the same base period as Illinois, Of those, eight have
adopted alternate base periods for individuals who do not qualify using the standard base
period. There are two reasons for the nationwide prevalence of the base period Illinois uses.

First, a base period of the first four of the last five quarters generally ensures that
‘unemployment insurance will be available for workers with a genuine attachment to the labor
force, but not necessarily for those with only a marginal connection

The legislative history of the Social Security Act indicates that unemployment
insurance was intended to be limited to individuals with established ties to the workforce.
According to a 1935 report by the Committee on Economic Security, which drew the
blueprint for today’s unemployment insurance system, unemployment insurance was intended
for the “ordinarily steadily employed,” The Ways and Means Committee's report on the Social
Security Act noted the program was not intended to provide relief for everyone who was out
of work.

Congress’ intent still makes sense today. Unemployment insurance is funded almost,
exclusively by employers. In Illinois, itis funded 100 percent by employers. Employers alone
should not bear the burden for individuals with little or no attachment to the world of work

Second, a base period like Illinois’ streamlines administration and minimizes the risk
of fraud, Within a month following the close of each quarter, Illinois employers provide the
state with reports on the wages paid to their workers during that quarter. The state uses those
reports to verify that claimants are monetarily eligible for unemployment insurance. With
Ilinois' base period, all reports needed to verify an individual's eligibility should already be
in the state’s computer system when the initial claim is filed


128

Exorcising the Devil from

DEVOLUTION

Devolution Need Not Reduce Federal Oversight

‘evolution, allowing the states (instead

of the federal government) to tax

employers to pay for the administra-
tion of their own state jobless benefit pro-
‘grams, has spurred some important concerns,
Many, including the national Advisory Coun-
cil on Unemployment Compensation, have
voiced the opinion that without federal over-
sight some states might severely cut back on
their unemployment compensation programs,
While most of the devolution proposals cal}
for less federal involvement, under devolu-
tion, there could be just as much federal con-
trol as now exists.

Currently, the Federal Unemployment Tax
‘Act (FUTA) requires employers to annually
pay a basic tax rate of 6.0% (plus a 0.2%
surtax) on the first $7,000 of each em-
ployee’s wages. However, if a state's un-
employment program meets certain federal
requirements, then the employers in that state
are granted a 90% reduction in the basic rat.
This brings the net FUTA tax down to 0.6%
(plus the 0.2% surtax). By asserting control
over whether the states qualify for the 90%
offset credit, the federal government effec-
tively maintains oversight of the state unem-
ployment compensation programs. The fed-
eral government also controls the purse
strings on the amount of administrative fund-
ing granted to the states (from annual FUTA
tax collections). Under devolution, the states
(instead of the federal government) would
collect the administrative taxes.

Devolution would not require that the federal
‘government be eliminated from the process.
‘The 90% offset credit which currently exists
‘on FUTA taxes would simply be increased to
1 100% offset credit. This means that as long.
as states conform to federal requirements the
entire FUTA tax would be offset. This would
effectively end the FUTA tax for as long as

states remain in conformity.

Jf states failed to conform to federal require-
ments, their employers would lose all, or
part, of the offset credit. Employers in those
states would then suddenly be faced with
paying not only their states’ new administra-
tive taxes but up to an additional 6.0%
FUTA tax on the first $7,000 of each work-
cer’s wages. (The 0.2% surtax would presum-
ably end.) Faced with such massive tax ram-
ifications, employers would have the same
strong motivation to make their states con-
form as presently exists

Some have voiced the concern that devolu-
tion could adversely impact the six jurisdic-
jons (Alaska, Virgin Islands, North Dakota,
Wyoming, Rhode Island and Montana) that
now receive more back in federal subsidies
than their employers pay in PUTA taxes.
How would these states get enough funding
to run their programs? Wouldn't their new
state administrative taxes have to be in-
creased beyond what their employers are
currently paying in FUTA taxes? In order to
address this problem, the devolution propos-
als allow these states to continue to receive
subsidies for several years during which time
these jurisdictions would, hopefully, fearn to
live within their own resources. However,
even if it were necessary for the other juris-
dictions to continue to support these states
indefinitely, they would collectively need to
set aside only a small pittance ($25.7 mittion)
‘compared to the $2.2 billion they are cur-
rently being shortchanged on FUTA dollars
by the Washington D.C. bureaucracy.

Another argument sometimes given in favor
of retaining the current system is that the
FUTA tax allows the federal government to
set aside funds for borrowing by states when
their jobless benefit programs go bankrupt.


134

STATEMENT ON BEHALF OF MRS. LUELLA PENNINGTON
AND THE PENNINGTON CLASS OPPOSING
LEGISLATION TO REVERSE. INGTON Y. DIDRICKS(

Introduction

on behalf of Mrs. Luella Pennington and the plaintiff class in
Pennington v. Didrickson, 22 F.3d 1376 (1994), we are responding to
the June 28, 1996 advisory issued by the Ways and Means Committee's
Subcommittee on Human Resources (the "Subcommittee") concerning the
proposed legislation to overturn the Pennington decision

Since 1938, section 303(a) (1) of the Social Security Act has
required that states’ unemployment insurance laws provide for
"methods of administration ... reasonably calculated to insure full
payment of unemployment compensation when due." 42 U.S.C. §
503(a) (1) (the "when due clause"). At least since the Supreme
Court's 1971 decision in California Department of Human Resources
Development v, Java

v. Java, 402 U.S. 121, the when due clause has been
interpreted to "require that a State (unemployment insurance) law
include provision for such methods of administration as will
reasonabl ly] insure the full payment of unemployment benefits to
eligible claimants with the greatest promptness that is administra-
tively feasible." 20 C.F.R. § $40.3(a); Java, 402 U.S. at 130-33

The “base period" in any state’s unemployment insurance
program is the time period within which claimants must have earned
sufficient wages to qualify for benefits. As defined in section
237 of the Illinois Unemployment Insurance Act, 820 ILCS 405/237,
Tilinois's base period is conprised of the "the first four of the
last five completed calendar quarters immediately preceding the
benefit year" (*Illinois’ base period"). Accordingly, Illinois’
base period skips any wages earned by a claimant in both the
calendar quarter in which he files his claim (the "filing
quarter"), because that is not a "completed" quarter, and the
preceding 'calendar quarter (the "lag quarter"), because that is the
Eifth of the five completed calendar quarters prior to the benefit
year. Consequently, when Illinois determines whether a claimant
has sufficient qualifying wages, it disregards any wages earned in
both the filing and the lag quarters (the “lag period")

In Pennington, the Court of Appeals for the Seventh Circuit
held “that section 237 is an administrative provision and, as such,
is subject to the timeliness requirements of the ‘when due’
clause." 22 F.3d at 1387. The legislation’s proponents, including
Ms. Loleta Didrickson, who was the defendant in the litigation
through much of its history, decry the Pennington decision. But
they do so without ever discussing its reasoning. Indeed,
Commissioner Richardson concedes that the proponents have appealed
to Congress in the hopes of being heard by a forum that will not be
restrained by an "intellectual exercise." Statement by Andrew N
Richardson ("Richardson Stmt.") at 3. In contrast, we urge
Congress to read not only the Bennington decision, but’ also Java
and its other progeny, and to consider the courte’ reasoning and
the legislative history underlying the when due clause. We believe
that after intellectually honest reflection, Congress will agree
that the Pennington decision assures prompt payment of unemployment
insurance benefits in furtherance of a public policy that was
embodied in the nation’s unemployment insurance program at its
inception because it is central to its purpose

Illinois’ Base Period Definition Is An Administrative Method,
Not An Eligibility Criterion

A. Because the when due clause governs only the states’
“methods of administration” of unemployment insurance prograns,
"applicable Federal laws provide no authority for the Secretary of
Labor to determine the eligibility of individuals under a State
law." 20 C.F.R. § 640.1(a) (2); see Ohio Bureau of Employment
Services v. Hodory, 431 U.S. 471, 482-87 (1977). The proponents
rely heavily on this principle. See e¢.g., Didrickson stmt. at 2
As the court of appeals noted, however, the "truism (chat the when


74

Another important issue I would like to address is the current
tax on unemployment compensation benefits. Before 1979, UC ben-
efits were excluded from the income for tax purposes. UC benefits
are currently subject to tax. This is grossly unfair because the UC
tax is not a tax on income. It is a tax on benefits, benefits received
during one of the most difficult times in a person’s life.

The UC tax hurts the economic security of workers throughout
America. Our system should be structured to provide benefits to
taxpayers, not dump penalties on the unemployed.

Mr. Chairman, I have talked to literally dozens of people in west-
ern Pennsylvania who have collected UC benefits and then paid
taxes on the benefits as normal income. Their experiences highlight
how grossly unfair the tax is.

The tax on UC kicks workers when they are down. Unemploy-
ment benefits are intended to stabilize the income of individuals
and families in the face of layoffs. Yet, someone who experienced
lengthy unemployment, a situation which depletes the financial re-
serves of most middle-class families, will face a large and usually
unexpected tax liability the next year.

For many who have struggled to survive a layoff, this tax bill is
the last straw. Simply allowing tax withholding on these benefits
is no solution. It merely depletes the value of compensation that is
already merely adequate.

I would argue, however this tax is administered, it is fundamen-
tally inequitable and perversely burdensome to a beleaguered mid-

le class.

Mr. Chairman, I also welcome the opportunity to testify in favor
of H.R. 3677, which addresses one of the problems, kind of a
unique problem, a loophole in the law that. falis disproportionately
on members of the acting profession. I would strongly urge that we
consider action on this particular problem because it is grossly un-
fair on this particular profession.

Charlton Heston is here to testify with far greater experience
and eloquence than I possess in this matter, but I would like to say
I think this is an issue that this Subcommittee ought to act on.

Finally, Mr. Chairman, I will conclude by emphasizing my strong
support for reforming our unemployment system. It is my hope
that our Subcommittee will give its strongest consideration to de-
veloping legislation that will encompass many of the suggestions
heard here today.

Following through on these recommendations will result in a
more manageable system and a more secure U.S. work force.

Mr. Chairman, I appreciate the chance to testify, and I would
like to submit my testimony in full for the record.

[The prepared statement follows:]


32

And we think that before anything like that is done that there
is information that this Congress does not have that it ought to
have in order to make its decision.

Second, this is one court in one district, the seventh circuit, and
we believe historically that our position with regard to States and
the Federal/State relationship has been upheld throughout courts
over many years, I mean since 1932.

We believe, on an appeal, that it’s very likely that this position
of Illinois could be sustained. And it would be beneficial if one went
through this appeal process and got that ruling rather than react-
ing to this immediate one-court decision.

Mr. CoLLINs. But you keep mentioning though that we should
seek more information. Where are you seeking your information
from? I mean I believe that’s what this panel is for today.

Who are you going to for your information?

Mr. UHALDE. We're getting our information from all the 50
States and an actuarial analysis of the impact of these decisions.
We have had contracts let. We work with the States in order to
make these actuarial estimates of the impacts on both benefits and
on costs, including costs of employers and administrative costs.

Mr. CoLuins. Well, we have 60 years of history, is that not infor-
mation well enough to make a determination?

Mr. UHALDE. That is information on the status quo.

Mr. COLLINS. You said yourself that we have had several court
rulings that have upheld those decisions. Why should we force Illi-
nois and 22 or 23 other States to continue to spend money to try
to seek the same decision that has been made and rendered by
other courts, why?

Mr. UHALDE. Because we believe that it’s important. We believe
that it is also——

Mr. COLLINS. But the other decisions were not important? We are
seeking another decision, even though you think that it may be the
same decision? Why not go ahead and legislate this thing and send
it down to the White House and let the President sign it? Would
you not recommend he sign or uphold what other courts have al-
ready upheld?

Mr. UHALDE. No, we think it is premature at this time to do the
legislation.

Mr. Couns. That wasn’t the question I asked. Would you rec-
ommend the President sign, yes or no?

Mr. UHALDE. I don’t make recommendations to the President on
signature of legislation at this point. I would have to see the legis-
lation; I would have to see what it’s going to do. I would have to
see whether it is going to address other issues in this area. This
is a very piecemeal approach to an issue.

Mr. CoL.ins. It would do exactly what’s been rendered by the
courts for the last 60 years that you have said you agreed with.

Mr. UHALDE. That’s correct.

Mr. CoLLins. Thank you, Mr. Chairman.

Mr. McCrery. Mr. English.

Mr. ENGLISH. Thank you, Mr. Chairman.

I wasn’t planning to ask a question but Mr. Uhalde, I was struck
by something you had said that I may have misunderstood, to the
effect that this court decision primarily would have an impact on


103

{A)the requirements of this paragraph shall apply to any

pension, retirement or retired pay, annuity, or other

similar’ periodic payment only if-
(4) such pension, retizament or retired pay,
annuity, or gimilar payment is under a plan
maintained (or concributed to} by a base persod
employer or charyea>le employer... , and
(ii) in the case of such a payment not made under
the Social Security Act or the Railroad Retirement
Act of 1974 . . . servic performed for such
employer by the individual after the beginning of
the base period . . . affect eligibility for, or
increase the amount of, such retirement or retired
pay, annuity or other similar periodic payment,
and* (Emphasis added. ]

In letters dated pecember 22, 1992, (to T. Nagle) and May 17, 1993,
(to J. Humphrey), Ira Gottlieb, a member of the law corporation
Fupresenting the unions, has proposed that pension offset is only
required when the base period empliyer is the same employer as that
with which the employee became pension @ligible and that such base
peried employment resulted in pension eligibility oz a pansion
increase. ‘r. Gottlieb further argues that each employer member of
a multi-employer unit should be censidered as a soparate and
distinct employer. ‘The following example illustrates the issue.

An {ndtvidual works for employer A and employer B, for 20
years, both of whom are members of a multi-emplcyer unit and
Contributed to the same psnsion plan. ‘The individual
nes pension elicibility based on employment with A

Some years later, while drawing the pension based on
employment with A and B, the same individual secures work with
employer C, a member of and contributor to the seme multi-
employer unit/pension plan to which A and B belong. After
being laid cff by employer C. the sole base period omployar,
the individual files a valid claim for unemployment insurance
benefits. Contributions by enployer C to the pension plan for
services performed after the beginning of the base period

result in an inerease in the individual’s pension.
Consequently, the entire pension is deducted from the
individual‘s UI benefits.

Mr. Gottlieb contends that because the individual's intial pension
eligibility was established by employment with employers A and B,
neither of whom are base period employers, UI benefits following
Separation from employer C are not subject to any offsat.



39

Mr. McCrery. I thank the gentleman for attempting to clarify
the issue.

I thank the members of the panel for your testimony. It has been
very helpful. I think the issue to most of us is quite clear. We do
look forward to trying to clarify this issue for the States. Thank
you.

Mr. UHALDE. Thank you.

Ms. Diprickson. Thank you.

Mr. Camp [presiding]. If we could have the next panel come for-
ward please. Hon. David Poythress, Warren Blue, Walter Curt.

Good morning and welcome to our witnesses. This panel is on the
devolution of unemployment insurance and we will begin with Hon.
David B. Poythress, Georgia Commissioner of Labor.

Let me just say that your full written comments will be placed
in the record and we are asking that witnesses confine their re-
marks to 5 minutes. A small red light will go on to let you know
when your time has expired and, at that point in time, if you could
wrap things up we would appreciate it.

Thank you.

STATEMENT OF HON. DAVID B. POYTHRESS, GEORGIA
COMMISSIONER OF LABOR

Mr. PoyTuress. Thank you, Mr. Chairman.

I appreciate the opportunity to be here extended by the Chair-
man and my fellow Georgian, Mr. Collins.

Tm the State Labor Commissioner of Georgia. Before talking
about devolution I would like to add one observation on the Pen-
nington case that was made quite astutely by Ms. Didrickson and
I think it is worth bearing in mind. Pennington, pressed to its log-
ical conclusion, stands for the proposition that a State unemploy-
ment insurance agency would have to do whatever it takes to pay
the maximum amount of money to any given claimant.

That case imposes on a government insurance program an orga-
nizing principle which is essentially welfare. And I think that is,
not only is Pennington a bad decision, it is bad for a profoundly im-
portant reason and we wholeheartedly support the Illinois legisla-
tion. We would recommend that it be passed as soon as possible.

On the subject of devolution, Mr. Chairman, I have submitted my
written report. I would like to speak informally a little bit about
the history of that concept and then to describe the existing unem-
ployment insurance system and then how I have proposed that it
be changed for the better.

First, I would say that this concept has been around for a long
time. It has been discussed in labor circles for at least a decade.
From a technical standpoint most all of the issues have been
hashed over, and it has been very thoroughly thought out from a
technical standpoint.

The concept that I have proposed is based on some pioneering
work that was done in New Hampshire. Colleagues in other States,
most notably in Virginia, concur with it. I believe it provides a
wonderful opportunity to genuinely return power to the States, to
lay the groundwork for major tax cuts and for minimizing some of
the Federal regulations that States have to put up with. It’s an op-


64

about $291 million annually.’ That does not include $72.6 million in FUTA
revenues (FY1994) used to pay the Internal Revenue Service to collect the tax.’

‘The Problem of Overtaxation

The federal problem of overtaxation focuses on the gulf between the
revenue collected from employers under the FUTA tax and the amount
appropriated to the states in the form of administrative grants to operate the
system. According to the U.S. Department of Labor, in FY1996, national FUTA
revenues are expected to total $5.74 billion, while only $3.54 billion, or 62
percent, will be sent back to the states to run the program.’

Since actual grants to individual states are determined according to
complicated formulas administered by the Labor Department, the disparity is
often far wider when the FUTA revenue collected from employers in a particular
state is compared with the grant money received by the state for program
management. For example, in FY1994, the last year for which such state-by-
state figures are available, employers in my own state, the Commonwealth of
“Virginia, paid an estimated $142.6 million in FUTA taxes, but only $60 million,
or 42.1 percent, was returned to run the Virginia Employment Commission.
Indiana received only 37.5 percent of the revenue produced from its employers,
the poorest ratio of any state. Overall, in FY1994, only five states and the
Virgin Islands were “winners,” receiving more in grant funds than their
employers paid in taxes, while 45 states, the District of Columbia, and Puerto
Rico, were “losers.”

‘What happens to the rest of the money?

A relatively small amount, estimated at $50 million for FY1996," is
expected to be spent to finance the federal share of extended benefits to
workers in certain states in times of high unemployment, while $250 million is
expected to be on loan to state trust funds with solvency problems.’ That will
leave an estimated balance of $14.97 billion in FUTA revenues in federal trust
fand accounts at the end of FY1996!"°

The Problem of Inefficient Administration

Even more than taxpaying employers, the jobless have a concrete interest
in efficient operation of the unemployment system because. to a degree, their
livelihoods and career prospects depend on it. “Unemployment Office” is a
misnomer, since services provided go well beyond taking and paying claims:
Employment services are offered to anyone seeking a job change, and critical
labor market information is furnished to employers and the general public. So
in a sense, everyone has a stake in what is more aptly described as the
employment security system.

Here are a few brief examples of some of the problems and inequities in
the system as it operates now:

« Rather than receiving a single annual federal grant to support its
employment security system, m each state receives funds through several grants,
one for unemployment insurance administration, one for the employment
service, and several for the collection and dissemination of labor market
information. The existence of distinct funding streams makes it impossible to
achieve economies of scale by using equipment or personne! funded under one

* Devolution, Governor George Allen's Proposal to Transfer the Administration and Financing of the
Employment Security System to the States, Third Revision, p. 6.

* Ibid. p. 3, citing U.S. Department of Labor figures.

7 UI Outlook, p. 5.

* Under the program, the federal and state govamments share equally the cost of extending benefits for
eligible claimants by up to 13 weeks, Normal maximum eligbilty is 26 weeks.

* UL Outlook, p. 15.

® Ibid., pp. 13-18.


148

Ill, RECOMMENDATIONS

«Transfer the financing and funding for the UI system and Employment Service to the
States.

This should include a repeal of the temporary 0.2 percent FUTA surtax and increase the FUTA
offset” from the current 90 percent to 100 percent if a state conforms with federal law. This will
retum $1.4 billion per year to employers and stimulate employment and wage growth. The
federal Employment Security Administration Account (ESAA) should be phased out. Existing
funds in the ESAA could be used for transition costs. Any funds remaining in the ESAA should
be allocated to the states’ accounts that remain at the federal level

States should be allowed to collect one Ul tax for administration and benefits. Each state would
then be responsible, and accountable, to their employers for UI payroll tax dollars and for the
administration and effectiveness of the UVES system. The combined state tax should remain
dedicated to funding the UC system and the states should be prohibited from dipping into their
accounts for anything.

+ Repeal the Wagner-Peyser Act and amend FUTA to require states to establish public
employment offices in labor market offices designated by state legislatures.

Each state should have the flexibility to deliver job placement assistance in ways that meet the
needs of its employers and job seekers. However, states should ensure reasonable access to
services for workers and to register for work all eligible claimants who are not temporarily laid-
off. Reform must enable states to explore ways to integrate employment services and reduce the
duration of unemployment payments by moving the unemployed into new jobs more quickly.
This could include opening up the job placement assistance offered through state ES offices to
private competition and other UI innovations.

‘+ Eliminate the federal extended benefit program and the federal extended
unemployment compensation account (EUCA).

Funds in the EUCA should be transferred to the state UI accounts based upon a state's relative
share of covered employment. The 1992 federal amendments that made it easier for states to
trigger extended benefits (EB)'° should be repealed. States should have the responsibility to
determine the number of weeks UI benefits are paid. The 1992 change made it easier for states
to qualify for extended benefits and gave an incentive for individuals stay on unemployment

° ‘The actual gross FUTA tax rate is 6.2 percent. However, employers in states with federally approved UL
programs (all 50 states) may credit 5.4 percent (90 percent FUTA offset) against the 6.2 percent tax rate, making the
net FUTA tax rate 0.8 percent.

'° ‘The 1992 amendment allowed states to trigger EB based on a certain percentage of its total unemployment rate
(TUR) instead of its adjusted insured unemployment rate (IUR). The IUR is computed by dividing the number of
people claiming UC benefits by the number of people in jobs covered by UC. The TUR is the ratio of all
unemployed workers to all workers in the labor force in that State. Eight states (Alaska, Connecticut, Kansas,
Maine, Oregon, Rhode Island, Vermont, and Washington) have approved the use of the TUR triggers.


35

Ms. DIDRICKSON. Obviously from our employers. It comes back
through administrative-—.

Mr. NussLe. So, you are asking small business people to put
more money into the system to pay for more appeals because you
want to wait for information you can’t tell us about that you don’t
know whether it’s going to be compelling? I mean this is a pretty
serious—I mean that’s why I wasn’t even going to get involved in
this. I was coming to see—Charlton Heston’s going to be here.
(Laughter.]

And I thought that was going to be interesting. I wasn’t even
going to get involved but this has got me a little bit baffled that
you would tell us to wait when, you know——

Mr. RANGEL. Would my dear friend yield?

Mr. NussLE. No. I would like to hear from the administration
what do they want us to wait for?

Mr. RANGEL. He’s exhausted his answer.

Mr. Nuss Le. Well, I don’t think you’ve got the answer, Charlie.
You tell us that we ought to wait until maybe the Democrats take
control which could take a long time.

Mr. RANGEL. You'll never know now, will you?

Mr. NussLe. Do you have any more information you can help us
with as to why we ought to wait other than it may be a percentage
that comes out that is not going to affect your recommendation?

Mr. UHALDE. No. I have presented to you, I believe, the reasons
why we think it would be inappropriate to act now.

Mr. Nuss ie. OK.

Mr. UHALDE. Thank you.

Mr. McCrery. Mr. Rangel, would you like to——

Mr. RANGEL. Thank you, Mr. Chairman.

Mr. Nussle, as I see it, if we got away from the present law and
the court decisions, it seems as though the court decision is more
sensitive to the benefits as relates to the worker and that present
law is more conservative as relates to protecting the employer.

As I understood the Secretary of Labor, he was saying that he
thought it would be a cost estimate involved in this. ‘And knowing
your concern, as well as your colleagues, our colleagues’ concern
about cost, it would seem to me that we would not want to look
at this and saying the poor employers will have to pay more money
in order to exhaust our legal remedies, or that the unemployed
wretched souls are getting too much.

If it’s a question of degree—and nobody is against anybody, em-
ployers who create the jobs or employees who do the labor—it’s just
how much do you think is a fair amount and how much does it cost
the State of Illinois or the employers throughout the country?

And, would that, Mr. Secretary, be one of the things that you
could bring to this Subcommittee?

Mr. UHALDE. That is precisely the information that we feel is im-
portant for the Subcommittee to have—the costs to employers, both
the continuing benefit costs and the administration costs and the
benefits that accrue for an alternative base period to claimants.
And that’s information that we just think is relevant to this.

Mr. RANGEL. Now, we don’t have any objection, Madam Comp-
troller, that the courts would be creating the law and the voice of
the people will not be heard. I know you adopted that from one of


67

Mr. RANGEL. Oh, you mean the national collection of employers’
taxes, don’t you?

Mr. PoyTurEss. No, I don’t.

Mr. RANGEL. What role would we play? You want us to collect
the taxes and then give a block grant. Have you got a formula for
the redistribution of the block grant?

Mr. PoyTurREss. That is exactly what we do not wish. That is
what we have now, and this changes it.

Mr. RANGEL. Well, what is it that you want?

Mr. Poyturess. The States to collect the tax——

Mr. RANGEL. Yes.

Mr. PoyTHRESS [continuing]. To keep in the State the amount
that they collect to run State activities, subject to the reallocation
of a portion thereof to fund the necessary portion of the Federal
Government's role.

Mr. RANGEL. What Federal Government’s role?

Mr. PoyTuress. The U.S. Department of Labor.

Mr. RANGEL. What?

Mr. BLUE. None of us have recommended that the Federal Gov-
ernment be taken entirely out of a national unemployment system.

Mr. RANGEL. Why not?

Mr. BLUE. I think there is a role in the States for the Federal
Government.

Mr. RANGEL. What role?

Mr. BLUE. The role is being one of being sure that States are
complying with certain requirements.

Mr. RANGEL. Oh, no. We trust the Governors. Now, cut out that
business. We have screwed it up. Let the Governors do it.

Mr. BLUE. I suspect if you would want to go that far, there would
probably be a lot of people who would be in favor of it.

Mr. RANGEL. Well, let me ask you this.

Mr. PoyTuress. There is a new party out there, I think, that has
recommended that——

Mr. RANGEL. Well, let me ask you this. Those that reflect busi-
ness now, do you think we would find employers, not feeling good
about saying it, because no one likes to pay taxes to the Federal
Government? So, if you want to pick up a vote or two, not the Fed-
eral Government. Do you think there would be employers that
would want 50 States deciding what the benefits are going to be?

Mr. BLUE. No. The States decide that now. That is a State issue
right now.

Mr. RANGEL. Then we could really keep the Federal Government
out of oversight. What would you want us to do in providing over-
sight?

Mr. Curt. Let me mention a couple of things.

Mr. RANGEL. What?

Mr. CurT. You mentioned, one, that you thought you had failed
or that the system had failed. I don’t think this system has really
failed.

Mr. RANGEL. Oh, I shouldn’t have said that.

Mr. Curr. I think it has been very successful.

Mr. RANGEL. What reason should we stay in it and all of this,
extended benefits?


104

Plaintiffs in seversl cizcuit court cases’ have raised the same
argument unsuccessfully and like Mr. Gottlieb, have cited the

legislative history.to support their argument.

The case Rivera v. Bacerza(9th Circuit 1983), discusses in detail
the meaning of the 3304(a)(15)(A}(i), and the appropriateness of
reverting to legislative history to determine that meaning. On the
issue of reverting to legislative history, the court ruled that the
meaning of the statute is clear on the face and henca resort to the
legislative history {s not necessary. The court did not agree with
the plaintif?’s argument that pension offset was only required when
the pension eligible employer and the base period employer are one
and the same. Although the pension plan in question in Rivera was
a Social Security pension, the cou: determination was based on
its interpretation of 3304(a}(15)(A:(1), which is applicable to
hoth private and government pensions. ‘The offset applies under
section 3304(a)(15)(A)(i} 4£ the base period employer "contributed*
to the plan from which the pension benefits are derived. Section
3304(a)(215)(A)(4i) makes a further stipulation for offset of
private pensicn plans that services performed "for such emplcyer by
the individual after the begianing of tha base period . . . affect
eligibility for, or ‘ncrease the amount of such pension.* This
sequixement {s applicd equally to both single employer units and
multi-employer units.

Clearly in the above example, employer C is a base period employer
who had cont=ibuted to che plan from which pension benefits are
derived and services for such employer (employer C), have resulted
in an increase in the pension amount. The 1980 amendments to the
federal offget provisions lowered the minimum requirement to
require offset for ‘only those «nemployed workers who wera
collecting unemployment benefits and retirement payments from the
same employer.“ In the above example, offset is required to
precluce the individual from drawing UI benefits and the pension
{amount of the increase) from employer C. Conversely, if the
services performed for employer C did not affect the individual’s
eligibility for or cause an increase in the amount of the pension,
no offset of UI benefits would be required under FUTA.

Offset of only the amount of pension increage based on employment
with employer C would appear to be a moze equitable alternative to
offset of tha total amount of the pension, However, as ruled in
the Ninth Circuit, by which this office and 20D is bound, the
language of the statute does not perait proportional offset. When
the conditions of 3304(a)(15)(A)(1 & ii) are satisfied the amount
of compensation payable to an individual shall be reduced (but not
below zero) by an amount equal to the amount of the peneion.

* Rivern v. Becerra, (9th Circuit 1983), Peare v. McParland,
(7th Cirenit 1984); and wan, (Zaatern District

Michigaa, Southern Division, 1986)


126

Counting Most Recent Earnings When Necessary,
as Provided by the Movable Base Period, Supports
lage Workers, Construction Workers & Other Neglected Grou

‘The “movable base period” (MBP), as exists in eight states, permits the use of
carnings in more recent quarters, when necessary in those cases where the claimant has
insufficient earnings using the first four of the last five calender quarters.

‘As documented in the Urban Institute report prepared for U.S. Department of
Labor, the MBP benefits several growing segments of the workforce that have
historically been conspicuously excluded from coverage, including low-wage, part-time
workers, intermittent and seasonal workers. Building construction showed the most
significant gains of any industry under the MBP, with a 35 percent increase in coverage
over other industries in those states that operate a MBP. Specifically, in the states studied,
8.2 percent of all claimants received benefits as a result of the MBP, compared to 11.4
percent of claimants who worked in building construction. Nationally, the estimates are
that the movable base period increases eligibility by 6 to 8 percent (payouts increase by 4
(0 6 percent).

Citing the concern that low-wage workers and part-time workers with substantial
labor force attachment are unfairly being denied unemployment benefits, the ACUG thus
recommended unanimously that ‘[a)ll states should use a movable base period in cases in
which its use would qualify an Unemployment Insurance claimant to mect the state’s
monetary eligibility requirements.”

a Movable
of its Adi

Since 1988, movable base period legislation has been enacted in eight states
(Maine, Massachusetts, Michigan (as of July 1997), New Jersey, Ohio, Rhode Island,
Washington, Vermont). This list includes four of the ten states with the highest level of
claims activity (Michigan, New Jersey, Ohio, Washington), thus accounting for 20 percent
of nation’s unemployment claims. Ifthese states can operate the ABP without causing a
collapse in the system or an outcry in opposition, iti fair to say that the consequences of
administration are not prohibitive

As the ACUC noted in its recommendation that the states adopt the movable base
period, “advances in technology have made it feasible for all states to use the [movable
base period] ....” ‘The Urban Institute report makes this point as well, citing numerous
strategies to reduce the costs of administration, such as speeding up the processing of
wage reports already submitted by employers rather than the far more expensive
approach, upon which the Illinois overestimates are based, of issuing individual requests
of employers of wage information. In addition, as the ACUC concluded, a large
proportion of those who are determined eligible using a movable base period would
become eligible eventually, thus the savings involved in not processing future claims must
be considered. Finally, as the ACUC also found, some increased costs in administration
of the unemployment claims are clearly offset by states costs involved in processing and
payment of means-tested benefits, such as Aid to Families with Dependent Children
(AFDC) and Food Stamps.


45

Our guiding principles, applied in Georgia’s proposal for a
devolved employment security system, are these

I

proposed employment security sys

The primary Federal role should be to assure that state
laws and policies conform to requirements to maintain a
public employment service and an unemployment insurance
program as prescribed in federal law:

Authorize states to collect a single payroll tax
including administrative and benefits components, to be
maintained in separate state-specific Trust Accounts
managed by the Treasury Department;

Treasury Department would continue to manage all
unemployment Trust Fund accounts so that funds will
continue to be counted in deficit calculations;

Develop clear, strict solvency standards for state
administrative trust accounts structured similar to
current state unemployment benefit trust accounts;

Allow a 100% offset of FUTA taxes to employers (currently
.8% of wages) at the point a state adopts its own
administrative tax;

Maintain a hold harmless funding level for states who
would lose grant funds with devolution;

Provide financing of national activities from state
Administrative Accounts; but only for essential federal
oversight requirements and state “hold harmless"
supplements. We anticipate this would not exceed 5% of
total administrative taxes collected;

Assure states full access to state administrative Trust
Accounts within solvency standards established. This
would mirror current handling of State Benefits Trust
Accounts;

Relinguish all federal claims on equipment and property
purchased with FUTA funds upon approval of each state’s
plan to assume responsibility for administration and
financing of the Employment Security System.

am attaching several diagrams showing the present and
tems at a conceptual level. The

differences in the several state devolution proposals are primarily
form rather than substance and can be readily reconciled in the
legislative process.

This is a wonderful opportunity to:

Truly return power to the states;
i the paperwork burden on American

business;
Save millions in wasted tax dollars; and
Lay the foundation for future tax cuts.

I strongly encourage your review and support of this proposal.


87

E3 SCREEN ACTORS GUILD

July 11, 1996
Subcommittee on Human Resources
Committee on Ways and Means
United States House of Representatives
Washington, D. C.
Re: H.R. 3677

Ladies and Gendemen:

This letter will provide a concise explanation of the problem under the
current Federal Unemployment Tax Act and of the proposed solution as encompassed
in H. R. 3677. While it is written with reference to the Pension Plan established
through collective bargaining by the Screen Actors Gulld (SAG), the basic facts are
equally applicable to the American Federation of Television and Radio Artists and to
the Writers Guild of America, west who are also participating in this effort.

Under the terms of the Screen Actors Guild-Producers Pension Plan
(established in 1960 by negotiation between SAG and the motion picture producers)
ap actor who has met the minimum requirements to qualify for benefits can take
Sormal retirement at age 65 (or early retirement as early as age 55). Having begun
to receive monthly pension checks, he will probably continue to seek work as an
actor. When motion picture, television film or television commercial work is
obtained, the actor's employer will, in compliance with the collective bargaining
agreement with SAG, contribute to the Pension Plan. Under the rules of the plan,
such contributions will result !n an increase in the actor’s monthly pension check.

Once the actor’s employment has ended, he may qualify for unemployment
insurance. While he has otherwise met the qualifications for unemployment
benefits, current law requires that an individual’s unemployment insurance benefit
be offset by his Pension benefit when

(1) he works for any employer-member of a multl-employer unit
which contributed to his pension, and

(2) where that work results in an increase in benefits.

The actor's new employer is, in all probability, an employer- member of the
same multi-employer unit which contributed to the actor's pension. As stated above,
the new employment increased his Pension. Under the law, his unemployment
benefit is subject to the offset.

It would be reasonable if the offset were limited to the amount of the increase.

Unfortunately, it Law
H.R. 3677 would limit the offset to the amount of the

increase.

[5737 WILSHIRE BOULEVARD « LOS ANGELES, CA 90030-3600 * TELEPHONE (213) 465-4000 + FAX (213) 549-6603
eh amet Aa A LC A A et A


8

We commissioned in 1994 a study to examine the effects of alter-
native base period arrangements that exist in six States currently.

The study, while it has been limited in scope, does suggest some
findings for alternative base periods: First, that increases in the
number of monetarily eligible claimants, especially among low-
wage and part-time workers, would accrue under alternative base
periods; that under alternative base periods, you would raise the
number of monetarily eligible claimants by 6 to 8 percent. This
would have a notable effect on UI benefit outlays and increase in
costs of about 4 to 6 percent and, in the short run, reduce Unem-
ployment Trust Fund balances. Alternative base periods also entail
additional administrative costs.

In June 1995, we again commissioned additional research on the
impacts of alternative base periods. This research is scheduled to
be completed in May of next year, and this will add to previous
work.

Among other things, we are analyzing and developing a means
to assess the impact of alternative base periods on trust funds over
time, determining the implementation and ongoing administrative
cost for States, and estimating the administrative cost to employ-
ers.

We are aware of the impact of various base periods on access to
the unemployment insurance system. We want to gain some fur-
ther knowledge through our research efforts. We are also aware of
the ramifications for States of the Pennington court decision. How-
ever, we believe that the legislation to amend title III to address
the Pennington issues would be premature at this time.

