U.S. GOVERNMENT PRINTING OFFICE

50–099 CC WASHINGTON : 1998

UNEMPLOYMENT INSURANCE ISSUES

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

APRIL 24, 1997

Serial 105–42

Printed for the use of the Committee on Ways and Means

(
ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HUMAN RESOURCES

E. CLAY SHAW, JR., Florida, Chairman

DAVE CAMP, Michigan

JIM MCCRERY, Louisiana

MAC COLLINS, Georgia

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

J.D. HAYWORTH, Arizona

WES WATKINS, Oklahoma

SANDER M. LEVIN, Michigan

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

WILLIAM J. JEFFERSON, Louisiana

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.
iii

C O N T E N T S

Page

Advisory of April 17, 1997, announcing the hearing ............................................ 2

WITNESSES

American Federation of Labor and Congress of Industrial Organization,

Jonathan Hiatt ..................................................................................................... 70

American Trucking Associations, Kenneth Simonson .......................................... 37

Association of Christian Schools International, William Bentley Ball ................ 96

California Health and Welfare Agency, Thomas P. Nagle ................................... 92

Doherty, Lynn Quigley, Illinois Department of Employment Security, and

State of Illinois ..................................................................................................... 60

English, Hon. Phil, a Representative in Congress from the State of

Pennsylvania ........................................................................................................ 9

Farr, Hon. Sam, a Representative in Congress from the State of California ..... 14

Georgia Department of Labor, David B. Poythress .............................................. 22

Gilbert, Gay, Ohio Bureau of Employment Services, and Interstate

Conference of Employment Security Agencies ................................................... 66

Hiatt, Jonathan, American Federation of Labor and Congress of Industrial

Organization ......................................................................................................... 70

Illinois Department of Employment Security, and State of Illinois, Lynn

Quigley Doherty ................................................................................................... 60

Interstate Conference of Employment Security Agencies, Gay Gilbert .............. 66

Masur, Richard, Screen Actors Guild .................................................................... 98

Miller, Albert R., Phoenix Closures, Inc ................................................................ 76

Nagle, Thomas P., California Health and Welfare Agency .................................. 92

Norwood, Janet L., Urban Institute ....................................................................... 45

Ohio Bureau of Employment Services, Gay Gilbert ............................................. 66

Oxfeld, Eric J., UBA, Inc ......................................................................................... 25

Peterson, Hon. Collin, a Representative in Congress from the State of

Minnesota ............................................................................................................. 85

Phoenix Closures, Inc., Albert R. Miller ................................................................ 76

Poythress, David B., Georgia Department of Labor ............................................. 22

Red Lake Band of Chippewa Indians, Bobby Whitefeather ................................. 86

Screen Actors Guild, Richard Masur ..................................................................... 98

Shadegg, Hon. John, a Representative in Congress from the State of Arizona . 15

Simonson, Kenneth, American Trucking Associations ......................................... 37

Thomas, Hon. Bill, a Representative in Congress from the State of California . 7

UBA, Inc., Eric J. Oxfeld ......................................................................................... 25

Upton, Hon. Fred, a Representative in Congress from the State of Michigan ... 12

Whitefeather, Bobby, Red Lake Band of Chippewa Indians ................................ 86

Wilson, Mark, Heritage Foundation ....................................................................... 30

SUBMISSIONS FOR THE RECORD

Allen, W. Ron, National Congress of American Indians, statement and

attachment ............................................................................................................ 138

American Legislative Exchange Council, Duane Parde, statement and

attachment ............................................................................................................ 124

American Society for Payroll Management, New York, NY, Clark G. Case,

letter ...................................................................................................................... 127

Anderson, Marge, Mille Lacs Band of Ojibwe Indians, Onamia, MN,

statement .............................................................................................................. 135

California Correctional Peace Officers Association, West Sacramento, CA, Don

Novey, statement ................................................................................................. 128

Case, Clark G., American Society for Payroll Management, New York, NY,

letter ...................................................................................................................... 127
Page

iv

Coalition on Human Needs, Jennifer A. Vasiloff, statement ............................... 129

Crooks, Hon. Stanley, Shakopee Mdewakanton Sioux (Dakota) Community,

Prior Lake, MN, statement and attachments .................................................... 179

Eastern Band of Cherokee Indians, Cherokee, NY, statement ............................ 130

Echohawk, John E., Native American Rights Fund, statement and

attachment ............................................................................................................ 144

Fond du Lac Band of Lake Superior Chippewa Indians, Cloquet, MN, Robert

B. Peacock, statement and attachments ............................................................ 132

Knight-Frank, Judy, and Clement J. Frost, Ute Mountain Ute Indian Tribe,

Towaoc, CO, and Southern Ute Indian Tribe, Ignacio, CO, joint statement .. 187

Mille Lacs Band of Ojibwe Indians, Onamia, MN, Marge Anderson,

statement .............................................................................................................. 135

National Congress of American Indians, W. Ron Allen, statement and

attachment ............................................................................................................ 138

Native American Rights Fund, John E. Echohawk, statement and

attachment ............................................................................................................ 144

Navajo Nation, statement ....................................................................................... 142

New Hampshire, State of, Department of Employment Security, Concord,

NH, Joseph Weisenburger, statement ................................................................ 150

Novey, Don, California Correctional Peace Officers Association, West

Sacramento, CA, statement ................................................................................. 128

Ohio State, Hon. George V. Voinovich, Governor, statement and attachment ... 152

Parde, Duane, American Legislative Exchange Council, statement and

attachment ............................................................................................................ 124

Peacock, Robert B., Fond du Lac Band of Lake Superior Chippewa Indians,

Cloquet, MN, statement and attachment ........................................................... 132

Pennington, Luella, Chicago, IL, statement .......................................................... 173

Shakopee Mdewakanton Sioux Community, Prior Lake, MN, Hon. Stanley

Crooks, statement and attachments ................................................................... 179

Sheridan, Mike, Texas Workforce Commission, Austin, TX, letter and

attachments .......................................................................................................... 187