Illinois has appeal rights at its disposal, as well as the ability to
establish an alternative base period on its own as other States
have done by changing its UI law. It is a choice for Illinois at this
point or any State’s choice on how to balance the various pros and
cons of immediate access for claimants versus a demonstrated at-
tachment to the labor force.

The real issue for the unemployment insurance system is not the
definition of a base period, per se, but the broad question of access
to the UI system. We would encourage States to consider seriously
changes that States could make to open their systems to those indi-
viduals who are truly attached to the work force, but are being de-
nied access due to unexamined, outdated policies, but the Depart-
ment will continue to work with States. We would also like to con-
tinue the research underway on alternative base periods.

This concludes my formal remarks, Mr. Chairman. We look for-
ward to working with you, Subcommittee Members, and the States
on making the UI system responsive to the needs of experienced
workers whose access to benefits might be hindered by outdated
policies.

Thank you.

[The prepared statement follows:]


UNEMPLOYMENT INSURANCE ISSUES

THURSDAY, JULY 11, 1996

HOUSE OF REPRESENTATIVES,
COMMITTEE ON Ways AND MEANS,
SUBCOMMITTEE ON HUMAN RESOURCES,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:07 a.m., in
room B~318, Rayburn House Office Building, Hon. E. Clay Shaw,
Jr. (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]

o3)


150

« Enable state legislators to determine the ES administrative budgets, payroll taxes, and
UI benefits under limited federal guidelines.

‘The UI system is an experience-rated and employer-paid payroll tax. The system was set up with
specific objectives and a designated tax as its funding source, Federal or state proposals that
would combine the funding sources for the ES program and job training programs are unwise.
Job placement services have different goals, populations, and outcomes, from those of training
programs. ES offices are suppose to get unemployment claimants get back to work quickly,
thereby ensuring employer taxes are as low as possible. But job training programs often do not
share that objective. Suggesting that FUTA payroll tax funds be utilized for anything else but
paying unemployment benefits and funding state job placement assistance is merely a backdoor
way of introducing a payroll tax for training. Transferring ES funding to the states removes the
potential for Congress to dilute the mission of the ES system and divert funding for other

purposes.

The limited federal guidelines should include the following:

‘The single state UI tax for both administration and benefits should be experience rated.

© Funds should be used only for program administration and paying weekly benefits, and
capped at levels necessary for proper and efficient administration during periods of high
unemployment.

‘States should be required to continue cooperative and financial contracts to administer the
interstate benefit program.

© Federal funding for the administration and payment federal employee UI benefits, military
separations, and disaster unemployment programs should be deposited in state UI accounts as
needed.

© Federal oversight should be limited to determining if state laws conform with federal
requirements.

IV. CONCLUSION
‘The recommendations presented here for the transfer of the UC system to the states constitutes a
modest, achievable proposal that will not unduly affect the federal budget. Ifenacted such a

transfer will enable states to reduce payroll taxes, increase jobs and take-home pay, reduce
paperwork burdens, and improve services for unemployed workers.

1e)


42

Statement
By
David B. Poythress
Georgia Commissioner of Labor
To The
House Committee on Ways and Means
Subcommittee on Human Resources

duly 11, 1996

Mr. Chairman and Members of the Subcommittee, my name is David
Poythress, and I am Commiasioner of Labor in Georgia.

I appreciate the invitation to appear today and present my
views on both the federal court’s ruling in the Pennington Case and
my proposal to transfer the Administration and Financing of the
Employment Security System to the States.

Positios wnnington

With the unique Federal-state partnership created by The
Social Security Act of 1935, states have retained broad discretion
to design their own unemployment insurance programs including
allowable benefits, amount of earnings necessary to qualify for
benefits, and all other eligibility requirements within broad
fairness guidelines.

The 1994 decision by the Seventh Circuit Court of Appeals
ruled that the base period process used by the Illinois
Unemployment Insurance Act is an “Administrative Provision" subject
to the "when due" clause of the Social Security Act. This ruling
is plainly contrary to the universal understanding, throughout the
60 year history of the Unemployment Insurance program that "base
period" determination is an eligibility requirement within the
ambit of state authority. The base period concept is not a matter
of administrative convenience. It represents the public policy
judgment of states that UI benefits should be payable only to
Persons with a demonstrated continued attachment to the workforce.

The Social Security Act of 1935 clearly envisions broad
latitude by states in designing their unemployment insurance
I urge you to enact legislation making congressional
that states are responsible for determining the terms
and conditions under which unemployment benefits are paid including
the establishment of base periods.

Transfer of Administration and Financing of the Employment Security
System to the States

The Employment Security System is composed of two major
components, The Unemployment Insurance system (UI), created by the
Social Security Act of 1935, is designed to provide workers with
insurance against involuntary unemployment by partial replacement
of lost wages. ‘The Employment Service (ES), established by the
Wagner-Peyser Act of 1933, is designed to provide job search
assistance to individuals and recruitment and referral services to
employers to get workers back to work as quickly as possible.

The UI and ES programs are highly integrated, and each depends
on the other for efficient administration, success in serving job
seekers and employers and keeping employer payroll taxes as low as
possible.


73

Unemployment is hard enough on families without the worry
that benefits will not be available because of the arcane structure
of the system. H.R. 3738, the legislation that I introduced, will
make several significant changes in the current system.

First of all, it will make it easier for States to provide extended
unemployment benefits to workers who have been unemployed for
long periods of time by broadening the trigger States can use to ac-
cess benefits.

Research has shown that the combination of the reduction of the
insured unemployment rate and the increase in the trigger level
during the recession of the eighties resulted in the failure of the
Extended Benefits Program to trigger on as unemployment contin-
ued to rise.

As a result, Congress found it necessary to pass a series of emer-
gency extensions of UI benefits. Put simply, no State was able to
tap into EB during the most recent recession. Therefore, it is nec-
essary, in my view, to reform the program prior to the onset of the
next recession. Emergency extensions of the benefits are a jerry-
built policy prescription, neither well timed nor well targeted. Our
best guess is that by lowering the trigger 1 percent the next few
years, 16 States might benefit.

During 1991 and 1992, my home State of Pennsylvania, if this
trigger had been in place, would have been able to offer workers
an additional 13 weeks of benefits. Other changes proposed in this
bill are, one, to encourage States to achieve forward funding of un-
employment insurance by maintaining sufficient Unemployment
Trust Fund balances to cover the needs of unemployed workers in
the event of a recession. States that maintain adequate reserves
based on their own experience to cover expenses in future reces-
sions would receive slightly increased interest earnings on the part
of their trust fund. States that fall short would receive slightly re-
duced interest earnings.

Another change we would propose is to allow interest-free cash
flow, Federal loans only for States that have sufficient trust fund
reserves to last through a future recession.

Another change would be to allow States to collect the Federal
share of unemployment insurance taxes from employers allowing
employers to fill out one form and write one check, not two, and
providing a more accurate accounting of revenues collected.

Finally, this legislation would require States to distribute infor-
mation packets explaining unemployment insurance eligibility con-
ditions to unemployed individuals.

All of these provisions, Mr. Chairman, are based on the Advisory
Council on Unemployment Compensation’s collected findings and
recommendations for 1994 through 1996.

I have concluded that if the recommendations were enacted into
law as I propose in H.R. 3738, States like Pennsylvania would have
the tools to assist workers faced with long-term unemployment.

I am particularly concerned about forward funding, Mr. Chair-
man. When | served as a staffperson, we had a $1 billion debt to
the Federal Government hanging over Pennsylvania like a sword
of Damocles. We need to have incentives built into the system to
avoid that situation in the future.


82

SAM FARR 197 annem non

cont oan negro Congress of the United States Pevleinetei
Sennvere sean oe Rouse of Representatives “oun”
comaures ON FEEOURCEE ‘®@lashington, BE 20515-0517 nea Caan
seusor~mmeers* STATEMENT OF CONGRESSMAN SAM FARR a

BEFORE HOUSE COMMITTEE ON WAYS AND MEANS: ae 28-1878
SUBCOMMITTEE ON HUMAN RESOURCES
JULY 11, 1996

Mr, Chairman, Members of the Subcommittee, I appreciate the opportunity to testify on behalf of
H.R. 3430, legislation introduced by myself and Congressman Fred Upton, to fix a serious flaw
in the unemployment compensation system.

Unemployment compensation is designed to give temporary assistance to workers who would
otherwise suffer from serious economic setbacks due to generally unexpected and sudden loss of
employment. It eases a tremendous burden for unemployed workers who lose their sole source
of income, providing them with a small “cushion” of support while looking for a new job.

Interestingly, election poll workers -- individuals who serve their community on election day at a
polling place ~- are also eligible for unemployment compensation. This seems odd, since the
very nature of the job is to serve for one day. Furthermore, poll workers receive a small
reimbursement for their time and expenses ~- usually sixty to eighty dollars ~ and generally do
not rely on their service as a poll worker as their main source of income.

In most cases unemployment compensation is usually reserved for long-term employees; thus,
not many poll workers have qualified for these benefits. But more and more have exploited their
eligibility to obtain significant compensation benefits ~ creating a financial drain on local
‘governments and increasing costs to the American taxpayer.

In my district, for example, a poll worker was eligible to receive up to $12,000 in unemployment
‘compensation after “losing his job” when the election ended. Because he had held, and retired
from, a prior job with the county elections board, the county was liable for the entire benefit — an
enormous financial burden they could scarcely afford.

States have tried to close this loophole themselves. Unfortunately, they have been hampered by
the fact that only federal law can specify who is not eligible for unemployment compensation.

H.R. 3430 would allow states, ifthey so chose, to close this loophole. It uses a $1,000 dollar per
‘year income threshold -- based on the income reasonably expected to be earned by the average
poll worker volunteer -- to separate poll workers from longer-term, wage-based election workers.
| would add that election workers earning under $1,000 per year are already exempt from paying
Social Security and Medicare taxes.

‘Abuse of the unemployment compensation system not only costs taxpayers more money, but
hurts those who have legitimate need for unemployment compensation. I thank the
subcommittee for their consideration of this measuse.ta,slose a costly loophole in federal law.


UNEMPLOYMENT INSURANCE ISSUES

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

JULY 11, 1996

Serial 104-77

Printed for the use of the Committee on Ways and Means

te

U.S. GOVERNMENT PRINTING OFFICE
39-336 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC. 20402

ISBN 0-16-055074-2



108

496-18

STATEMENT OF TRE
AMERICAN FEDERATION OF LABOR-
CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO)

FOR THE

SUBCOMMITTEE ON HUMAN RESOURCES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
guly 11, 1996

The AFL-CIO encourages Congress to fashion a consensus
response to unemployment insurance (UI) administrative financing
problems. It is our belief that a solution can be reached which
brings together labor, employers, federal and state
administrators without fundamentally altering the current
federal/state relationships. The current devotution proposals,
however, can never build that consensus. If anything, by
proposing a sweeping overhaul which threatens many ancillaxy
elenents of the core system and creates unnecessary
uncertainties, these ill-conceived proposals delay the formation
of the alliances we need to fix administrative problems.

Regarding the Pennington lawsuit, the AFL-CIO believes the
right of claimants to a fair and accurate accounting of previous
earnings and to payment of benefits in an expeditious manner must
be weighed along with state rights to determine program
characteristics. The State of Illincis has appealed this
decision and has yet to exhaust its legal recourse. We believe
the district court -- which is entirely composed of judges
appointed by President Reagan -- has rendered a fair and accurate
judgement which should not be overturned through legislative
action

The following statement addresses devolution and Pennington
in that order.

DEVOLUTION

Pressing Issues sevond Administrative Finance

The AFL-CIO shares the concerns of a?l panelists that
administrative financing issues must be resolved. Gur membership
includes both claimants and public sector employees, creating a
significant interest in a stable, tuily-funded administrative
system. However, we urge Congress to take a broader look at tne
unsatisfactory insurance afforded the nation's unemployed workers
through the current federal/state system

Throughout the 1980s, state and federal legal restrictions
on eligibility have reduced the percentage of the unemployed
receiving benefits from 75 percent in 1978 to only 36 percent
last year. Even accounting for changes in the demographics of
the unemployed, the Advisory Council on Unemployment Compensation
and numerous independent researchers have noted the important
contribution of state legal restrictions in reducing the


131

STATEMENT OF JOHN DODDS, PAUL LODICO
AND BARNEY OURSLER
PHILADELPHIA UNEMPLOYMENT PROJECT
MON VALLEY UNEMPLOYED COMMITTEE
BEFORE THE
COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ON THE SUBJECT OF UNEMPLOYMENT INSURANCE ISSUES

uly 25, 1996

Mr. Chairperson and Members of the Subcommittee on Human Resources.
We are John Dodds, Director of the Philadelphia Unemployment Project, from
Philadelphia, Pennsylvania, and Barney Oursler and Paul Lodico, Directors of the
Mon Valley Unemployed Committee, located in Western Pennsylvania. Both the
Philadelphia Unemployment Project and Mon Valley Unemployed Committee are
membership organizations which provide advice and assistance to large numbers
of unemployed individuals in our respective communities. We also participate in
advocacy efforts on behalf of the unemployed at the local, state, and national levels.
We would like to thank the Committee for providing us with the opportunity to
present to you our views as to why Congressional action would be inappropria
Feverse the Tth Circuit dedsion in Pennington v. Didrikson. ‘That decision
interpreted the "when due” requirement in the Social Security Act, which requires
the payment of benefits as soon as "administratively feasible’, to mandate the use
of a base period counting recent wages

Several people who run state unemployment agencies have complained to
you as to why this decision burdens them. We think the focus should more
appropriately be upon the burden faced by unemployed workers who have to
endure waits of up to six months for unemployment benefits that they have earned
but cannot access because the state prefers not to count the wages earned in the
four to six month period immediately before the loss of their jobs.

‘The use of a base period which counts the wages in the four to six month
period immediately preceding job loss is sometimes referred to as an “alternative
base period” or "ABP". Those who would be benefited by the use of an ABP
eventually become eligible without it if they wait long enough. The ABP does not
create any new eligibility criteria. ‘These people have already earned enough to
meet the state's eligibility standards, and they have lost their jobs through no fault
of their own. Their wage profile will look exactly the same when they qualify for
benefits as it did when they applied. The four to six month wait for benefits,
however, can have drastic effects upon the worker and his or her family.

‘The stories of M.B. and RP. are typical. _M.B. worked in an ambulance
garage in Philadelphia. M.B. had been on welfare, and had gone to school to
become an Emergency Medical Technician. It was the kind of job she had always
wanted. Unfortunately, she was subjected to overt sexual harassment on the job.
Nevertheless, she stayed until she was fired with a flimsy explanation and was
replaced by a man. M.B. had worked long enough to have sufficient earnings
under Pennsylvania's financial eligibility criteria. However, she needed to count
her most recent wages before she could have access to her benefits. Like many
people terminated under false pretenses, M.B. could not find other work, despite
her efforts to do so. She had no choice but to return to welfare. She eventually
lost her apartment, since even with welfare, she could not pay her rent. The last
time M.B. was heard from, she was living in a city shelter.

RP. is a young mother with two toddlers. She needed to stop working to
care for them while they were small. She re-entered the workforce in December
of 1995, working as a cashier at a check-cashing agency in Philadelphia. She
worked hard, but was fired by an unscrupulous employer with little regard for the
wage payment laws, This occurred in July of 1996. During her employment R.P.
earned enough to be eligible for benefits under the unemployment compensation
program. However, despite the fact that she is currently unemployed and in need




109

percentage of the unemployed who receive benefits.+

As the economy produces more low wage jobs and less secure
employment, these tightening restrictions threaten the counter-
cyclical power of the system and drastically curtail the
insurance function of the program. At a time when millions of
Americans feel vulnerable and anxious about their economic
future, Congressional attention to peripheral notions like
devolution is a distressing commentary on the state of political
discourse around unemployment insurance. Worse, the
Congressional attempt to circumvent the Pennington decision, as
discussed below, threatens to undermine one positive step toward
claimants’ rights in the current environment.

What is Devolution

The idea of "devolution", or sending administrative funding
decisions to state jurisdictions, raises fundamental issues that
extend far beyond what may at first appear to be a simple
technical issue. In a wide range of policies where states are
under increasing fiscal pressure -- from training to Medicaid to
welfare -- reformers are pressing forward with efforts to expand
state-level control over social policy. Devolution of UI
administrative funding and policy is part of this broad wave of
policy interventions. Indeed, because UI is already so heavily
state oriented, we believe the current interest in devolution is
merely an attempt to capitalize on a broad policy thrust where
smaller administrative simplifications would achieve the same
goal.

Plans for UI devolution have been advanced primarily by
state administrators in Georgia, New Hampshire, Ohio, and
Virginia. Although details vary, the thrust of these proposals
is that states should collect and control administrative funds
The implication is that the federal government has too much
control of "their" funds and leaves the states perpetually under
funded. The proposals try to free additional administrative
dollars by diverting program dollars, usually including
elimination of the Extended Benefits program. Proposals vary in
relation to other federal UI programs, labor market information,
and other aspects of UI administration.

Devolution: History
"Devolution" is an idea which comes and goes. it

periodically resurfaces and it nev: happens. In Ways and Means
hearings in 1939, the Social Security 31rd noted

Bassi, et al. (1996) "The EvoJution of Unemployment
Insurance," Advisory Council on Unemployzent Compensation,
Background Papers, Volume III, January; Anderson and Meyer (1994)
“Unemployment Insurance Benefits and Takeup Rates," Working Paper
4787, National Bureau of Economic Research; Corson and Nicholson
(2988) "An Examination of Declining UI Claims During the 1980s,"
UI Occasional Paper 89-3, US Department of. Labor.



30

wise, we are facing in the next year a potential $15 million cost in
the State of Illinois and we don’t know where we will get that $15
million. And that’s just the administrative costs.

Mr. RANGEL. But you haven't the slightest clue what the Con-
gress would come up, do you?

Ms. DiprIcksoNn. Pardon me?

Mr. RANGEL. You have no idea what legislation we would come
up with.

Ms. D1pRICKSON. I understand that Congressman Crane is intro-
ducing legislation this afternoon.

Mr. RANGEL. Well, it is generally true that when the Majority
wants something done, the Minority does not have much influence.
Under the normal way legislation is prepared you really don’t know
what will be signed into law.

My point, really, is that the Department of Labor indicated that
they have an advisory council and there are a lot of recommenda-
tions out there that they support. As they’ve indicated today, the
State would determine the base period. Since everyone does not
agree with what you have said, that you have exhausted your legal
remedies, that the best thing that could be served is that we get
all of these people—Mr. Secretary, how long has your Department
been working on this issue?

Mr. UHALDE. I believe the original case was filed in 1985.

Mr. RANGEL. No. I mean the revisions, the Council on Unemploy-
ment. Are you familiar with this?

Mr. UHALDE. Yes. And the Advisory Council has issued its report
this year-——

Mr. RANGEL. And these are experts?

Mr. UHALDE. Yes. This was a bipartisan commission appointed
part by the administration, part by the Congress, both Majority
and Minority and——

Mr. RANGEL. And so, the Congress will be best served if we just
look at the basis of the recommendations. Most people believe that
the States should control the base period. I don’t think there is any
disagreement out there.

And the question is, whether we do it on what makes us feel
good, or act on the information of those people who specialize and
recognize that there is a problem out there.

So, unless there’s something urgent, is there anything urgent
that any of the panel members feel—

Ms. DipRICKSON. | think the question here is, you know, what is
the benefit to waiting? And as I reread the Secretary of the Depart-
ment of Labor’s testimony here it is clearly stated. It is Illinois
choice or any State’s choice of how to balance the various pros and
cons of immediate access versus demonstrated attachment to the
labor force.

Mr. RANGEL. Well, let me ask the Secretary, do you believe that
Illinois has exhausted its appeals rights?

Mr. UHALDE. No. We believe there is still an appeal right——

Mr. RANGEL. The Supreme Court?

Mr. UHALDE [continuing]. To the Supreme Court on this issue. I
recognize that they have been not accepted once but we understand
that could——


89

BBB SCREEN ACTORS GUILD

July 8, 1996

Subcommittee on Human Resources
Committee on Ways and Means
United States House of Representatives
Washington, D.C.

Re: 3677
Ladies and Gentlemen:

in conjunction with the testimony of Mr. Charlton Heston before your
subcommittee on this date. we herewith submit copies of the following
correspondence:

1. Letter dated December 22, 1992 from Ira L. Gottlieb, Esq. of the
law firm of Taylor. Roth, Bush & Geffner (now Geffner & Bush)
to Mr. Thomas P. Nagle. Director, Employment Development
Department of the State of California;

Letter dated May 4, 1993 from Mr. Nagle to Mr. John Humphrey,
Regional Director for Unemployment Insurance Services of the
Employment Training Administration of the United States
Department of Labor;

Letter dated May 17, 1996 from Mr. Gottlieb to Mr. Humphrey;
4. Letter dated June 9, 1993 from Mr. Don A. Alcar, Regional
Administrator of the Employment and Training Administration of
the United States Department of Labor

Sincerely.

C5 > eee

Leonard Chassman
Hollywood Executive Director

Encl’s.

5757 WILSHIRE BOLLEVARD + LOS ANGELES, CA 90036-3600 + TELEPHONE (213) 549-6612 + FAN (213) 549-6603

ano Sven eta Acs Amare FLED a aie ems Feder a es


84

The plans are wholly funded by employer contributions. It is this
unusual set of facts which creates the onerous application of sec-
tion 3304 that now exists.

Parenthetically to this, let me point out that American films are
overwhelmingly dominant in the world market, producing an un-
matched trade surplus for our country.

Our organizations have been helping to encourage employment
for seniors in support of the national interest and in ensuring that
senior citizens remain active, contributing members of society. Sen-
ior images in our media make a major contribution to that objec-
tive, but such images are very rare.

Senior performers typically continue to seek employment in their
chosen profession after they begin to receive the pension benefits
they have earned over a lifetime of work in our industry.

Now, when the performer gets a new part, the new employer will
make an additional contribution to the multiemployer pension
fund, an additional contribution which will create an incremental
increase in his pension plan, his monthly pension.

Should these performers later apply for unemployment benefits
for which they have qualified, section 3304 requires that the
amount of the benefit be offset by the total amount of the perform-
er’s pension, not just by the amount of the increase, but by the
total amount of the pension. The offset will substantially reduce or
even erase completely the unemployment insurance benefit. H.R.
3677 would very simply limit the offset to the amount of the in-
crease.

We have for the Subcommittee a package of correspondence
which began in December 1992 between our attorney, the Califor-
nia Employment Development Department, and ultimately the U.S.
Department of Labor. With the Chair’s permission, I ask that this
package be accepted and included in the record of today’s proceed-
ings. This correspondence shows that efforts were made to correct
this inequity at the State level, we hoped by administrative inter-
pretation.

The need for congressional action was confirmed, however, in a
letter dated June 9, 1993, in which the Department of Labor stat-
ed, “Offset of only the amount of pension increase would appear to
be a more equitable alternative to offset of the total amount of the
pension.” However, the language of this statute does not permit
proportional offset.

Passage of H.R. 3677 will provide the change in language we
need here and provide our community with a more equitable alter-
native, as acknowledged by the Department of Labor.

Most significantly, the encouragement to senior artists to con-
tinue contributing to their industry, to their own self-esteem, and
to America’s culture would be a valuable corollary of your favorable
action.

Thank you, sir.

(The prepared statement and attachments follow:]


12

Chairman SHAW. Thank you for your testimony.

Ms. Wyrsch, did you have testimony or are you accompanying
Mr. Uhalde?

Ms. Wyrscu. No, I do not.

Chairman SHAW. Our next witness was introduced by Congress-
man Crane, the comptroller of the State of Illinois, Ms. Didrickson.

Am I pronouncing that right?

Ms. Diprickson. Didrickson. That is correct.

Chairman SHAW. Yes, OK. Fine.

STATEMENT OF HON. LOLETA A. DIDRICKSON,
COMPTROLLER, STATE OF ILLINOIS

Ms. Diprickson. Well, good morning, Mr. Chairman.

Chairman SHaw. I would like to ask all the witnesses, if you
could, the lights that are on the table are set for 5 minutes. If you
could kind of keep an eye on them. I am not going to be too strict
with the gavel, but if you could keep an eye on it. When the red
light comes on, it means that the time has expired.

Proceed as you wish, please.

Ms. Diprickson. Thank you, Mr. Chairman and Members of the
Subcommittee.

On behalf of Governor Jim Edgar and myself, as the comptroller
of the State of Illinois, I thank you for the opportunity to testify.

I am asking for your help in passing the legislation that Con-
gressman Phil Crane will be introducing later this afternoon in
order to overturn the Federal appellate court decision in Pen-
nington v. Jackson, Pennington v. Didrickson, and now Pennington
v. Doherty.

When I served as director of the Department of Employment Se-
curity, it was obvious to us at the department that this case was
not only pivotal to the definition of unemployment insurance law,
but it had serious financial implications to our State and Federal
Government, as well as to the employer community.

The interpretation of the appellate court decision will result in
an overall shift in the intent of unemployment insurance represent-
ing a 180-degree departure from how the Federal Government and
States have really defined the Social Security Act since its incep-
tion, more than 60 years ago.

The blueprint for today’s unemployment insurance system was
intended for unemployment insurance benefits to be limited to indi-
viduals who are ordinarily steadily employed, not to provide relief
simply for anyone who is out of work. In other words, it wasn’t de-
signed to be a welfare program financially supported by employers.
It is an insurance program.

Pennington is a class-action lawsuit which is challenging Illinois
base period, as you just heard. The period of time reviewed to de-
termine whether an individual has earned enough to qualify for un-
employment insurance. The base period also determines the
amount of the individual’s weekly unemployment check.

Virtually all States define the base period in the same way as Il-
linois, I believe about 49 States, using the first four of the last five
completed calendar quarters preceding the individual’s filing an
initial claim.


54

tion for alternative base periods. And it is our opinion that they are
being proposed only because they think the court system has al-
ready told them to do so. Those are big States. California is a $75
million administrative cost item for just to put the program in
place.

So, it’s got to be done and it’s got to be done now. We look for-
ward to working with you on all these issues.

Thank you.

(The prepared statement and attachments follow:]


96

agreement. The individual filed for UI benefics and both
employer A and employer B were base pericd enployers on the OI
claim, The work performed by the individual after the beginning
of the base period increased the individual's pension avard.

on received from a
le "only where the
e the identical, single

The Unions and their attorneys urge that a pe:
wenployer pension plan should be deduc

pension employer and the base period employer

employer" as ia the example shown above.

ng his of her initial
the Unions argue thar the pension should
le fo. the Ur benefits. for example:

‘The same individual mentioned above secured work wich employer C
some two years after applying for his SAG pension which was
based on employment with employers A and 8. Buployer C also had
a collective bargaining agreement with SAG and contributed to
the Fensicn fund on the individual's bebaif while he worked.
After being laid off by employer C, the individual filed a valid
claim for UT benefits. the only base period employer was
employer C.

The Deparcrent determined that the work the individual performed
for employer C after the beginning of the base period did result
the pension award. Thus, the entire pension
the increase) will be deductible from th

The Departnent's position is that employer ¢ contributes to the same
multi-employer pension fund from which the individual's pension is
paid. Employer C is a base period employer and the work the individual
performed after the beginning of the base period did result ia an
increase of the pension award.

‘The Unions and their attorneys disagree wich this interpretation.
Their position is thac the individual earned his initial eligibility
for the SAG pension based on his wor with employer A and employer 8,
neither of whom were base period employers in the second example.

‘Thus, employer C is not the "pension" employer and the pension benefits
should not ke deducted from the UI benefits.

While the Deparcnent feels that its interpretation of state and federal
law with respect co the offset of pension payments from UI benefits is
correct, we agreed to request an opinion from the Department of Labor
{DOL) as to whether there would be a conformity issue should cur
Departnent change its interpretation of how the pension offset law
applies ro pensions paid froma multi-employer rension fund and adopt
the interprecation urged by the Unions.



15

Testimony
The Honorable Philip S. English
before the House Ways and Means
Subcommittee on Human Resources
July 11, 1996

Mr. Chairman and fellow Members of the Subcommittee, I want to thank you for
holding this important hearing and for allowing me to address my colleagues and

everyone in attendance today on unemployment reform. As most of you may know,
before being elected to Congress, I was the Research Director for the Senate of
Pennsylvania's Labor and Industry Committee. During my tenure, I dealt with many of
the issues being discussed today and I can tell you from my own hands-on experience that
the current unemployment insurance (UI) system is badly in need of reform. States are
not equipped to tackle unemployment in the 90's with a UI system that has changed very
little since its inception and cannot deal effectively with the changing nature of
unemployment. I will discuss several changes to the system I am proposing as well as the
unfair taxation of benefits during my testimony today.

Late last month, I introduced legislation designed to empower states to meet the
needs of the long-term unemployed. The current unemployment insurance system was
created to help states combat short-term unemployment. Unfortunately, workers who are
laid off from their jobs now are less likely to return to their previous jobs as in the past —
and long-term unemployment is increasing. The current system cannot adequately
address long-term unemployment.

Unemployment is hard enough on families, without the worry that benefits will not
be available because of the arcane structure of the system. H.R. 3738, the legislation I
introduced, will make several important changes to the current system:

1.) Make it easier for states to provide extended unemployment benefits to
workers who have been unemployed for long periods by broadening the
trigger states can use to access benefits.

Research has shown that the combination of the reduction in the Insured
Unemployment Rate and the increase in the trigger level during the recession of the
1980's resulted in the failure of the Extended Benefits program to trigger "on" as
unemployment continued to rise. As a result, Congress found it necessary to pass a series
of emergency extensions of UI benefits. Put simply, no state was able to tap into
Extended Benefits during the most recent recession. Therefore, it is absolutely necessary
to reform the program pricr to the onset of the next recession. Emergency extensions of
benefits are a Jerry-Built policy prescription neither well-timed nor well-targeted.


36

the Members. But you don’t truly believe that the voice of the peo-
ple will be denied as a result of us waiting, do you?

Mr. UHALDE. No.

Ms. DIDRICKSON. I guess, Congressman, my question is, what is
the benefit of waiting? And I believe that the real question here is
a preemption question, did Congress, 60 years ago, intend to pre-
empt States rights?

Mr. RANGEL. Well, let me ask you this.

Because I don’t presume that you know whether the voice of the
people are the unemployed workers or whether the voice of the peo-
ple are the more politically powerful employers but isn’t the issue
really whether an employee receives more or less benefits?

Ms. DIpRICKSON. No. The issue really is whether or not 60 years
ago did Congress intend to preempt States rights? Should we have
the ability, as a State, to be able to establish our base period? That
is the issue.

Mr. RANGEL. And if the voice of the people had an opportunity
to be expressed, you think they would think that is the issue?

Ms. DrpRICKSON. The voice of the people do have a voice in the
State of Illinois through their legislative body——

Mr. RANGEL. But we are talking about——

Ms. DIDRICKSON [continuing]. When we established the base pe-
riod.

Mr. RANGEL. But notwithstanding the sovereign rights of the
State of Illinois, there is a Federal role here, don’t you agree,
please, yes?

Ms. Drprickson. I believe that there is a Federal role here in
terms of the legislative body here to determine whether or not did
Congress intend to preempt States rights 60 years ago.

Mr. RANGEL. And I know you would not deny us the opportunity
to have as much information in front of us as possible to make cer-
tain that we get it right.

Ms. Diprickson. Well, I think you've heard from your colleagues
on this panel how much information and what information and 60
years’ worth of precedents with regards to allowing States to be
able to establish their own base period and the fact that 49 States
have a similar situation with Illinois and that there is a nationwide
implication here that is very, very immediate and very clear.

Mr. RANGEL. Your response shatters the reason for panels. If I
have to listen to my colleagues, in the Majority, then I’m out of
business.

Ms. DipRICKSON. But you could also then listen to it. It also shat-
ters it if we are going to let the bench legislate versus you, Con-
gressman.

Mr. RANGEL. Well, the court made a decision and under our legal
system you appeal it and after you exhaust your legal remedies
then that would be the time for us to act. Unless there is an emer-
gency and the Congress believes that we have to make certain that
the voice of the people, as heard through the employers, is pro-
tected, then let’s move swiftly.

But if we want to find out whether or not the decision is too gen-
erous for the employers in the States, then I think that I would
want as much information as possible.


48

Employment Security System
Administrative Financing

0.8%
Effective
Tax

6.2%

Tax
Liability

Present Proposed


GOVERNOR Pere WILSON

Statement of the Honorable
PETE WILSON
Governor, state of California
before the
House Ways and Means Committee
Subcommittee on Human Resources

duly 11, 1996

Mr. Chairman and Members of the Subcommittee, as you
consider selected unemployment insurance issues I would like to
bring to your attention a situation that has arisen in California
involving the payment of unemployment benefits to criminals upon
release from prison, Immediate action is required by Congress to
prevent the blatant misuse of taxpayer dollars.

Pursuant to the passage of a ballot initiative by California
voters in 1990, the State of California established the Joint
Venture Program in the state prison system. Under this program,
private businesses may contract with the California Department of
Corrections to hire inmates to produce, on the grounds of state
prisons, various goods and services for sale. Similar programs
have also been established in several other states.

The Joint venture Program provides an opportunity for
inmates to learn important work skills and generates revenues and
savings to the state and federal governments. Up to eighty
percent of an inmate’s income is subject to: federal, state and
local taxes; withholding for support of the prisoner’s family;
payment of restitution to crime victims; and reimbursement to the

state for the cost of room and board.


53

percent back of the moneys that the employers in that State are
paying.

This shortfall is a disservice, Mr. Rangel, to claimants and to em-
ployers, and we believe something should be done and we believe
that devolution offers an opportunity to correct this problem.

Let me give you some ideas of what this service is. Federal law
requires that benefits be paid through the public employment of-
fices. Most States have cut those back. Some of them have almost
done away with them because of the lack of funds. It is intended
that the UC claimants are exposed to job search assistance at these
offices and many of these offices just don’t exist any more in some
States. Ohio has cut back by over 40 or 50 percent.

Federal law also requires the public employment service to ad-
minister the work test to UC claimants and this is intended to
identify claimants who are not making conscientious efforts re-
quired by the State law to find new work and, thus, should not be
receiving benefits. Identifying these claimants properly, having the
funds to identify these claimants properly is vital to maintaining
the integrity of the system. And studies have shown that money
being placed in job placement services is an effective use of scarce
resources.

Included among the advantages of devolution, we believe, are
many of the comments that Mr. Poythress just made, more re-
sources at lower cost, increased compliance by employers due to
State enforcement. There are a lot of employers out there not pay-
ing the tax and it’s only going to be really enforced if the States
can get at that. The Federal Government cannot get at that.

Reduce administrative costs, we believe will get fewer forms. IRS
won't be involved any more, that costs money. The State agencies
will have more flexibility and with fewer mandates and probably
have more money at lower costs to employers.

Now, we do believe that you need to address the Federal Ex-
tended Benefits Program because this is important in crafting the
legislation. And the wage base differential, a need for borrowing by
States when they do run out of funds, and perhaps in situations
where there is a temporary shortfall of funds.

We are not advocating eliminating the DOL function in compli-
ance issues. We are not advocating eliminating some of the Federal
compliance requirements. We are advocating a more efficient and
flexible use of the funds.

Let me finish up—and I almost hesitate to bring this up—on the
Pennington case. The Advisory Council was mentioned as getting
into alternative base periods. If you read that report, the Advisory
Council said, it’s a States rights issue. It suggests that States look
at alternative base periods, but it does not suggest a mandate by
either the court system or by Congress to do that.

We have done a little survey and the employer community is es-
timating the cost to research the information, the wage information
that is needed to comply with this other base period that has been
added on could run between $15 and $20 per claim. And we wonder
what a cost benefit analysis would really produce.

Now, I understand the Department of Labor claims that they
need one. I don’t think it’s necessary, it just ought to be done and
done now. California and New York have already proposed legisla-


138

D. Ms. Didrickson also argues that “[i]n the 1970's Congress
itself expressly recognized and took no issue with the states’
widespread use of base periods consisting of the first four of the
last five quarters."  Didrickson Stmt. at 2, But Congress dealt
with base periods only in its enactment of 26 U.S.C. § 3304(a) (7),
which was designed to control for a wholly separate problem of
"double dipping" by those claimants who try to reuse wages for
second claims. Accordingly, the court of appeals determined that
§ 3304(a) (7) "had nothing to do with the operation of the ‘when
due’ clause and certainly did not address the issue of whether the
type of base periods used in the Illinois statute violated that
clause." 22 F.3d at 2383

TIT. The Uae Of An Alternative Movable Base Period Will Neither
Increase The Risk Of Fraud Nor Substantially Increase
tin
A. The proponents also argue that Illinois’ base period

“streamlines administration and minimizes the risk of fraud"
because it allows for verification of a claimant's wages,
Didrickson Stmt. at 1, whereas use of an alternative movable base
period "would entail either essentially taking a claimant's word
for it as to the amount of [his most recent] earnings, thereby
increasing the risk of fraud, or requiring additional reporting
from employers to verify the earnings, thereby imposing new
‘paperwork burdens.'" Id. at 3

In fact, however, the testimony in Pennington confirms that a
movable base period can be most easily designed by using the very
same wage data - collected and processed in precisely the same way
- that Illinois does now. The only difference would be that,
instead of enforcing a mandatory delay on using a claimant's recent
wage data, the state would assess eligibility based on those wages
as soon aS they were reported by the former employer and processed
onto the state's data base, for any claimant who needed his more
recent wages to qualify for benefits. But since exactly the same
wage data would be collected in exactly the same way, a movable
base period would neither require reliance on claimants” statements
as to what their wages had been, nor impose new paperwork burdens
on employers or the state.