Southern Ute Indian Tribe, Ignacio, CO, Judy Knight-Frank, and Clement

J. Frost, joint statement ...................................................................................... 187

Texas Workforce Commission, Austin, TX, Mike Sheridan, letter and

attachments .......................................................................................................... 187

Ute Mountain Ute Indian Tribe, Towaoc, CO, Judy Knight-Frank, and

Clement J. Frost, joint statement (see listing under Knight-Frank, Judy) .... 187

Vasiloff, Jennifer A., Coalition on Human Needs, statement .............................. 129

Voinovich, George V., Governor of Ohio, statement and attachment .................. 152

Weisenburger, Joseph, New Hampshire Department of Employment Security,

Concord, NH, statement ...................................................................................... 150
(1)

UNEMPLOYMENT INSURANCE ISSUES

THURSDAY, APRIL 24, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HUMAN RESOURCES,

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:35 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:]
2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HUMAN RESOURCES

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1025

April 17, 1997

No. HR–6

Shaw Announces Hearing on

Unemployment Insurance Issues

Congressman E. Clay Shaw, Jr., (R–FL), Chairman, Subcommittee on Human Resources of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on certain unemployment insurance issues. The hearing will take place on Thursday, April 24, 1997, in room B–318 Rayburn House Office Building, beginning at 10:30 a.m.

In view of the limited time available to hear witnesses, oral testimony at this

hearing will be from invited witnesses only. Witnesses will include 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 or for inclusion in the printed record of the hearing.

BACKGROUND:

The Federal-State unemployment insurance (UI) system is designed to provide

temporary benefits to individuals with a recent work history who become involuntarily unemployed. Federal taxes generally support the administrative expenses of

the system, with State taxes supporting benefits. Increased skepticism about the efficiency of the system, and especially its administration, have been cited in calls by

States and employers for reform.

The Subcommittee is interested in various proposals to reform the administrative

financing of the system. One proposal, supported by nine States (Kentucky, New

Hampshire, Ohio, Georgia, Missouri, Virginia, Texas, Mississippi, and Oklahoma)

would allow States to collect all taxes needed to pay for both administration and

benefits (although the Federal Government would continue to set the level of tax

that pays for administration). Another proposal would end the Federal tax and replace it with a State-set tax supporting administration. Both would allow the 0.2

percent Federal surtax, currently authorized through December 31, 1998, to expire.

Proponents argue that allowing States greater authority to collect administrative

funds would lead to lower payroll taxes, reduced business paperwork, and improved

efficiency in labor markets across the country. While no pertinent bill has been introduced in the current Congress, the Subcommittee is interested in suggestions for

change that promise increased employment and business growth while preserving

the principles of the current unemployment insurance system.

A second major area of interest involves State flexibility in administering the UI

system. In determining whether a worker’s employment record is sufficient to warrant benefits, 47 States consider only wages earned 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 ‘‘alternative base period,’’ increasing the likelihood that

these workers will qualify for benefits. A recent Illinois Federal court decision (Pennington v. Doherty) 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
3

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.

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.’’

FOCUS OF THE HEARING:

The hearing will focus on two main issues. First, the Subcommittee will consider

testimony on administrative financing reform proposals that would allow greater

State control in collecting taxes and administering unemployment insurance programs. Second, witnesses will discuss the implications of the Pennington case, a

Federal court decision that has drawn into question whether States have full authority to set base periods used in determining eligibility for unemployment insurance benefits. In addition, other witnesses will discuss the way the UI system affects prisoners, Native Americans, actors and poll workers, and others.

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 and

a 3.5-inch diskette in WordPerfect or ASCII format, with their address and date of

hearing noted, by the close of business, Thursday, May 8, 1997, to A.L. Singleton,

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 least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on a 3.5-inch diskette in WordPerfect or ASCII format.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.
4

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–225–

1904 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Comceed.

mittee as noted above.

Chairman SHAW. If everybody could take their seats we will prof

Keeping the UI, unemployment insurance, system operating

smoothly and efficiently is important to more than a hundred million employees, to millions of employers, and to the strength and

vitality of the U.S. economy.

In keeping with the Subcommittee’s oversight of unemployment

insurance, this hearing has three goals: One, to consider long-term

changes to improve the system in years to come; two, to examine

steps Congress must take in the coming months to keep the system

running efficiently; and, three, to hear about a variety of proposals

to improve the individual components of the system.

We have a distinguished panel of Members to lead off our hearing, who will testify about a range of issues, including the treatment of Indians, actors, poll workers and prisoners under the current system.

After we hear from Members, our first panel will examine proposals designed to increase State flexibility in operating their unemployment insurance system. Bipartisan proponents argue that

reforms can lead to lower payroll taxes, less paperwork, and improved efficiency in labor markets across the country.

Significantly, nine States and employer groups led by UBA, Inc.,

have come together to support a detailed reform proposal, and the

Subcommittee is eager to hear about this and other proposals to

strengthen the UI system.

It is my hope to draft legislation, hold a hearing on the bill, and

to proceed to markup on a reform proposal that features the type

of changes we will hear about today.

Our second panel involves an issue that demands our immediate

attention. Since its inception in the thirties, there has been universal agreement that States have the right to set base periods used

to determine eligibility for unemployment insurance benefits. Until

now. A Federal court decision in Illinois in the Pennington case

means that more than 40 States now face a possibility of being

forced to adopt a new, more liberal standard for determining eligibility for unemployment 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.

For our final panel, expert witnesses will present further testimony about several issues that Members have raised. Unfortunately, Charlton Heston could not join us again, which means that

we will have been spared the deluge of bad puns that everyone had

to endure at our last hearing on this particular topic. Probably all
5

for the best, so those of you who are waiting to see Charlton

Heston, I apologize, but he will not be with us this morning.

[The opening statement follows:]

Opening Statement of Hon. E. Clay Shaw, Jr.

Keeping the unemployment insurance system operating smoothly and efficiently

is important to more than 100 million employees, to 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 three goals: (1) to consider

long-term changes to improve the system in years to come; (2) to examine steps Congress must take in the coming months to keep the system running efficiently; and

(3) to hear about a variety of proposals to improve individual components of the system.