B. The proponents also argue, however, that the Pennington
decision "could have a costly impact upon’ employers and state
government [s] ... and aggravate the federal deficit by hundred’s of
million’s of dollars." Didrickson Stmt. at 1. She estimates
administrative costs in Illinois at § 12 - § 15 million in one-time
costs and $ 2.5 million in yearly operating expenses. Id. at 2-3.
She estimates trust fund outlays of 1.5%, but also notes one study
that, she claims, indicates that alternate base periods could raise
state trust fund outlays by 4 to 6%. Id. at 2-3. From these
estimates, she contends that trust flind outlays for a movable base
period would be between § 180 million to 750 million over 6 years,
or § 22.5 million to $ 93.75 million per year which, she claims,
would trigger automatic tax increases. Id. She concludes from all
these figures that the Pennington decision will "cause nationwide
disruption in the various states’ unemployment compensation
system." Id.

None of this is realistic. First, as accurately described by
the court of appeals, the claimants’ evidence supports a narrowly~
based challenge to the section 237-type base period; not a
challenge based on any alternative base period that any litigant
might conceive. 22 F.3d at 1380 n. 3. Furthermore, seven states
(Maine, Massachusetts, New Jersey, Ohio, Rhode Island, Vermont and
Washington state) already use movable base periods and Michigan and
New York will begin doing so soon. Yet the sky has not fallen in
any of those states. Indeed, the Advisory Council concluded "that
advances in technology have made it feasible for all states to use
the most recently completed quarter when determining benefit
eligibility." Unemployment Insurance in the United stat.



49

Employment Security System Financing
Present

Federal Unemployment Trust Fund

5%
Bonetta cco
Account Account Admi
a

oa

Refunds to States



78

Chairman SHAW. Without objection, all of the testimony will be
submitted for the record.
Mr. Upton.

STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN

Mr. Upton. Thank you, Mr. Chairman. Thanks for the oppor-
tunity to testify before you today.

The bill I bring before you today, H.R. 3430, introduced by myself
and Mr. Farr, is extremely simple, yet extremely important.

Under current law, cities and counties in your districts are re-
sponsible for paying unemployment benefits for folks who work as
an election official, even if they only work 1 or 2 days a year.

An unemployment claim was filed against one city in Michigan
by an election inspector who worked in the August primary and
November general elections in 1994. Amazingly, now the city is re-
sponsible for paying unemployment benefits to this worker.

Recognizing this injustice, the Michigan State Legislature at-
tempted to change unemployment laws in Michigan. However, the
Department of Labor was quick to point out that this situation
must first be corrected by amending the Federal Unemployment
Tax Act known as FUTA. H.R. 3430 makes this correction in the
FUTA law, and it allows the States to provide this exemption if
they choose to do so.

The CBO has assured us that the bill is budget neutral. H.R.
3430 simply gives the States the freedom to run their unemploy-
ment compensation programs as they see fit. As we all know, mu-
nicipal budgets are extremely tightly stretched, providing our con-
stituents with the services that they need and deserve.

I know of no opposition to this bill. We have received many let-
ters of support from around the country, and we appreciate your
help in getting this bill out the door.

{The prepared statement and attachment follow:]


88

EXAMPLE
(for the purpose of Illustration, the figures are hypothetical)

Assume that the actors’s monthly pension benefit prior to his
new employment was $600 per month. As a result of his new
employment his monthly benefit is Increased by $7 to $607 per
month.

Assume that the determined unemployment insurance benefit
4s equal to $650 per month.

Under current law, the monthly unemployment benefit of
$650 would be reduced by $607, leaving a net unemployment
benefit equal to $43 per month.

Under the change encompassed in H.R, 3677, the monthly
unemployment benefit of $650 would be reduced by $7, leaving a
net unemployment benefit equal to $643 per month.

It is important to remember that absent the two criteria cited above (an
employer in the same employer group and an increase in the pension)

the individual's unemployment insurance benefit would not
be reduced. Accordingly, the current law discriminates against persons in our
industry who enjoy the benefits of a multi-employer plan (which is essential to a
freelance marketplace) and who are allowed to benefit from the fruits of their post-
retirement work by virtue of the increased pension.

Respectfully submitted by,

ed

Leonard
Hollywood Executive Director


43

Currently each state sets and collects a state payroll tax for
UI benefits and deposits those funds into state-specific Benefit
Accounts maintained by the federal government as part of the
Unemployment Trust Fund (UTP). A separate federal payroll tax,
collected by the Internal Revenue Service (IRS) under the Federal
Unemployment Tax Act (FUTA) is a dedicated employer tax to support
administration of the Unemployment Insurance (UI) laws and the
Employment Service (ES). FUTA was established as a contract with
private sector business that these dedicated taxes would be u
only for unemployment and employment services.

The concept of “devolution” of most of the management of the
Employment Security System from the U. S. Department of Labor to
the states has been studied carefully for many years in labor
department circles. It is fiscally sound, administratively simple
and politically realistic. I believe the time to implement it ia
now.

I have attached, for the record, a copy of the Executive
of Georgia’s Proposal to transfer the administration and
financing of the Employment Security System to the states.

This very straightforward proposal does three main things.

1) ‘It establishes a single, state-collected payroll tax for
both UI benefits and UI/ES administration,

--Eliminating the current duplicative tax system and
saving private sector employers approximately half a
billion dollars annually in filing coste;

--Eliminating IRS collection of the federal payroll tax,
thus saving $75 to $80 million each year;

--Making the marginal additional cost to the states to
collect "both" taxes negligible.

These savings could begin as soon as states - instead of the
IRS - begin collecting the .8% PUTA tax. At the point when a state
adopts its own administrative tax, the .8% federal FUTA tax would
be completely offset to the employer. State collections would be
deposited in state specific accounts in the UTF to avoid any
adverse impact on the federal deficit.

2) It eliminates micro-management of state programe by the
U. S$. Department of Labor (USDOL) and establishes the
foundation to downsize the USDOL bureaucracy by 50% to
75%.

3) Tt_assures that the employers who pay FUTA taxes get the
full benefit of those taxes. Reduction of IRS and USDOL
roles will greatly reduce the costs and improve the
efficiencies of the system.

In summary, Mr. Chairman, this is a wonderful opportunity to:

Truly return power to the states;
Lighten the paperwork burden on American business;
Save millions in wasted tax dollars and
jay the foundation for future tax cuts.

I strongly encourage the committee’s favorable consideration
of this proposal.



This argument might have been valid when
the states could obtain interest free loans;
however, now they must pay interest just like
any other borrower. In addition, the federal
government has penalized some states
‘through disallowing part of the FUTA offset
credit when states are delinquent in repaying
their federal loans. As a consequence, many
states already go through private sources for
funds.

iggest challenge to passing
effective legislation to devolve the adminis
trative cost of state unemployment programs
to the states is finding other savings to com-
pensate for the perceived loss of the FUTA
surplus by the federal government, The
Congressional Budget Office (CBO) will
likely score devolution as a net loss of fund-
ing, In actuality, devolution will end up as
substantial savings for most jurisdictions.
Because the responsibility for funding state
administration would be devolved to the
states and the states’ unemployment trust
funds would continue to be banked in Wash-
ington D.C., a more realistic scoring would
be that devolution is revenue neutral.

Unfortunately, the current political climate,
spawned by a substantial federal budget

129

deficit, may favor allowing the federal gov-
ernment to continue overcharging employers
for the administration of their state unem-
ployment programs. The table on the follow-
ing page shows a clear imbalance in the way
FUTA funds are currently being dispersed.

Most states have been conspicuously short-
changed by the federal government's uneven
eturn of theit employers’ FUTA taxes.

Many states have even been forced to add
administrative taxes to their state unemploy-
‘ment tax rate schedules. Employers in these
states are paying for program administration
‘wice-first through the FUTA tax and then
through a separate state administrative tax.

The states receive back an average of just
over 60% of the money that the federal
government collects through the FUTA tax.
‘The rest of the money is retained in Wash-
ington D.C. where it helps to counteract the
‘budget deficit. Because most state unemploy-
‘ment agencies are accustomed to working
with much less than their employers have
been paying in FUTA taxes, providing a
100% offset against the federal tax would
allow most states to replace the FUTA tax
with substantially lower state administrative
taxes. ©

Larry C. Clark is Vice President of Information Management for The Gibbens Co., Inc., a national
employee-owned firm which specializes in unemployment claims management. Mr. Clark is a
member of the Board of the National Foundation for Unemployment Compensation & Workers’
Compensation. He is Vice President of the Association of Unemployment Tax Organizations. Prior
to his twenty-four year employment duty with Gibbens Company, Mr. Clark worked as an eligibility
adjudicator and trainer for the California Department of Human Resources Development (now the

Employment Development Department).


113

Loan Fund an_important Current Feature

A specific insurance feature of the current system which
must be retained is the loan fund. Under current law, 4 portion
of FUTA taxes goes into a Federal Unemployment Account (FUA}
which makes loans to insolvent state trust funds. States
currently repay these loans with interest. This fund is a vital
part of the national commitment to social insurance. Any
devolution proposal which threatens its integrity should be
rejected.

Extended Benefits Program Issues

Most proposal for devolution include elimination of the
Extended Benefits program. Such proposals go far beyond the
supposed technical fix that advocates claim they are making ~
through devolution. :

The AFL-CIO has long been a critic of the existing =B
program, but we believe the program should be improved and not
eliminated. It is noteworthy that the Advisory Council on
Unemployment Compensation devoted all of its 1994 recommendations
to this program. We concur with their recommendations in this
avea, particularly the use of the state's seasonally adjusted
total unemployment rate as an BB trigger mechanism. Since 1.3
million unemployed workers were without work for 27 weeks or more
last year, proposals to eliminate the EB program, rather than
strengthen it, should be rejected

Administrative Funding Reform Possible Without Devolution

We agree that some aspects of the current administrative
funding structure should be reformed. it is possible to shape a
reform agenda that brings together labor, employers, and
administrators around common concerns. An acceptable reform
proposal must promote a better linkage between work load and
available funding. We believe this can be achieved within the
existing Department of Labor effort around the Administrative
Financing Initiative. Any reform must encourage innovation and
research in the national interest as well as cover current
expenditures. It should provide a secure funding base for
unexpected economic downturns. It should address unnecessary
restrictions on the movement of funds within che Employment
Service, though not out of the Employnent Service. It should
promote simplification of employer paperwork without sacrificing
important labor market information

PENNINGTON VS ILLINOIS
Unemployment Insurance and the Low Wage Labor Market
As mentioned at the outset, the AFL-CIO is particularly

concerned that restrictions in state UT programs prevent too many
of the unemployed from receiving benefits. Within the range of


122

ANOTHER ALTERNATIVE

While devolution of ES administrative financing to the states is supported by some
employers and ES administrators, another alternative should be considered.

“The inadequate funding problem expressed by state administrators and employers is a
valid concern, However, this concern can be addressed within the current system.
‘The methodology for providing administrative funding to states needs to be refined
and updated. Policy regarding the movement of funds from one ES program to
another needs to be changed to permit more efficient use of administrative funds.

‘The federal partners have considerable expertise. Their guidance and oversight of state
programs has allowed the development of a number of new initiatives (state
demonstration projects) which have resulted in their expansion to other states.
Funding for these demonstration projects would be lost if devolution occurred.

‘The current high level of funds in the FUT accounts should be re-examined. There
is more than sufficient funds available to sustain the needs for which specific ES funds
were designed. The Congress should reduce FUTA taxes, including the elimination of
the 0.2% FUTA temporary surtax.

Devolve (1-18-96)


127

The Movable Base Period
Broad Bi-Partisan Support in the Stat

Contrary to the perception promoted by the Illinois defendants, the MBP has the
support of Republicans and Democrats, including President's Bush chair to the Advisory
Council on Unemployment Compensation, industry representatives on the commission,
and the Governors of New Jersey and New York.

The ACUG, chaired by President Bush's appointee, recommended that the states,
adopt the movable base period in no uncertain terms. Most recently, New Jersey did so
in late 1995. ‘The legislation passed both houses of the New Jersey Legislature, which are
Republican controlled (Assembly vote: 77-0; Senate vote: 31-7), and was signed by
Governor Whitman with substantial support of workers in the construction trades and
other industries. This legislative session, Governor Pataki introduced a bill adopting the
MBP in New York, which passed the Republican-controlled Senate and awaits action by
the Assembly. Indeed, of all the states that have adopted the MBP, the New Jersey and
New York legislation is among the most beneficial to claimants, covering not only the
wages earned in the most recent completed calendar quarter but also the wages earned in
the quarter in which the claimant filed for benefits not yet completed.

To Overnule the Pennington Case by Legislation,
While the Appeal is Still Pending,
Would Undermine the Judicial Process

Finally, itis an affront to the judicial process, not to mention an inefficient use of

the limited time and resources of the U.S. Congress, to consider legislation to overrule the
Pennington I case while the appeal is still pending before the federal courts. It would clearly
set a dangerous precedent for Congress to step in at this point in the proceedings and take

away the plaintiffs fundamental right to their day in court to prove and defend the case on
the law and the merits

On July 10, the day before the hearing before the Ways and Means Committee,
Subcommittee on Human Resources, the state of Illinois filed a 48-page brief before the
USS. Court of Appeals for the Seventh Circuit, arguing for reversal of the district court's
decision enjoining the state’s system, Indeed, the defendants go to great lengths in their
appeal brief to argue that the appeal court should review the trial court’s decision “de
novo”; an independent review of the law and facts which, if decided in favor of the
defendants, would essentially render the controversy moot. Moreover, it is worth noting
that Pennington case is still the only federal court decision on this issue, explaining why the
‘U.S. Supreme Court declined to review the first appeal. Accordingly, in the interests of
the plaintiffs’ right to judicial review in the case and sensitive balance between the role of

the federal courts and Congress, the controversy is one that should first be resolved by the
federal courts.


CONTENTS

Advisory of June 28, 1996, announcing the hearing .
WITNESSES
U.S, Department of Labor, Raymond J. Uhalde, Deputy Assistant Secretary

of Labor, Employment and Training Administration; accompanied by Mary
Anne Wyrsch, Director, Unemployment Insurance Service ..

American Federation of Television and Radio Artists, Charlton Heston .

English, Hon. Philip S., a Representative in Congress from the State of
Yennsylvania .

Farr, Hon. Sam, a Representative in Congress from the State of Cal

Georgia, State of, Hon. David B. Poythress, Commissioner of Labor

Illinois, State of, Hon. Loleta A. Didrickson, Comptroller see

Interstate Conference of Employment Security Agencies, Andrew N. Richard-

son .. _ .
National Coalition for Unemployment Compensation ‘Tax Reform, ‘Warren
. Blue ..

Phoenix Closures, Inc., Albert R. Miller
RE. Harrington, Inc. Warren G. Blue
Screen Actors Guild, Charlton Heston
Shenandoah Electronic Intelligence, Inc.,
Upton, Hon. Fred, a Representative in Congress from the of Michiga:
West Virginia, State of, Bureau of Employment Programs, Andrew N. Rich-

ardson, Commissioner :
Writers Guild of America, West, Charlton Heston

SUBMISSIONS FOR THE RECORD

American Federation of Labor and Congress of Industrial Organizations,
statement . -

Allen, Hon. George, Governor, Commonwealth of Virginia, statement

California, State of, Hon. Pete Wilson, Governor, statement

Clark, Larry C., Gibbens Co., Inc., Reno, NV, statement and attachment

Dodds, John, Philadelphia Unemployment Project, and Mon Valley Unem-
ployed Committee, Philadelphia, PA. joint statement

Employers’ Unemployment Compensation Council, Southfield, Mi, statement .

Employment Task Force, New York, NY, and National Employment Law
Project, New York, NY, joint statement

Gibbens Co., Inc., Reno, NV, Larry C. Clark, statement and attachment .

Mon Valley Unemployed’ Committee, and Philadelphia Unemployment
Project, Philadelphia, PA, John Dodds, Paul Lodico, and Barney Oursler,
joint statement . sre : .

National Employment Law Project, New York, NY, and Employment Task
Force, New York, NY, joint statement ......... _— :

Oursler, Barney, Philadelphia Unemployment Project, and Mon Valley Unem-
ployed Committee, Philadelphia, PA, joint statement ......... .

Pennington, Luella (and the class of unemployment insur:
Chicago, IL, joint statement ... sessvanneveeees .

Philadelphia ‘Unemployment Project, and Mon Valley Unemployed Commit.
tee, Philadelphia, PA, John Dodds, Paul Lodico, and Barney Oursler, joint
statement ., vee

Thomas, Hon. Bill, a Representative in Congress from the State of California,
statement . a -

Virginia, Commonwealth of, Hon. George Alien, Governor, statement

Wilson, Hon. Pete, Governor, State of California, statement

Wilson, Maris, Heritage Foundation, statement

(ap

Page

131
134

131

142
143
117
145


145

United States House of Representatives
Ways and Means Committee
Subcommittee on Human Resources

July 11, 1996

Testimony on the Transfer of the Administration and Financing of
the Unemployment Compensation System to the States

By
Mark Wilson
Rebecca Lukens Fellow in Labor Policy
The Heritage Foundation
Washington, DC 20002

Mr. Chairman, Members of the Committee, thank you for inviting me to testify on the possible
transfer of the administration and financing of the Unemployment Compensation System to the
states. Unfortunately, prior commitments precluded me from appearing before the committee
today. Please accept my written testimony and enter it into the record.

It should be noted that the following testimony is my own view and does not necessarily reflect
that of The Heritage Foundation.

1, BRIEF OVERVIEW OF UNEMPLOYMENT COMPENSATION SYSTEM

‘The Unemployment Compensation (UC) system has two main objectives. It is to provide
temporary and partial wage replacement to recently unemployed workers, and help stabilize the
economy during recessions. To accomplish these two objectives the UC system consists of two
programs; Unemployment Insurance and the Employment Service (UES). The UC program
currently is financed by two separate taxes, with two different tax forms, by two levels of
government. A Federal Unemployment Tax (FUTA) of 0.8 percent! on the first $7,000 of each
employees wages and state unemployment insurance taxes that average 0.9 percent of total

' The current 0.8 percent FUTA tax rate has two components: a permanent tax rate of 0.6 percent, and a temporary
surtax of 0.2 percent. The surtax was first passed in 1976 to restore depleted state UI accounts and was suppose to
expire in 1987. Since 1987, the surtax has been extended four times primarily to fund extended benefit programs
and is now suppose to expire in 1998,


106

Chairman SHAW. Thank you, Mr. Heston.

Mr. Rangel.

Mr. RANGEL. Thank you.

I want to thank Mr. Heston for taking the time out to testify be-
cause we are all aware that so few people who enter your business
end up as successful as you have been, and therefore, we need peo-
ple like you to encourage our young people to know that there is
some type of a safety net for them.

I cannot think of anyone that would object to correcting this in-
equity as it exists, and I cannot think, Mr. Heston, of a piece of
legislation that has hit this particular Subcommittee that has been
bipartisan in nature, and so I want to welcome that opportunity.
Then, if you have some spare time, a few Democratic things I may
ask you to join with me on——

Mr. HEsToN. That is a fair accomplishment.

Mr RANGEL [continuing]. In helping some of these young peo-
ple—

Mr. Heston. I play many roles.

Mr. RANGEL. Welcome, and it really says a lot for you, knowing
the value of your time to actually, as you would play the role, to
take care of the lesser among your people.

Mr. HeEsTON. Well, thank you, Congressman.

If I may add a short addenda, I think an unusual, indeed, pos-
sibly unique feature of this problem is the small number of people
to which it applies. You are talking about some 700 members of the
various guilds I mentioned who would find themselves in this situ-
ation, and also to have their pension, as I said, not just reduced
by the increase, but the entire pension, it seems clearly indefensi-
ble, as the Department of Labor actually agreed, but they said you
are going to need legislation.

Thanks to you gentlemen here, we are——

Mr. RANGEL. Mr. Chairman, I understand—well, I know that
some pension legislation may be coming to conference, and if it is
within the scope, the leadership will make the decision, but I am
certain on the outside there would be no objection.

Chairman SHAW. We are looking into that. I think there is a
hook in the bill that presently is between the House and the Sen-
ate, and we possibly can work something out.

We are also going to have to formulate some legislation to take
care of the Illinois situation, which is going to be a little more dif-
ficult because I think the administration filed a brief in support of
Illinois and since has done a turnaround on it.

Mr. RANGEL. It may be a little more difficult for other reasons
as well.

Chairman SHaw. I would like to thank the entire panel for their
testimony. It is very insightful testimony. I feel that Mr. Farr and
Mr. Upton have really thrown us a softball which we might be able
to correct in a suspension. We will look into it.

Has anyone filed this bill on the other side?

Mr. Upton. I would just note, Mr. Chairman, that both Mr. Farr
and myself appeared before the Bipartisan Corrections Day Panel,
and they recommended that we move forward and, obviously, go
through the appropriate procedure here. Of course, the way that
that system works is it does have to be reported out of Committee,


66

Mr. Camp. Thank you very much.

Mr. Rangel, would you like to inquire?

Mr. RANGEL. Yes. We are moving quickly into a period where a
lot of people believe that the States are in a better position to take
care of problems that are local, and we are getting involved in the
block grant proposals which reduces the size of the Federal expend-
itures, as well as their interference, because in the areas of health
care and welfare reform we say trust the Governors. After all, you
haven't done a good job.

If we block grant it, we will be in the posture of having to deter-
mine how to redistribute the money, and the easiest way is that
you get back what you put in. Then, when we run for reelection,
whether it is health care or unemployment or welfare, ultimately
we could say we are getting out of this Federal interference, Gov-
ernors know best, States know best, why don’t you just take care
of your own. Tax what you think is fair, and then we will really
reduce dramatically the Federal tax.

It is just a step further, I think, from what you are talking about.
If we are abusing the system, not giving you back your fair return,
trust your State ‘Tegislators in doing the right thing. Keep your own
employers’ tax money. Take care of your own unemployed, and let
us just get on with the national defense.

Do any of you object to just taking that extra step, and if so,
why?

Mr. PoyTuress. I think you described the system that we are
recommending.

Mr. RANGEL. That the Federal Government not collect, not do
anything, just say whatever we are doing, just repeal the law. You
don’t touch your employment taxes. Let the States do it.

Mr. Poyturess. No. No, that is not the recommendation at all.
The recommendation—

Mr. RANGEL. Well, I am saying that is what I am saying. That
the next step would be that we will not be the collection agency for
the States. You are smart. You are sensitive. You know how to bal-
ance budgets. We don’t. So you do it.

Mr. Poyturess. That is what we are recommending.

Mr. RANGEL. Well, then what is it that you—where do we differ?
Then the Federal Government will not collect any of your employ-
ers’ taxes, right? You are recommending that?

Mr. POYTHRESS. Correct.

Mr. RANGEL. And that we will just—

Mr. PoyTHRESS. Excuse me. The government would not collect it
directly. Now, some of the money would be made available. Some
of that money would come to the Federal Government to fund the
oversight role which all of the recommendations embrace that there
is a Federal oversight role.

Mr. RANGEL. Wait 1 minute. What oversight role? We are talking
States rights here. So please don’t agree with half of it.

I am saying take the Federal Government out of it. The Gov-
ernors are oversighted.

Mr. PoyTuress. Nobody has recommended that.

Mr. RANGEL. Why not?

Mr. PoyTuREss. Because there needs to be a national system of
unemployment insurance.


52

Mr. Camp. Thank you very much.
And now, Warren Blue, senior vice president and general counsel
of R.E. Harrington, Inc.

STATEMENT OF WARREN G. BLUE, SENIOR VICE PRESIDENT
AND GENERAL COUNSEL, R.E. HARRINGTON, INC., COLUM-
BUS, OHIO; AND CHAIRMAN, NATIONAL COALITION FOR
UNEMPLOYMENT COMPENSATION TAX REFORM

Mr. BLUE. Thank you, Mr. Chairman.

Tm appearing here today as the chairman of the National Coali-
tion for Unemployment Compensation Tax Reform.

This is an organization consisting of employer associations and
hundreds of individual employers who have concerns with the very
point that Mr. Poythress was making as to the efficiency of the use
of the Federal taxes collected from employers.

Some of the organizations that are part of the coalition include
the National Association of Manufacturers, NFIB, U.S. Chamber of
Commerce, the American Payroll Association, and the UBA, Inc., of
which Charles Little, who is president of UBA is here with me, and
I’m on the board of UBA, Inc.

There are two major problems that have brought employers to
this position of having formed this coalition. The first one has been
an ongoing problem since the middle or late eighties and that is
the continual taxing of employers with a two-tenths percent surtax
which was imposed in 1976 to pay off a debt that the Congress in-
curred when they extended the Unemployment Benefit Program,
borrowed general revenue funds and then told employers they were
going to have to pay the money back. That debt was paid off in
1987. It has since been extended four times and most recently ex-
tended to the first part of January, January 1, 1999.

To make matters worse, the administration has proposed extend-
ing this two-tenths to 2006, and after 2002, require employers to
report and pay this tax monthly, rather than quarterly.

We see no need for the extension of this tax. We are in favor of
a repeal of this tax and we obviously oppose the administration’s
concept of continuing taxing to reduce the deficit, because that’s
what the money is used for. This costs about $1.5 billion a year to
the employers of this country.

Our second major problem consists of the system which now basi-
cally is taxing the employer community twice to pay for the admin-
istration of the program throughout the United States. Congress
has seen fit to only appropriate 60 percent of the money that the
employers are paying in the FUTA tax to be used for administra-
tion in some of these other trust funds that Mr. Poythress has just
mentioned.

And to make matters worse, some 21 States have decided since
they are not getting enough money back—remember Congress is
only giving 60 percent of the money back—that they have come up
with separate taxes, including the State of Georgia, to pay for the
administration since they need the funds in order to provide the
program to claimants and employers.

All States, except five and the Virgin Islands, receive less than
collected from the tax the employers pay. Indiana only receives 37


101

would request a meeting with you to discuss the DOL's
response and the steps to be taken thereafter.

Thank you for your consideration.
Very truly yours,

TAYLOR, ROTH, BUSH & GEFFNER
A Law Corporation

du

IRA L. GOTTLIEB

a

ILG:pjw
Enclosure(s)

cc: Ken Orsatti
Leonard chassman
Vicki Shapiro
Bert Freed
Warren Kimmerling
Mark Farber
Pamm Fair
Brian Walton
Thomas Nagle (Director, EDD)

sage ttre

teu 1599
Meee


26

Having said allthis, I recognize there are reasonable people who might disagree with
me, I could probably have a spirited debate with them on the wisdom of an altemate base
period. The problem is, as the Pennington case has transpired, most of my concerns will
never even enter into the debate. According to the most recent district court decision, the only
relevant considerations in deciding whether a state should adopt an alternate base period are
how much more would be paid in benefits and what the impact would be on government's
operating expenses, The cost to employers, in terms of higher taxes and additional paperwork,
will simply not count. Employers will not even be able to have the satisfaction of voting
against the judge who made the decision. Mr. Chairman, employers are the ones who pay for
the system; our concerns should at least be considered relevant to the discussion

‘The legislation Iinois is seeking will simply make sure that the decision as to whether
the benefits of an alternate base period justify its costs remains one for policy makers
accountable to those who will be affected by the decision and that, as the costs and benefits
are weighed, all sides’ concerns are given their due. I respectfully ask you to support it.

As to devolution, as with everything else, the devil is in the details. However, done
correctly, I believe it could make the employment security system more accountable to the
people it serves, allow for more flexibility and smarter choices by state officials, and make the
system cheaper for government and employers. Your consideration of the matter will be a real
service to employers and job seekers alike.

Thank you for you taking the time to have this hearing today and for considering my
views.


22

A number of states have put alternative base periods in place to address the circwnstances of the
plaintiffs in Pennington - individuals who would not qualify using the first four of the last five
quarters but who would qualify if more recent wages were used. ICESA believes that states
should continue to have latitude to establish such alternatives or other standard base period:
that the first four of the last five quarters is only one of a variety of base periods that states might
use, As technology that permits states to collect and process wage information more quickly
becomes available, more states may wish to establish alternatives or more recent quarters as their
base periods. However, purchasing the latest technology and implementing alternatives to
standard practices are expensive. Administrative funding for unemployment insurance was cut
about 6% in FY 1996, and increases in the future to support practices such as alternative base
periods does not appear likely.

As you know, administrative funding for unemployment insurance is included under domestic
discretionary spending caps although the program is an entitlement. There is currently no
provision for increases in administrative funding for unemployment insurance under the
discretionary caps--even though the number of beneficiaries who would be entitled to be served
could increase substantially in an economic downturn,

Implications

‘The Pennington decision blurs the line between what is an eligibility requirement and what is an
administrative method, potentially giving rise to further lawsuits against state employment
security agencies regarding issues beyond base periods. We are concerned that Pennington
could establish a precedent for determination of other qualifying and eligibility requirements for
state unemployment benefits by the judicial rather than the legislative process. Expansion of the
courts’ authority into setting qualifying and eligibility requirements for unemployment benefits
preempts the democratic process and, as a result, is likely (o erode public support for the
program,

In the legistative process, discussions about qualitying and eligibility are not an entirely
intellectual exercise. The practical implications, as well as the intellectual basis, of new
provisions must be recognized because the legislative body bears responsibility for the outeome
For example, in a state where individuals in the same circumstances as the plaintils in
Pennington are not eligible for benefits, legislators must explain to constituents why they are not
eligible; in a state where an alternative base period is put in place, legislators must explain to
their employer constituents that theit unemployment (axes will be higher. In the legislative
process, all interests must be weighed. The courts simply issue an opinion and take no
responsibility for implementation.

Recommendation

We believe that it is in the best interest of the unemployment insurance system and the workers
and employers it serves to maintain the historical interpretation of the Social Security Act’s
“when due” clause; that interpretation would be changed significantly if the Pennington decision
stands. ICESA urges you to enact legislation making clear Congressional intent to leave
establishment of base periods to the states.


105

In summary, tt {s our opinion that amending 2DD policy to
discontinue pension offset when the pension amount has been
increased based on services performed in the bage period, and tha
base pericd employer hag contributed to a sulti-employer pension
plan, would raise an issue of conformity with the minimm
requirements of Section 3304(a)(15), PUTA.

Questions concerning this information should be referred to Jamia
Bachinski at (415) 744-6648.

Sincerely,

Don A. Balcar
Regional Administrator

cc: Ira Gottlieb, TAYLOR, ROTH, BUSH & GEFPNER, A law Corporation


34

Mr. UHALDE. The question and the information that we are going
to get is on the impacts and the costs of the alternative base peri-
ods or not having alternative base periods. Which individuals are
affected, what are the administrative costs, what are the benefits
paid and the costs to employers of this court ruling if it went to
the balance of the 47 States.

Already here, we've discussed the difference between an impact
of 1% percent in terms of benefits and the impact of 6 percent in
terms of benefits. That’s quite a difference and we think we need
that information to then——

Mr. Nusste. To do what? To recommend whether or not we are
going to preempt the Stat2s or not? I mean no matter what infor-
mation you get back, are you going to come to us and say, Now,
we want to make this Federal if it is six or if it’s five or if it’s one?
Are you going to come to us at any of those ranges and recommend
that we take over this system and preempt the States and not let
them determine the base period?

Mr. UHALDE. No. We don’t believe that we have—

Mr. NuSSLE. Well, then what information are we waiting for that
is going to impact this decision, that’s what I don’t understand.

Mr. UHALDE. I do not believe and we do not believe that the Con-
gress wants to make a decision without knowing the implications
as to costs.

Mr. NusSLE. You made the decision to support with an amicus
brief without this information. Now, you're telling us to wait. It
was OK for you to do it?

Mr. UHALDE. It was a decision in terms of our interpretation of
the law and regulation.

Mr. NussLe. And we are interpreting the court decision and the
information we have. We have our bevy of attorneys and staff look-
ing into it. We have the opportunity to listen to the experts who
are here today from Illinois and West Virginia and elsewhere.
They’re telling us it is probably a good idea to get involved in this.

And why are your experts more interesting or more accurate
than our experts or why is it that there’s information—I mean,
what information are we going to get? You have not convinced me
that there is any information out there that we’re going to get be-
tween now and March that is going to either affect your rec-
ommendation to us on legislation or on our decision to pass or
write legislation.

What is there out there?

Mr. UHALDE. I’ve stated what we believe is the importance of the
information. It is not compelling to you but it’s information that we
think is important and ought to be considered.

Mr. NusSsLe. Well, I mean you're giving us a pretty strong rec-
ommendation here to wait. I would like you to be a little bit more
compelling than I don’t know what it will be or I don’t know what
impact it will have. I mean you're telling the States to wait and
you're telling us to wait and you're telling them basically go ahead
and file another appeal.

Can I ask, who pays for these appeals?

Ms. Diprickson. The State of Illinois.

Mr. NussLe. And where does this money come from?


115

suggests that the state right to set eligibility is paramount,
claiming 60 years of history. Over those same 60 years, however,
the federal government has had the right to insist that benefits
be paid in a timely manner (under the "when due” clause) and has
exercised that right. In Pennington, the Republican-appointed US
court of Appeals, Seventh Circuit, ruled that waiting up te six
months for reported wages was a violation of timeliness and they
ruled that it was administratively feasible to count most recent
earnings. Illinois can and should accurately count earnings.
They should not come to Congress to deny this responsibility.

Eight States Have Voluntarily Passed Moveable Base Leciglation

Bight state have voluntarily passed legislation to do what
Illinois claims it cannot accomplish. In Maine, Massachusetts,
New Jersey, Ohio, Rhode Island, Vermont, and Washington, states
use a base period which includes earnings in the most recent
quarter. Michigan has adopted a flexible base period effective
one year from now. With so many states successfully adopting a
moveable base period, it is not surprising that Illinois has thus
far been unable to convince the court that it is not
administratively feasible. We urge Congress to avoid passing
legislation which will impede claimants’ rights to what has been
epeatedly proven feasible.

Avoiding Welfare Throush Fair Accounting

Opponents of Pennington claim that it makes UI more like
welfare. Apparently, they believe any effort to include more of
the unemployed in the program will necessarily involve including
the "undeserving". They couldn’t be more wrong. we believe the
opposite is true. Pennington requires Illinois to make a timely,
accurate accounting a worker's employment history. By more
accurately measuring labor force attachment, Pennington requires
Illinois to pay UI to unemployed workers. Ironically, without
this administrative fix, many unemployed workers will be denied
benefits and be more likely to receive welfare instead.

The U.S. labor market is increasingly producing low wage,
contingent jobs. Yet state eligibility criteria continue to
reflect past history, demanding high prior earnings and stable
employment. We believe significant change is needed te bring
state UI systems in line with existing labor market trends. Only
by adopting reforms such as the moveable base period can UI
eligibility criteria accurately reflect an individual's
attachment to the new labor market

CLOSING REMARKS

‘The U.S. unemployment insurance system is in dire need of
reform. Too few of the unemployed receive too little in benefits
for too short a time, In addition, the current administrative
financing system keeps the supporting infrastructure of the
system starved for funds. This situation is problematic enough
given the current, lengthy economic recovery. But this recovery


t With, But
Due Claui

II. The Pennington Decision 11
ized By Hi

A. The legislation’s proponents argue that Pennington
“represents a 180-degree departure from the manner in which both
the federal government and states have construed the Social
Security Act, since the statute's enactment more than 60 years
ago." Didrickson Stmt. at 1. They contend that this deviation
from the historical interpretation of the when due clause was
wrought by activist federal judges intent on usurping the
legislature's "policy making authority", Didrickson Stmt. at 1,
through "judicial fiat." “Statement of Hon. Philip M. Crane, 142
Cong.Rec. __ (July 11, 1996). In fact, however, like the district
judge who decided the case, the three court of appeals’ judges were
all appointed by President Reagan. Moreover, the Pennington
decision itself confirms that they are judicial conservatives.

For example, the proponents argue that "(tlhe United States
Supreme Court has held that the Social Security Act was intended to
recognize the importance of each state establishing its own
eligibility criteria for unemployment insurance." Didrickson Stmt..
at 2. But that, too, just begs the question of whether Illinois’
base period is an eligibility criteria or an administrative method.
Moreover, the Pennington court’s conclusion that Illinois’ base
period is an administrative provision, not an eligibility criteria,
is not only consistent with Supreme Court precedent, it is required
by two unanimous Supreme Court cases: enia De

of v, Java, 402 U.S. 121 (1971) and Fusari
v. Steinberg, 419 U.S. 379 (1975). See 22 F.3d at 1386.

In Java, the Court considered the legality of a provision that
suspended payment of benefits to any claimant who had won an
initial determination, during the pendency of any appeal by the
claimant’s former employer. 402 U.S. at 122. Though the case
concerned California's unemployment insurance code, the statutory
provision at issue was used in 48 states. See Appendix to
Appellants’ Brief in Java, No. 807 (U.S. Sup. Ct. 1970) at 69-70.
Nonetheless, in a unanimous opinion, the Court held that the
provision violated the when due clause because ‘when due’ was
intended to mean at the earliest stage of unemployment that
payments were administratively feasible." Id. at 131,

After a thorough review of the Congressional history that led
to enactment of the when due clause, Chief Justice Burger concluded
that the when due clause was designed to provide prompt wage
replacement to displaced workers both "to tide them[} over, until
they get back to their old work or find other employment, without
having to resort to relief", 402 U.S. at 131 (quoting HR Rep No.
615, 74th Cong, 1st Sess, 7 (1935)), and to "exert {) an influence
upon the stabilization of industry. Id. at 132

This history of when due jurisprudence belies the proponents’
argument that Pennington represents judicial encroachment on
legislative prerogatives. After all, the when due clause is itself
a legislative enactment. And one with the backing of the
Constitution’s Supremacy Clause. U.S. Const., art. VI, cl. 2. It
is, therefore, entirely appropriate for the federal courts to
enforce the when due clause. Indeed, one cannot help but feel that
the proponents disparage the federal courts so vigorously because
they resent the fact that unemployed Americans went to the federal
courts to enforce their rights against state policy that violates
federal law. But just as the Java Court struck down a state's
administrative provision because it delayed payment of unemployment
insurance in violation of the timeliness demanded by the when due
clause, the Pennington court concluded that Illinois’ base pericd
is an ‘administrative provision that delays payment to eligible
Claimants


58

be deposited in the Federal Unemployment Trust Funds and so would
still be in the Unified Federal Budget for purposes of deficit
calculations

As to the Loan Account, it has been suggested that funds currently
in the account be used to create a revolving fund since states must
repay loans with interest. If at some point additional funds to pay
U.C. benefits were needed, repayable advances could be made from
general revenue, as has been done in the past. More recent
experience has shown that states are hesitant to use this fund and
have adopted alternative funding mechanisms. This same approach
(repayable advances), should it ever occur, could be used to assist
in financing temporary shortfalls in administrative funds.

Regardless of the exact method, which requires much attention to
detail, employers must be relieved of the present double taxation

Need to Overrule Pennington Decision on Base Period

We support amending the Social Security Act to provide that
determination of a state’s base period is a decision that should
be left to the state. This would overrule the decision of the
Seventh Circuit Court of Appeals in the case of Pennington v.
Doherty. This decision held invalid Illinois’ use of a base period
of the first 4 of the last 5 completed calendar quarters to
determine if the wages earned by the claimant were sufficient to
qualify for unemployment compensation. This is the definition of
base period used by most states. However, a few states use an
alternative base of the last 4 completed quarters if it results in
more favorable treatment for the claimant. Pennington claimed, and
the Circuit Court agreed, that since it is technically feasible for
Tllinois to use this alternative base period, its failure to do so
violates section 303(a)(1) of the Social Security Act which
requires a state unemployment compensation program to provide for
such methods of administration that are found by the Secretary of
Labor to insure full payments of unemployment compensation when
due. The Secretary of Labor has never found that the first 4 of the
last 5 completed calendar quarter base period violated this
provision, but the 7th Circuit Court did. We feel this is a matter
that is best left to each state to decide what will work best in
its particular case.

Conclusion

We appreciate this opportunity to appear before your Subcommittee
today and look forward to working with you to develop a proposal
to reduce taxes. If I or any member of our Coalition can be of
service to you in your deliberations we are ready to assist in any
way we can.


112

for unemployment-related purposes. Employers and labor have been
willing to make a few noteworthy exceptions to this rule by
diverting some U2 funds into training accounts in a small number
of states. These programs are good examples of exceptions that
prove the rule; they reflect intense bargaining among interests
and include significant program oversight by joint labor-
management bedies. They are extremely controversial, and both
labor and employers tend to rally around the concept of keeping
the UI trust funds as a trust for the unemployed.

There is widespread concern that devolving administrative
funds to the states will promote a merger of employment-related
funds with other funds. In the process, the interests and
concerns that iabor and business share will be more difficult to
vealize. This concern is particularly acute given current
proposals to block grant many other social programs and the
downward pressure on federal funding

‘There is another troubling aspect to this merging of funds
Again, the origins of UI financing are instructive in this
regard. As early as 1939, the Social Security Board voiced
concern about state control leading to political patronage. The
Social Security Act established federal oversight and merit
employment systems precisely to avoid expanding patronage and
making the system vulnerable to corruption. The rush to devolve
UI administration and every other sccial policy reopens this
critical debate in American politics. We are deeply concerned
that devolution of administrative funds will result in a new
breed of patronage as private firms and political friends vie for
these funds without sufficient federal oversight or merit
employment requirements.

Threat_to Insurance Functions

Secure administrative financing is essential to fulfilling
che insuvance function of UI. Devolution poses a potential
threat to social insurance in two senses. First, the essence of
social insurance is pooled risk. A devolved administrative
financing system narrows the pool of available funds for
administrative uncertainties. Economic downturns are never
evenly distributed across the states. The risks facing
administrative funding should be more broadly distributed to
acknowledge this.

Second, downward pressure on administrative funding implies
downward pressure on program performance. For example, the cost
of administering a benefits denial .5 i-ost certainly lower than
the cost of administering a successful ela:m for benefits, Any
administrative financing system shoutd acknowledge the higher
cost associated with case management versus disqualifications.

We are concerned that downward pressure on administrative funding
will lead to unfair restrictions on aecess to the system.
Similarly, small states and less pcrulous state will almost
certainly have to raise employer taxes following devolution. All
of the states that had a 90 percent or better return of FUTA
funds in grants had small tax bases: Alaska, Idaho, Maine,
Montana, North Dakota, Rhode Tsland, Vermont, wyoming



76

2.) Encourage states to maintain sufficient unemployment trust fund balances
to cover the needs of unemployed workers in the event of a recession. States
that maintain adequate reserves (based on their own experience) to cover
expenses in future recessions would receive slightly increased interest
earnings on part of their trust fund; states that fall short would receive
slightly reduced interest earnings.

3.) Allow interest-free, cash-flow federal loans only for states that have
sufficient trust fund reserves to last through a future recession.

4.) Allow states to collect the federal share of unemployment insurance taxes
from employers, allowing employers to fill out one form and write one check,
not two.

5.) Require states to distribute information packets explaining unemployment
insurance eligibility conditions to unemployed individuals.

Alll of these provisions are based on the Advisory Council on Unemployment
Compensation's Collected Findings and Recommendations for 1994-1996. As most of
you know, the Advisory Council was established under the Emergency Unemployment
‘Compensation Act of 1991. That law instructs the Council to evaluate the unemployment
compensation program and make recommendations for improvement. The long process
of drafting H.R. 3738 allowed me to utilize my experience when considering the effects
each recommendation would have on the UI system. I have concluded that if the
recommendations were enacted into law, as I propose in H.R. 3738, states (like
Pennsylvania) would have the tools to assist workers faced with long-term
unemployment,

Another important issue I would like to address is the current tax on
unemployment compensation (UC) benefits. Before 1979, UC benefits were excluded
from inclusion in income for tax purposes. UC benefits are currently fully subject to tax.
This tax treatment, in place since 1987, puts UC benefits on a par with wages and other
ordinary income in regard to income taxation. Last year, I introduced legislation, H.R.
2461, the "Unemployment Tax Repeal Act," to again exclude UC benefits from inclusion
in gross income for tax purposes. The pre-1979 exclusion was upheld by Internal
Revenue Service rulings based on three arguments: 1.) the law did not explicitly require
taxation of UC, 2.) the benefits were viewed as part of the social welfare system and not
regarded as wages, and 3.) taxation would undercut UC's income support objectives. I
feel the final justification is particularly true. The UC tax is not a tax on income,



28

probably for three or four reasons. One, we think there are appeal
rights that currently exist, and I think it is important to get the
court decision. We would have argued that the legislation is in-
tended to correct, within the law, this one narrow interpretation,
but that could leave open, then, what is primary State responsibil-
ity in other areas. This is a very narrow surgical legislative point.

Second, we now have some research ongoing, and legislative deci-
sion should be made with full information.

We have already heard that Illinois believes the cost would be
about 1.5 percent. That also means benefits that people aren’t get-
ting is about 1.5 percent, but our preliminary analysis is that it
could be as much as 6 percent.

Well, 6 percent in terms of benefits not paid to individuals, as
well as 6 percent cost to the trust fund; that is quite a difference,
and if we are going to legislate, we ought to legislate with the best
information possible. In March, we will have pretty solid informa-
tion on this question. We think it is reasonable to have such infor-
mation.

Mr. McCrery. So, in other words, you are telling us today that
even though the Department filed an amicus brief that you were
filing the amicus brief strictly as a lawyer interpreting what you
appreciated to be the current law, but if you were writing the law,
you may arrive at a different conclusion. You may write a different
law. You may not give the States the right to determine their own
base periods. Is that correct?

Mr. UHALDE. Historically, our position has been that this issue
is an eligibility issue, a determination of the States.

Mr. McCrery. Right.

Mr. UHALDE. That is correct.

Our position with regard to eligibility issues is unchanged—it is
a position for the States, but there is a legitimate question; if you
are going to change the Social Security Act and change the law
now, then we should do this with full information. There isn’t full
information.

Mr. McCrery. Mr. Chairman, if you will indulge me just to con-
tinue this point.

Chairman SHAw. Yes, go ahead.

Mr. McCrery [presiding]. I am confused because you seem to be
saying now that you are in agreement with the law as you inter-
pret it, that this ought to be an eligibility issue and, therefore, de-
termined by the States. If, in fact, that is your position, then why
would you quarrel with legislation which would clarify the law?

Mr. UHALDE. Because we believe that at this point that is pre-
mature to be able to do.

Mr. McCrery. That brings us back to my original statement that
your only objection is that it is premature.

Mr. UHALDE. I attempted to clarify why we believed that was
premature in this instance.

Mr. McCrery. Again, if your only objection is that it is pre-
mature, I don’t understand why. If we are willing to go through the
trouble, it is no sweat off your back if we do the work and pass
the bill. All you have to do is sign it. If we are willing to do the
work to clarify the law to do what you say you think it should do,
give the States the right to determine their eligibility periods or


94

given the legislative admonition enunciated in §1255.3(b) and
Evans, if there is any room for discretion in interpreting the
federal law, the EDD must opt for the position that most severely
Confines the offset burden. The above discussion demonstrates
that such a limiting construction is dictated by the statute.

In sum, the interpretation of the federal offset adopted by the
EDD, rather than being required, is in fact not justified by its
literal language. A tore sound’ interpretation, and one in
keeping with state policy, would apply the offset only vhere the
sam employer provided both the pension and the base period work
resulting in pension eligibility or increase.

We hope the’ above persuades you to reconsider and revise the
EDO's position consistent therewith. We request the opportunity
to meet with you to further explicate our position and address
any questions you may have, sometime in mid to late January.
Please contact the undersigned so we may arrange for such a
meeting. Thank you for your cooperation.

very truly yours,

TAYLOR, ROTH, BUSH & GEFFNER
A Law Corporation

\ ae i
tue x Tere
IRA &. GOTTLIEB

rLG:pjw

cc: Ken Orsatti
Leonard Chassman
Vicki Shapiro
Bert Freed
Warren Kimmerling
Mark Farber
Pamm Fair
Brian Walton

naseu 3599
aitese


STATEMENT OF RAYMOND J. UHALDE
DEPUTY ASSISTANT SECRETARY OF LABOR
EMPLOYMENT AND TRAINING ADMINISTRATION
BEFORE THE
SUBCOMMITTEE ON HUMAN RESOURCES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES

July 11, 1996
Mr. Chairman and Members of the Subcommittee

Thank you for the opportunity to testify on the Pennington
decision and its impact on the unemployment insurance program.
I also want to introduce Mary Ann Wyrsch, Director of the
Unemployment Insurance Service in the Department of Labor's
Employment and Training Administration

BACKGROUND

Before discussing the Pennington decision, I want to provide
you with some background information on the matter at issue in
that case, the establishment of base periods under the
unemployment insurance program

State unemployment insurance (UI) laws identify a base
period for measuring the wages earned by an individual from
employment that is covered under the unemployment insurance
system. Earnings during the base period are then used as the
basis for determining whether the individual qualifies for
unemployment benefits, the weekly benefit amount, and the
duration of such benefits.

‘The date establishing the beginning and ending of the base
period depends on when the claimant first applies for benefits or
first begins drawing benefits. In all States the base period is
comprised of four quarters or a 52-week period. Most States (47)
define the base period as the first four of the last five
completed calendar quarters immediately preceding the first day
of an individual's “benefit year." (The "benefit year" is the
period in which rights to unemployment benefits based on the
claimant's base-period employment may be exercised.) Two States
use as the base period the 52 weeks preceding the benefit year
two States use the last four quarters, one State uses the four
quarters ending four to seven calendar months before the benefit
year, and one uses a uniform calendar year.

In addition to the primary base period, seven states
presently provide for alternative base periods (ABPs) if the
claimant does not meet qualifying requirements using the primary
base period. Generally, this ABP is the last four quarters
preceding the filing of the clain.

The interval between the end of the base period and the
beginning of the benefit year -~ the lag period or quarter -- is
intended to allow time for the recording of the base-period wages
necessary to establish a benefit year, prior to the beginning of
such year. In States using the first four quarters, the lag is
three to six months; in States using the last four quarters, the
lag is less than three months. While initially a long period of
time was necessary to collect and post wage information,
technology has reduced the amount of time needed to do so. All
wages in covered (insured) employment earned during the base
period -- regardless of the number of different employers -- are
used in determining qualification for benefits.

There are several advantages to claimants in using the most
recent wages possible. First, recent wages tend to be higher and
therefore, the benefit entitlement (both the amount and the
duration) could be higher. Second, some claimants may have
recent employment, but may not have wages reaching back five


TT

tax on benefits -- benefits received during one of the most difficult times in a person's life.
‘The UC tax hurts the economic security of workers throughout America. Our system
should be structured to provide benefits to taxpayers, not dump penalties on the
unemployed.

Mr. Chairman, I have talked to literally dozens of people in Western Pennsylvania
who have collected unemployment benefits - and then paid taxes on the benefits as
normal income. Their experiences highlight how grossly unfair the tax is.

The tax on unemployment compensation kicks workers when they are down.
Unemployment benefits are intended to stabilize the income of individuals and families in
the face of layoffs. Yet someone who experiences lengthy unemployment -- a situation
which depletes the financial reserves of most middle class families -- will face a large
(and usually unexpected) tax liability the next year. For many who have struggled to
survive a layoff, this tax bill is the last straw.

Simply allowing tax withholding on these benefits is no solution: it merely
depletes the value of compensation that is already merely adequate. I would argue that
however this tax is administered, it is fundamentally inequitable and perversely
burdensome to a beleaguered middle class.

Mr. Chairman, I will conclude by emphasizing my strong support for reforming
our unemployment system. It is my hope that our Committee will give its strongest
consideration to developing legislation that will encompass many of the suggestions
heard here today. Following through on these recommendations will result in a more
manageable system and a more secure U.S. workforce.

Thank you for the opportunity to testify today.


83

Chairman SHaw. Thank you. I think that presents to us a no
brainer.

Mr. Heston.

STATEMENT OF CHARLTON HESTON, ON BEHALF OF THE
SCREEN ACTORS GUILD, AMERICAN FEDERATION OF
TELEVISION AND RADIO ARTISTS, AND WRITERS GUILD OF
AMERICA, WEST, LOS ANGELES, CALIFORNIA

Mr. HESTON. Thank you, Mr. Chairman.

First, let me thank you and the Members of this Subcommittee
for addressing this issue, particularly Congressman English and
the other Members who have joined the sponsorate.

I am also grateful for the chance to testify not on my own behalf,
but for my colleagues in the entertainment industry, in particular,
my fellow senior performers represented by the Screen Actors
Guild, the American Federation of Television and Radio Artists,
and the veteran writers who are members of the Writers Guild of
America, west.

As for me, I am an actor, writer, and director. I helped found a
television actors union, now defunct, in the early days of live TV.
I currently belong to four unions. I was president of one of them
for six terms. I have chaired an international conference of per-
formers unions and a presidential task force in the arts. I led a
contingent of our members behind Dr. King in his march in this
city in 1963. That’s simply to say that this old horse knows the
road.

I’m here today to express my support for H.R. 3677, which would
amend a provision of section 3304 of the Federal Unemployment
Tax Act. That section, as currently written and interpreted by the
courts, operates to the detriment of senior entertainment industry
professionals who are participants in multiemployer pension plans,
depriving them of unemployment insurance benefits for which they
are otherwise qualified.

To help understand this issue, let me give you some perspective
on our profession. While some of us are millionaires, most struggle.
The Screen Actors Guild has 82,000 members. The last figures I
saw said that 80 percent of them make less than, much less than
$10,000 a year. Just about every one of us, performer and writer
alike, is a freelance worker. When we are employed, it is often
short term and always temporary.

Artists in entertainment move from employer to employer. Peri-
ods of unemployment are a fact of life; even the best and most suc-
cessful performers have lean times.

Tam not just talking about motion picture and television actors,
but of the writers, television and radio commercial performers,
voice-over artists, broadcasters, singers; in short, the men and
women whose images, voices, and words entertain and inform the
Nation, indeed, the whole world, through visual and audio media
and film, the art form of this century and the next.

These workers are covered by multiemployer pension plans
which have been established by collective bargaining between our
organizations and the producers, advertising agencies and the
broadcasting entities who employ us, by agreement between the ne-
gotiating parties.


5

Members being forced to wander about the desert for the upcoming
40 years.

The opening statement of Mr. Ford, without objection, will be
made a part of the record at this time.

[The opening statement of Mr. Ford follows:]

OPENING STATEMENT OF HON. HAROLD E. FORD

Mr. Chairman, I want to thank you for convening this unemployment compensa-
tion hearing today. I hope it is the beginning of a bipartisan review of how well our
Nation’s unemployment program is working and what steps, if any, we need to take
to improve it.

I come to this session with an open mind. I have no preconceived notion of the
reforms that are needed in the system and am anxious to hear what all the play-
ers—DOL, the States, employers, and workers—have to say.

T do want to urge caution, however, with regard to the so-called Pennington case.
As I understand it, both the State of Illinois and the Department of Labor disagreed
with the conclusion reached by the appeals court in Pennington. The State has the
right to appeal that decision and has done so. I am inclined to let the legal process
play itself out before we consider a legislative remedy to just this narrow problem.

After all, the Advisory Council on Unemployment Compensation—which we estab-
lished to suggest reforms for this program—has made a mumber of recommenda-
tions, including several that pertain to the calculation of the base period.

T suggest that we take the time now to carefully review all legislative proposals
that have been made and develop a consensus package of reforms, rather than cher-
ry pick just one issue.

T look forward to the testimony.

Chairman SHaAw. I would like to yield at this point to Congress-
man Phil Crane who has joined us for the purpose of making an
introduction.

Mr. CRANE. Thank you very much, Mr. Chairman.

As you know, Illinois has been engaged i litigation regarding
the base period used to determine the eligibility for unemployment
compensation, and while the outcome of this suit will unquestion-
ably have a significant impact on Illinois, it may also lead to
changes across the country. The final ruling could lead to greatly
increased costs, both for individual States and the Federal Govern-
ment, but perhaps even more troubling is the circumvention and
misinterpretation of congressional intent through judicial action.

Later today, I will introduce legislation which would clarify cur-
rent law to protect the rights of States to determine their own base
periods. I don’t believe that this is a radical change, but merely re-
inforcement of what had been the common understanding of the
law.

To help explain the need for this action, it is my pleasure to have
the opportunity to introduce to you the comptroller of my home
State of Illinois, Loleta Didrickson. Loleta is uncommonly qualified
to speak on this issue having served not only as the director of the
Illinois Department of Employment Security, but also as a member
of the Illinois House of Representatives for four terms.

She was elected to her current position in 1994, becoming the
highest ranking Republican woman ever elected in Illinois.

I know you will find her expertise and testimony useful in under-
standing this complex issue, and I hope that the Members of this
Subcommittee will support my legislation.

Thank you, Mr. Chairman.

Chairman SHAW. Thank you, Mr. Crane.



111

lower percentage of the unemployed receiving benefits than the
national average; three of the four paid benefits to less than
one-fourth of their unemployed. Similarly, the biggest winner in
the transfer of administrative funding was Alaska, a state which
also leads the nation in percentage of the unemployed receiving
benefits. New Hampshire, which pays only one-fourth of its
unemployed benefits, gets only about 60 percent of its FUTA
payments returned in grants. This suggests that, far from being
an issue of inequity, the uneven transfer of funds among states
reflects the fact that the unemployed are more likely to receive
benefits in some states than in others. New Hampshire, Virginia,
Georgia, and Indiana would have higher reimbursement rates if
their systems met the needs of more of the unemployed in their
states

National Priorities still Relevant

In 1935, various program designs were debated for the UI
system. Given the rapid expansion of federal authority in the
New Deal, the proposal for UI was based on a strategic decision
not to push for a national system. Instead, the Social Security
Act imposed a federal tax which would be refunded, in part, to
states that established UI systems in conformance with a narrow
set of federal standards relating to administrative requirements
and coverage of selected industries. The federal tax was
primarily used to encourage state activity, not to fund a federal
program. This approach left eligibility, benefit duration, and
benefit levels in state control.

There is another, equally important fact about the use of a
federal UI tax to leverage state action. It was quite
consciously intended to reduce the role that interstate
competition played in thwarting state efforts to establish UI
systems. A uniform taxable wage base and tax rate were seen as a
level playing field from which states would build their systems.
This uniform, national tax for administration was quite
consciously part of the federal element of the system

The current push to expand state control reduces federal
input into a system that is already dominated by state interests.
States currently control decisions about who receives benefits,
how long they will receive benefits, how much they will receive,
whether the state will adopt alternate triggers for Extended
Benefits, and what level of experience rating their taxes will
reflect. Although states might prefer to have complete control
over every aspect of the system, we believe the modest authority
which remains in federal hands through administrative financing
plays an important, if small, role in vaintaining system
tegrity. Nationally important r nitiatives around
quality control, demonstrations, ani research are particularly
threatened

EUTA funds Diverted from Employment Service Programs

I there is any consensus among employers and the labor
movement regarding UI it is that FUTA funds should only be used


81

Chairman SHAW. Thank you.
Mr. Farr.

STATEMENT OF HON. SAM FARR, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Farr. Thank you, Mr. Chairman.

I just want to add to Congressman Upton’s comments that we
found in California a pollworker who worked 1 day, but because he
had retired from county business and because the job was termi-
nated through no fault of his own—the election was over, it was
a 1-day event—he was able to go back and collect $12,000 in unem-
ployment insurance.

There is obviously a loophole. This bill closes it. It is a very sim-
ple bill. It leaves it up to the States, and it uses the same threshold
that the Federal Government has determined to use in income tax
and Medicare, the thousand-dollar threshold.

So we are leaving it up to the States. The State of California did
repeal the law last year, but it is dependent upon Federal action.
We think this bill remedies a problem, and we hope that you will
move it with due haste.

Thank you.

{The prepared statement follows:]


107

but I think they will look very favorably on not only putting that
under suspension, but under a corrections day.

Chairman SHAW. Unless there are some fishhooks that aren’t ap-
parent, I can tell you that we will move that very expeditiously, but
1 think with elections coming up, maybe we can do something be-
fore that happens.

Mr. Heston. And if I may?

Chairman SHAW. Yes, sir.

Mr. Heston. In terms of our undertaking, we received assur-
ances from Senator Hatch, in the other House-——

Chairman SHAW. Yes, sir.

Mr. HESTON [continuing]. That he would be willing to cosponsor
from that side, the lower body. I don’t know how to put that, the
lower body. I didn’t say “upper.” I said “other.”

Chairman SHaw. If you will carry that message over to the Sen-
ate you can count on my full cooperation.

I thank all of you, and this hearing is adjourned.

{Whereupon, at 12:37 p.m., the hearing was adjourned.]

[Submissions for the record follow:]


92

provision to maintain its federal certification, but the state
legislature has left no doubt that EDD is to comply "with the
etter of the federal law, and nothing more," in light of the
*Gelf-destruct” clause of Unemployaent Insurance Code §1255.3(b) ,
and the legislature's view that

the pension offset provision was both unfair and
Misguided, . . . that . . . many workers pushed into
early retirement actively seek() new employment . . .
(and) a pension offset unfairly discriminates against
workers wholly dependent upon income from pensions and
unemployment compensation. . . «

Evans v. Unemployment Ins, Appeals 8d 39 Cal.3jd 398, 409, 410
(1985). The EDD is therefore under legislative and judicial
gandate to maxinize unemployment benefits and minimize the impact
of the pension offset, as long as such policy is not inconsistent
with clear federal law.

ANALYSIS OF THE PENSION OFFSET

Abiding by the legislative command to accord the federal law no
nore than its most restrictive, literal meaning, requires the
pension offset to be operative only when the pension plan has
been contributed to by the base period employer, and the work
performed for "such" employer results in pension eligibility or
an increase in the amount of the pension.

‘Thus, the offset applies where an employee works for employer A,
retires with a pension, then returns to A, and as a result of the
second stint, his/her pension amount increases. By the same
token, if the employee worked for and retired from employer A,
and then went to work for employer 8, any unemployment benefits
resulting from an eventual layoff from B would not be offset.

Why should that result change if B happens to be in a multi-
employer unit waich alse contains A? Given that the legislature
and the Supreme Court authorize only the narrowest, leanest
application of the offset, and that nothing in the federal law
requires a different result in the multi-employer, context, the
EDD must not extend the offset to that situation.’

' At our October 15, 1992 meeting, Ms. Lopez stated that

she was unaware of any federal law or regulation that required
the EDD to maintain its current interpretation, and our research
has revealed no such federal law.


May 1987

Dec 87,

November 1991

Mf 199

August 1993

HISTORY OF 0.2% FUTA SURTAX

0.2% surtax enacted to pay EUCA debt ($6.2 billion
at that time). BUCA debt grew to $8.6 billion in
1977. Projection: Tax was to be paid for 5 years
and retire the existing debt ($6.2 billion)

0.2% surtax extended until debt is repaid.

Debt repaid -- 10 years and 5 months after the 0.2%
tax was enacted. The 0.2% tax was to terminate at
the end of 1987.

0.2% surtax extended for 3 years -- through 1990 -
-'to build EUCA and offset deficit.

0.2% surtax extended for 5 years -- through December
1995 -- to build BUCA and offset deficit

0.2% surtax extended for 1 year -- through December
1996 -- to offset deficit and build BUCA.

0.2% surtax extended for 2 years -- through December
1998 -- to build EUCA and offset deficit.

Clinton Administration proposes a permanent
extension of the 0.2% surtax -- to be used to fund
a new FUTA account (Reemployment Training Assistance
Account) from which income support, while in
training, could be paid for up to 78 weeks
(including regular and extended benefits, if
available)

Clinton Administration proposes an extension of the
0.2% surtax through December 31, 2006. The stated
purpose of this extension is to support the
continued solvency of the Federal unemployment trust
funds and maintain the ability of the unemployment
system to adjust to economic downturns.


56

These projections assume that the 0.2% surtax will finally be
permitted to terminate at the end of 1998 as provided in current
law

Employers have reason to be skeptical that the 0.2% FUTA surtax
will actually be permitted to expire at the end of 1998. This tax
was first enacted in 1976 to repay a $6.2 billion Extended Benefit
(BUCA) debt. The tax was supposed to be paid for five years. In
1982 it was extended until the debt is repaid. The debt was repaid
in 1987, but the tax has been extended four times since then and
in 1994’ the Clinton Administration proposed to make it permanent
to fund their proposed Reemployment Training program. The
Administration has proposed extending the 0.2% FUTA surcharge to
2007, and requiring depositing state and FUTA taxes monthly
Starting 2002 for employers of 20 or more.

A possible solution to many of these problems just discussed could
be accomplished by the adoption of the concept of devolution of the
FUTA tax to the states while still maintaining some federal control
of the system

The most common means suggested for "devolving" power from the
Federal government to the states has been the use of block grants
without the strings and detailed Federal requirements of
categorical grants. However, in the case of the Federal-State
Employment Security Program the most logical and best approach may
be by use of a "100% Offset". The Offset would increase the
current 90% credit to 100% of the 6.0% Federal Unemployment (FUTA)
tax rate which is applied against unemployment taxes of states
complying with Federal requirements.

Use of a 100% Offset would reduce the FUTA tax rate to zero and
relieve employers of the burden of filing returns and depositing
the tax with the IRS. It would save some $94.9 million the IRS
projects as their cost of collecting the tax in 1996, and millions
used by the Department of Labor to determine state allocations,
conduct audits, etc.. A prior 1985 devolution proposal by the then
OMB Assistant Director, John Cogan suggested simply reducing the
effective net Federal ‘tax, rather than 100% Offset, in order to
fund those Federal Employment Security activities that would
continue. However, from an employer viewpoint, not providing a
100% Offset would eliminate an important advantage of devolution -
that is doing away with the filing of returns and depositing funds
with the IRS.

There are a number of benefits from devolution that could be
realized by all parties concerned - the states, employers,
and the Federal government:

1, The states would be given the resources to operate more
efficient employment security services that meet the needs of
workers and business and the employers’ taxes would be used for
the purposes for which they were intended.

2. Tax collections will improve and compliance burdens on
employers would be lessened.

Employers will no longer have to make reports and pay two separate
taxes to two layers of government - federal and state. States will
collect more taxes as a result of this consolidation since this is
the primary tax for State Employment Security Agencies. The states’
expertise on this particular tax is much greater than the IRS which
is focused primarily on cther taxes. In fact the IRS relies heavily
on the state agencies for audits and employer information. Also
compliance will be simplified because the differences in
definitions and coverage that exist between FUTA and state law will
be eliminated.

3. States would be relieved of burdensome Federal regulations
and requirements that hinder then in providing efficient services
to employees and employers.


18

Mr. Camp [presiding]. Thank you very much.
Now we will hear from Andrew Richardson, commissioner of the
West Virginia Bureau of Employment Programs.

STATEMENT OF ANDREW N. RICHARDSON, COMMISSIONER,
WEST VIRGINIA BUREAU OF EMPLOYMENT PROGRAMS; ON
BEHALF OF THE INTERSTATE CONFERENCE OF EMPLOY-
MENT SECURITY AGENCIES

Mr. RICHARDSON. Thank you, Mr. Chairman and Members of the
Subcommittee. My name is Andy Richardson. I am the commis-
sioner of the West Virginia Bureau of Employment Programs. I am
a past president of ICESA, the Interstate Conference of Employ-
ment Security Agencies. I am here in that capacity. ICESA is the
national organization of the State officials who administer the em-
ployment security system which includes the unemployment com-

ensation programs, the job service offices across the United
States, labor market information, and in most States the job train-
ing programs as well.

I would like to thank Chairman Shaw and the staff and Mem-
bers of the Subcommittee for inviting ICESA to present our views
today. I would commend my written statement for your review, and
I will summarize some of my thoughts here verbally in the interest
of time.

I believe this particular issue strikes at the very heart of the
very unique Federal-State relationship that the Nation’s unemploy-
ment system has experienced since its creation in the thirties.

The Federal law, the Social Security Act, defers to the States to
determine eligibility requirements for unemployment compensation
benefits. An individual must have sufficient wages preceding the
filing of a claim to demonstrate a sufficient attachment to the labor
force in order to qualify for this insurance program.

That period is called the base period. In most States, that is, in
fact, the first four of the last five completed calendar quarters. The
wages that you have earned during that period will determine the
amount of your unemployment benefits and how long they will be
available.

For example, if you filed a claim today, July 11, 1996, your base
period would be April 1, 1995, through March 31, 1996.

Even if they had worked all the period of time from April 1,
1995, right up through yesterday, that would be the period of time
looked at, and it is a very predictable, manageable concept.

The legislative framework that created the unemployment sys-
tem is the Social Security Act of 1935, and it gave States broad dis-
cretion in the establishment of their unemployment programs, in-
cluding the terms and conditions under which benefits are payable.

Now, through the history of this program, determining the period
that constitutes the base period for eligibility for unemployment
compensation has been one of the many eligibility criteria that the
Federal law has deferred to the State governments.

It is remarkable, really, that the structure of the State programs
is very similar. Most States, in fact, do use the first four of the last
five calendar quarters for the base period.

Why? Well, when they set up the system nationally in the thir-
ties, draft legislation was prepared for the States by the Federal


47

Employment Security and Training Financing
Proposed

(USDOL) General

5% for Revenue

Administration
95%

YY '
~~ Stays in _

: ame One Block Grant
— Tax For Training

\, Cut

State Employment
& — — Agency
Job
Training
Employment namsloyment
Service Insurance

(-FUTA Funds ‘Il - General Revenue Funds

| U.S. Government



51

Employment Security System Financing

Federal U

State
Benefit
Accounts

State
Benefit
Funds

State Share
of Extended
Benefits
Account

Proposed

Accounts

State Admin.

Funds
State Share
of Admin.
Account

State. Share
of FUA
Excess

Account

Capped
FUA Account



80

STATE OF

ICHIOAN

CANDICE $ MILLER. Secretary of State
MICHIGAN DEPARTMENT OF STATE
TREASURY BUILDING, LANSING, MICHIGAN 1801

May 14, 1996

The Honorable Bill Archer

Chairman. Ways and Means Commitiee
United Sues House of Representatives:
1236 Longworth House Office Building
Washington, D.C. 20515

Dear Congressman Archer:

‘As Michigun's Chief Elections Official, | am writing to urge your support of House Resolution
(HR) 3430. introduced by Congressmen Fred Upton and Sam Farr, which deals with poll workers
and unemployment benefits.

‘Under current Federal regulations, an elections official who files for unemployment benefits is
entitled to those benefits, even though he or she may work only two or three days per year.
Recently, a claim was flied against the City of Grand Rapids, Michigan. by an Elections Inspector
who only worked the August Primary and the November General Election in 1994. Incredibly, the
City was responsible for paying a portion of his unemployment benefits.

When our Legisiature tried to amend Michigon law to remedy the problem, the U.S. Department of
Labor informed them that the change would first need to be made on the Federal level. House
Revolution 3430 makes the neceseary changes in Federal law and allows stutex to make their own
individual changes should they s0 choose.

Ordinarily, those who work in the polls are volunteers who fee! working ar elections is a part of
their civic duly or a service to the community. They arc compensated, but their position Is not
treated as a full-time cmployment opportunity. The possible abuse to our unemployment system
under the current regulations places an unjust burden to our local governments, [ encourage your
full support of and leadership in passage of HR 3430.

Sincerely,

(hndiv Soa

Candice S, Miller
Secretary of State

c: Congressman Fred Upton.
Congressman Sam Farr


142

Statement of the Hon. Bill Thomas
Subcommittee on Hurnan Resources
Concerning Unemployment Benefits.

July 19, 1996

Mr. Chairman, recent communications between the Department of Labor and California
show we have another problem to correct in restoring power to the States. Bluntly, the
Department is saying California has to pay unemployment benefits to certain criminals being
released from prison. If we are to give states the flexibility they need to deal with criminal
behavior and to return prisoners to society with skills they can use in honest employment, we
need to correct this aggregious case of elevating form over substance.

As the Subcommittee is aware, current federal law requires employers to pay federal
ermployment (FUTA) taxes on work performed by their employees. This includes prison inmates
who work for private companies through innovative work programs established in several states,
including California. Today, some 200 people in California prisons are employed in jobs
provided under agreements between the state and private businesses. However, FUTA taxes do
not have to be paid for work by prisoners employed in prison operations such as the laundry or
cabinet shop

Since FUTA taxes are paid on behalf of some prisoners, the U.S. Department of Labor
has ruled that these prisoners must be paid unemployment benefits upon their release from their
"job"--essentially, when they are released from prison. Failure to comply is serious: California
employers, for example would lose tax credits worth $1.7 billion for FUTA taxes they pay on
other workers if the California program is disqualified.

Why does Labor take this position? ‘The federal unemployment insurance program only
permits denial of employment benefits in three cases: if the worker’s income exceeds certain
limits; the claim is fraudulent; or the employee was fired for misconduct. Since prisoners lose
jobs when paroled or released from prison, they do not fit the exceptions.

California voters established the Joint Venture Program in 1990, creating a private work
program for prison inmates. Criminals' wages are used to compensate victims, offset
incarceration costs, and set aside funds (20%) for the inmate's support upon his or her release
from prison. In 1996, California voters overwhelmingly passed an initiative (Proposition 194)
that denies unemployment benefits to criminals participating in the Joint Venture Program.