We have a distinguished panel of Members to lead off our hearing, who will testify about a range of issues including the treatment of Indians, actors, poll workers,

and prisoners under the current system.

After we hear from Members, our first panel will examine proposals designed to

increase state flexibility in operating their unemployment insurance systems. Bipartisan proponents argue that reforms can lead to lower payroll taxes, less paperwork,

and improved efficiency in labor markets across the country. Significantly, nine

States and employer groups led by UBA have come together to support a detailed

reform proposal, and the Subcommittee is eager to hear about this and other proposals to strengthen the UI system. It is my hope to draft legislation, hold a hearing

on the bill, and proceed to markup on a reform proposal that features the type of

changes we will hear about today.

Our second panel involves an issue that demands immediate attention. Since its

inception in the 1930s, there has been universal agreement that States have the

right to set base periods used to determine eligibility for unemployment benefits.

Until now. A federal court decision in Illinois in the ‘‘Pennington case’’ means that

more than 40 States now face the possibility of being forced to adopt a new, more

liberal standard for determining eligibility for unemployment benefits. Unless Congress acts quickly, almost every State will be forced to pay higher unemployment

insurance benefits resulting in more red tape, higher taxes on employers, and less

job creation. Overall, added costs could reach as high as $1 billion each year.

On our final panel, expert witnesses will present further testimony about several

issues Members raised earlier.

Mr. L

Chairman S

EVIN. Yes, I do.

HAW. Sandy, do you have an opening statement?

f

But I think other very charismatic people are here, so no one

should leave.

Mr. Chairman, I want to begin by thanking you for scheduling

this hearing. As we discuss the proposals on administration financing reform and on the Pennington case that are the stated focus of

this hearing, I would strongly urge that we keep in mind the overall features of the unemployment insurance system so that we do

not lose sight of the forest for the trees.

First, unemployment is a national problem. The unemployment

insurance system was designed as a Federal-State partnership, and

we must maintain the basic structure of shared responsibility and

oversight between the Federal Government and the States.

Unemployment hits regions of our country at different times and

to different degrees. People move from State to State seeking new

employment. It is a national priority to support these individuals

and assist in their transition to new employment.

Second, fewer and fewer workers are qualifying for unemployment benefits. This is especially true of low-wage workers, even

those who have a strong attachment to the labor force, and the increasing proportion of our work force engaged in part-time or tem-
6

porary employment also experiences great difficulty in obtaining income support and employment services through the UI system.

Finally, more and more workers are facing permanent dislocation. The rate at which unemployed workers exhaust benefits has

climbed steadily since 1945. Conversely, the percent of individuals

losing their jobs on a temporary basis has fallen substantially since

1965.

Almost one-half of those workers permanently displaced from

their jobs end up making less than 80 percent of their prior income

or not finding employment at all. We must do a better job of assisting these workers in their search for new skills and new employment.

I recognize that our method of allocating administrative funds is

frustrating to the States and the employers who pay these taxes.

There ought to be ways of addressing these issues on a bipartisan

basis.

In approaching the issue, we should give due consideration to the

fact that the current allocations take workload and, therefore,

recipiency rates into account. The Federal taxable wage base has

not kept pace with wage growth in the economy. And we should address the shortcomings of the extended benefits program designed

to fill in during tough economic times, which nearly every expert

agrees doesn’t work.

But these issues cannot be considered in a vacuum. We must reexamine the initial purpose of the unemployment insurance system

as a whole within the context of our rapidly changing economy. Is

the system still able to meet the goals of providing temporary wage

replacement to unemployed workers with a labor force attachment?

Is the system still able to provide for the stabilization of the

economy? Until the UI system addresses the needs of unemployed

workers with a labor force attachment, including the reemployment

needs of the permanently displaced, I would argue that we are failing to achieve the legitimate goals of the system.

We cannot afford to do all that some would like, but we should

try to find some things we can all support. I look forward, Mr.

Chairman, to addressing these important issues with you on a bipartisan basis.

[The opening statement follows:]

Opening Statement of Hon. Sander M. Levin

Mr. Chairman, I want to begin by thanking you for scheduling this hearing. As

we discuss the proposals on administrative financing reform and on the Pennington

case that are the stated focus of this hearing, I would strongly urge that we keep

in mind the overall features of the unemployment insurance system so that we do

not lose sight of the forest for the trees.

• First, unemployment is a national problem. The unemployment insurance system was designed as a federal-state partnership, and we must maintain the basic

structure of shared responsibility and oversight between the federal government and

the states. Unemployment hits regions of our country at different times and to different degrees—people move from state-to-state seeking new employment. It is a national priority to support these individuals and assist in their transition to new employment.

• Second, fewer workers are qualifying for unemployment benefits. This is especially true of low-wage workers, even those who have a strong attachment to the

labor force. The increasing proportion of our workforce engaged in part-time or temporary employment also experiences great difficulty in obtaining income support and

employment services through the UI system.
7

• Finally, more and more workers are facing permanent dislocation. The rate at

which unemployed workers exhaust benefits has climbed steadily since 1945; conversely, the percent of individuals losing their jobs on a temporary basis has fallen

substantially since 1965. Almost half of those workers permanently displaced from

their jobs end up making less than 80% of their prior income or not finding employment at all. We must do a better job of assisting these workers in their search for

new skills and new employment.

Now, I recognize that our method of allocating administrative funds is frustrating

to the states and the employers who pay these taxes. There ought to be ways of addressing these issues on a bipartisan basis. In approaching the issue, we should give

due consideration to the fact that current allocations take workload, and therefore

recipiency rates, into account, and that the federal taxable wage base has not kept

pace with wage growth in the economy. And we should address the shortcomings

of the extended benefits program—designed to fill in during tough economic times—

which nearly every expert agrees doesn’t work.

But these issues cannot be considered in a vacuum. We must re-examine the initial purpose of the unemployment insurance system as a whole within the context

of our rapidly changing economy. Is the system still able to meet the goals of providing temporary wage replacement to unemployed workers with a labor force attachment? Is the system still able to provide for the stabilization of the economy?