‘The Department of Labor decision would force Californians either to pay out
unemployment benefits (o released prisoners or to eliminate a program that has been successful
in helping criminals transition back into the workforce. Allowing employees to lose $1.7 billion
in credits for taxes they pay on the services of ordinary working people is not an option, needless
to say.

Legislation | have introduced, H.R. 3858, would change the law to treat all prison
inmates who participate in work programs the same: their services would be exempt from the
PUTA tax, This would effectively deny unemployment benefits to released prisoners and
prohibit the Department of Labor from placing such a ridiculous requirement on the states. The
bill's enactment would give states an additional tool to use in trying to reform criminal behavior
and I hope my colleagues will agree to its adoption in the near future.


135

due clause governs administrative methods but not eligibility
criteria) simply begs the question and, consequently contributes
nothing to the inquiry before us." 22 F.3d at 1382.

What is required, of course, is to determine whether Illinois’
base period is an administrative method or an eligibility criteria.
An eligibility provision "define[s) the class of persons eligible
for benefits."  Hodory, 431 U.S. at 486-87. In an effort to
suggest that a lag period is necessary to determine eligibility,
the proponents characterize the Pennington claimants as those who
"[alre not monetarily eligible for unemployment benefits."
Richardson stmt. at 1, But that is not so. In fact, the
Pennington claimants are, by definition, only claimants who have
earned sufficient wages to qualify for benefits. 22 F.3d at 1385

Moreover, the lag period does not exclude claimants from
eligibility; ‘it just delays the time at which the state will
consider a Claimant's most recent wages in determining his or her
eligibility. To argue the contrary, the proponents ignore the
single most important fact about the operation of the Illinois base
period: that the Pennington claimants become eligible for benefits
by doing nothing more than waiting until sufficient time has passed
to file a second claim, since wages that are initially disregarded
because they fall in a claimant’s lag period, become qualifying
wages by the passage of enough time so that they fall within the
first four of the last five completed calendar quarters prior to

the filing of the later-filed claim. Pennington, 22 F.3d at 1385.
Thus, although Illinois’ base period delays the time at which

the state will count a claimant’s most recent wages toward
eligibility, it does not prevent a claimant from using those same
wages so long as he waits a sufficiently long time before filing a
claim. Causing a claimant to wait to receive benefits, however, is
just what the when due clause was designed to prevent. Java, 402
U.S. at 131-33,

B. The legislation’s proponents also urge that Illinois’
base period "ensures that unemployment insurance will be available
for workers with a genuine attachment to the labor force, but not
necessarily for those with only a marginal connection." Testimony
of Loleta A. Didrickson ("Didrickson stmt.") at 1; see id
(employers ... should not bear the burden for individuals with
little or no attachment to the world of work"). In fact, however,
exactly the opposite is true: the lag period “causes
(claimants] with relatively strong attachment to the work force to
wait until that attachment has weakened before they can receive
benefits." 22 F.3d at 1385. Thus, the contention that Illinois’
base period restricts payment of benefits to claimants with
stronger workforce attachment is not just wrong; it is perverse.
c. Furthermore, the proponents have repeatedly conceded that
the purpose of Illinois’ base period is solely administrative, not
substantive. For instance, in the Pennington litigation itself,
Illinois repeatedly admitted that the lag period “is necessary
because some time is required for employers to report wages and for
the [state agency] to make that information available in the local
(unemployment insurance] offices where claims are first taken and
adjudicated." 22 F.3d at 1387. And in his submission to the
Subcommittee, Mr. Richardson concedes that whether states can
shorten their lag periods is dependent solely on whether
“technology permits states to collect and process wage information
more quickly." Richardson Stmt. at 3. These concessions confirm
what the court of appeals found: that Illinois’ base period is "an
administrative method employed to accommodate the time needs of a
wage record [data collection) system. In a world of high-speed
information exchange, the lag quarter would not exist; yet an
eligibility requirement like the ‘voluntary leaving’ provision
iwhich disqualifies claimants who leave work without good cause
attributable to the employer} would." 22 F.3d at 1387.


13

Now, the plaintiffs in Pennington maintain that Illinois base pe-
riod violates the Social Security Act’s “when due clause.” They
argue that anyone who is not monetarily eligible using Illinois base
period should be able to establish eligibility through an alternative

ase period using the last four quarters.

I don’t believe that Congress intended to preempt States rights
with this. Contrary to arguments by both the U.S. Department of
Labor and the State of Illinois, the Seventh Circuit Appellate Court
ruled that Illinois base period could be challenged under the “when
due clause” and returned the case to district court to determine
whether the Illinois base period violated the Federal provision.

The appellate court instructed the district judge to weigh the
benefits of individuals filing unemployment insurance claims using
the alternate base period against the State’s interest in holding
down those administrative costs and minimizing fraud.

On remand, the district judge determined the claimant’s interest
outweighed our State’s interest, and Illinois was to adopt the alter-
nate base period.

The appellate court’s decision on Pennington v. Didrickson con-
tradicts legislative history and Supreme Court precedent. It also
defies the U.S. Department of Labor’s longstanding reading of the
Social Security Act in giving States flexibility to establish their
own eligibility criteria. It calls on appointed Federal judges to
make a policy judgment, the types of decisions that State and local
officials elected by the people are better suited to make.

The appellate court’s ruling separates the authority to make pol-
icy decisions from accountability for those decisions, and the finan-
cial implications are far reaching. In fact, not only does this case
have an impact on administrative cost and increased Federal fund-
ing from your perspective, it impacts those who make up the back-
bone of our economy in Illinois, our employers. Clearly, Pennington
would hike State government's cost of doing business.

When the case was remanded back to the district judge, he noted
the administrative cost to Illinois probably using the alternate base
period. It is going to cost us somewhere from $12 to $15 million one
time plus $2.5 million every year thereafter.

The judge also acknowledged that the Federal Government—the
Federal dollars to cover those costs were not likely to be provided.

Pennington could substantially raise outlays from Illinois Unem-
ployment Trust Fund account and impose hefty increases on our
employers in terms of their taxes.

The Illinois Department of Employment Security estimates the
alternate base period would increase Illinois trust fund outlays by
1.5 percent.

A U.S. Department of Labor study indicates alternate base peri-
ods raise State trust fund outlays by 4 to 6 percent.

Let us just talk about a 1.5-percent increase in outlays from Illi-
nois trust fund account. It would amount to more than $180 million
over the next 8 years, or on an annual basis, that is $22 million
in the State of Illinois.

If I use the Federal Department of Labor’s 6-percent increase,
the total is $750 million. Now we are talking $93 million annually.

Since State trust fund accounts are part of the unified Federal
budget, as you are aware, the difference between the increased out-


137

B. The proponents contend, however, that “since the
establishment of the unemployment insurance system, the Labor
Department ... has considered a base period of the first four of

the last five quarters to be consistent with the clause and, in
fact, has suggested that the states use such a base period."
Didrickson stmt. at 2. That, too, is simply wrong. To the
contrary, in 1962, the Secretary of Labor issued a policy statement
urging states to keep their lag periods "as short as possible",

Unemployment Insurance Legislative Policy: Recommendations for
State Legislation, 1962, thus confirming not only that lag periods
should not unnecessarily delay payment of benefits, but also that
the Secretary has historically treated base periods as
administrative methods, which are subject to his regulatory
authority, rather than éligibility criteria, as to which he has no
such authority. See Bennington, 22 F.3d at’ 1384.

‘The legislation’s proponents rely on draft bills issued by the
Secretary of Labor in 1932 and 1950, one of which includes a base
period definition like the one used in Illinois. From these draft
bills, the proponents contend that "({t]hroughout the history of the
unemployment insurance program, determining the period that
constitutes the base period for unemployment insurance claims
purposes has been one of many eligibility criteria that federal law
left to the states." Richardson Stmt. at 2; see also Crane Stmt.
(Pennington is "diametrically opposed to the common practice
recognized as lawful and legitimate for decades").

As the court of appeals noted, however, the “draft bills do
not ... directly address the issue here: whether the lag period
arrangement can be termed a matter of eligibility as opposed to a
matter of administration." 22 F.3d at 1364, The court therefore
concluded that:

the mere fact that the draft bills take notice of a lag
period similar to the ... [Illinois base period] does not
indicate that the lag period is in compliance with the
‘when due’ clause or the corresponding regulations. A
state must pay unemployment benefits ‘with the greatest
promptness that is administratively feasible.’ 29 C.F.R.

§640.3(a). Needless to say, what was ‘administratively
feasible’ when the draft bills were written - 1937, 1950,
and 1962. - is much different from what is

administratively feasible in today’s technologically
advanced world. Id. at n. 6

©. Recent history also belies the proponents’ contention
that long lag periods are acceptable. Congress recently empaneled
the Advisory Council on Unemployment Compensation ("Advisory
Council") to study the nation’s unemployment insurance program.
See P.L. 102-164. The Council was chaired by Dr. Janet L. Norwood,
who was Commissioner of the Bureau of Labor Statistics and is a
senior fellow at The Urban Institute. In its February 1995 report
to the President and Congress, the Advisory Council recommended
that "[a]ll states should use a movable base period in cases in
which its use would qualify an Unemployment Insurance claimant to
meet the state’s monetary eligibility requirements." Unemployment
Ineurance in the United States: Benefits, Financing, Coverage,
Advisory Council on Unemployment Compensation, Feb. 1995 at 17.
‘The proponents thus ask Congress to reject a policy suggested to it
by the very body Congress empaneled to provide precisely such
advice.



55

Statement of Warren G. Blue to the Hou
Ways and Means Subcommittee on Human Resourc

Re: Unemployment Compensation Reform

duly 11, 1996

I am Warren G. Blue and appear here today as Chairman of a
Coalition of business organizations, including UBA, Inc. and the
American Payroll Association, and’ businesses concerned with
Unemployment Compensation issues. A list of the members of this
Coalition for U. C. Tax Reform are appended to my statement. I am
Senior Vice President and General Counsel of R. E. Harrington,
Inc., Columbus, Ohio, a nationwide Unemployment Compensation Third
Party Administration firm representing many thousands of employers
in all states.

Before we discuss solutions, it seems appropriate to identify the
existing problem for employers regarding the collection and use of
FUTA tax revenue.

2. Present Federal revenue collected from employers to pay for
the administration of the state unemployment compensation program,
as well as to reserve some money for specific funding of possible
loans to states and to pay the federal share of the extended
benefit program, is almost $5.6 billion per year. Department of
Labor figures for fiscal year 1994 indicate that the states
received back in grants only 60.1% Of the revenue paid by employers
in FUTA taxes. In that year, total FUTA taxes amounted to
$5,538,600,000 while grants were only $3,327,800,000. The amount
returned to states range from a low of 37.5% for Indiana to a high
of 268.5% for Alaska. Only six states received more in grants than
they paid in FUTA taxes. All the overages for these six states
could have been paid by the short-fall of a single state - Florida,
for example.

We believe that the refusal by Congress to appropriate tax revenue
to the states for the purpose collected has resulted in claimants
being under served as it undermines the efforts of the state
Employment Agency to match available jobs to appropriate claimants,
and has consequently increased the duration of the payment of
benefits. The effect is obviously also detrimental to employer
interests because the result is not only increased costs but also
unfilled jobs.

2. As a result of this shortfall of revenue to the states to
administer programs, fourteen states have enacted separate taxes
on employers to pay for needed administration costs and thus
employers are paying the tax twice. The states with specific
administrative surtaxes are Alabama, California, Colorado,
Delaware, Georgia, Idaho, Iowa, Louisiana, Maryland, Montana,
Nevada, New Hampshire, South Carolina and Wisconsin. In addition,
seven Other states (Hawaii, Minnesota, Oregon, Rhode Island, South
Dakota, Texas and Washington) have surtaxes to support what is
referred to, variously, as job or economic development, training,
work search or aid to dislocated workers, which in reality are
administrative surtaxes by another name.

3. The present system is inefficient and costly as it requires
employers to complete both federal and state forms, pay a
collection fee to the Internal Revenue Service, has cumbersome
rules for state agencies to comply with federal mandates, created
large separate federal funds with significant reserves which may
not be necessary and perpetuates a "temporary" 0.2% surtax on
employers which is not necessary and should have been terminated
as the law originally provided in 1987. Attached is a chart
showing the history of this tax.

In regard to the separate funds it should be pointed out that FUTA
funds are deposited in the following Federal Accounts:
Administration Account (BSAA), Loan Account (FUA) and the Extended
Benefit Accounts (EUCA). ‘The projections contained in the
President's FY 1997 Budget show the balance in these three accounts
increasing from $15.8 billion in 1996 to $26.8 billion in 2001


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HUMAN RESOURCES.

FOR IMMEDIATE RELEASE CONTACT: (202) 225-1025
June 28, 1996
‘No. HR-13

Shaw Announces Hearing On
Unemployment Insurance Issues

Congressman E. Clay Shaw, Jr. (R-FL), Chairman of the Subcommittee on Human
Resources of the Committee on Ways and Means, today announced that the Subcommittee
will hold a hearing on selected unemployment insurance issues. The hearing will take place
on Thursday, July 11, 1996, in room B-318 of the Rayburn House Office Building,
beginning at 10:00 a.m.

Oral testimony at this hearing will be heard from invited witnesses only. Witnesses
will include State governors, State unemployment insurance directors, employers, and other
experts on unemployment insurance issues. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

‘The Federal-State unemployment compensation system is designed to provide
temporary benefits to individuals with a recent work history who become involuntarily
unemployed. In determining whether a worker's employment record is sufficient to qualify
for benefits, 47 States consider only wages eamed over 4 of the last 5 completed calendar
quarters (called the worker's "base period”). A few States also consider the worker's
eligibility under an “altemative base period," increasing the likelihood that these workers will
qualify for benefits. A recent Illinois Federal court decision (Pennington v. Doherty) has now
called into question what formerly was assumed by States - that the Social Security Act
provides States with the authority to select their own base period, which need not include the
use of an alternative base period. If every State were required to use an alternative base
period, as the Pennington decision foreshadows, the consequences could be significant in
terms of higher benefit payments and higher payroll taxes.

The Subcommittee is also interested in various proposals, referred to generally under
the term “devolution,” that have been developed by several States to increase State flexibility
in the operation of their unemployment compensation system. Proponents argue that allowing
States greater authority would lead to lower payroll taxes, reduced business paperwork, and
improved efficiency in labor markets across the country. While no bill has been introduced in
the current Congress, the Subcommittee is interested in considering suggestions for change
that promise increased employment and business growth while preserving the principles of the
current unemployment insurance system.

In announcing the hearing, Chairman Shaw stated: "Keeping the unemployment
insurance system operating smoothly and efficiently is important to employees, employers,
and the U.S. economy. This hearing is part of our ongoing efforts to ensure that the current
system is working well and to explore ways of making it even better in the future.”

(MORE)


72

rate by one-third, yet everybody is still collecting benefits for the
same period of time? :

It is our philosophy that if we can turn this back to the States
and they can use their funds properly that they will be able to ob-
tain jobs for claimants; that the employer will have less cost; that
the government will collect more money because they will be pay-
ing taxes on their wages; and the system will have credibility.

One way of doing that is a system which is now in place, but not
well financed. It is profiling. I am sure that Mr. Poythress could
probably comment on that.

Getting people jobs who are unemployed claimants is one of the
targets the employers are looking for in this system.

Mr. Nusste. Thanks. Thank you.

Chairman SHAW. Does anyone have anything further?

Mr. Collins.

Mr. CoLuins. No questions.

Chairman SHAW. OK. I want to thank the panel for being with
us this morning.

There is a vote on the floor, which I understand is a rule on
HHS. The Subcommittee will recess for approximately 15 minutes
while we go vote. We will come right back, and at that time we will
bring the third and final panel before the Subcommittee.

(Recess.]

Chairman SHaw. If we could go ahead and get started, we have
Mr. English. We are awaiting Mr. Upton and Mr. Farr, and Mr.
Heston is now with us.

If you would like to take a seat at the witness table, I think you
and Mr. English will be, in part, talking about the same subject.

Mr. English.

STATEMENT OF HON. PHILIP S. ENGLISH, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. ENGLISH. Thank you, Mr. Chairman, and thank you for the
opportunity to testify today and for holding this hearing on a vari-
ety of necessary unemployment insurance reforms.

As you may know, prior to being elected to Congress, I served
briefly as research director for the Senate of Pennsylvania’s Labor
and Industry Committee. During my service, I dealt with many of
the issues being discussed today, and I can tell you from my own
hands-on experience that the current UC system is badly in need
of reform.

States are not equipped to tackle unemployment in the nineties
with an unemployment insurance system that has changed very lit-
tle since its inception and cannot deal effectively with the changing
nature of unemployment. I will discuss several changes to the sys-
tem that I am proposing, as well as unfair taxation of benefits.

Late last month, Mr. Chairman, I introduced legislation designed
to empower States to meet the needs of the long-term unemployed.
The current unemployment insurance system was created to help
States combat short-term unemployment. Unfortunately, workers
who are laid off from their jobs now are less likely to return to
their previous jobs than in the past, and long-term unemployment.
is increasing. The current system cannot adequately address long-
term unemployment.


27

Chairman SHAw. Thank you.

Mr. McCrery.

Mr. McCrery. Mr. Richardson.

Mr. RICHARDSON. Yes, sir.

Mr. McCrery. Are you familiar with the holding in the Pen-
nington case by the appeals court?

Mr. RICHARDSON. Yes.

Mr. McCrery. Can you explain it? In other words, what did the
court say was wrong with having no alternate base period? Why
isn’t Illinois base period adequate?

Mr. RICHARDSON. I think it has to do with their interpretation
of when benefits are due and the imposition of a very liberal inter-
pretation of that concept to ensure that the most attractive way of
paying the benefit is found for the unemployed worker.

To me, it rejects the consideration of the level of attachment to
the work force, the attachment to the labor market that is suffi-
cient for consideration of this insurance program.

Mr. McCrery. Give me an example of an alternate base period
that the court would have you use.

Mr. RICHARDSON. An alternate base period example would be the
four most recent completed calendar quarters, instead of the first
four of the last five. I believe in the example I used, April 1, 1995,
through March 31, 1996, would be the base period under the first
four of the last five concept, if you were to file a claim today.

With an alternative base period, you would not only look at that,
but you would look at July 1, 1995, through June 30, 1996, and
whichever produced the best benefit for the unemployed worker
would be the base period that you would use to determine the ben-
efit amount.

Now, this is problematic for the States. To begin with, the wage
reports for June 30, 1996, aren’t even due in my State until the
end of July. Now, I don’t have that data. That means that I am
going to have to request that last quarter from the employer in
order to make that determination.

Now I request that. Now we get into some verification issues. We
get into some accuracy issues. I think you raise the risk of increas-
ing errors on the part of the payment processes. It could delay the
payment of benefits while you are waiting to get that data from the
employer.

Mr. McCrery. Mr. Uhalde, I gathered from your testimony that
the Department of Labor’s primary objection to legislation moving
forward at this time is that it is premature. Is that correct?

Mr. UHALDE. That is correct.

Mr. McCrery. You don’t have any problem with the substance
of the legislation. I mean, are you in agreement still, as your ami-
cus brief stated, that this should be a State’s right to establish the
base period?

Mr. UHALDE. The amicus brief that the Department filed was an-
swering a very narrow question, and that was, Is the Illinois base
period consistent with current law and regulations, and in our ami-
cus brief we stated that in our opinion it was. That is our current
interpretation, our present interpretation of the existing law.

The question that is being asked here is whether there ought to
be legislation on that particular issue, and we think it is premature


70

part of the asset side of the balance sheet, and I don’t understand
that.

It seems to me that if you have the benefit money and this trust
and the administration money and a trust that is exactly like it,
how can one count and the other not? I think they should both
count and be counted against the national debt.

Now, the bigger question, I think, goes to what happens when
the States bleed down the accounts, as they surely would. The tax
cut that I am talking about would result in long-term diminution
in the size of those trusts, and I think that is just a judgment that
the Congress has got to make.

Mr. Curt pointed out and as we have all pointed out, those
funds serve very little useful purpose at this point except to mini-
mize the apparent size of the national debt, even though they can
only be spent for the specific purposes for which they were col-
lected. Their presence simply masks the size of the national debt.

Mr. CoLuins. In other words, get back to truth in budgeting.

There are a variety of State proposals along these lines. How
would you characterize the major differences between the various
State proposals?

Mr. PoyYTHRESS. Minimal. The differences between—there are
three proposals out there, New Hampshire, Virginia, and Georgia.
We talk continually among ourselves, the three players in those
States, and I believe it would be fair to say that at this point the
differences are minimal and could be resolved easily through the
legislative process.

Mr. COLLINS. You mentioned the Pennington decision. I think
you went straight to the heart of why there are a lot of people that
would like to retain or uphold the Pennington decision. You men-
tioned the word “welfare” versus insurance benefits. There are a lot
of people in this town who like to use the dependency of the wel-
fare system. If they can create additional welfare systems, it helps
to enhance their reelection to come back here and govern and con-
trol those benefits.

Again, I appreciate the job you do for the people of the State of
Georgia and your efforts in this proposal.

Mr. Poyturess. Thank you.

Mr. CoL.ins. Thank you, Mr. Chairman.

Mr. Camp. Thank you.

Mr. English.

Mr. ENGLISH. No questions, Mr. Chairman.

Mr. Camp. Thank you.

Mr. Nussle.

Mr. NussLE. Yes. I just want to thank the panel for coming for-
ward with some good ideas. It is a complicated issue, and yet, there
are some seemingly commonsense solutions to it that you have
come forward with.

I just want to show my appreciation for those ideas and just ask
one thing about when it comes to the devolution issue. You were
kind of getting into it a little bit with Mr. Rangel, but I want to
be clear on what you envision within your proposal would be the
Federal role and give you an opportunity to answer it without get-
ting hit.

What will we still be doing?


146

wages. The revenue raised by FUTA is designated for Unemployment Insurance (UI)
administration and maintaining a system of Employment Service (ES) offices. Portions of
FUTA revenues also fund the federal half of the Extended Benefits Program and federal loans to
depleted state accounts. State Ul tax revenues fund their weekly UI benefit payments and the
state half of the Extended Benefit Program. FUTA revenues are deposited in three federal
accounts and state UI tax revenues are deposited in 53 state accounts maintained by the federal
government (one for each state, D.C., Puerto Rico, and the Virgin Islands). At the end of fiscal
year 1995, state accounts in the UI Trust Fund had balances totaling $35.9 billion and the three
federal accounts had balances totaling $11.9 billion. Like the Social Security Trust Fund, any
positive balance in the Ul Trust Fund effectively is used to fund other federal programs for as.
long as there is the federal budget is running a deficit. General revenues are used to fund federal
unemployment benefit programs and allowances such as Trade Adjustment Assistance and
NAFTA Transitional Adjustment Assistance.

IL. WHY THE UI/ES SHOULD BE TRANSFERRED TO THE STATES

When UC was enacted in 1935, Congress intended it to be a federal-state partnership. The
federal government was to set broad parameters for the system, provide adequate and equitable
funding for state administration, and oversee state law and operations to ensure compliance and
conformity. The states were to be responsible for carrying out the program while complying
with all federal laws and regulations, as well as their own state requirements. However, the
federal government has used the state conformity process to frequently upset the balance of
administrative funding and workloads by dictating that states absorb the costs of administering
additional programs.’ Moreover, the state conformity process has resulted in a “one-size fits all”
approach that does not address the needs of individual states, nor provide states with the
flexibility to address the needs of individual workers,

Over the past decade, federal budget constraints have had a detrimental effect on the services
provided to unemployed workers by the state Ul system and ES offices. Even though FUTA
revenues collected for Ul and ES administration have been more than sufficient, Congress
continues to extend the 0.2 percent FUTA surtax on jobs and limit Ul and ES administration
appropriations.’ This effectively masks the true size of the federal deficit. The federal
government has come to use the UI system as a source of funds for programs that lead to longer

* The state unemployment insurance tax varies from state to state, is paid by employers and is experience-rated
(employers with few layoffs typically have the lowest tax rates). State legislatures determine the tax rate and the
taxable wage base. Twelve states limit taxable wages to the federal minimum of $7,000, other states have ceilings
raging from $8,000 in eight states, to $25,500 in Hawaii

Edwin M. Kehl, “Administrative Simplification of Unemployment Compensation Programs,” in W. Lee Hansen
and James F Byers eds., “Unemployment Insurance: The Second Half-Century,” The University of Wisconsin Press,
1990
* ‘The balance in the Employment Security Administration Account will be $2.4 billion in September 1995. This is
$1.01 billion more than the statutory limit. There is also a $7.4 billion balance in the Federal Unemployment
Account that has been built up using surplus FUTA payroll taxes. In fiscal year 1995, Congress withheld over $900
million in FUTA revenues



63

‘STATEMENT OF WALTER CURT
PRESIDENT
‘SEI, INC.

Chairman Shaw, Members of the subcommittee, my name is Walter Curt.
1am President of SEI, Inc., an electronics research and development firm with
headquarters in Harrisonburg, Virginia.

1 am privileged by your invitation to offer the perspective of a small
businessman and interested citizen as you take up the topic of unemployment
insurance reform.

‘At the beginning, let me say that I believe our federal-state system of
unemployment insurance has generally served us well since it was created in
1935. Tens of millions of workers who have lost their jobs without fault have
been sustained with temporary assistance until” returning to gainful
employment. This has often prevented families losing their homes or
automobiles or suffering the indignity of public assistance. At the same time,
the limited duration and amount of benefits, as well as work search
requirements, help ensure that the program is a bridge to reemployment rather
than a path to welfare dependency.'

While it is not uncommon for employers (me included) to complain about
an individual adjudication of benefit eligibility, few question the wisdom and
necessity of a sound national system of unemployment insurance. Nor do I
think employers as a whole object to paying reasonable charges to support an
efficient system. -

My purpose in appearing today, therefore, is not to advocate the
elimination or curtailment of America's unemployment system, which is
expected to serve more than 9 million people and distribute more than $24
billion in benefits during the current fiscal year. | am here instead to explore
with you ways in which the program can be improved by reducing unnecessary
tax and paperwork burdens on employers, and streamlining administration to
enhance services to the out-of-work.

The Two-Tax System

As you are aware, employers pay not one but two unemployment
insurance taxes.

‘The State Tax: The most familiar and visible tax is an employer payroll
tax imposed by each state to pay the actual benefits to the jobless. Each state
legislature determines the tax rate range. Taxes everywhere are “experience
rated,” rising or falling for each employer depending on its layoff record, in
much the same way motorists’ automobile insurance premiums vary with their
driving records.

The Federal Tax: Less well known is a second employer payroll tax,
levied by Congress under the Federal Unemployment Tax Act (FUTA), that is
intended primarily to finance program administration, in the form of federal
grants to states enabling them to maintain state unemployment offices and pay
their workers. This tax is imposed at an effective flat rate of 0.8 percent’ on the
first $7,000 in wages earned by each worker employed by a covered employer.‘

Of course, employers must also file two tax returns, a quarterly return to
the state, and an annual return to the federal government. This duplicative
paperwork exercise has been estimated to cost American employers collectively

‘According to the U.S. Department of Labor, the FY1996 average duration of benefits is expected to be

only 14.7 weeks. Uf Outlook, March 1996, Key Data Summary.

* Bid,

+ The gross tax rate is 6.2 percent, but all employers in all sates that have programs meeting certain
{ederal conditions receive a 5.4 percent tax credit. All stales have approved programs and thus
ail covered employers enjoy the tax credit. The 6.2 percent rate also includes a 0.2 percent
surtax that now extends until January 1, 1999.

in 1994, about 108 million workers —- 98 percent of all wage and salary workers and 90 percent of all

‘employed individuals — were covered by the (unemployment insurance) system.” How the

Unemployment ‘Works, Congressional Research Service, The Library of

Congress, Sept. 2, 1994, p. CRS-2.


20

STATEMENT
BY
ANDREW N. RICHARDSON
COMMISSIONER
WEST VIRGINIA BUREAU OF EMPLOYMENT PROGRAMS.
ON BEHALF OF THE

INTERSTATE CONFERENCE OF EMPLOYMENT SECURITY AGENCIES

TOTHE .
HOUSE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HUMAN RESOURCES

JULY 11, 1996

Mr. Chairman and members of the Subcommittee, my name is Andy Richardson. Tam
Commissioner of the West Virginia Bureau of Employment Programs, and 1 am here today
representing the Interstate Conference of Employment Security Agencies (ICESA). ICESA is
the national organization of state officials who administer the nation's public Employment
Service, unemployment insurance laws, labor market information programs and, in most states,
job training programs,

1 Would Jike to thank Chairman Shaw for the invit
federal court's ruling in the Pennington ease.

tion to present ICESA’s views about the

Background

To establish eligibility for unemployment benefits, an individual must have sufficient wages
preceding the filing of a claim. The period surveyed for these wages is called the “base period.”

Most states use a base petiod consisting of the first four of the last five completed calendar
quarters. For example, if the claim were filed today, July 11, 1996, the base period would be
April 1, 1995, through March 30, 1996, Even if the individual had worked during all of the
period from April 1, 1996, through July 10, 1996, the wages from this work would not be used to
determine eligibility for a claim,

The first four of the last five completed calendar quarters is the most common base period. Tt
reflects the public policy judgement that unemployment benefits should be paid only when the
claimant has an established attachment to the labor force. In addition, almost all states determine
eligibility for benefits using wage information which is reported by employers on a quarterly
basis for all workers. It takes time for these reports to be completed and submitted by employers
and for states to enter the information into state computer databases.

Outline and Status of the Pennington Case

As you know, the plaintiffs in Pennington are a class of claimants who were not monetarily
cligible for unemployment benefits using the standard Illinois base period but would have been
eligible had earnings subsequent to the first four of the last five quarters been considered. They
contend that the Illinois base period violates the Social Security Act's requirement that
administrative methods ensure that Ul benelits are paid “when due.”

In 1994, the Seventh Circuit Court of Appeals reversed the district court and ruled that the base
period provided for by the Illinois Unemployment Insurance Act is an “administrative provision”
subject to the “when due” clause. The appellate court remanded the case to the district court for
a determination as to whether the “when due” clause had been violated. ‘To make the
determination, the district court was instructed to balance the plaintiffs’ interest in prompt
payment of benefits against the state’s interest in minimizing administrative costs and preventing
fraud, The U.S. Department of Labor submitted an amicus brief to the court supporting the
Uilinois Department of Employment Security's position that the base period is an eligibility
requirement, not an administrative method, and accordingly, not subject (o the “when due”
clause. ‘The court appeared to give litle weight to the Labor Department's arguments because
the department has not issued regulations on the matter.



37

Mr. Secretary, can we accelerate whatever information is avail-
able and let your people know that this is a very urgent issue, that
the whole Nation is waiting to see how we’re going to handle this
case that comes out of Illinois? Could we do this because we are
floundering for something besides cigarettes to deal with. Can you
find out how quickly can we get that information? Can we get it
so we can get a bill out of here before we adjourn?

Mr. UHALDE. Absolutely, Mr. Rangel. We will see how quickly we
can get that information.

Mr. RANGEL. OK. I assume when I get home at the townhall
meetings they are going to be asking, What the heck have you done
with that case in Illinois and I want to be able to say we are re-
sponding because we want the voice of the people in this Congress
to be heard. I can’t wait to get the information.

Thank you.

(The following was subsequently received:]


57

Federal controls have increased over the years and new Federal
prograns administered by the states have been added. Separate
funding sources have mandated unnecessary expenditures and hindered
efficiencies that might otherwise been realized. Federal savings
also would result from the need for less Department of Labor
program staff.

The Department of Labor would still be responsible: for: (2)
oversight of compliance and conformity, (2) administration of
federal programs through contracts with states, and (3) federal
budget and reporting requirements.

Some devolution proposals which have been suggested would make the
application of the "work test" optional with the states. This is
a Federal requirement, contained in the Wagner-Peyser Act, which
should not only be continued, but strengthened. The "work test" is
applied when the Employment Service refers an unemployment
compensation claimant to suitable work. A basic requirement of all
state UI laws is that for a person to draw UI benefits he or she
must be able and available for suitable work. Any devolution
legislation should contain specific provision to assure the close
integration of the State Unemployment Insurance Services and the
State Employment Services. Some states have not always done a very
good job of integrating the two services and the application of the
"work test" has not been as effective as it should have been. While
dealing with welfare recipients and first time job seekers is an
important service, the needs of the insured claimants should still
be given first priority.

Employer Concerns

As we have explained, business in principle is supportive of
devolution. However, we have some concerns about how specific areas
would be implemented such as:

* What happens to the State Extended Benefit Programs which are
financed on a 50/50 Federal-State basis with the Federal sot
coming from FUTA funds?

* Since many states have higher tax bases than the FUTA base of
$7,000 will some states collect more in taxes from some
employers than under the present system? And would these
additional funds be needed?

* What happens to states that need to borrow from the Federal
oan Account that is funded by FUTA?

* What happens to states that may experience a temporary
shortfall in funds needed to administer their programs?

The Extended Benefit Program has not worked as employers had hoped
when we supported its enactment. We had hoped that Congress would
rely on this program and not enact special supplemental "emergency"
benefit programs every time it perceived a serious unemployment
problem. This has turned out to be a naive hope. Fortunately, many
times when Congress has enacted these “emergency” supplemental
benefit programs it has recognized that they should be financed
from general revenue and not by employer payroll taxes.

Some proponents of devolution have contended that many states will
be able to reduce employer taxes that fund employment security
administration. The savings, which it has been estimated could
amount to as much as $291 million annually, would result from joint
filing of FUTA taxes and state taxes with one collection agent, the
state. However, if a state with a higher wage base than the federal
base of $7,000 used its higher base for calculating the
administrative tax, this would result in some shifting of the tax
burden to higher wage employers.

It should be noted that regardless of how the administration tax
is calculated many proposals still require all state employment
security taxes, both for administration and benefits, would still


23

Mr. Camp. Thank you. .
First, before we go to questions, we will hear from Albert Miller,
president of Phoenix Closures, Inc.

STATEMENT OF ALBERT R. MILLER, PRESIDENT AND CHIEF
OPERATING OFFICER, PHOENIX CLOSURES, _INC.,
NAPERVILLE, ILLINOIS

Mr. MILLER. Thank you, Mr. Chairman and Members of the Sub-
committee. My name is Bert Miller, and I am the president and
chief operating officer of Phoenix Closures. My company is located
in Naperville, Illinois, and produces container caps for regional and
national brands, both domestic and international. Our customers
cover a variety of markets including foods, household chemicals,
cosmetics, health care products, industrial products, and pharma-
ceuticals.

Phoenix Closures presently employs more than 200 workers and
has been an Illinois employer for over 100 years.

I am here today to express my strong support for the legislation
Governor Edgar and Comptroller Didrickson are seeking in connec-
tion with the Pennington case. I also have a general observation re-
garding devolution of the employment security system.

As to Pennington, there are problems both with the alternate
base period itself and the manner in which its proponents are try-
ing to implement it.

The Pennington alternate base period would provide for the pay-
ments of unemployment benefits financed exclusively by employers
to individuals with no established connection to the work force. To
that extent, it would turn the unemployment insurance system into
a 100-percent employer-financed welfare program, something well
beyond what I understand to have been Congress’ intent and some-
thing employers cannot afford.

Comptroller Didrickson has already discussed the estimates re-
garding the alternate base period’s potential impact on the trust
fund and employer taxes. A 1.5-percent increase in outlays would
raise employer taxes by nearly $70 million over the next 8 years.
A 6-percent increase would increase taxes by nearly $350 million
over that period.

To put those numbers into context, let me talk briefly about my
own company’s situation. Phoenix Closure’s sales for the year to
date are up 30 percent over last year. However, rising raw material
costs left the company’s bottom line essentially unchanged. In an
environment where output has to improve by nearly one-third just
for business to stay even, the prospect of any tax increase is
daunting. The possibility of a $350-million tax increase is abso-
lutely staggering.

The alternate base period’s cost to employers, however, would not
necessarily be limited to higher tax. I understand employers would
also be faced with the additional reporting requirements with pen-
alties for noncompliance in the event they failed to verify claim-
ant’s earnings not yet in the State’s computer system on a timely
basis.

I am also troubled by the potential impact on government, $12
to $15 million in startup costs and $2.5 million in extra annual
costs with no identifiable source to cover those costs.


144

= America’s businesses are burdened by having to file two, separate reports and pay
two, separate taxes to two government entities. The FUTA paperwork burden alone
costs U.S. employers an estimated $291 million each year.

= Many states’ employers pay unnecessarily high federal unemployment taxes. Of
the 53 states and jurisdictions, employers in 47 paid more in federal unemployment
taxes than their states received in 1994, the last year for which figures are available,

= Alll available funds for states to run the employment security system are not
appropriated by Congress and appropriations continue to decline. According to
ULS. Department of Labor projections, in Fiscal Year 1995 only 61 percent~or $3.47
billion of $5.7 billion in revenues--was appropriated for state administration of the
employment security system. Yet, the House Appropriations Committee, in its FY
1997 Labor-Health and Human Services-Education funding bill cut $38 million from
the FY 1996 level for state employment services and more than $200 million from the
Administration's estimate of the funds needed to serve those entitled to unemployment
benefits in FY 1997.

‘The following are the key elements of my devolution proposal:

= Maintain a national employment security system but eliminate the burdensome
federal mandates which cause inefficiencies and impose increased costs to the
states, Federal oversight should be limited to ensuring that state laws and policies
conform to the basic requirements that would be retained in FUTA, to provide a
public employment service and an unemployment insurance system.

= Effectively eliminate the collection of the FUTA tax by increasing the offset credit
for states from 90 percent to 100 percent as long as they conform to basic,
national requirements, Taxing authority for administrative purposes would be
transferred to the states. Each state would determine and collect taxes to finance its
employment security system. For employers, this positive reform would mean
elimination of the current 0.2 percent surtax, a savings of $1.4 billion per year, and
relief from the costly burden of filing two different sets of forms.

= Hold harmless, at least for a transition period, those few states that now receive
more in federal grants than their employers pay in taxes. Funds from the current
administrative account in the trust fund could be used to supplement the
unemployment taxes paid in these states for at least five years.

= Deposit state funds collected for benefits and administration in the UTF, which
would remain in the federal budget. Changes to the employment security system
may affect the budget deficit and require offsets; however, this would minimize the
impact.

CONCLUSION

Devolution of the employment security system is a good idea whose time has come.
Funding for unemployment insurance, employment service, and labor market information
programs comes from employer-paid taxes which can be used only to support these
programs. States should be given the resources and the authority to develop systems
responsive to the needs of their workforces and employers. The benefits can include payrall
tax cuts in most states, reduced burdensome paperwork, and improved services for workers.


90

TAYLOR. ROTH. BUSH & GEFFNER
A Law Corporaron,
Las Vegas (702) 387-1292

3500 Were Olive Avenue
San Dio (619) 292-1640,

Suite 1100 San France (415) 7347292

Surbank, California 91505 Teleco (818) 973-3201

(818) 973-3200 Fe

anon 6. Tavoe

- J. Weldon Grager=

Jonstnn €Walers* VIA UPS NEXT DAY AIR ‘eter LCase
hema Tm ir

“rsa oe Fle Na.
“Aa Rearna e 11640-0041

December 22, 1992

‘Thomas P. Nagle
Director

Employment Develcement Cepartment
g00 Capital Mall

Sacramento, California 95814

RE: Unemplovment’ offset

Dear Mr. Nagli

This office represents the Screen Actors Guild (SAG), the
American Federaticn of Television and Radio Artists (AFTRA) and
the Writers Guild of America, west (WGA west) jointly referred to
as the "Unions." Please accept the thanks of the Unions for
arranging for our meeting with your representative, Marie Lopez,
on October 15, 1992 in Los Angeles. The meeting proved to be
worthwhile and infornative. Indeed, it is partly at her
suggestion that we now address our concerns directly to you, and
request a meeting with you in an effort to obtain relief from a
serious problem the senior members of the Unions are
experiencing.

As I am sure you are aware, in this era of dual income households
and high unemploynent (especially in California), it is difficult
for most retirees to make ends meet just with income from social
security and their pensions. For this reason many retiree
members of the Unions are compelled to supplement their fixed
pension incomes through post-retirement employment.
Unfortunately, the inherent nature of virtually all the work in
the entertainment industry is seasonal, and sporadic. The
competition for the few employment openings made available to
perforners and writers of retirement age is intense. The
inevitable result of the combination of all these economic
realities is that many retirees find themselves relying
substantially on unemployment benefits to cover their living
costs in the interim periods between what little employment they
are able to find.


44

A osal t Administration and Fin.
2: 1 nt rity S: te e States

Executive 51
By

David B. Poythress, Commissioner
Georgia Department of Labor

The Employment Security System is composed of two major
components. First, the Unemployment Insurance system (UI), created
by the Social Security Act of 1935, is designed to provide workers
with insurance against involuntary unemployment by partial
replacement of lost wages. Secondly, the Employment Service (ES),
established by the Wagner-Peyser Act of 1933, is designed to
provide job search assistance to individuals and recruitment and
referral services to employers, to get workers back to work as
quickly as possible.

The UI and ES programs are highly integrated and each depends
on the other for efficient administration; success in serving
individuals and employers; and, keeping employer unemployment taxes
as low as possible.

Currently each state sets and collects a state payroll tax for
UI Benefits and deposits those funds into state specific Benefits
Accounts maintained by the Federal Government as part of the
Unemployment Trust Fund (UTF). A separate federal payroll tax,
collected by the Internal Revenue Service (IRS) under the Federal
Unemployment Tax Act (FUTA), is collected as a dedicated employer
tax to support administration of the Unemployment Insurance (UI)
laws and the Employment Service (ES). FUTA was established as a
contract with business that these dedicated taxes would be used
only for unemployment and employment services.

The concept of transferring the Administration and Financing
of the Employment Security System to the States, usually referred
to as "Devolution", has been studied for many years and is fiscally
sound, administratively simple, and politically realistic. It also
would be easily compatible with any of the several Employment and
Training block grant proposals currently before Congress.

Our relatively simple devolution proposal would accomplish
several objectiv

* Establish a single, state-collected payroll tax for both
UI benefits and UI/ES administration;

* Eliminate the current duplicative tax system saving
American businesses approximately half a billion dollars
annually in paperwork and filing costs;

* Eliminate IRS collection of the FUTA taxes, thus saving
$75 to $80 million each year;

* Significantly reduce micro management by the USDOL and
establish the foundation to downsize the USDOL by up to
75%;

* Assure that employers get the full benefits of the FUTA
taxes they pay by reducing the roles of IRS and USDOL;

* Return power to the states and lay the foundation for
possible tax cuts.


85

TESTIMONY BY CHARLTON HESTON
IN SUPPORT OF H.R. 3677
BEFORE THE HOUSE SUBCOMMITTEE ON HUMAN RESOURCES
OF THE HOUSE COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES,
July 11, 1996

My name’s Charlton Heston.

First, Mr. Chairman, let me thank you and the members of this Subcommittee for addressing
this issue and giving me the chance to testify, not on my own behalf, but for my colleagues in the
entertainment industry, in particular my fellow senior performers represented by the Screen Actors
Guild, the American Federation of Television and Radio Artists and the veteran writers who are
members of the Writers Guild of America, west.

As for me, I'm an actor, writer and director. | helped found a TV actor's union, now defunct,
in the early days of live TV. I currently belong to four unions, was president of one for six terms,
chaired an international conference of performers unions and a Presidential Task Force on the arts.
ed a contingent of our members behind Dr. King in his march in this city in 1963. That's simply
to say that this old horse knows the road.

'm here today to express my unconditional support for H.R. 3677 which would amend a
provision of Section 3304 of the Federal Unemployment Tax Act. That Section, as currently written
and interpreted by the courts. operates to the detriment of senior entertainment industry professionals
who are participants in multi-employer pension plans, depriving them of unemployment insurance
benefits for which they have otherwise qualified.

To help understand this issue, let me give you some perspective on our profession. While
some of us are millionaires, most struggle. The Screen Actors Guild has 82,000 members. The last
figures 1 saw said 80% of them make less than $10,000 per year. Just, about every one of us,
performer and writer alike, is a freelance worker. When we're employed, it's often short term and
always temporary. Artists in entertainment move from employer to employer. Periods of
unemployment are a fact of life; even the best and mast successful performers and writers have lean
times. I'm not just talking about motion picture and television actors, but of the writers, television
and radio commercial performers, voice-over artists, broadcasters, singers -- in short, the men and
women whose images, voices and words entertain and inform our nation...indeed, the whole world,
through visual and audio media and film, the art form of this century and the next. These workers
are covered by multi-employer pension plans which have been established by collective bargaining
between our organizations and the producers, advertising agencies and broadcasting entities who
employ us. By agreement between the negotiating parties, the plans are funded by employer
contributions. It is this unusual set of facts which creates the onerous application of Section 3304
that now exists. (Parenthetically, let me point out that American films are overwhelmingly dominant
in the world market, producing an unmatched trade surplus for our economy.)


62

only $60 million, or 42 percent, was returned to run the Virginia
Employment Commission.

We have heard about Indiana and their ratio today and how poor
that is, but overall in fiscal year 1994, only five States and the Vir-
gin Islands were winners, getting back more than they paid in,
while 45 States, including the District of Columbia and Puerto
Rico, were losers in this lottery.

What happens to the rest of the money? A relatively small
amount estimated at $50 million for fiscal year 1996 is expected to
be spent to finance the Federal share of extended benefits to work-
ers in certain States in times of high unemployment while $250
million is expected to be on loan to State trust funds with solvency
problems. That will leave an estimated $15 billion in FUTA reve-
nues in Federal trust fund accounts at the end of the fiscal year.

Another problem is the inefficiency created under the current
system. For instance, rather than receiving a single, annual Fed-
eral grant, each State receives funds through several single-
purpose grants. This makes it impossible to achieve economies of
scale by using equipment or personnel funded under one grant to
provide customers with services designated for financing under an-
other program.

Federal grants are inevitably accompanied by a welter of regula-
tions, restrictions, and reporting requirements. While some Federal
oversight is reasonable, much of the regulation by the Department
of Labor is needless or even counterproductive.

Several detailed and technical proposals have been advanced for
unemployment insurance reform. Here are three broad principles
that I hope can form a basis for further discussion.

First, let States finance the administration of their own State un-
employment offices. Nearly every State would be able to impose a
much lower tax on employers and raise revenue equal to or greater
than the amounts it currently receives in Federal grants.

Second, end the Federal/State extended benefits system and close
the Federal trust fund accounts for administration. Extend the ben-
efits and loans to State benefit funds distributing the nearly $15
billion on hand to individual State trust fund accounts.

State accounts would receive a massive infusion of assets. That
would permit in most cases the reduction of existing State taxes,
increases in benefits, or both.

Third, pare the Federal oversight back to the essentials, while re-
taining important protections such as minimum national standards
for employer coverage and Federal requirements for fair hearings
for individuals whose claims have been denied.

As I said earlier, employers do not object to paying reasonable
taxes to support an efficient system of employment security. The
current figures suggest that employers may be overpaying $2 bil-
lion a year in taxes, resulting in the accumulation of nearly $15 bil-
lion in idle funds to finance a system that lacks the flexibility to
make the best use of the funds it does receive.

I firmly believe reform along the lines I have suggested will
produce a fairer policy for employers and a more supportive system
‘or jobless Americans.

Thank you.

{The prepared statement follows:]


86

Our organizations have been helping to encourage employment for seniors in support of the
national interest in insuring that senior citizens remain active, contributing members of society.
Senior images in our media make a major contribution to that objective, but such images are all too
rare. Senior performers typically continue to seek employment in their chosen profession after they
begin to receive the pension benefits they've earned over a lifetime of work in our industry. When
the performer gets a new part, the new employer will make an additional contribution to the
multi-employer pension plan -- an additional contribution which will create an incremental increase
in the performer's monthly pension check. Should these performers later apply for unemployment
benefits for which they've qualified, Section 3304 requires that the amount of the benefit be offset
by the total amount of the performer's pension -- not just by the amount of the increase-- but by the
total amount of the pension. The offset will substantially reduce or even erase completely the

unemployment insurance benefit. H.R. 3677 would, very simply, limit the offset to the amount of
the increase.

We have for the Subcommittee a package of correspondence which began in December 1992,
between our attomey, the California Employment Development Department, and ultimately, the U.S.
Department of Labor. With the Chair's permission, I ask that this package be accepted and included
in the record of today's proceedings. This correspondence shows that efforts were made to correct
this inequity at the state level, we hoped by administrative interpretation. The need for congressional

action was confirmed, however, in a letter dated June 9, 1993, in which the Department of Labor
stated:

“Offset of only the amount of pension increase... would appear to be a more equitable
alternative to offset of the total amount of the pension. However...the language of the statute
does not permit proportional offset.”

Passage of H.R. 3677 will provide the change in language we need here and provide our
community with the more equitable alternative, as acknowledged by the Department of Labor. Most
significantly, the encouragement to senior artists to continue contributing to their industry, to their
‘own self-esteem and to America's culture will be a valuable corollary of your favorable action.


121

«© Many ES administrators feel that allocations to state ES agencies by the USDOL
are not sufficient to cover the administrative costs. A number of states have had to
enact additional employer paid state taxes to cover the shortfall. State ES
administrators argue that the formula, used by the USDOL to fund the states, is
outmoded.

‘+ ES administrators feel that administrative fund allocations for some ES progeams
have onerous reporting requirements and are inflexible as to the use of the funds.
‘That js, the states are not permitted to move funds as needed for efficient

administration

‘+ State ES agencies do not receive ali of the FUTA taxes paid by employers in their
state, This is most evident in periods of low unemployment, as is currently the
case.

DEVOLUTION PROPOSA:

The Devolution proposals generally transfer to the states the responsibility for
collecting and controlling administrative funds. The proposals differ as to the handling
of currently existing funds held in the three federal accounts. All of the proposals
require revenue from these administrative taxes to be deposited in the U.S. Treasury.

MP xe)

Some employers support the Devolution concept. However, several concerns need to
bbe addressed and may argue against the transfer of the responsibility to the states.

1) Presently, FUTA taxes are earmarked for ES programs only. Employers are
concerned about the possibility of mixing state administrative ES revenue with
fands for non-ES programs.

The taxable wage base in 39 states exceeds the $7000 FUTA wage base, Employers
are concerned that the FUTA “net tax” of 0.8% (including the temporary FUTA
surtax) will be applied by sates to their currently existing state taxable wage base.
This would greatly increase employer taxes.

Interstate claims and multi-state coordination of ES programs need to be
maintained, There is a concern that the costs to maintain this coordination will
still require a federal tax

4) There needs to be a mechanism which allows states to borrow funds from the
Federal Treasury if state Ul benefit Trust Funds become insolvent. The FUTA
Federal Unemployment Account is the loan fund from which states borrow.

5) The Devolution proposals eliminate the “insurance” aspects of the federal-state
partnership.

6) Most of the Devolution proposals eliminate the Federal-State Extended Benefit
(EB) Program and leave the existence of this program to the discretion of each state.
‘The EB Program provides additional weekly benefits during periods of high
‘unemployment and have been some help in stabilizing the state and national
economy.

While Congress is returning the responsibility of a number of programs to the
states, the federal-tate UI program isa creation of the Congress, not one which had
its roots in the states and was taken over by the federal government. The
continued existence of an interstate UI system has national economic implications.


124

‘The Pennington J Decision Upholds 60 Years
Established Law Interpreting the Social Security Act
Prev Har. ed Payment of Benefits

‘The federal requirement that states pay benefits in a timely fashion, as codified by
the “when due” clause of the Social Security Act (#2 U.S.C. section 503(a)(3), is one of
the very few restrictions imposed on the states in the operation of the federal-state
unemployment system. The Pennington I decision correctly interprets this limited federal
obligation on the states following a long line of cases and the evolving standard of what is
“administratively feasible”, consistent with the federal regulations interpreting the statute.

Under the Illinois law, workers who need their most recent wages to qualify for
benefits must instead wait 3 to 6 months until those wages make their way into the state’s
computer system. Asa result, when they first apply for benefits, they are told they have to
reapply months later. This is precisely the kind of unreasonable delay that the "when due"
clause was intended to prohibit, as the appeals court clearly held in Pennington I. Thus,
Pennington simply requires a state to use the most recent earnings in calculating eligibility
for benefits. Illinois has not lost its ability to set its own monetary eligibility standard. Tt
has only lost its ability to make workers with earnings over that standard wait for weeks
‘or months before they can recover their benefits.

Indeed, Pennington Fis a natural extension of a long line of cases interpreting the
“when due” clause, including the Supreme Court’s decision in Califomia Human Resources
Dept, v. Java, 402 U.S. 121, 133 (1971). In Java, for example, the Court did not consider
simply whether the law requires that unemployment benefits be processed in a timely
fashion, and the defendant’s would argue. As a result, the Court struck down the
practice, a policy decision of the state of California, to withhold benefits while appeals
filed by an employer were pending. Similarly, in Pennington J, the court found that the
“when due” clause was intended to protect against the delay caused by a policy decision
to withhold payment of benefits. Moreover, what is “administratively feasible”, the
standard of the regulation interpreting the “when due” clause, necessarily changes over
time. Thus, given changes in technology allowing for more prompt processing of wage
records submitted by employers, the requirements of the “when due” clause must evolve
as well, as the district court concluded in the Pennington case.

Delaying receipt of benefits has significant consequences, especially for low-wage
workers who are often forced to rely instead on public assistance. For example, a study
done in New York of workers who exhausted their unemployment benefits found that 26
percent eventually ended up on public assistance. As described in the Java case, which
reviewed the legislative history of the “when due” clause, “[p]aying compensation to an
unemployed worker promptly after an initial determination of eligibility accomplishes the
congressional purposes of avoiding resort to welfare and stabilizing consumer demands;
delaying compensation until months have lapsed defeats these purposes.” Ifthe State
chooses to, it remains free under the Pennington I decision to change basic eligibility
requirements, by increasing the earnings levels or reducing benefit levels, but not by
slowing payment of benefits simply because the individual's most recent earnings are not
yet registered in the State's wage record system.

Finally, the argument advanced at the hearing on the proposed legislation, that
the court in this case deviated “180 degrees” from 60 years of history interpreting the
“when due” clause, is pure hyperbole. To the contrary, the appeals court panel that
decided the Pennington I case was as judicially conservative as any pancl that has ever been
assembled to hear a case. Indeed, each of the three judges on the panel was appointed to
the bench by President Reagan (the district court judge as well was a Reagan appointee).
‘The appeals court thus painstakingly followed the letter and spirit of the 1935 Social
Security Act in applying the “when due” clause to this case. It is worth noting as well that


31

Mr. RANGEL. Well, you have no idea what this Congress will
come up with if we come up with anything at all. And I hope that
we might take into consideration all the available information
based on studies, not to do what Illinois wants, but what is good
for the entire Nation.

Illinois has seen what they perceive as States rights violated. I
guess there is a lot of support for that. But I would assume, Sec-
retary Uhalde, that this panel has discussed issues that go far be-
yond the Illinois court decision. Is that correct?

Mr. UHALDE. That’s correct.

Mr. RANGEL. So, listen, we got a lot of things to do between now
and the time we get out there to change this Congress. I would
hope that we will just move on to something else and then when
we get back in, we will do it the right way.

Mr. McCrery. Mr. Collins.

Mr. CoLLins. Good morning, Mr. Chairman.

Ms. Didrickson, as I understand though, you have not entered
this case as just Illinois?

Ms. DIpRICKSON. That's correct.

Mr. COLLINS. There are how many other States involved?

Ms. DIDRICKSON. We had 23 other States that appealed with us
to the U.S. Supreme Court when we were denied a hearing.

And, as you heard, Andy Richardson, who has testified on behalf
of ICESA, all the other States, there’s a very clear danger here that
this legislation from the bench for Illinois is going to—and I believe
the U.S. Department of Labor has also said—it’s going to serve as
precedent in other States.

So, there’s a legal lawsuit pending right now, I understand, in
the State of Washington and there are other States where similar
action is pending.

Mr. COLLINS. And how many States have used this same cri-
teria?

Ms. DipricKSON. My understanding is that there are 49 States.

Mr. CoLLins. And you're saying the danger here is that the Con-
gress may not legislate but the bench may legislate.

Ms. Diprickson. I’m saying that the bench has legislated.

Mr. CoL.ins. Leaving very little of the voice of the people to be
heard, just the bench.

Ms. DiprickSON. That’s right.

Mr. Couins. Mr. Uhalde, you’ve talked a lot about alternatives,
alternative criterion. Is it not true that each State, through their
legislature, could establish their own criteria or an alternative cri-
teria than what these 47 States now use?

Mr. UHALDE. That’s correct.

Mr. CouLins. But based on your testimony though you are saying
that Washington should do it or as Mr. Richardson has said, the
bench should do it?

Mr. UHALDE. No. As I said, we filed an amicus brief supporting
the State of Illinois in our interpretation of the current law and
regulation that supported the State in their position. Historically,
it has been an eligibility issue and the States have preeminence in
setting those eligibility criteria. The question that we are asked
now is ought there be new legislation enacted for this issue?


7

While initially a long period of time was necessary to collect and
post the wage information, technology has reduced this amount of
time needed. All wages and covered employment earned during the
base period, regardless of the number of different employers, are
used in the determination of the qualification of benefits.

It is important to recognize that there are several advantages to
the claimant in using the most recent wages possible. First, the
most recent wages tend to be higher, and therefore, the benefit en-
titlement, both the amount of benefits and the duration of benefits,
could be higher for a claimant.

Second, some claimants may have recent employment, but may
not have wages reaching back five quarters and, therefore, would
not have sufficient wages to qualify.

While there is nothing to prevent the claimant from waiting until
the subsequent quarter to file a claim, during the interim the
claimant may not have income support. The delay can be up to 6
months and may create financial hardships, particularly for low-
wage and part-time workers.

Now, in the Pennington case, a claimant who was denied unem-
ployment benefits because she did not have sufficient wages during
the base period filed suit in Federal court in July 1985 claiming
that Illinois base period was inconsistent with Federal law.

The claimant argued that the base period violated section
303(a)(1) of title III of the Social Security Act.

The State of Illinois argued the base period is not a method of
administration, but an eligibility criterion which is a matter of
State discretion. The Department of Labor filed an amicus brief in
the case supporting Illinois interpretation of the law.

The U.S. Court of Appeals reversed the decision of the district
court. The U.S. Court of Appeals found the base period is an ad-
ministrative consideration within the meaning of title III of the So-
cial Security Act.

The district court, upon remand, subsequently held that given
the delay in eligibility determination caused by Illinois base period,
the State’s base period did not ensure the greatest promptness that
is administratively feasible in paying UI.

The court of appeals’ decision applies only to the States of Illi-
nois, Indiana, and Wisconsin. The district court’s decision applies
in Illinois. However, these cases could serve as a precedent in other
cases.

Subsequent to these decisions, the Advisory Council on Unem-
ployment Compensation completed its comprehensive examination
of the UI system. The Council explored issues in the UI system
that it believes should be addressed as we move into the next cen-
tury, including issues relating to low-wage workers, part-time
workers, and workers and their work arrangements connected to
the labor force.

With respect to alternative base periods, the Advisory Council
recommended that the States use an alternative base period when
necessary to qualify claimants for benefits.

As a followup to the Council’s work, we in the Department of
Labor have initiated research regarding a number of issues raised
by the Council. Included in this research effort is research on alter-
native base periods.


139

Benefits, Financing, Coverage, Advisory Council on Unemployment
Compensation, Feb. 1895 at 16

Moreover, the provision that the Supreme Court struck down in
Java was used’ in 48 states. See Appendix to Appellants’ Brief in
Yava, No. 507 (U.S. Sup. Ct. 1970) at 69-70. Yet the proponents
offer no evidence that compliance with Java disrupted the nation’s
unemployment insurance program at all

C. Ms. Didrickson’s cost figures are enormously inflated
For example, her estimates of administrative costs include
unnecessary additional costs for a wage request system to obtain
wage data before it is reported in the normal manner. The evidence
at trial confirmed that if Illinois did pay to add a wage request
component to a movable base period, that alternative would be
"administratively feasible" in the sense that, if there was no
cheaper alternative, the costs of those systems would be worth the
benefits they would generate to the claimants. But, in Illinois,
the marginal benefits of adding a wage request component is too
small to justify its greater expense over the alternative of simply
using the most recent wage data when it is reported in the usual
course. Thus, while IDES could enhance a movable base period
system marginally by incorporating a wage request component, the
when due clause does not require that it do so

Ms. Didrickson estimates also include costs for a “reachback"
component to find claimants who were previously denied benefits
But the Eleventh Amendment to the U.S. Constitution, U.S. Const.,
amend. XI, prohibits the courts from ordering any such relief. See
Faschal v. Jackson, 936 F.2d 940 (7th Cir. 1991)

qllinois’ insistence on calculating the costs of a movable
base period by including a wage request and a "reachback" component
is designed merely to inflate the "costs" of a movable base period
The following table compares Illinois’ cost estimates with those
components included and the same estimates with those components
eliminated:

Estimate With Estimate Without
Wage Request Wage Request
and_"Reachback" and_"Re: ack"

Conversion Costs

Non-computer $ 4.1 million $ 411,260

Computer § 9.3 million § 8.8 million

TOTAL $ 13.3 million § 6.2 million
Operating costs $ 2.8 million $ 400,000

The table confirms that, if the costs of a wage request and a
“reachback" component are eliminated, Illinois’ estimates of the
conversion costs would drop $ 7.1 million, from $ 13.3 million to
$6.2 million, and its estimate of the yearly operating costs would
drop $ 2.4 million, from § 2.8 to § 400,000.

D. As for trust fund outlays, the evidence at trial
confirmed that a movable base period in effect in Illinois during
1986 would have paid a substantial proportion of about 23,000
additional claimants approximately 13.6 million additional dollars,
and approximately 13,000 claimants would have been paid benefits
sooner, In 1994, the Director of the Illinois Department of
Employment Security estimated that the additional benefits paid to
claimants would be about $ 30 - $ 40 million a year. See Director
Doherty’s letter of July 7, 1994.


a7

periods of unemployment for workers’ and unnecessarily high payroll taxes. This is contrary to
the primary purpose of the UI system® and reduces real wages.

In fiscal year 1994, employers in 25 states paid far more in FUTA taxes that their states got back
(these states received less than 60 percent of their FUTA taxes). In all 46 states received less
than their total FUTA taxes paid, As a result, many states’ employers are paying unnecessarily
high payroll taxes that limits job growth and reduces state services. For example, in FY 1994,
employers in Tennessee paid $113.9 million in FUTA taxes but the state received only $43.8
million in FUTA grants to administer their UV/ES program, a loss of $70.1 million. Employers
in Florida paid $290.7 million in FUTA taxes but the state received only $116.7 million back
from the federal government, a loss of $174 million. Alll told the federal government collected
$5.539 billion in FUTA taxes in FY 1994 and after skimming money off the top for bureaucracy,
demonstration projects, it runs the remainder through a maze of formulas and equity adjustments
and then returns on average about 60 percent back to the states.

Under the current UC system employers also are burdened by having to make reports and pay
two separate taxes (federal and state) for what is essentially one system. It is estimated that the
paperwork burden for filing the FUTA tax return costs the nation’s employers almost $500
million annually. This burden directly reduces economic development and job growth and could
easily be eliminated.

Studies show that states can effectively decrease the duration of unemployment and thereby
reduce payroll taxes and increase jobs." The UC program should be reformed to limit the federal
role in the system, as Congress originally intended, and to restore responsibility and
accountability for the program to the states.

Lawrence F. Katz and Bruce D. Meyer, “The Impact of the Potential Duration of Unemployment Benefits on the
Duration of Unemployment,” National Bureau of Economic Research, Working Paper No. 2741, October 1988
This study concluded that extending the duration of UI benefits ftom 6 months to | year will increase the mean
duration of unemployment by 4 to 5 weeks. Examples of federal programs that increase the duration of UI benefits
are the extended benefit programs and trade adjustment assistance

In today’s economy, the primary purpose of the UVES system is to move workers that have permanently lost
their jobs into new ones as quickly as possible.

” Daniel S. Hamermesh, “New Estimates of the Incidence of Payroll Tax,” Southern Economic Journal, Winter
1979. Research on the incidence of taxation has generally concluded that payroll taxes are predominantly, if not
completely, borne by labor in the long-run through lower real wages.

* Bruce D. Meyer, “ Policy Lessons from the U.S. Unemployment Insurance Experiments,” National Bureau of
Economic Research, Working Paper No. 4197. The willingness and ability of states to explore innovative ways to
reduce UI duration is evident from the number of the state UI experiments have been wholly state funded.



46

Employment Security and Training Financing
Present

General
Revenue

—

60% Returned

to SESA's 2004
| "Training"
f Programs

“State Employment
Security Agency

| |
A a
| Employment | Unemployment me
i. Service Insurance raining

([] - FUTA Funds I - General Revenue Funds


6

I would like at this time to invite the first panel to the witness
table. It will be Raymond Uhalde, the Deputy Assistant Secretary
of the Employment and Training Administration of the U.S. De-
partment of Labor. He is accompanied by Mary Ann Wyrsch, Direc-
tor of the Unemployment Service.

In addition to the comptroller from the State of Illinois, we have
Andrew Richardson who is commissioner of the West Virginia Bu-
reau of Employment Programs, on behalf of the Interstate Con-
ference of Employment Security Agencies, and Albert Miller who is
president of Phoenix Closures, Inc., Naperville, Illinois.

Welcome. Mr. Uhalde, if you would like to lead off.

All of the witnesses’ full statements will be made a part of the
record.

You may proceed as you wish. We encourage you to summarize
if you feel comfortable in doing so.

STATEMENT OF RAYMOND J. UHALDE, DEPUTY ASSISTANT
SECRETARY OF LABOR, EMPLOYMENT AND TRAINING
ADMINISTRATION, U.S. DEPARTMENT OF LABOR;
ACCOMPANIED BY MARY ANN WYRSCH, DIRECTOR,
UNEMPLOYMENT INSURANCE SERVICE

Mr. UnALDE. Thank you, Mr. Chairman and Members of the
Subcommittee. I want to introduce Mary Ann Wyrsch who is the
Director of the Unemployment Insurance Service in the Employ-
ment and Training Administration, U.S. Department of Labor.

Before discussing the Pennington decision, I believe we ought to
give a little bit of background on the issue of the base period and
the establishment of base periods under the UI, Unemployment In-
surance, Program.

State UI laws identify a base period for measuring the wages
earned by an individual from employment that is covered under the
unemployment insurance system. Earnings during the base period
are then used as the basis for determining whether the individual
qualifies for unemployment benefits, and are also used to deter-
mine the weekly benefit amount and the duration of benefits.

The primary base period that has been defined for most States
has been a base period that is the first four of the last five com-
pleted calendar quarters, immediately preceding the first day of an
individual’s benefit year.

Two States use as the base period the 52 weeks preceding the
benefit year. Two States use the last four quarters, and one State
uses four quarters ending 4 to 7 calendar months before the benefit
year, and one State uses a uniform calendar year.

In addition to the primary base period, seven States presently
provide for an alternative base period if the claimant does not meet
the qualifying requirements using the primary base period.

The interval between the end of the base period and the begin-
ning of the benefit year or the lag period or lag quarter is intended
to allow time for the recording of the base period wages necessary
to establish a benefit year prior to beginning of such year.

In States that use the first four quarters, the lag is 3 to 6
months. In States that use the last four quarters, the lag is less
than 3 months.


40

portunity to minimize paperwork on the American business com-
munity.

The present employment security system is funded by two taxes.
The first is the State benefit tax. That money is collected locally
by State departments of labor. It is deposited in State-specific trust
accounts which are managed by the Treasury Department. That
money is expended only for benefits, unemployment insurance ben-
efits. Within general operating guidelines, States have essentially
unrestricted access to their own benefit moneys.

The other payroll tax is the FUTA tax or the Federal Unemploy-
ment Tax Act tax. Those funds are collected to pay for the adminis-
tration of the system.

They are collected by the Internal Revenue Service. They are also
computed against salaries. They are collected quarterly. The Inter-
nal Revenue Service transmits that money to the U.S. Department
of Labor and the U.S. Department of Labor expends it in various
ways.

Our best information is that the cost of collecting that tax by the
IRS is about $75 to $85 million a year. Our friends in the small
business organizations have estimated that as much as a half a bil-
lion dollars is expended by American businessmen, businesspeople
in maintaining the separate tax system. Paying two taxes, two
checks, two forms, two audits, two everything.

When the money is received in the U.S. Department of Labor it
basically goes to four different spending categories. The first is sub-
sidies to small States which do not have an employer base big
enough to generate enough tax to pay overhead. That does not nec-
essarily represent any sort of inefficiency on the part of those
States. They are simply small States. That’s a fact of life and the
proposal that I have made would hold those States harmless.

The second amount of money goes to pay actually the operating
costs of the U.S. Department of Labor, that’s about 5 percent, and
we think that’s about right.

And about 60 percent of the money is returned to the States for
administration. The problem is it is not returned dollar for dollar.
In some States, they get materially less than what their employers
pay in. In Georgia, we get about 40 cents on every dollar that our
employers pay. Therein is the nut of this problem.

The fourth avenue through which those funds are channeled is
into a series of trusts which are maintained by the U.S. Depart-
ment of the Treasury and the money, in effect, cascades through
three sets of trusts. The first is called the administrative account
or the administrative trust. The second is the extended benefits ac-
count. And the third is a loan account for loans to States whose
benefit accounts go insolvent.

The proposal that I have made is that the two taxes be combined.
Not legally. They would be maintained as separate legal taxes. But
they would be combined and collected by the States. There would
be a single tax form, a single check, and a single audit. The moneys
would be deposited in State-specific benefit accounts, as they are
now, but also State-specific administrative accounts, also main-
tained by the Treasury for security purposes. And the States would
have, within broad guidelines, unrestricted access to their own ad-
ministrative money.


120

CNTADLOS MENT MICHIGAN

COMPENSATION

COUNCH
VI Northneste Marlene D, Jobe
> Executive Director
(193547916

DISCUSSION PAPER ON DEVOLUTION

BACKGROUND

Alll states enacted Unemployment Insurance (UI) laws in the mid-1930's as a result of a
Congressional mandate passed in the Social Security Act. Over the years, this federal-
state program has contributed to economic stability in the country by paying benefits
to unemployed workers. For more than 60 years, this federal-state partnership has
been amended and refined and, generally, has worked well.

Since its inception, the cost of administrating state Employment Security (ES)
programs has been funded by an employer paid federal payroll tax. This Federal
Unemployment Tax Act (FUTA) tax is collected by the IRS and deposited in the U.S.
Treasury. The money is allocated to three separate federal ES accounts. AAs of the end
of fiscal year 1995, the three accounts contained the following amount

Employment Security Administration Account (ESAA)
Extended Unemployment Compensation Account (EUCA)
Federal Unemployment Account (FUA)

Total 12.04

ESAA pays for the administrative costs of running state ES programs. The allocation
of administrative funding to the states is the responsibility of the U.S. Department of
Labor (USDOL). EUCA pays for the 50% federal share of the Extended
Unemployment Benefit Program. FUA is the account from which states can borrow
funds to pay unemployment benefits if their state trust fund becomes insolvent.

‘The FUTA tax does not pay for the cost of state unemployment benefits 10
unemployed workers. These costs are funded by employer paid experience rated state
taxes. The proceeds of the state taxes are also forwarded to the federal treasury and
drawn down by each state, as needed, to pay benefits vo unemployed workers.

FUTA requires employers to pay a gross federal payroll tax of 6.0% on the first $7,000
of wages paid annually to each employee. ff the state unemployment insurance law
conforms with federal requirements, employers are eligible for a tax credit of 5.4%, oF
90% of the FUTA tax. Currently, employers in all states receive the tax credit. Since
1976, employers have paid an additional 0.2% temporary FUTA surtax. ‘This surtax is
now scheduled to expire on January 1, 1999 after having been extended several times
by the Congress. Consequently, the net FUTA tax is 0.8%, or a maximum of $56 per
employee.

There are four (4) proposal! ro move the responsibility for the cost of administering
state ES agencies from the federal government to the states. The concept, known as
“Devolution”, has been discussed and debated in past years, but appears to be gaining
momentum and support. Devolution seems consistent with other federal initiatives to
move the responsibility of programs from the federal government to the states. The
impetus to devolve the responsibility for ES administrative costs to the states appears
to be the result of several concerns, including the following:

* Specific proposals are from the states of Georgia, New Hampshire, Ohio and Virginia,


19

Government, and that legislation became the genesis of virtually
every unemployment compensation law across the United States.
So the Federal Government provided all the States with draft legis-
lation saying here is the way to comply with the Federal law.

Now we have the Pennington case coming along saying that that
very concept of legislation that was provided in a model format for
the States is not correct, and instead of using this framework to
defer to the States on how to determine when meeting the “when
due clause,” we now have this different approach being proposed.

The view of the Interstate Conference of Employment Security
Agencies is that this is a matter to be left to the States. We don’t
oppose alternative base periods. In fact, many States have opted to
do that across the country. Most States, however, do use the first
four of the last five quarters. Some States use more recent wages
for qualifying purposes.

ICESA believes that States should continue to have latitude to
establish such alternatives or other standard base periods—that
the first four of the last five calendar quarters is only one of a vari-
ety that the States choose to use.

We are concerned that the Pennington case could establish a
precedent for the determination of other qualifying and eligibility
requirements for State unemployment benefits by the judicial rath-
er than the legislative process.

Expansion of the court’s authority in setting qualifying and eligi-
bility requirements for unemployment benefits preempts the demo-
cratic process and, as a result, is likely to erode public support for
the program.

For example, some States choose to make certain decisions rel-
ative to payment of unemployment compensation. What constitutes
a just cause for quitting? Are we now going to have the court sys-
tem direct us that certain things are a just cause for quitting and
you, therefore, must pay unemployment compensation benefits?