Until the UI system addresses the needs of unemployed workers with a labor

force attachment, including the reemployment needs of the permanently displaced,

I would argue that we are failing to achieve the legitimate goals of the system. We

cannot afford to do all that some would like, but we should try to find some things

that all can support. I look forward to addressing these important issues with you

on a bipartisan basis.

We have our panel of members. I see Mr. Farr is not with us yet,

Chairman SHAW. Thank you, Mr. Levin.

f

but he hopefully will be joining us. We will lead off with two Members of our Committee, a senior Member, Mr. Bill Thomas, and Phil

English, who is not only a Member of the Full Committee, but also

of this Subcommittee; Fred Upton from Michigan; and John Shadegg from Arizona.

We’re pleased to have you gentlemen with us. As usual we have

your full statement which will be made a part of the record. You

may feel free to summarize as you might wish.

Mr. Thomas.

STATEMENT OF HON. BILL THOMAS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. THOMAS. Thank you very much, Mr. Chairman. It’s a pleasure to be with you to discuss a bill that I have, H.R. 562, and there

are several others that I would like to mention at the end of my

statement as well. I would tell my friend from Michigan that I

think a mobile labor force indeed argues for a national labor policy.

But my bill, and perhaps several others, will, I think, focus on

some anomalies that when States make judgments that for themselves seem prudent, and you have a national labor law, oftentimes

there are some catch-22 situations. And I would like to address

what I believe to be one of those in the bill that I have offered

which would correct the problem.

California voters established what was called a joint venture program in 1990. It was a work program for inmates incorporating private contractors and other folks. The wages that the prisoners were

to earn were to be used for a number of purposes, among them, to

compensate victims, to offset incarceration costs, and then some
8

set-aside funds—about 20 percent—so that when they’re released

from prison they would have some money available for them.

Because of the mix with Federal labor law, the Department of

Labor said that you can deny unemployment benefits in only three

instances. One, if a worker’s income exceeds certain limits; two, if

the claim is fraudulent; or, three, the employee was fired for misconduct.

Well, the reason the prisoners lost the jobs under this program

was because they left prison. And the Department of Labor argued

that these prisoners then deserved unemployment compensation at

the time they left prison, because it didn’t meet any of the three

Federal requirements for not giving them unemployment compensation.

The people of the State of California passed last year Proposition

194, which was an initiative on the ballot that said we want to

deny unemployment compensation upon release of these prisoners

who were in a program that we otherwise think is a good program.

This created a situation which I hope will be resolved with the

Committee and the Congress in the signing into law of H.R. 562,

because all this does is basically say, that the conundrum that the

States are now in would be resolved.

H.R. 562 changes the law to treat all prison inmates who participate in work programs the same. Their services would be exempt

from the FUTA tax, and that you don’t get into this anomaly because it’s a private structure which we happen to think provides

job opportunities that enhance the chances of the prisoner once

they leave prison, that when they leave prison, because they’re in

that program, they deserve unemployment compensation.

That’s the sum and substance of H.R. 562, Mr. Chairman, and

if I might just very briefly, as Chairman of House Oversight that

oversees all Federal election laws, this deals with another anomaly

between Federal law and States.

The gentleman from Michigan and the gentleman from California have H.R. 961, and I would like to speak very briefly in favor

of the idea of not allowing poll workers who are designated to have

a job for 1 day out of the year to be eligible for unemployment compensation, and I would underscore our friend from Illinois, Mr.

Crane’s H.R. 125, to overturn the Federal court decision as well.

And with that, Mr. Chairman, I thank you for your time.

[The prepared statement follows:]

Statement of Hon. Bill Thomas, a Representative in Congress from the

State of California

Mr. Chairman, I appreciate this opportunity to explain my bill, H.R. 562, to the

Subcommittee. Briefly, I want to give States an extra tool for reforming criminals.

Today, federal law is discouraging States from adopting innovative approaches to reintegrating prisoners into the workforce by requiring states to pay unemployment

benefits to some criminals just because they are released from prison. That should

be a matter states decide for themselves in choosing methods for reforming prisoners.

As background, California voters established the Joint Venture Program in 1990,

creating a private work program for inmates. Prisoners’ 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. Last year, California voters

overwhelmingly passed an initiative (Proposition 194) to deny unemployment benefits to criminals participating in the Joint Venture Program. That is where the trouble started.
9

The Department of Labor says unemployment benefits have to be paid to ex-prison inmates who worked for private companies in these cooperative work programs.

Since FUTA taxes are paid on behalf of some prisoners, Labor 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 their jobs when paroled or released from prison, they

do not fit the exceptions.

This creates a conundrum for states: if they have someone work in the prison

laundry, they do not have to pay benefits, but if they try to create an innovative

program in cooperation with a private company, the prisoners in that program must

be paid unemployment when they are released. For states like California where voters have clearly said unemployment benefits are not to be paid in such cases, the

only answer may turn out to be foregoing cooperative ventures with the private sector that could very well help prisoners prepare themselves for reentry into society.

Allowing employers 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.

H.R. 562 changes the law to treat all prison inmates who participate in work programs the same: their services would be exempt from the FUTA 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 you will report the bill in the near future.

Mr. English.

Chairman SHAW. Thank you.

f

STATEMENT OF HON. PHIL ENGLISH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. ENGLISH. Thank you, Mr. Chairman. I want to thank you for

the opportunity to testify, and I wanted to thank you and our fellow Members of the Subcommittee for having this hearing to focus

on some, I think, important issues in improving the Federal system

of UC, unemployment compensation.

As many of you know, early in my career I served as research

director of the State Senate Labor and Industry Committee dealing

with many of the issues being discussed today. And from my own

personal perspective, I think the current unemployment insurance

system is badly in need of basic structural reform.

Earlier this year I introduced legislation designed to empower

States to meet the needs of the long-term unemployed. The current

UC system is structured to help States combat short-term unemployment. Unfortunately, many skilled workers who are laid off

from their jobs now are less likely to return to their previous jobs

than in the past, and I think the system needs to be moved to adequately address that.

H.R. 940, the legislation that I introduced, will make several important changes to the current UC system. First of all, we will provide extended unemployment benefits to workers who have been

unemployed for long periods of time, by broadening the trigger

States use to access extended benefits.