This is a substantial encroachment into the deference to the
States and the design of these programs, and the recommendation
of the Interstate Conference of Employment Security Agencies is
that it is in the best interest of this very precious national system,
this unique Federal-State relationship in the Unemployment Insur-
ance Program, the workers it serves and the employers it serves to
maintain the historical interpretation of the Social Security Act’s
“when due clause”; that that interpretation would be substantially
changed if the Pennington decision stands, and therefore, ICESA
urges you to enact legislation making it clear that congressional in-
tent is to leave establishment of base periods up to the States.

Thank you very much for the opportunity to be with you today.
I would be happy to respond to any questions.

(The prepared statement follows:]


14

lays and the higher taxes would translate into an increase in the
Federal deficit, a more than $100-million increase if outlays rose by
1.5 percent, or using that 6 percent, a $400-million increase.

To maintain an adequate trust fund balance with the additional
outlays resulting from this decision, employers would be forced to
pay higher unemployment insurance taxes. It probably would re-
sult in nearly a $70-million tax increase over the 8-year period
using that 1.5 percent.

If I use the 6 percent, now you are looking at employer taxes in-
creasing $350 million over that 8-year period.

Let me just kind of go through that because I see the red light
is on. Really, my specific request to you is for an amendment to the
“when due clause,” as I understand Congressman Crane is going to
be introducing.

We are a very rich, vibrant Nation, but how we can truly be
ready to meet the economic challenges of the next century is to
make certain that our business community is not unfairly saddled
with hundreds of millions of dollars of new taxes.

In closing, I would just like to thank you for your time and con-
sideration and also refer to the previous testimony from the De-
partment of Labor that said that Illinois has the choice. The fact
of the matter is that we do not have a choice in terms of being able
to get out from underneath this Pennington decision, the U.S. Ap-
pellate Court decision that has been filed against us in the State
of Illinois.

It is a tremendous cost for us. We once before tried to go before
the U.S. Supreme Court with 23 other States and were denied. We
don’t really see the fact that the court system is going to be able
to allow us to be able to have our own States rights here in terms
of eligibility, and so that is why we are looking to the U.S. Con-
gress.

Thank you very much.

[The prepared statement follows:]


WAYS AND MEANS SUBCOMMITTEE ON HUMAN RESOURCES
PAGE TWO

FOCUS OF THE HEARING:

The hearing will focus on two main issues. First, witnesses will discuss the
implications of, the Penningron case, a Federal court decision that has drawn i
whether States have full authority to set base periods used in determining eli
‘unemployment insurance benefits. Second, the Subcommittee will consider testimony on
devolution proposals that would allow greater State control in setting and collecting
unemployment taxes and in administering State unemployment insurance programs. In
addition, other witnesses will discuss the way the unemployment insurance system affects
actors and poll workers, among other issues

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

‘Any person or organization wishing to submit a written statement for the printed
record of the hearing should submit at least six (6) copies of their statement, with their
address and date of hearing noted, by the close of business, Thursday, July 25, 1996, to
Phillip D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of
Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those
filing written statements wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this purpose to the
Subcommittee on Human Resources office, room B-317 Rayburn House Office Building, at
Teast one hour before the hearing begins.

FORMATTING REQUIREMENTS:

seh statement proceed fer peoting ts to Common by a wines, xy wei statement or exit sable fr the peated

‘aco uxy wien commana In rarponae i & request for wren comments art confor tothe guidalinsHicted low. Aay atement
rent na tn eh thee wl ot be peat, bat wl be a te Commitee fet for revi and uae by che
Comma.

1 ‘A statamenis and uxy accompanying hibits for pind mast be type i single space om legaiaae paper and may
‘not emeeed alo 10 pages tooling azachmeats

‘2 Copan of whe documents suv as exh material wil ot be acopind fr peating, instead, exh materia
‘heals be relersncad an quoted or paraphrased. All eiDt mara not meting Chee specications Wil be malstaine tn the Common
‘le fr revow and ats by the Common

2 Aves appearing at pubic hearing. o submicing 1 satement forte cert of» yuie hearing. or sobmitag
‘wre comments rxponse tt 4 pulled request fr comments by the Camis, wast incinde an hi taeneat of subuiesin a Ht of
‘ll elo, persons, or ogantzadens ou whetebebal he witnees appears

4A supplemental shew: wast accompany ouch statement ising the name, fll sree, a tlephone number where
‘wien or the daipuate rprecentatve say be ruached and a topical ening or summary ofthe coments und reemuendationg tn the fall
‘atament, ‘Tala expplomeatal set wl uot be incinde tn the printed record.

‘Tee above rvs and Unttatons apply only t terial Dtag subse fr prating. Statements and exhibits

‘supplementary materia} ebm slay for Gsttbution tothe Members, the pros andthe pubic darng the course of a pole hearing may
‘bo enbmltod In other forms.

Note: All Committee advisories and news releases are now available on the World Wide
‘Web at "HTTP://WWW.HOUSE.GOV/WAYS_MEANS*’ or over the Internet at
*GOPHER.HOUSE.GOV" under "HOUSE COMMITTEE INFORMATION’.


132

of that money to support herself and her three and four year old children, she has
‘been told that she cannot gain access to it until October. She does not know how
she is going to make ends meet until then, if she is unable to secure another job.
‘Since she cannot expect a decent reference from her employer (who is aleo refusing
to pay her some of the wages he owes her), her job prospects are not good.

‘The goals of the unemployment compensation system can never be met if
people like M.B, and R.P., who have met the states’ eligibility criteria and who
‘become unemployed through no fault of their own, are denied timely access to the
benefits which were intended to help them get back on their feet. Unemployment
compensation was intended to assist the unemployed worker to meet his financial
obligations while he was unemployed so that he could spend his energies looking
for new employment. In designing the program Congress also recognized that the
impact of unemployment extends beyond the unemployed individual into the local
economy. The lesson painfully brought to public consciousness during the
depression was that people out of work have no money to spend, depleting the
market for goods and services being produced in other sections of the economy, and
risking further unemployment as businesses downsize to reflect the decreased
demand. Congress intended both to insure unemployed workers and to minimize
the ripple effect that unemployment has upon the entire community.

Neither the goal of helping the unemployed person to remain self-sufficient
nor the goal of stabilizing the economy during periods of unemployment ean be
accomplished unless unemployment compensation finds its way into the
unemployed workers’ pocket as goon as possible after unemployment occurs. The
timing of the payments is as important as the money itself.

‘The base period like the one attacked in Pennington has draconian
consequences for low wage workers and other workers, such as those in the
building trades, who are genuinely attached to the work force, but because of their
pattern of wage collection are unable to have access to unemployment benefits
when they most need them. Low wage workers must work longer than others in
order to acquire enough base wages to be eligible for the unemployment
compensation program. They are the least likely to have savings or other private
resources to tide them over while they wait for their benefits to become available.
They typically work in jobs which provide little or nothing in the way of benefits
or severance allowances, or any protection at all from arbitrary dismissal. For
many, the acquisition of a low wage job was their ticket away from welfare
dependency. Sudden unemployment with no access to the unemployment
‘compensation benefits they have earned often leaves them with no recourse other
than to go back on welfare, a step which has dramatic psychological as well as
economic consequences for themselves and their families.

‘The base period considered by the Court in Pennington is used in many
states acrosa the country. This is a historical legacy which emanated from
administrative need during the 1930's. Clearly at that point in time, long hefore
computers and other technology, states in fact needed a fair amount of time to
secure wage records from employers and record them into the system (most likely
by hand). ‘The definition of the base year as the first four of the last five completed
calendar quarters was adopted not because of its usefulness in paying benefits ag
soon as possible, and not because it, somehow measured a person's attachment to
the work force, but because it was unrealistic to acquire and input the necessary
information any faster.

“Administrative feasibility” is a flexible concept. A bureaucratic desire to do
things the way they have always been done should not be permitted to undermine
the economic security of the unemployed. It is clearly administratively feasible to
access recent wage information with far greater speed today than it was in 1936.
‘That being the case, there is no justification for making people who need to rely
upon their more recent wages in order to access the system, to wait for up to six
‘months in some cases before benefits can be paid. By requiring them to wait, the
‘unemployment program is actually working against itself. It magnifies, rather
than reduces, the impact of unemployment upon the workers, their families, and
their communities. It frequently pressures people onto public assistance to meet


110

the suggestion...the Federal Government should collect
the entire Federal tax and make grants-in-aid to the
States, instead of allowing an offset on the Federal
tax.

Since 1939 the boundaries between federal and state activity have
been fought over again and again without a significant move
toward devolution, No constituency is completely satisfied with
the existing mix of roles -- least of all those of us who
advocate for claimants -- but no constituency can gain enough
allies to change the balance. Devolution is particularly
vulnerable in this regard, because its strong allies are
comparatively few given the potential impact on the system.

Tt is difficult to find any sizeable block of support for
devolution. Most large, miltistate employers don't like the
uncertainty that the new proposal introduces. They are not
swayed by the illusory promise of easier wage reporting. The
fact is, they don't know what systems they will face in 50 unique
state tax environments. Even more employers worry about UI funds
mingling with other state funds, a practice currently restricted
by federal law.’ Claimant advocates know that a range of
programa will be eliminated and they are uncertain about state
commitments in the face of interstate competition. Small states
worry about funding adequacy.

Ravocates of devolution may think they have solutions for

each of these criticisms, but a vast reform like they are

proposing needs staunch allies and clear benefits. These

proposals are unlikely ever to achieve that broad level of
nEidence.

isthe Current Fund Distribution Unfair?

Devolution proponents argue that the current system should
be eliminated in part because of the supposedly unfair
distribution of funds both among the states and between the
federal government and all states. They point out that only two-
thirds of all UI tax dollars are returned to the states. They
also point to the high rate of return of tax dollars to some
states and low percentage return in cthers. This perspective
obviously disregards the fact that any insurance system will
redistribute pooled funds based on differences in risk. It is
not sufficient to say that some states get back less than they
send to Washington. Reform advocates must show that they get
back less than they need to fulfill their obligations to the
unemployed. A review of performance in the states which are
pushing devolution provides some insight inte the source of their
low return on funding.

All four of the states which have advocated devolution had a

2 These and other employer concerns are well-documented in

Employers Unemployment Compensation Council (Michigan)
"Discussion Paper on Devolution", January 18, 1996


69

find out whether we can get back to where we used to be, where
we have States in charge of their own rights as relates to this spe-
cifically.

Thank you.

Mr. Camp. Thank you.

Mr. Collins may inquire.

Mr. Couuins. Thank you, Mr. Chairman.

First of all, I would like to welcome Commissioner David
Poythress, the Labor Commissioner of Georgia. Not only is he well-
knowledged in the area of Department of Labor, but he has a his-
tory and background in the area of Medicaid, too, because at one
time he was the Commissioner of Medical Assistance for the State
of Georgia. As a county commissioner back at that time, he was
very helpful to me in many ways when I approached him with
questions and problems that we had.

Commissioner Poythress, what are the advantages to employers
that you see in the proposal that you outline, also to taxpayers and
to employers?

Mr. PoyTHRESS. The advantage to the employer most imme-
diately is they pay only one tax, or at least they fill out only one
tax return, write one check, and are subjected to only one audit.

The administrative costs to the business community are hard to
estimate, but they run to the hundreds of millions of dollars, which
would be saved.

Second, the proposal would position the States to do two things.
First, as Mr. Blue pointed out, the proposal would make available
to State agencies more funds to run their own operations, and
there are agencies, mine among them, who are feeling very finan-
cially strapped these days to pay administrative costs, but more
importantly, it would position the States to authorize very, very
substantial tax cuts. That is to say, the amount of money collected
for the administration of the program could be cut by, in some
States, as much as 60 or 50 percent.

Mr. COLLINS. What about employees, the folks who would become
unemployed and seek benefits? Do you see any danger to them?

Mr. POYTHRESS. It would be invisible to them. It would be invisi-
ble to them.

Mr. CoL.ins. Do you see an enhancement to them, possibly?

Mr. PoyTHRESS. Well, there could be an enhancement in terms
of improved efficiencies in the State. If the State had more money
and had less—or should I say, more flexibility in terms of manag-
ing its own administrative affairs.

Mr. COLLINS. Based on our scoring techniques on revenues if we
are going to devolve this tax back to the States, how could we rem-
edy the fact that today we use those funds to cover part of the defi-
cit?

Mr. PoyTHRESS. My proposal is that the trust fund moneys be re-
allocated to either the State benefit accounts or the State adminis-
trative accounts, both of which would be maintained by the U.S.
Treasury Department.

The benefit account funds are now scored as part of the national
asset side of the balance sheet, as I understand it.

It has been suggested that if the administrative accounts were
treated the same way, though, they could not be scored as being


24

lam no apologist for government. By and large, it needs to work
a whole lot smarter and cheaper than it does now. However, we
cannot realistically expect results if we just keep it doing more
things.

The alternate base period takes us further in the wrong direc-
tion. It just gives government one more thing to do.

Having said all this, I recognize there are reasonable people who
might disagree with me. I could probably have a spirited debate
with them on the wisdom of an alternate base period. The problem
is, as the Pennington case has transpired, most of my concerns will
never enter into the debate.

According to the most recent district court decision, the only rel-
evant considerations in deciding whether a State should adopt an
alternate base period are how much more would be paid in bene-
fits, and what the impact would be on government’s operating ex-
penses. The cost to employers in terms of higher taxes and addi-
tional paperwork simply won’t count. Employers won't even be able
to have the satisfaction of voting against the judge who made the
decision.

Mr. Chairman, employers are the ones who pay for the system.
Our concerns should at least be considered relevant to the discus-
sion.

The legislation Illinois is asking for is simple. It will just make
sure that the decision about whether the benefits of an alternate
base period justify its cost remains one for policymakers who will
be accountable to the people affected by the decision. It will also
ensure that as the cost and benefits are weighed, all sides’ concerns
are given their due. I respectfully ask you to support it.

As to devolution, as with everything, the devil is in the details.
However, done correctly, I believe it could make the employment
security system more accountable to the people it serves, allow for
more flexibility and smarter choices by State officials and make the
system cheaper for government and employers. Your consideration
of the matter will be a real service to employers and jobseekers
alike.

Thank you very much for taking the time to hear my point.

(The prepared statement follows:]


COMMONWEALTH of VIRGINIA
Office of the Governor

George Allen
“Goveenat

FOR THE RECORD

STATEMENT OF GOVERNOR GEORGE ALLEN

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HUMAN RESOURCES
JULY 11, 1996

DEVOLUTION OF THE EMPLOYMENT SECURITY SYSTEM

‘Mr. Chairman and Members of the Subcommittee:

Since my election as Governor of the Commonwealth of Virginia in 1993, I have
sought not only to preserve but to enhance the prerogatives of states and the people within
our federal system. I believe that transferring the administration and financing of the
employment security system to the states would do just that.

OTHER GOVERNORS CONCUR

1 am not the only governor to believe that the states should be empowered to finance
and manage their own employment security systems. When I presented my proposal to
devolve the employment security system to the National Governors’ Association Economic
Development and Commerce Committee in February, the governors voted unanimously to
pursue this issue.

The reforms I proposed could cut payrall taxes in most states, reduce burdensome
paperwork, and improve services for workers.

BACKGROUND

The nation’s employment security system includes unemployment insurance,
employment service, and labor market information programs.

Employers pay two taxes to support the current system. ‘The Internal Revenue
Service (IRS) collects a federal payroll tax under the Federal Unemployment Tax Act
(FUTA) to finance program administration. State employment security agencies collect a
state payroll tax to fund unemployment benefits.

‘The revenues from both federal and state taxes are deposited in various accounts in
the Federal Unemployment Trust Fund (UTR) and can be used only for administering the
employment security system and paying benefits.

PROPOSED REFORMS

The changing nature of employment and the workforce make the employment security
system more important than ever to employers and jobseekers, yet there are inefficiencies
which should be addressed.

Stat

iol + Richmond, Virginia 23219 » (G04) 786-2211 + TDD (604) 371-8015,


10

quarters and therefore, would not have sufficient wages to
qualify. While there is nothing to prevent the claimant from
waiting until the subsequent quarter to file a claim, during the
interim, the claimant may not have income support. The delay can
be up to six months and may create financial hardships,
particularly for low-wage and part-time workers

PENNINGTON CASE

In Pennington, a claimant who was denied unemployment
benefits because she did not have sufficient wages during the
base period, filed suit in Federal court in July 1985 claiming
that Illinois' base period was inconsistent with Federal law.
The plaintiff argued that the base period violated section
303(a)(1) of Title III of the Social Security Act (SSA) which
requires:

“such methods of administration...as are found by the
Secretary of Labor to be reasonably calculated to insure
full payment of unemployment compensation when due.”
(Emphasis added.)

The State of Illinois argued that the base period is not a
method of administration, but an eligibility criterion which is a
matter of State discretion. The Department of Labor filed an
amicus brief in the case, supporting Illinois’ interpretation of
the law.

While the District Court ruled in favor of Illinois in
October 1992, the U.S. Court of Appeals (7th Circuit) reversed
the decision. The Court of Appeals found that the base period is
an administrative consideration within the meaning of Title III
of the Social Security Act and remanded the case to the District
court for determination of whether the Tllinois base period
satisfies the "when due" requirement of Federal law.

The District Court subsequently held that, given the delay
in eligibility determinations caused by Illinois’ base period,
the State's base period did not insure the greatest promptness
that is administratively feasible in paying UI. ‘The Court's
decision permanently prohibits Illinois from applying its base
period -- the first four of the last five completed calendar
quarters -- to the class claimants -- those ineligible
due to insufficient earnings during the base period

The Court of Appeals decision applies only to States in its
circuit: Illinois, Indiana, and Wisconsin. The District Court's
decision applies only to Illinois. However, these cases may
serve as precedent in the event other cases arise.

ADVISORY COUNCIL ON UNEMPLOYMENT COMPENSATION

The Advisory Council on Unemployment Compensation earlier
this year completed its comprehensive examination of the UI
system. The Council explored issues in the UI system that it
believed should be addressed as we move into the next century —
including issues related to low-wage and part-time workers.

With respect to alternative base periods (ABPs), the Council
recommended that States use an ABP when necessary to qualify
claimants for benefits. As follow-up to the Council's work, we
have initiated research regarding a number of issues raised’ by
the Council. Included in this effort is research on ABPs

RESEARCH ON ALTERNATIVE BASE PERIODS.

The Employment and Training Administration (ETA:
commissioned in 1994 a study to examine the effects of ABP
arrangements that exist in six states. The study, while limited
in scope, suggests that an alternative base period:


141

IV. The Percentage Of Unemployed Americans Who Receive
Unemployment Insurance Benefits Is At An Historic Low, Making
This A Particularly Inappropriate Time To Undermine’ The
Protection Of The When Due Clause

The 74th Congress enacted the when due clause to assure that
unemployed Americans like Mrs. Pennington receive prompt
replacement of lost wages during periods of unemployment.

Java, 402 U.S. at 130-33. The term of the 104th Congress is a
particularly inauspicious time to undermine that policy. In its
1993 report to the Chairman of the Senate Committee on Finance, the
GAO confirmed that the percentage of unemployed workers who receive
unemployment insurance benefits has declined to historic lows of

less than 40%. Unemployment Insurance: Program’ ty to
Objectives Jeopardized, GAO/HRD-93-107 (Sept. 1993).

Moreover, in its 1996 report to Congress, the Advisory Council
confirmed the GAO‘s conclusion, finding that, in 1995, 14 states
paid unemployment insurance to a quarter or fewer of their
unemployed workers, and that Illinois paid only 37.2% of its

unemployed. Defining Federal And State Roles in Unemployment
Insurance, A Report to the President and Congress, Advisory Council

‘on Unemployment Compensation, Jan. 1996; see Table 4-2 ‘Ratio Of
Unemployment Insurance Claimants To Total Unemployment, By State,
1995."

A recent study concludes that "(t]he presence of an
alternative [movable] base period raises the number of monetarily
eligible claimants by 6 to @ percent.* | Vronan, Wayne, The
Alternativ ployment, ance:

Rae eens Dauninaten Gecioion otters some reversal
of the precipitous drop in the rate of unemployment insurance
xecipiency. And the GAO has confirmed that "(t]he receipt of
{unemployment insurance] benefits lis] an important factor in
keeping unemployed workers above the poverty level." GAO Report at
5.


29

their eligibility criteria, then I don’t understand your objection. If
we are willing to do the work and make the court case moot, basi-
cally, by making sure the interpretation of the law is clear along
the lines that you think it should be, then I don’t see that you
should object to our moving forward.

Mr. UHALDE. We object because we don’t think we ought to go
forward without full information on this. We have quite a diverse
understanding of what the impacts of this are going to be.

Our preliminary analysis is looking at the impact of people in fil-
ing in a static period over 1 year. We don’t know, for example, how
many of these individuals ultimately would have waited and filed
anyway, so that these net benefit costs may be lower in this case.
There are both costs to the system and to employers, but there are
also benefits to individuals.

We stated our opinion in terms of the legal opinion, but I think
if one is going to take the next step in terms of the legislation, the
Congress as well as the administration ought to be informed.

We also think we can improve the system working with States
using electronic filing to help reduce the lag period for individuals.
We are working with States to be able to do that.

Mr. McCrery. OK. Well, thank you very much for responding to
my questions.

Mr. Rangel.

Mr. RANGEL. Thank you. To the comptroller from Illinois, I as-
sume the State opposes the decision that has been made in the
Pennington case?

Ms. DIpRICKSON. That is correct.

_Mr. RANGEL. I assume, further, that you are appealing that deci-
sion!

Ms. DipRICKSON. We have. We have gone with 23 States all the
way up to the U.S. Supreme Court after the decision by the U.S.
District Appellate Court and were not successful. We’ve spent over
half a million dollars to do that.

Illinois really has no choice.

Mr. RANGEL. I would assume, not having read your papers on ap-
peal, that if you are successful then existing law will be what you,
what the State will be guided by.

Ms. DipRICKSON. If we are successful in appealing, right. But we
have not been successful, there is a track record out there. And we
have no choice.

Mr. RANGEL. What is going to happen?

Ms. DiDRICKSON. We went to the U.S. Supreme Court and were
turned down and remanded back to the district court.

Mr. RANGEL. Have you exhausted your legal remedies?

Ms. Diprickson. Other than the U.S. Supreme Court which we
have already tried to appeal to, with 23 other States, and the case
was not heard, we are currently back before the Federal appellate
court.

Mr. RANGEL. So, would you support the Congress drafting legis-
lation that would clarify this issue?

Ms. DIDRICKSON. Yes, we would. We see it as a preemption issue,
60 years ago, the question really is, Did Congress intend to pre-
empt States rights? I think we've clearly heard that that wasn’t the
intent and we would like to be able to clarify that. Because, other-


98

TayLOR. ROTH. BUSH & GEFFNER
‘A Lew Corporason

Las Vegas (702) 387-1292

3500 Wear Olive Avenue Sit Oi 619) 291-1640
Suite 1100 Sus Frnt 45) 3 7pe
‘Burbank. Califorma 91505 ‘elecopeer (818) 973-3201

(818) 973-3200

VIA EXPRESS MAIL
May 17, 1993

Mr. John Humphrey

Regional Director for the
Unemployment Insurance Services

Employment and Training Administration

U.S. Department of Labor

Post Office Box 193767

San Francisco, California 94119-3767

RE: en offset by Pensiol
Dear Mr. Humphrey:

‘This is to supplement the position taken by SAG, AFTRA and
the WGA, West Which was set forth in my December 22, 1992
letter to Thomas Nagle, and enclosed with Mr. Nagle's May 4,
1993 letter to you.

As you are aware, it is the policy of the State of California
to maximize the availability of unemployment benefits to
employees in this state, and concomitantly to encourage
people to seek and obtain gainful employment. The current
position of the EDD does not fulfill those goals to the
greatest extent consistent with applicable law, and as will
be explained in this letter, in fact inhibits the search for
employment among retirees. ‘We are confident that the EDD
would reconsider its policy if the Department of Labor
provides it with assurances that it will not be considered
out of conformity with federal law in doing so. Since there
is no federal law expressly prohibiting the adoption of the
Unions! position in the multiemployer context, there is no
reason for the DOL to intervene in this matter. The Unions
therefore urge the Department to give the EDD approval to
reconsider its policy on this point.


140

Ms. Didrickson’s newest “high side" estimate is $ 93.75
million per year. But that assumes that, because the percentage of
Claimants who receive benefits would increase by 6 - 8¥ if the
state used a movable base period, the trust fund outlays would also
increase that much, That assumption is unquestionably wrong since
the vast majority of claimants who would be benefitted by a movable
base period are those who would receive at or near the minimum
benefit amount.

Moreover, while the applicable federal statutes give the
states wide latitude to assure the solvency of the trust fund by
setting their own benefit amounts, tax rates and eligibility
requirements, the when due clause is one of the few federal limits
on the states’ discretion. By assuring that states do not adopt
methods of administration that unreasonably delay the payment of
benefits, the when due clause enforces the congressional purpose of
prompt payment to tide workers over during periods of unemployment
and to prevent the deepening of recessions. Java, 402 U.S. at 130-
33. Accordingly, a state may not justify a violation of the when
due clause by claiming that it had to delay payment of benefits to
maintain its trust fund balance. See id., 402 U.S. at 129-33.

The when due clause’s assurance that states will honor the
claimants’ interest in prompt payment of benefits necessarily means
greater outlays from the trust fund. But the nation’s unemployment
insurance program exists solely to provide prompt assistance to
eligible claimants during periods of unemployment. Thus, to
complain that the states are obligated to pay benefits promptly
from the trust fund is to complain of the very purpose of the
unemployment insurance system itself

E. For the same reason, the tax consequences for employers
is not a cogent reason for abandoning the when due policy. For
many years, employers have not had to finance unemployment
insurance to pay benefits to the Pennington claimants. Employers
have therefore been permitted to escape that part of the excise tax
they were supposed to pay for use of the nation’s labor supply.

Indeed, a study by the U.S. Department of Labor, using data
from Illinois, concludes that some employers obtain a form of
subsidy by laying off workers while their wages are still within
the lag period, thereby avoiding the charge associated with those
workers’ unemployment insurance claims. Unemployment Insuxan

Lai » Occasional Paper 93-1, U.S. Dept. of Labor
(1993). The researchers estimated that °27 percent of all (UI
chargeable) layoffs for a 4-5 quarter period were free layoffs to
the firms initiating the layoffs ... [and that] the percentage of
layoffs that are free varies from only 13 percent for the largest
firms to 39 percent for construction firms." Id. at xiv
Moreover, they concluded that "this. UI subsidy actually tends to
destabilize rather than stabilize employment.” Id. at 3.

The General Accounting Office ("GAO") agrees. A 1993 GAO
report to the Chairman of the Senate Committee on Finance concerned
the reasons why the percentage of unemployed workers who receive
unemployment insurance benefits has declined employment
Ingurance: Program's Ability to Meet Objectives Jeopardized,
GAO/HRD-93-107 (Sept. 1993). In that report, which was based on

data from Illinois, the GAO noted that "[s]tate officials ... said
some employers control employee work schedules and earnings to
ensure that they do not meet the qualifying requirements." GAO
Report at 5

‘The unemployment insurance tax is a fair excise on employers’
use of the nation’s labor supply. We ought not undermine a 60-year
old policy of paying prompt unemployment insurance benefits to
eligible workers because some employers who hire the nation’s most
vulnerable workers prefer not to pay their fair part of the costs
of unemployment when they lay those workers off


91

As if these circumstances were not difficult enough, the retiree
members must overcome an additional burden in their struggle to
maintain in accordance
with the urrent interpretation of applicable tax law,
Renbers' unemployment benefits will be offset by th
benefits where they work for any employer-member of a multi-
employer unit which contributed to their pension and where that
work results in pension eligibility or an increase in benefits.
This severely restricts the ability of many retirees to find work
that will not, ironically, cause then financial hardship, and
arbitrarily punishes employees who happen to work in an industry
dominated by multi-employer entities. Since, as wilt
demonstrated below, California law requires that the pension
offset be minimized to the greatest possible extent, and federal
law does not require such an offset in this instance, the unions
urge that the EDD adopt and apply an interpretation, consistent
with the applicable statutes, that requires pension offset only
where the pension employer and the base period employer are the
identical, single employer.

THE APPLICABLE LAW

In 1980 Cong)
pertinent part:

S amended 26 U.S.C. §3304(a) (15), to read in

A) the [pension offset] requirements of this
Paragraph shall apply to any pension. . . only if -

(i) such pension . . . or similar payment is under a
plan maintained or (contributed to) by a base period
employer or chargeable employer (as determined under
applicable law), and

(ii) in the case of such a payment not made under the
Social Security Act or the Railroad Retirement Act of
1974. . ., services performed for such employer by the
individual’ after the beginning of the base period (or
Femuneration for such services) affect eligibility for,
or increase, the amount of, such pension, . . -

(B) the State law may provide for limitations on the
amount of any such a reduction to take into account
contributions made by the individual for the pension,
: . . OF other similar periodic payment. . .
(emphasis added).

‘The state of California is required to conform its unemployment
benefits policy to federal strictures such as the pension offset


uv

© Increases the number of monetarily eligible claimants --
especially among low-wage and part-time workers;

© Raises the number of monetarily eligible claimants by six to
eight percent;

© Has noticeable effects on UI benefit outlays -- an increase
in costs of four to six percent -- and short-run effects
reducing unemployment trust fund balances;

© Entails additional administrative costs.

In June 1995, ETA commissioned additional research on the
impacts of alternative base periods. This research -- scheduled
for completion in May 1997 -- will build on previous work. Among
other things the contractor will analyze and develop a means to
assess the impact of ABPs on trust funds over time, determine
implementation and ongoing administrative costs for States, and
estimate administrative costs to employers.

DEPARTMENT OF LABOR POSITION

We are aware of the impact of various base periods on access
to the UI system, and we want to gain further knowledge through
our research efforts. We also are aware of the ramifications for
States of the Pennington court decision. However, we believe
that legislation to amend Title III to address the Pennington
issue would be premature at this time. Illinois has appeal
rights at its disposal as well as the ability to establish an ABP
on its own -- as other States have done -- by changing its UI
law. It is Illinois’ choice, or any State's choice, of how to
balance the various pros and cons of immediate access versus
demonstrated attachment to the labor force.

The real issue for the UI system is not the definition of a
base period per se, but the much broader question of access to
the UI system. We would encourage States to seriously consider
changes to open their systems to those individuals who are truly
attached to the workforce, but are being denied access due to
unexamined and outdated policies.

The Department will continue to work with States, and we
also will continue the research underway on the alternative base
period concern.

This concludes my formal remarks. We look forward to
working with you and subcommittee members -- and States -- on
making UI systems responsive to the needs of experienced workers
whose access to benefits is hindered by out-dated policies.



97

We request an opinion as to whether the DOL would consider that the
Department was exenpting retirement income which meets the requirements
of subparagraph (A) of Section 3304(a) (15) from deduction and whether
this would resule in a conformity issue.

Thank you for your assistance in this matter.

Co RLS

THOMAS P. NAGLE
Director

Enclosure

ce: Screen Actoré Guile
Tra L. Got!



102

U.S. Department of Laber Enolgment a! Trening iat
Franesca, “Zalfernia 04119-9767,

Repty to he Arentian of: STG.

Tune 9, 1993
Mr. Thomas P. Nagle
Director

Employment Development Department
2.0. Box 826880 (Attn: MIC 40)
Sacramento, CA 94280-0001

Dear Hr. Nagle:

I am writing in zeply to your May 4, 1993, request for an opinion
oa the iaaus of pension offset. In particular, you asked whether
altering the Employment Development Department‘s interpretation of
the pension offset provision as requested by attorneys for several
entertainment industzy unions, would raise an {save of conformity
with Federal statute.

The law corporation of Taylor, Roth, Bush & Geffnor, as
mepresentatives for the Screen Actors Guild, the American
Yederatior of Television and Radic Artists and the Writers’ Guild
of America, hereafter referred to as the ‘unions, argue that by
incorporating a broader than necessary interpretation of Pederal
pension offset provisions, California policy needlessly penalizes
individuals in the entartainment industry who are covered under a
multi-employer pension plan. Stutes may, of course, choose to
broaden tke application bf the offset provision beyond the minimum
Yederal requirement. However, a State may not consistently with
Federal law exempt any pension income from offset if offset is

od by application of the minimum Federal requirements.
Although we are sympathetic to the difficulties faced by retirees,
it is cuz opinion that adoption of the policy suggested by the
unions and their attorneys would exempt from offset ponsions which
are subject to offset under the minimum Federal requirement.

The provisions of Federal Inw elevant to pension offset of
unemployment insurance benefits are found at Section 3304
fa) 031) (1 & 44) of the Federal Unesployment Tax Act (FUTA) which

(15) the amount of compensation payable to an individual . .

which beging in a period with respect to which suck
individual is receiving a governmental or othar pension,
retirement pay, annuity, or any other similar perfodic payment
which is based on the previous work of euch individual shall
be reduced (but not below zero) by an amount equal to the
amount of auch pension, retirement or retired pay, annuity or
other payment which is reasonably attributable to such veek
except that -


118

The Joint venture Program has been very successful.
However, this partnership with the private sector has created an
unintended consequence. Employers participating in the Joint
Venture Program must pay unemployment insurance taxes for the
inmates they employ through the program. This makes the inmate
eligible for unemployment payments when they are paroled or
released from prison. I am sure you would agree that the
unemployment insurance program was never intended to be an ex-
convict support progran.

In an attempt to resolve this issue, the California
Legislature passed and I signed a bill, S.B. 103, to place on the
ballot an initiative to deny unemployment benefits to inmates
upon their release from prison. The ballot initiative,
Proposition 194, was overwhelmingly passed by California voters
in March 1996.

This should have been the end of the story, but,
unfortunately, it was not.

The U.S. Department of Labor has threatened to deny
California companies $1.7 billion in unemployment insurance tax
credits if the State of California implements Proposition 194.
One option offered by the U.S. Department of Labor to avoid this
action is for the State of California to make the inmates
employees of the State. Not only is this option an insult to the
hardworking California correctional staff, it is unacceptable to
california taxpayers.

To prevent U.S. Department of Labor sanctions and ensure
that criminals do not qualify for unemployment benefits upon

release from prison, I support legislation introduced by


65

grant to provide customers with services designated for financing under
another. For example, a computer obtained for use in processing
unemployment claims cannot be used to help a job applicant find new work.

* Federal grants are inevitably accompanied by a welter of regulations,
restrictions, and reporting requirements. While some federal oversight is
reasonable, much of the regulation by the Department of Labor is needless or
even counterproductive.

* The Labor Department's allocation formulas for its unemployment
insurance grants create perverse incentives by rewarding states with more
money the longer it takes to process an average insurance claim. This
discourages automation and innovation.

Sensible Unemployment Insurance Reform

Several detailed and technical proposals have been advanced for
unemployment insurance reform. Rather than addressing these or offering a
complete blueprint of my own, I would like to outline three broad principles of
reform I hope can form a basis for further discussion.

First: Give responsibility to the states to finance administration of their
own state unemployment offices. Each state legislature would decide how large
a state tax to impose upon employers to bring in sufficient revenue to support
its own system. Nearly all states would be able to impose a much lower tax on
employers and raise revenue equal to, or greater than, the amounts they
currently receive in federal grants." Dual tax returns would no longer need to
be filed, and problems associated with multiple funding streams would
disappear.

Second: End the federal-state extended benefit system, and close the
federal trust fund accounts for administration, extended benefits. and loans to
state benefit funds, distributing the nearly $15 billion on hand to individual
state trust fund accounts. State accounts would receive a massive infusion of
assets that would permit in most cases the reduction of existing state taxes
that finance benefits, increases in benefits, or both. States would also have the
option of introducing their own extended benefit programs and determining the
conditions under which they would become effective. Loans to insolvent state
trust funds could be made from federal general revenues.

Third: Pare back to the essentials federal oversight rules, while retaining
important, substantive protections, such as minimum national standards for
employer coverage and federal requirements for fair hearings for individuals
whose claims are denied.

Conclusion

As I said earlier, employers do not object to paying reasonable taxes to
support an efficient system of employment security. But current figures
suggest that employers may be overpaying $2.2 billion a year in taxes,
resulting in the accumulation of nearly $15 billion in idle funds, to finance a
system that lacks the flexibility to make the best use of the funds it does
receive. I firmly believe reform along the lines I have suggested will produce a
system not only fairer to taxpaying employers, but also more effective in Serving
its primary client, jobless Americans.

More than sufficient funds exist in federal accounts to hold harmless at curent funding levels the six
“winner jurisdictions for a five-year transition period.


71

Mr. Poyruress. I would say not much different from what you
are doing now.

I think, and while we love our friends in the U.S. Department
of Labor, many of us feel like there are parts of it that are
overstaffed, specifically the field offices which were created in an
earlier time when communications are not what they are today. We
feel like it could be significantly downsized, if not eliminated, but
as Mr. Blue said and as all of these proposals contemplate, there
is a requirement for a consistent—reasonably consistent national
policy as far as an unemployment system is concerned, and we
would see that as essentially staying in place, not being quali-
tatively different from what it is today.

Mr. BuvE. If I can comment, what you are really doing for the
most part is eliminating the jobs in the employment and training
division, the UI division, of people who sit and try to find a way
to reallocate this money back to the State agencies of which none
of the State agencies are happy with for the most part. There are
people sitting there looking at unit cost and so forth, and obviously
if this were accomplished, that wouldn’t be necessary anymore.

For the most part, the rest of the functions of DOL would prob-
ably remain in place.

Mr. NussLe. Go ahead.

Mr. Curt. There is one other aspect of it, and that would be the
reduction of the Internal Revenue Service requirements.

Mr. BLUE. Yes.

Mr. Curt. If you got rid of the IRS secondary collection, you
could significantly reduce the effort and the labor involved in that
in terms of the IRS.

Mr. NussLe. All right. I am just keeping a mental list here, as
well as on paper. IRS jobs are at stake. DOL jobs are at stake, and
I haven’t heard anybody yet at least—and this is what we need to
find out, if there is anyone who disagrees with the efficiencies that
you have outlined here vis-a-vis allowing the States to continue
their role, but basically taking over the administration of these dif-
ferent proposals as you have outlined them.

The third, of course, is that we don’t have as much money out
here to play with, to make the deficit look smaller, which means
it is not that the deficit looks smaller. It means that money can be
used for something other than labor or unemployment benefits or
issues. We can build roads and we can do whatever.

Mr. BLUE. You have the money. You just decided because you are
siphoning it off as it comes through here and it goes back to the
States, about 40 percent of it.

Let me make an observation. Something that I believe could be
utilized for the use of those funds by the States, which is not being
done now, is the effort to obtain jobs for claimants.

State agencies are not doing a good job, and there are a lot of
reasons for that, about getting claimants jobs. The statistics show
that since 1975 up through 1993, even though the insured unem-
ployment rate has gone from 6.1 to 2.6, the average duration of
people who are on unemployment, average duration has not
changed one whit, 15.7, 15.9, 15.9. How could this be when the un-
employment rate has gone down and the insured unemployment


16

Pennington Lawsuit

‘The plaintiffs in Pennington are arguing that Lllinois’ base period violates the Social
Security Act’s “when due clause.” The plaintiffs maintain that anyone who has not earned
$1,600 over the 12 months included in the base period, or has not earned $440 outside the
high quarter, should be able to try to establish eligibility through an alternate base period
using the last four quarters

‘When the case was first heard in district court, the judge agreed with Illinois that, as
part of the state's monetary eligibility requirement, Hlinois’ base period could not be
challenged under the Social Security Act. However, the appellate court reversed and
remanded the case, to determine whether the Illinois base period violated the "when due
clause.”

To make that determination, the appellate court instructed the district judge to
balance the benefits which some claimants could derive from the alternate base period against
the state's interest in holding down administrative costs and minimizing fraud. On remand, the
district judge determined the claimants’ interests outweighed the state's and, therefore, that
IMlinois had to adopt the alternate base period. Ilinois has again appealed,

‘With all due respect, I submit the appellate court was wrong, for a number of reasons.
‘The legislative history of the Social Security Act indicates Congress intended states to have
broad freedom to set up the types of unemployment insurance systems they considered
appropriate.

The United States Supreme Court has held that the Social Security Act was intended
to recognize the importance of each state establishing its own eligibility criteria for
‘unemployment insurance.

In addition, since the establishment of the unemployment insurance system, the Labor
Department - the federal agency charged with enforcement of the “when due clause” - has
considered a base period of the first four of the last five quarters to be consistent with the
clause and, in fact, has suggested that the states use such a base period.

In the 1970's, Congress itself expressly recognized and took no issue with the states’
widespread use of base periods consisting of the first four of the last five quarters.

Beyond all that, however, the appellate court was wrong because the balancing test
it prescribed is essentially a policy judgment of the type that governors and state legislatures
are elected to make and are better-suited to make. The appellate court's ruling has separated
the authority to make policy decisions from accountability for those decisions, with potentially
expensive consequences.

Potential Dlinois Impact of Pennington

In deciding the case on remand, the district judge noted that the administrative costs
of the alternate base period could be substantial - $12 million to $15 milion in one-time costs
and $2.5 million in additional yearly operating expenses according to the Department of
Employment Security. He also acknowledged that additional federal dollars to cover those
costs were not likely to be forthcoming, He did not, however, concern himself with where the
money to cover those costs would come from or with any of the other significant implications
of what the plaintiffs want.

In fact, in addition to hiking state government's costs of doing business, Pennington
‘could substantially raise outlays from Illinois’ Unemployment Trust Fund account and impose
hefty increases in employer taxes.

The Department of Employment Security estimates the alternate base period the
plaintiffs are seeking would increase Illinois’ Trust Fund outlays by 1.5 percent. A Labor


THE PROBLEM

As noted in our December 1992 letter, especially in the
current economy, the Unions‘ retirees find it necessary to
supplement their base retirement income with earnings from
new employment. Retirees already encounter severe
difficulties in this endeavor because of the tendency of
employers not to hire older workers, the intermittent
character of the vork they perform, and generally because of
the dismal economic conditions that currently prevail in
california.

The difficulties faced by the retirees are compounded by the
problem the Unions seek to address in this letter. The
industry in which the Unions’ members vork is dominated by a
multi-employer unit consisting of individual employers vho
contribute to a collectively-bargained pension plan. The
EDD's treatzent of the unit as one large employer for offset
purposes is neither mandated by federal law, nor serves the
legislative purpose of avoiding having an employer pay twice
to benefit an unemployed retiree. Under the current EDD
regime, if a retiree works for an employer who contributes to
the multiemployer pension, and as a result of that work, her
pension increases, then the entire amount of her pension (not
just the amount of the increase) is applied to cffset any
Glaim for unemployment benefits. The EDD applies this rule
even to base pericd employers who did not contribute to the
original pension of the employee. The deterrent effect of
this rule is clear: why perform intermittent work for
relatively little income and a minute increase in pension, if
that increase will erase the unemployment benefits needed to
tide oneselz over between jobs? At least where the pension
employer and base period employer are not the sane, there is
no rule or reason to justify that result.

LEGISLATIVE HISTORY

Our December 1992 letter provides the textual analysis
supporting the desired change in the EDD's policy. Enclosed
with this letter are excerpts from the legislative history

demonstrating that the amendments to the federal law relating
to pension offset were designed to limit that offset to “only
those unemployed workers who were collecting unemployment

benefits and retirement payments from the same employer" (Tab
A, p.23048 (highlighted portion)). Senator Bradley's remarks


21

The Ilinois DES appealed the seventh circuit’s ruling to the Supreme Court which declined to
hear the case in November 1994 and remanded the case to the district court. Twenty-three states
signed an amicus brief supporting Illinois’ position

On remand, the district court weighed four factors: 1) the number of additional eligible claimants
there would be under an alternative base period; 2) (he amount of additional benefits that would
be paid; 3) the increased promptness with which eligible claimants would receive benefits; and,
4) the administrative costs of implementing an alternative base period. ‘There was no
consideration of the potential impact on employers in terms of additional costs or administrative
burden. With respect to administrative costs, the court found |DES’ evidence credible--the
agency would incur more than $13 million in one-time costs and additional annual operating
expenses of more than $2.5 million. ‘The court also stated it was likely that federal funding to
cover the costs would not be forthcoming. Nevertheless, the court concluded that the first three
factors inured to the plaintiffs’ benetit and outweighed the fourth. Accordingly, Illinois’ base
period was held to violate the “when due” clause.

ICESA’s Views

(Dur nation’s unemployment insurance (UI) system is a unique federal-state partnership,
grounded in federal law but executed through state law by state officials. The legislative
framework created with the Social Security Act in 1935 gives states broad discretion (o design
their own unemployment insurance programs including determining the terms and conditions
under which benefits are payable.

Prior to the court’s interpretation in Pennington, Section 303 (a) (1) has been interpreted by the
Executive Branch and by the courts since 1935 fo mean that benetits should be paid as promptly
as is feasible administratively under the terms and conditions of state laws,

‘Throughout the history of the unemployment insurance program, determining the period that
constitutes the base period for unemployment insurance claims purposes has been one of many
eligibility criteria that federal law has left to the states. For example, each state--through its
legislative process--decides the amount of earings necessary to quality tor benefits, whether
various reasons for voluntarily leaving a job constitute “good cause” and when the reasons for
discharge from a job are such that an individual is disqualified from benefits.

‘The legislation establishing the unemployment insurance system in this country makes it clear
that Congress intends for the states to have wide latitude in designing their unemployment
compensation programs. That being the case, it is remarkable that the structures of state
programs are so similar. ‘This phenomenon can most likely be traced back to “draft bills” for
state unemployment compensation laws that were provided to the states by the Department of
Labor to illustrate legislation that would meet federal requirements, ‘The base period that {llinois
and most other states use was included in a draft bill that many states used as a model for their
respective state laws, Therefore in establishing a base period consisting of the first four of the
last five completed calendar quarters, states were assured that their law conformed to federal
requirements. In addition, each year the Secretary of Labor must certify to the Secretary of the
Treasury that each state's unemployment compensation law is in conformity with federal law in
order for employers doing business in the state to claim the 90% offset credit against federal
unemployment tax obligations. ‘The Secretary has certified the Illinois law and the laws of other
states with the same base period structure for almost 60 years.

We believe that the court’s decision in Pennington is an implausible interpretation of the Social
Security Act’s requirement that administrative methods be designed (o ensure the prompt
payment of benefits when due and is inconsistent with the intent of Congress that states have
wide latitude to design state unemployment insurance programs.



50

Employment Security System Financing
Proposed

Federal Unemployment Trust Fund

5%
Maximum

Loan Federal
Account Admin.

Overflow to
State Accounts

| Employer Taxes: *y



95

EDDA

Sie Caloma  reate ane Wale agwey

People of Cailorna in

+ May 4, 1993
to, 40:20:93.024:2rm
25) 634-8220

3

Mr. John Humpa:
* Regional Direc

‘rancisco, CA 94139-3767

west (WGA, west), hereafter referred to as the "Unions." The letter
requested that we reconsider our Departnent's position with respect to
when a pension from a multi-employer pension plan is deductible from
unemployment insurance (UI) benefits. Enclosed for your information is
a copy of the letter dated Decenber 22, 1992,

california iaw ig the offset of pension benefits from Ut
benefits conforms with federal law, 26 U.3.C., Section 3304(a) (18)...
Based on our interpreration of both state and federal law, a pension
wich is based cn an individual's own work is deductible from UT
benefits

1. A base pezicd employer on the UI claim maintained or contributed
to the fund from which the pension is paid, and

2, The work performed by the individual after the beginning of the
base period affected the individual's eligibility to receive the
pension or increased the award of the pension.

‘The Unions agree wich the Department that a pension received by one of

their menbers would be deductible unde: the following circunstances:
An individual worked for 30 years for employer A and employer B,
Boch of whom had contracts with SAG and so contributed to the
fension fund provided for in the collective bargaining

Employment Oevelogment Deparment / P.O, 6x 825880 / Sscramento CA 94280-0001


33

Illinois. Am I misquoting you on that or is that a misunderstanding
of the thrust of your remarks?

Mr. UHALDE. I believe the impact is within that circuit court dis-
trict which is Illinois, Wisconsin and Indiana.

Mr. ENGLISH. OK. I was curious because looking at the amicus
brief filed in this case by the administration and I’m going to quote
from it, the claim was made,

Given the widespread use of the type of base period employed by Illinois an order

striking down the Illinois law undoubtedly would cause nationwide disruption in the
various States’ unemployment compensation system.

So, you are arguing that the claim in the brief maybe was over-
stated? That there was not likely to be that kind of orbit of com-
parison?

Mr. UHALDE. I think the direct—as I understand the law—the di-
rect legal interpretation by the circuit court applies to these three
States I mentioned. I believe probably the amicus brief was then
talking about the influence that that might have on other States
over time.

Mr. ENGLISH. I guess my concern is—and, again, I have not seen
the legislation myself—that given the legislative process here, if
the existing court decision is upheld and the Supreme Court does
not knock down the Pennington case as it has been currently de-
cided, is this not a decision likely to be applied nationwide before
Congress would have an opportunity to act in a year or two?

That, to me is a very real concern suggesting that we ought to
be acting quickly if, in fact, this is potentially a major source of dis-
ruption of unemployment insurance.

Mr. UHALDE. I believe quick is relative. We don’t believe that
this is going to impact nationwide within the period that we're
talking about. We want to get information back. We have all the
analysis and reports coming in, in March of next year. So, we don’t
believe that this is going to spill over between now and then and
if we can go to the Supreme Court, as you are suggesting, that cer-
tainly isn’t going to happen between now and March or the spring
of next year.

Mr. ENGLISH. Thank you very much,

I will yield back the balance of my time.

Mr. McCrery. Mr, Nussle.

Mr. NussLe. Thank you, Mr. Chairman.

I wasn’t going to ask any questions either but you have me baf-
fled. What information are you waiting for? What’s coming in
March that—I mean you filed an amicus brief without this infor-
mation in support of Illinois and now you are telling us to wait.
What was enough information for you to file a supporting amicus
brief to start with but you're telling us now when it’s going to af-
fect, nationwide, possibly 49 States that we ought to wait until
March to get some information. What information are you, are we
going to get that is going to help us here that we don’t already
have?

Mr. UHALDE. The amicus brief was filed and in reading in the
amicus brief the amicus brief spoke strictly to the legal question.

Mr. NussLe. OK, that’s fine, but what information are we going
to get by March?


133

their basic needs. This is directly contrary to the public’s interest in minimizing
utilization of our country’s welfare programs, and attenuates, rather than
strengthens, the person's attachment to the workforce.

Both M.B. and R.P. have been unnecessarily victimized by the system which
should have been there to help them overcome the obstacles which almost always
accompany unemplayment, particularly for low wage workers. They arenot alone
‘Thousands of similar stories are being written every day as the American
workforce replaces many of its high paying manufacturing jobs with low-wage, no
benefit service jobs. Job security for a major segment of our population is a thing
of the past, even in industries which were once thought to provide lifetime
employment opportunities. It is ironic that at a time when industries nationwide
are adopting newer technologies in order to enhance profits and in many cases,
reduce the need for employees, the unemployment compensation system is tied to
a pre-technology mode of operation which prevents workers from accessing benefits
they have earned. Congress should not condone such a mindset on the part of
state unemployment compensation authorities.



7

Department study indicates alternate base periods raise state Trust Fund outlays by four to
six percent. A 1.5-percent increase in outlays from Llinois’ Trust Fund account would amount
to more than $180 million over the next eight years, a six-percent increase would total $750
million.

As state law is currently written, additional outlays would automatically trigger tax
increases for Ilinois business. A 1.5-percent increase in outlays would result in nearly a $70-

lion tax increase. A six-percent increase in outlays would raise employer taxes by $350
nillion.

Since state Trust Fund accounts are part of the unified federal budget, the difference
between the increased outlays and the higher taxes would translate into an increase in the
federal deficit - a more than $100-million increase if outlays rose by 1.5 percent; a $400-
million increase if outlays rose by six percent

Moreover, determining eligibility based on wages earned after the first four of the last
five quarters would entail either essentially taking a claimant’s word for it as to the amount
of those earings, thereby increasing the risk of fraud, or requiring additional reporting from
employers to verify the earings, thereby imposing new “paperwork burdens.”

Potential National Impact of Pennington

Pennington’s impact in Minois, including its effect on the federal deficit, could presage
things to come for nearly every other state. The appellate court’s decision is binding in
Indiana and Wisconsin, as well as Iinois, and can be used as precedent to attack other states"
unemployment insurance laws, Moreover, Pennington's use as precedent will not necessarily
be limited to cases where an alternate base period is the difference between eligibility and
ineligbility. States can expect the argument that the “when due clause” requires an alternate
base period when an alternate base period would yield a higher weekly benefit check.

Pennington has blurred the line between what a state can and cannot be sued for under the
“when due clause.”

In the friend-of-the-court brief it submitted to the appellate court, the Labor
Department said, "Given the widespread use of the type of base period employed by Illinois,
an order striking down the Ilinois law undoubtedly would cause nationwide disruption in the
various states’ unemployment compensation systems.”

‘The case’s implications beyond Illinois’ borders prompted 23 states to join Illinois in
requesting Supreme Court review of the appellate court's decision

Conclusion

‘The type or number of base periods a state uses is not the litmus test of the fairness
of that state’s unemployment insurance system. It is simply a reflection of how that state's
policy makers have decided to allocate the system's limited resources to best serve the
interests of everyone whom the system was established to serve.

My specific request to you is for an amendment to the “when due clause” to clarify
the Social Security Act does not govern state base periods. The amendment will eliminate the
need for further costly litigation. Consistent with the intent of the unemployment insurance
system's architects it will also ensure that requirements as to eligibility remain a decision for
state policy makers, who are directly accountable to the people who will be impacted by that
decision

I look forward to working with you toward a speedy resolution of this issue.

Thank you again for your time and consideration


61

Mr. Camp. Thank you for your comments.
Walter Curt, president of Shenandoah Electronic Intelligence.

STATEMENT OF WALTER CURT, PRESIDENT, SHENANDOAH
ELECTRONIC INTELLIGENCE, INC.; HARRISONBURG, VIRGINIA.

Mr. Curt. Distinguished Members of the Subcommittee, my
name is Walter Curt. I am president of SEI, Inc. It is an elec-
tronics, research, and development firm located in Harrisonburg,
Virginia.

I am privileged by your invitation to offer the perspective of a
small business man and an interested citizen on the topic of unem-
ployment insurance reform.

At the beginning, let me say that I believe our Federal/State sys-
tem of unemployment insurance has generally served us well since
it was created in 1935. Tens of millions of workers who have lost
their jobs without fault have been sustained with temporary assist-
ance until returning to gainful employment. This has often kept
families from losing their homes or automobiles or suffering the in-
dignity of public assistance. At the same time, the limited benefits
and work search requirements help keep the program a bridge to
reemployment rather than a path to welfare dependency.

While it is not uncommon for employers, me included, to com-
plain about individual cases, few question the wisdom and neces-
sity of a sound national system of unemployment insurance, nor do
I think employers as a whole object to paying reasonable charges
to support an efficient system.

My purpose in appearing today, therefore, is not to advocate the
elimination or curtailment of America’s unemployment system. I
am here instead to discuss ways the program can be improved by
reducing unnecessary tax and paperwork burdens.

As you know, employers pay not one, but two unemployment in-
surance taxes. First is the employer payroll tax imposed by each
State to pay the actual benefits to the jobless. Taxes everywhere
are experience rated, rising or falling for each employer depending
on its layoff record, in much the same way motorists’ automobile
insurance premiums vary with their driving records.

Less well known is the employer payroll tax levied by Congress
under the Federal Unemployment Tax Act, also known as FUTA.
The FUTA tax is intended primarily to finance program adminis-
tration through Federal grants to States to maintain State unem-
ployment offices and pay their workers. Paperwork on these taxes
is estimated to cost American employers about $300 million annu-
ally or up to $500 million as we have heard here today. That does
not include $70 million in FUTA revenues for the fiscal year 1994
used to pay the IRS to collect the tax.

The problem is the gulf between the FUTA revenue collected and
the amount returned to the States as administrative grants. Ac-
cording to the U.S. Department of Labor in fiscal 1996, national
FUTA revenues are expected to total about $6 billion with only
$3.5 billion, or 62 percent, being sent back to the States to run the
programs.

This disparity is often wider for individual States. For example,
in fiscal year 1994, employers in my own State, the Commonwealth
of Virginia, paid an estimated $140 million in FUTA taxes, but


130

GEREN?
ILOMPANY

How many of their employer's FUTA dollars do the states get back?
siursdietion | UTA | UTA | Grants! | RANK
|

‘Juistiction | FUTA | UTA | Grants! | RANK
6 Ga | Fat Sas

New Hampshire $147 $245 BOOR 28

Delaw 104 $175 594% 29
Arkansas $274 $489 584% 30
Winois $153.7 $270.7 588% 31
Ovlshons =» «$315 857.3 5.0% 32
as Nebraska «$19.0 $34.6 54.0% © 93
(dah $207 $214 96.7% 7 | Wisconsin «$649 «$1195 543K OH
Maine $222 $231 96.1% 8 | Missouri 3009 $1189 521K 35
Vermont $106 $11.7 90.6% — 9 | Colorado 3447 $860 520% 36
Connecticut «$65.8 «$743 BBE% © 10.—| Mississippi © «$254 «$48.9 51.9% 37
Puerto ica $288 $331 870% 11 | Alabama $415 $828 60.1% 38
Washington 4946 $1113 850% 12‘ So.Caraing $966 $734 49.9% 8
Dist. of Columbia $15.7 $185 849% = 13_| Lousiana $984 $78.1 488% 40
California 9539.2 $8555 823% 14 | lawa $287 $594 483% 41
South Dakota $10.8 $13.9 76.3% «= 15—| Minnesota. «$529 $111.2 47.6% 42
utah $282 $386 756% 16 | Kentucky $349 $738 47.3% 43
Oregon $487 $656 74.2% © 17_| Kansas $255 $549 470% 48
PennsyWvania «$173.7 $245.7 70.7% = 18_| Arizona $394 $859 45.9% 45
Hawaii $18.1 $25.7 704% 19 | Texas $1720 $9817 45.1% 48
Michigan $142.8 $204.2 689% —20—| Georgia $682 $1002 426% «47
New York $248.4 $3553 699% 21 | Ohio $105.7 $2490 424% 48
Maryland $680 $98.1 66% 22 | Virginian $600 $1426 42.1% 49
New Jersey «$117.0 $168.2 69.6% © 23 | Florida $1167 $2907 40.1% 50
West Virginia «$19.9 «$29.4 «G7.7K 24 | No.Caroing $638 «$185.3 38S ST
NowMexico «$18.9 $28.0 675% © 25-—‘| Tennessee = $43.8 $113.9 SBSH BZ
Nevada $25.2 $390 646% = 26 | Indiana $485 $1283 375% 5
Massachusetts $87.8 $136.1 64.5% | tors | s33278 | 95,5986 | 60.1%

scons arg ranked by percentage of FU taxes etumed in the form of federal administra grants, als
ions. Totals may not add up due to rounding. These are the latest figures available and apply to
‘The source of this information is the U.S. Department of Labor. The six highlighted jurisdictions
gfe the only snes which ressved more ack from the fedtal government than they pad under the Federal
Unemployment Tax. Act (FUTA). As you can see from the totals, the federal government retained over
§2.7¥0,400,000. Ths is # compelng erument for devolving th expense of administration of unemployment
insurance programs away from the federal government and giving it to the states.



114

barriers put in place by state programs, monetary eligibility
requirements disproportionately affect low wage workers. The
reduced purchasing power of displaced, low income workers is a
significant public policy issue which warrants national
attention.

Research funded by the non-partisan National Commission for
Employment Policy last year examined the impact of state monetary
eligibility requirements on UI recipiency rates for various
population groups.’ Their research essentially duplicated the
eligibility screening process which unemployed individuals face
in each UI jurisdiction. They used the earnings history of
individuals in the Survey of Income and Program Participation to
estimate the number of individuals rendered ineligible for UI at
each step in eligibility determination.

Among their findings were: (1) 34 percent of women and 15
percent of men were excluded from benefits due to monetary *
eligibility issues, (2) women are twice as likely as men to fail
state requirements for high quarter earnings, and (3) only nine
percent of all unemployed workers who worked part-time received
benefits. These findings suggest that state monetary eligibility
requirements, particularly for high quarter earnings, pose a
significant hurdle for the unemployed seeking insurance benefits
The impact of high quarter requirements is exacerbated where
states delay counting the most recent quarter of earnings, a
quarter which may prove essential to eligibility. The Pennington
case thus represents a small step toward rectifying the vast
disparity of treatment which the unemployed face under current
state practice in most states.

The Pennington Case

In Luella Pennington vs Lynn Doherty, Director of the
Illinois Department of Employment Security, 22F.3rd 1376 (7h
Cir. 1994) the Seventh Circuit court found that federal
timeliness requirements (the so-called “when due" clause) of the
Social Security Act were violated because Illinois makes eligible
workers wait up to six months before they file a claim in order
to allow time for processing the most recent quarter of earnings
at the time of layoff. The U.S. Supreme Court denied the
2lincis appeal. On remand, the U.S. District Court ordered
Illinois "to adopt an alternative within a reasonable time" to
expedite accounting for a worker’s most recent earnings. The
state is not currently paying anyone benefits under the required
Illinois has filed an appeal

Pennington simply requires a state te include the most
recent earnings in calculating benefit eligibility. Illinois

Yoon, Spalter-Roth, Baldwin (2995), "Unemployment
Insurance: Barriers to Access for Nomen and Part-Time Workers,"
National Commission for Employment Policy.


116

will not last forever, We are deeply concerned that the next
economic downturn will be confronted with insufficient
administrative funds and a state-based system that is far too
restrictive to provide the necessary counter-cyclical demand.
see an overwhelming need to return the system to its founding
principles -- an insurance system help the unemployed weather
economic misfortune, a national commitment to smoothing the
crashing waves of economic uncertainty

we


4

Chairman SHAW. We will go ahead and start the hearing.

Last night, there were a number of votes on the floor that I un-
derstand have been rolled over to today. When they call for votes,
we will have to go down to the floor. We will have to recess for the
appropriate time, so that people don’t have to wait for us to come

ack,

Keeping the unemployment insurance system operating smoothly
and efficiently is important to more than 100 million employees,
the millions of employers, and to the strength and vitality of the
U.S. economy.

In keeping with this Subcommittee’s oversight of unemployment
insurance, this hearing has two goals; first, to examine steps that
Congress must take in the coming weeks to keep the system run-
ning efficiently, and second, to consider long-term changes to im-
prove the system in years to come.

Our first panel involves an issue that demands immediate atten-
tion. Since its inception in the thirties, there has been universal
agreement that the States have the right to set base periods used
to determine eligibility for unemployment benefits until now. A
Federal court decision in Illinois, the Pennington case, means that
47 States now face the possibility of being forced to adopt a new
more liberal standard for determining the eligibility of unemploy-
ment benefits.

Unless Congress acts quickly, almost every State will be forced
to pay higher unemployment insurance benefits resulting in more
redtape, higher taxes on employers, and less job creation. Overall,
added cost could reach as high as $1 billion each year.

After this hearing, I plan to move legislation to the House floor
to fix this problem. Given the huge number of States affected, and
the administration’s support for the Illinois position in a 1994 ami-
cus brief, I hope this can be a bipartisan effort.

Our second major panel will examine proposals designed to in-
crease State flexibility in operating their unemployment systems.
Bipartisan proponents argue that reforms can lead to lower payroll
taxes, less paperwork, and improved efficiency in labor markets
across the country.

Several States already have detailed proposals, and I understand
that the National Governors’ Association meeting this weekend will
include discussion of such reforms.

So, even though we probably will not act on legislation until next
year, this Subcommittee needs to start examining the comprehen-
sive calls for change coming from Republican and Democrat Gov-
ernors all across this Nation.

On our final panel, one of our Subcommittee colleagues, Phil
English, will discuss this bill to expand benefits for the long-term
unemployed and to make it more likely that States will have suffi-
cient reserves to weather future recessions.

Congressman Upton and Congressman Farr will discuss their bill
on pollworkers, and Charlton Heston, speaking on behalf of the
Screen Actors Guild, will describe legislation of interest to enter-
tainers.

Let me warn my colleagues that any bad puns connecting unem-
ployment insurance with Mr. Heston’s movie roles may result in


93

The EDD's interpretation of the offset statute is broader than is
required by its literal language, in fact, erases a key word, and
furthermore injects ambiguity and uncertainty, all of which can
and should be avoided by a narrower reading.

Under the EDD's interpretation, Congress meant to apply the
offset to anv employment which results in pension eligibility or
increase. If Congress intended that result, it could have stated
50 with fewer words and greater clarity. The EDD's
interpretation thus lends a gloss of ambiguity that clouds the
meaning of “employer" for no discernible reason.

More fundamentally, the EDD's interpretation renders the word
“such” in subparagraph (A)(ii) superfluous. If the only criteria
for applying the offset were that the base period employment
result in pension eligibility or increase, (as the EDD's
interpretation demands), there would be no need for the words
“for such employer” to appear in (A) (ii). In order to instill
meaning in that phrase and the remainder of (A)(ii) as well, "for
such employer" must be understocd to mean the game employer as
the base pericd eaployer. Thus, subparagraph (A) (ii) is
comprised of two separate components: (a) a requirement that the
base period enployer be the game employer as that with which the
employee became pension eligible, and (b) a requirement that the
base peripd enploynent result in pension eligibility or

increase.’ In other vords, (A) (ii) requires both a match

between pension and base period employer, and in addition, a
change in pension status resulting from that last employment.

Congress was certainly aware of the existence of multi-employer
pension plans, and could easily have provided for the broad
reading of §3304(a) (15) adopted by the EDD if it intended to do
so. In fact, it has chosen in analogous contexts in the Internal
Revenue Code (§§415 and 403(a)(17)) to apply the statute on an
employer-by-employer rather than on a plan-wide basis. again,

2 At the October 15, 1992 meeting, Ms. Lopez cited
v. Becerra, 714 F.2d 887 (9th Cir, 1983), a social security case,
as a possible analog in support of EDD's position. However,
subparagraph (A) (ii) expressly does not apply at all to social
security, and does apply to private pensions such as those
covering SAG, AFTRA and WGA members. The Ninth Circuit
recognized and articulated that distinction in its discussion of
the legislative history, 714 F.2d at 893. Indeed, the Seventh
Circuit Court of Appeals recognized that in the private pension
context, the limitation of offset applicability to a return to
work with the same employer vould apply. Beare v. McFarland, 778
F.2d 354, 356-357 (7th Cir. 1985).


38

STUDY

Analysis of Unemployment Insurance (UI) Claims - Revised Base
Period in the UI Program

‘VENDORS

Planmatics Inc. (Primary)
Urban Institute (sub)

PURPOSE

The purpose of this study is to examine the implications of
states providing Alternative Base Period (ABP) options to UI
claimants. This study will provide information which will assist
national and state level policy analysts in decision making with
regard to the implementation of ABP.

In its Request for Proposals process, the Department of Labor
outlined twenty three research tasks. Cost concerns limited this
study to twelve of those tasks. These tasks can be grouped into
three major areas of study. They are:

(A) Effects on UI Trust Funds

(B) Effects on UI Administrative costs

(Cc) Effects on Employers

DELIVERABLES

DELIVERABLE DELIVERABLE
DATE

1. | Preliminary report on the Trust Fund | January 1996
Model based on one state.

2. | Preliminary report on the May 1996
Administrative Cost Process Model
3. | Completed Trust Fund Model based on July 1996

eight states.

4. [Preliminary report on Employer Costs | October 1996

5.|Draft final report on the entire May 1997
project

6. | Final Report June 1997



125

the Advisory Council on Unemployment Compensation (ACUC), a bi-partisan
commission chaired by President’s Bush’s appointee, Janet Norwood, also concluded that
requiring the movable base period “is consistent with the legislative requirement that
states ensure full payment of Unemployment Insurance when due.”

‘The Pamington Legislation, if Enacted,
Would Continue the Dramatic
Decline in Workers’ Access Unemplo

Before addressing the proposed Penningion legislation in further detail, cis
important to focus on the major issues that plague the program, as recently documented
by the Advisory Council on Unemployment Compensation, which was specifically
charged with reevaluating the effectiveness of the program. Most important, the ACUC
lamented the dramatic decline in the rates that unemployed workers have been able to
access unemployment benefits due, in part, to increased limits on coverage in federal and
state laws. The Paenington legislation, if enacted, would conspicuously ignore the
recommendations of the ACUC, and continue the disturbing trend in federal and state
law limiting access to the unemployment benefits.

In the 38 years from 1946 to 1984, the percentage of the unemployed receiving
benefits dropped below 40 percent only once. In 1975, it reached a high of 76 percent.
Since 1984, it has dropped consistently below 40 percent, averaging 33 percent between
1984 and 1989. In 1990, the year the recession began, it stood at only 37 percent, much
lower than any previous recession year. In June 1996, the ratio of the unemployed versus
those who receive unemployment benefits stood at 33 percent, with wide variations from
state to state (ranging from a high of 65 percent in Rhode Island to a low of 17.6 percent
in Virginia, according to 1995 data). This trend poses a serious risk to the two main
functions of the program: 1) to replace worker earnings while they look for new work; and
2) to stimulate and support the economy during periods of high unemployment.

‘As documented by a recent report of the National Commission for Employment
Policy, women, part-time workers, and low-wage workers are also disproportionately
excluded from recovering benefits. For example, prior earnings requirements exclude 34
percent of women versus 15 percent of men who apply for benefits. Indeed, women now
account for 46 percent of the labor force, 44 percent of the unemployed, but only 40
percent of unemployment compensation recipients. Almost four times as many part-time
workers than full-time workers fail to meet the prior earnings requirements. Finally, state
monetary eligibility requirements, based on earnings levels rather than hours worked,
conspicuously discriminate against low-wage workers. For example, a full-year worker
earning the minimum wage and working at least 10 hours per week will qualify for
benefits in only 17 states. By contrast, a full-year worker earning $10 an hour and
working 10 hours a week will qualify for benefits in 47 states.

Asa result of these disturbing developments, Congress created a bipartisan
commission in 1992, the Advisory Council on Unemployment Compensation (ACUQ),
charged with reevaluating the effectiveness of the unemployment system at the state and
federal levels. Three years and three reports later, the verdict from the ACUC came in
Joud and clear -- the unemployment system is fundamentally flawed and in dire need of
repair. Significantly, the ACUC concluded that low-wage, temporary and part-time
workers, who are disproportionately women, were the hardest hit by the failures of the
current system. Ironically, this also occurs at a time when the low-wage workforce has
been growing and welfare reform is forcing more and more women workers with young
children into the labor market.


100

included in the booklet are to the same effect: if an
employee works for an employer who is “separate and apartTM
from the employer paying his pension, and is laid off, he is
entitled to unemployment benefits (Tab B, pp. 26040-26041).
There is no reason to expand the narrow legislative focus,
trained on avoiding an employer “double” payment, in the
context of multi-employer-dominated industries.

That Congress vas aware of the existence of such industries
and nevertheless chose not to broaden the scope of the
Pension offset as the EDD has done is evidenced by the
Portion of legislative history at Tab C. Congress vas
addressing changes in ERISA specifically with respect to
multiemployer pension plans at the very time it was enacting
the pension offset amendments that are found at 26 U.S.C.
§3304(a) (15). Congress recognized certain advantages to the
utilization of such plans, and found them "particularly but
not exclusively important in industries such as... the
performing arts, vnich (is) characterized by nobility of
employees, or employers, or rapid turnover of both” (Tab c,
p.2921). “If Congress had wished to require expansion of the
Pension offset in the multiemployer context in the manner of
the EDD's policy, given its consciousness of the prevalence
ef such plans in certain prominent industries, it vould have
done so. In the absence of such a clear federal requirenent,
the DOL need not impose one on the state of California.

conctustow

In our telephone conversation last week, you mentioned that
your initial response to the EDD's correspondence was to
avoid intervention in the absence of a federal mandate
contrary to any suggested EDD action. Acknowledging that
that response was neither final nor the official DOL position
at this time, the Unions urge the DoL to follow that initial
impulse, and’allow the EDD the latitude necessary to modify
its policy in the manner advocated herein. That modification
would be consistent with federal law and Congressional
intent, and would effectuate California policy to the benefit
of employees in this state.

Once you have had an opportunity to consider this matter, we


41

From those administrative collections, a percentage amount as
determined by the Congress through the budget process would be
redirected to the U.S. Department of Labor to fund their operating
costs. In Georgia, as I mentioned, we get back about 40 cents on
the dollar. If we were able to keep 95 percent on the dollar, we
would be postured to extend to our employer community enormous
tax cuts almost immediately. Also, we see the implementation of
this as taking no more than 12 months and not a lot of money.

The final point of the recommendation has to do with the disposi-
tion of the trusts. This is the most technically and the most legally
and politically complex part of the whole proposal. We have rec-
ommended that the administrative trust be abolished and that
those funds be redistributed to the States on a pro rata basis, that
is, on the basis of covered wages, to be used initially to fund the
cost of the conversion. There would be some data processing costs
involved.

And we have recommended that the extended benefits account
trust also be eliminated and those moneys redistributed to the
States into their benefit accounts on the same basis of covered
wages. The Extended Benefits Program is used very little by only
a few States and we feel like it has very little real utility as far
as a national public program is concerned.

And then, finally, we have recommended that the loan account
be maintained but that it be capped at a certain amount as deter-
mined by the Congress, so that funds do not continue to build and
build and build.

As I said at the outset, Mr. Chairman, this is a wonderful oppor-
tunity to really return power to the States, to minimize the paper-
work burden on American business and to posture the States to
grant major tax cuts to their employers.

Thank you.

(The prepared statement and attachments follow:]