Research has shown that the combination of the reduction on the

insured unemployment rate, and the increase in the trigger level
10

during the recession of the eighties resulted in the failure of extended benefits to trigger on as unemployment continued to rise.

In my view, it is absolutely essential to reform this part of the

program prior to the onset of the next recession.

Second of all, this legislation would encourage States to maintain

sufficient UC trust fund balances to cover the needs of unemployed

workers in the event of a recession. In the early eighties, Pennsylvania was one of a number of States that had a problem of a massive structural deficit in the UC program.

States under my bill that would 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, a financial incentive to do the right thing.

Third, this legislation would allow interest-free cash flow Federal

loans only for those States that have sufficient trust fund reserves

to last through a future recession.

Fourth, it would 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.

Fifth, it would require States to distribute information packets

explaining fully unemployment insurance eligibility conditions to

unemployed individuals. All of these provisions are based on recommendations by the Advisory Council on Unemployment Compensation’s Collected Findings and Recommendations for 1994

through 1996.

If these provisions were enacted into law, as I propose, States

like Pennsylvania would have the tools to assist workers facing

long-term unemployment.

Another issue I would like to briefly address is the current tax

on unemployment compensation benefits. Prior to 1979, UC benefits were excluded from income for tax purposes.

UC benefits are currently placed on a par with wages and other

ordinary income, with regard to taxation. I have introduced H.R.

937, the Unemployment Tax Repeal Act, to once again exclude UC

benefits from Federal taxation.

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 imperils the economic security of workers throughout

America. Our unemployment insurance system should be structured to extend a safety net, not dump penalties on the unemployed.

The tax on unemployment compensation kicks workers when

they’re down. Unemployment benefits are intended to stabilize the

income of individuals and families that face layoffs, yet someone

who experiences lengthy unemployment will face a large and usually unexpected tax liability the next year.

For many of those who are struggling to survive a layoff and get

back on their feet, this tax bill is the last straw.

I urge the Subcommittee to review these issues, and to also hear

the testimony from the Screen Actors Guild later on in this hearing

in support of another bill that I have introduced, H.R. 841, which

corrects a section of the Federal Unemployment Tax Act that oper-
11

ates to the detriment of senior entertainment industry professionals.

Mr. Chairman, in conclusion, by emphasizing my strong support

for reforming our unemployment system, it is my hope that our

Subcommittee will give its strongest consideration to moving forward legislation to encompass many of the suggestions heard

today.

Following through on these recommendations will be a big boon

for American workers.

Thank you.

[The prepared statement follows:]

Statement of Hon. Phil English, a Representative in Congress from the

State of Pennsylvania

Mr. Chairman and fellow Members of the Subcommittee, I want to thank you for

scheduling this important public hearing and for affording me the opportunity to address the Subcommittee on the urgent issue of unemployment insurance reform. As

most of you may know, early in my career, I served as 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 basic structural reform. States are poorly positioned to tackle unemployment in the 90’s with a UI system that has changed very little since its inception

and in some important respects become frayed over the last two decades. I want to

take this opportunity to discuss several changes to the system I am proposing as

well as the unfair taxation of benefits during my testimony today.

Earlier this year, I reintroduced legislation designed to empower states to meet

the needs of the long-term unemployed. The current unemployment insurance system is structured to help states combat short-term unemployment. Unfortunately,

many skilled 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. 940, 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 prior to the onset of the next recession.

Emergency extensions of benefits are a jerrybuilt policy prescription neither welltimed nor well-targeted.

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.

All 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. 940 (previously H.R. 3738 in the 104th Congress) allowed

me to utilize my experience when considering the effects each recommendation
12

would have on the UI system. I have concluded that if the recommendations were

enacted into law, as I propose in H.R. 940, 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. I introduced H.R. 937, 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, 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 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.

At a time when many in Congress have expressed the creditable concern that the

tax code taxes certain kinds of income more than once, we need to recognize that

the UC tax represents what amounts to double taxation of a very vital stream of

income for workers. These benefits are financed by taxing workers’ jobs, with most

of the practical consequences of a direct tax on the workers themselves. To further

tax these benefits adds a new layer of taxation, dramatically increasing the tax burden on vulnerable working families at the expense of tax equity.

You will also have the opportunity today to hear from Mr. Richard Masur, President of the Screen Actors Guild, in support of another bill I introduced, H.R. 841.

As he will describe, H.R. 841 would correct a section of the Federal Unemployment

Tax Act (FUTA) that operates to the detriment of senior entertainment-industry

professionals.

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.

Mr. Upton

Chairman SHAW. Thank you, Mr. English.

f

STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MICHIGAN

Mr. UPTON. Thank you, Mr. Chairman. I’m going to submit my

full statement for the record. But I just want to say that I appreciate your holding this hearing and allowing us again to testify as

you did last year.
13

I want to read briefly a letter that I received this week from our

Secretary of State, parts of her letter.

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 2 or 3 days a year.

Recently, a claim was filed against the city of Grand Rapids by

an elections inspector who only worked the August primary and

the November general election. Incredibly, the city was responsible

for paying a portion of his unemployment benefits, primarily because he lost his job through no fault of his own—the election was

over. The polls closed at 8 o’clock.

When our legislature tried to amend Michigan law to remedy the

problem, the U.S. Department of Labor informed them the change

would first need to be made on the Federal level. The bill that Sam

and I have introduced, H.R. 961, makes the necessary changes in

Federal law and allows States to make their own individual

changes should they so choose.

Ordinarily, those who work in the polls are volunteers who feel

working at elections is part of their civic duty or is service to the

community. They are compensated, but their position is not treated

as full-time employment opportunity.

The possible abuse to our unemployment system under the current regulations places an unjust burden on local governments and

I encourage—this is a letter to Chairman Archer—I encourage your

full support of and leadership in passage of the bill, H.R. 961.

Earlier this week, I might note that Bill Archer did send me a

letter, and it says this: Our intent at this point is to consider this

issue in the context of a larger unemployment bill this year. Using

our vehicle, I expect your provision to be included along with a few

others, and I expect the Committee will act on this this year.

So even though last year I had the great job of sitting next to

Charlton Heston, our bill didn’t move. This year when I don’t sit

next to him, if our bill moves, I’ll be even happier, and I appreciate

the bipartisan support and certainly the leadership of my colleague

Sam Farr on this issue as well.

[The prepared statement follows:]

Statement of Hon. Fred Upton, a Representative in Congress from the State

of Michigan

Chairman Shaw, thank you for allowing me to testify today on this important

issue. I applaud your commitment to reforming our nation’s unemployment system.

The 105th Congress is looking for as many ways as possible to relieve local governments from unnecessary federal regulations. HR 961 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 our districts 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 961 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 961 simply gives the States the freedom to run their unemployment compensation programs as they see fit.
14

Municipal budgets are already tightly stretched to provide our constituents with

the services that they need and deserve. I know of no opposition to this bill and

have received many letters of support from local governments across the country.

I’m pleased that you, Mr. Chairman, expressed support for my bill during a hearing on this issue last year and I look forward to working with you in the months

ahead. It is time to free local governments from a costly and unnecessary requireseems like he could have done something with legislation. [Laughment and pass HR 961.

Chairman SHAW. Charlton Heston, I saw him move a sea. It

f

ter.]

Mr. UPTON. Well, I was with Mohammed Ali yesterday, and he

still can move a sea.

Chairman SHAW. Mr. Farr.

STATEMENT OF HON. SAM FARR, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. FARR. He could move a sea, but we couldn’t move a bill.

Thank you, Mr. Chairman. I am here to support Congressman

Upton’s legislation that we cosponsored together.

There is a problem that needs fixing. Federal law determines

who must be covered by unemployment compensation, and who

may not be. And the interpretation of that law has rendered an incredible problem that I think you would all agree is just outrageous.

We had a poll worker in Santa Cruz County come volunteer to

be a poll worker, and was paid the minimum amount to be a poll

worker. And then, because it was a 1-day event, he filed for unemployment compensation. And because he had been a prior county

employee, the elections department had to pay him $12,000.

And if you can imagine how many people could take advantage

of this loophole—I think Los Angeles County has 40,000 people

that work for them on election day—it’s just unfathomable how

many people could take advantage of a law that never intended to

be that way.

It is a loophole, and this bill closes it. It’s a very simple bill. It

leaves it up to the States, and it uses the same threshold the Federal Government has already determined and used in other cases

for income tax and Medicare—that is, a $1,000 threshold.

And so this bill would continue to leave it up to the States. The

State of California did repeal the law last year, but it is dependent

upon Federal action to be implementable.

I think this bill remedies the problem, and we hope you will

move it in due haste. I’d be glad to answer any questions you might

have.

[The prepared statement follows:]

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

of California

Mr. Chairman, Members of the Subcommittee, I appreciate the opportunity to testify on behalf of H.R. 961, 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 hardship due to a sudden, unexpected loss

of employment. It provides unemployed workers with a small ‘‘cushion’’ of support
15

while looking for a new job, easing a tremendous burden for those who lose their

sole source of income.

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 temporary (for one day only).

And because poll workers receive a small reimbursement for their time and expenses (usually fifty-five to eighty dollars) they generally do not rely on their service

as a poll worker as their main source of income.

In the majority of cases, unemployment compensation is reserved for long-term

employees, preventing poll workers from qualifying for these benefits. But more and

more have exploited their eligibility to obtain significant unemployment benefits,

creating a financial drain on local governments and increasing costs to the American

taxpayer. In my own district, 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. However, they have learned

that only federal law can specify who is not eligible for unemployment compensation.

H.R. 961 would allow states, if they so choose, to close this loophole. It uses a $1,000 dollar per year compensation threshold—based on the reimbursement reasonably expected to be paid to the average poll worker volunteer—to separate poll

workers from longer-term, wage-based election workers. I would note that election

workers earning under $1,000 per year are already exempt from paying Social Security and Medicare taxes.

Our legislation has been endorsed by county elections offices and country clerks

around the country, as well as the California Secretary of State. It would prevent

an abuse of the unemployment compensation system which drains taxpayer dollars

and hurts the very people who need this assistance the most. I thank the Subcommittee for their consideration of this important measure.

Mr. Shadegg.

Chairman SHAW. Thank you, Mr. Farr.

f

STATEMENT OF HON. JOHN SHADEGG, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ARIZONA

Mr. SHADEGG. Thank you, Mr. Chairman. I appreciate the opportunity to be here today and to testify in support of H.R. 294, the

Indian Tribal Government Unemployment Compensation Act Tax

Relief Amendments of 1997.

This bill is one bill of a package of three pieces of legislation designed to promote economic development on America’s Indian reservations. You have already received written testimony, and you

will receive compelling testimony today from people who will benefit from this legislation on why it is needed and essential.

I would like to focus my remarks on why I introduced it, since

I represent a district which is urban in nature, has no Indian reservations, and has a Native American population of less than 2

percent.

The bottom line issue here is economic development on America’s

Indian reservations. I believe that is essential for the good of the

Nation as a whole. Yet, since about the seventies, the greatest economic development which has occurred on America’s Indian reservations has occurred in the form of Indian gambling.

Indian gambling is now an explosion growth industry on all of

the reservations across America, and yet I believe if we searched

our consciences, we might conclude that it is not the principle type
16

of economic development we ought to be encouraging on Indian reservations.

Based on my experience as a special assistant attorney general

in Arizona, I saw a number of problems associated with professional gambling, from corruption of those operations, to addiction

to gambling, to moral decay. The price of gambling is fairly high.

Recently, the National Indian Gambling Commission reported

that nearly one-half of the Nation’s 273 tribal gambling operations

had failed to meet Federal standards designed to keep their casinos

free of crime.

Federal officials announced that information last week, and also

announced that 17 people, including several linked with a prominent organized crime family, had been indicted on charges of attempting to infiltrate and control the now-defunct gambling casino

at the Rincon Indian Reservation north of San Diego.

I believe very firmly that in the long run, the Native American

communities and tribes of this Nation will suffer as a result of Indian gambling. The Rincon indictments, I think, are just the beginning.

What then is the right remedy? Well, the right remedy is, I believe, legitimate economic development on Indian reservations.

Congress has punted on that issue to date, and has not done

what it could and what it should do. A part of the answer is to fix

the Federal unemployment tax act, and the problem it is creating

for Indian reservations. The problem, Mr. Chairman, is that under

recent rulings by the IRS, the Internal Revenue Service is now

treating tribal governments as though they were businesses for the

collection of unemployment taxes. They are treating them the same

as private sector commercial employers. That is, they are requiring

them to pay in unemployment insurance and employment taxes as

though they were profitmaking operations.

Congress didn’t change this law. The IRS did. And the result has

been extremely unfair to some tribes, because the IRS, on an ad

hoc basis, is going after some tribes, requiring them to be treated

as though they were commercial businesses in the payment of unemployment insurance taxes, but not after all tribes.

H.R. 294 would solve this problem by amending the Federal law

to clarify expressly that tribal governments when they act in their

governmental capacity should be treated just like States and local

units of government for purposes of collection of Federal unemployment insurance taxes.

H.R. 294 would also authorize tribal governments, like State and

local governments, and tax exempt organizations, to contribute to

a State unemployment insurance fund on a reimbursable basis for

unemployment benefits actually paid out to former employees.

It’s one step toward providing legitimate economic development

on America’s Indian reservations. I believe it is a step in the right

direction. I believe it will help provide the right framework to encourage legitimate economic development which will be there at

some point in time when, I hope, we can see a reduction in Indian

gambling on America’s Indian reservations.

And I urge your support for its passage, and appreciate the time.

[The prepared statement follows:]
17

Statement of Hon. John Shadegg, a Representative in Congress from the

State of Arizona

Thank you, Mr. Chairman, for the opportunity to testify today in support for H.R.

294, the Indian Tribal Government Unemployment Compensation Act Tax Relief

Amendments of 1997. I appreciate your consideration of this legislation I sponsored.

H.R. 294 is one of three bills I have introduced which promote economic development on Indian reservations.

You have received written testimony and will later hear compelling testimony in

support of this legislation from those who would benefit. Additionally, I understand

you have received a number of letters of support which show broad support for this

legislation. I want to speak briefly about why I introduced this legislation and why

I think it is important in the long term.

Economic development on American Indian reservations is essential for the longterm prosperity of Native Americans. Since the 1970s more and more Indian tribes

have turned to gambling as a solution to their economic needs. In 1988 Congress

passed the Indian Gaming Regulatory Act to address problems emerging with Indian gambling which was increasing at a rapid pace across American Indian reservations and providing significant economic development for the first time on many

reservations. Gambling, however, is not the principle type of economic development

which we should be encouraging on Indian reservations and ultimately I believe it

will be detrimental to Native Americans and all Americans.

Based on my experience as a Special Assistant Attorney General for the State of

Arizona, I saw first hand the problems associated with professional gambling. From

corruption to addiction to moral decay, the price of gambling is not worth the temporary profits to be gained.

I believe that the passage of the Indian Gaming Regulatory Act, while well-intentioned by some in Congress, was a mistake. While I understand that at the time

of its passage IGRA was meant to provide a consistent regulatory framework for Indian gaming, it has failed.

For example, the National Indian Gaming Commission recently reported that

nearly one-half of the Nation’s 273 tribal gambling operations had failed to meet

a federal standards deadline designed to keep casinos free of crime. Moreover, federal officials announced last week that 17 people, including several linked to a Pittsburgh organized crime family, have been indicted on charges of attempting to infiltrate and control the now-defunct gambling casino at the Rincon Indian Reservation

north of San Diego. I believe very firmly that in the long run, the Native American

communities and tribes in this nation will suffer as a result of gambling. The Rincon

indictments, I fear, are only the beginning.

According to a 1994 study, for every dollar that a community will receive from

gambling revenues, three dollars will be needed to cover the additional costs incurred by gambling such as infrastructure expenditures, regulatory costs, expenses

to the criminal justice system and large social-welfare costs.

Last year, Americans spent $550 billion in legal gambling—a 3200 percent increase since 1974 when casino gambling was prohibited in every state but Nevada.

Close to 10 million Americans now have a gambling habit that is out of control. The

cost of treatment for gambling addicts ranges from $18,000-$50,000 per person.

Unquestionably, compulsive gambling is linked to the accessibility and acceptability of gambling in communities. According to one study, the number of compulsive gamblers will increase between 100–550 percent when gambling is brought into

an area. Research now shows that gambling is the fastest growing teenage addiction. In my state of Arizona alone there are 14,000 young compulsive gamblers. And

20 percent of compulsive gamblers attempt suicide.

Fundamentally, increased gambling results in ruined lives and destroyed families

and businesses. Apart from the social price, gambling presents huge economic costs

to our communities.

Again, my commitment to sound economic development on Indian reservations is

sincere. I have felt very strongly for a long time that promoting gambling on America’s Indian reservations as a way to assist Native Americans is dead wrong. We owe

Native Americans and their communities far more than that. Congress, in effect

punted on the issue of promoting economic development in 1988 and it is our responsibility to pick up the ball and provide legitimate, long-term solutions for Native Americans. One way is to fix the Federal Unemployment Tax Act (FUTA) problem.

The FUTA problem is this, Mr. Chairman—in the early part of this decade the

IRS reversed its prior practice and began to treat more and more tribal governments

as if they were private-sector commercial business employers for purposes of deter-
18

mining how they must participate in unemployment insurance programs under

FUTA.

But Indian tribes are essentially governmental in nature. They are not businesses

and there are important public policy reasons for treating them differently from the

private sector.

Congress did not change the law. What changed was the interpretation given the

law by some over-eager tax collectors at the IRS. The result has been very unfair

as the IRS has begun to go after some tribes who have never paid into nor taken

anything out of the FUTA system.

My bill, H.R. 294, would amend FUTA to clarify, in express terms, that tribal governments, when acting in their governmental capacity, should be treated just like

state and local units of government are treated for FUTA purposes. Under this bill

the IRS would have no authority to assess federal FUTA taxes against tribal governments, just as it cannot do so against like state and local governments and taxexempt organizations.

In addition, H.R. 294 would authorize tribal governments, like state and local governments and tax-exempt organizations, to contribute to a state unemployment insurance fund on a reimbursable basis for unemployment benefits actually paid out

to former employees. Simply, tribes would pay as they go. If a tribe doesn’t lay off

anyone, it doesn’t pay and if a tribe lays off a lot of employees, the tribe reimburses

the full amount.

As I said before, H.R. 294 is one of three bills I have introduced to provide additional, legitimate, economic development for Native Americans. I appreciate your

consideration of H.R. 294 as a part of this legislation and urge you to support its

passage. It is a small step in promoting economic development for Native Americans. Thank you again for your time and attention to this important matter.

Mr. Camp.

Chairman SHAW. Thank you, John.

f

Mr. CAMP. Thank you, Mr. Chairman. Thank you, Mr. Upton, for

taking the time to testify today. And I would ask—I notice that you

mentioned this letter you received from our Secretary of State regarding this bill, and I would ask unanimous consent to make the

entire letter part of the record.

Chairman SHAW. Without objection.

[The information follows:]
19

fix, as well as the Chairman of the Committee. I know you menMr. CAMP. And I appreciate that the State is supportive of your

f

tioned his support.

Can you tell me, Has the U.S. Department of Labor commented

officially in any way on your proposal?
20

Mr. UPTON. I don’t think they have commented. I can’t imagine

there is a lot of objection to what we want to do. In essence it allows the States to make a decision. Sam, do you know if they’ve

given any position?

Mr. FARR. Well, we have a letter here I’m just seeing for the first

time. Essentially, it says why we have to amend the law.

Mr. UPTON. It clearly needs a fix, because it can’t happen without a legislative fix, and that’s why we’re here today. And again

we’re not aware of any objection to what we want to do.

I’ve talked to the Chairman, Chairman Archer, about it. It really

does close a loophole. Those of us that are opposed to fraud and

abuse—I think everybody here—I have got to believe would be supportive of the effort, and it ought to be, as Mr. Shaw said last year,

a no brainer.

Mr. CAMP. Well, I certainly support what you’re doing, and want

to work with you.

Mr. UPTON. You do support it, and I appreciate your help here

on the Subcommittee to get this thing done.

Thank you.

Mr. CAMP. Thank you, Mr. Chairman.

Chairman SHAW. I think that provision has good bipartisan support.

Mr. Levin.

Mr. LEVIN. I’ll resist the temptation to ask questions. I thought

all the testimony was interesting, and I think we need to explore

further the activities of the Indian reservation units as to why

they’re covered.

And also as to Mr. English’s testimony, I personally very much

support its thrust, and I think it will be interesting to see what

comments some of the panelists who come have on it.

Thank you, Mr. Chairman.

Chairman SHAW. Thank you. Mr. McCrery.

Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Shadegg, as I understand your proposal, you want to basically have tribal governments treated as State and local governments with respect to

FUTA taxes.

But you also include another provision that would authorize tribal governments to contribute to a State unemployment insurance

fund on a reimbursable basis.

Is that something the State and local governments are authorized to do now, or must they do that?

Mr. SHADEGG. I believe it is what they are authorized to do now.

I don’t know that they are required to do it. They are authorized

to contribute. So we would make—in both regards—we would make

tribal governments, when they are acting in their governmental capacity, the same as a State or local government, or a tax-exempt

organization.

Mr. MCCRERY. OK. Thank you.

Chairman SHAW. Mr. Collins.

Mr. COLLINS. No questions.

Chairman SHAW. Mr. Coyne.

Mr. COYNE. No questions.

Chairman SHAW. Mr. English.

Mr. ENGLISH. No questions.
21

Chairman SHAW. Mr. Watkins.

Mr. WATKINS. Thank you, Mr. Chairman. I’m very interested in

this. We have a lot of Native Americans in Oklahoma, and I’m trying to see how broad this would be as far as taxes in dealing with

the Indian tribes, because there is a great question of them utilizing their funds today as a business or industry or as a government,

especially in contributions in campaigns, a lot of them being heavily involved.

If they’re going to be treated as a government entity, would they

be allowed also to contribute to campaigns?

Mr. SHADEGG. Mr. Watkins, I am certainly not advocating that

they get some special status for contributing to campaigns, and I,

quite frankly, don’t know their status for contributing to campaigns.

Our goal here is simply to say—it’s actually to correct an inconsistency. The original interpretation of the law by the IRS was that

tribal governments when they employ people in a governmental

type capacity were to be treated, and in fact were treated by the

IRS, I think until the beginning of this decade, routinely as being

governmental entities and not required to pay in on an advanced

basis for the employees in anticipation of an unemployment tax

claim.

At some point in this decade, the IRS came along and with regard to some tribes—and I think it’s worth your looking into the

situation in Oklahoma, because it is not inconsistent across the

country with regard to some tribes the IRS has come along and

said, No, we don’t think you really are a governmental entity, and

so we’re now going to start treating you as though you were a private business.

It would be intent, Mr. Watkins, that when the tribe acts in a

business capacity, let’s say it owns, as some tribes in Arizona do,

a sand and gravel operation, or a block manufacturing plant, or

some other business enterprise, I think it ought to be treated as

a business in that capacity.

But in my view, when it is acting as a governmental entity, administering the tribe, I think it ought to be treated like other units

of government. It’s more governmental in nature at that point.

Now, whether or not someone ought to take a look at whether

that governmental entity can make campaign contributions, that

might be a parallel question.

Mr. WATKINS. I’ve read your letter, and it’s very interesting, because I agree with your letter here. I’ve been trying to get some

of the tribes in Oklahoma to not only lift their vision, but to be able

to do more in economic development. And I helped tribes—two of

them—in developing their overall economic development plan, trying to move them from just smoke shops and gambling, into more

manufacturing and other types of job opportunities.

Mr. SHADEGG. Certainly, I think that’s in the best interest of all

Americans.

Mr. WATKINS. Definitely.

Mr. SHADEGG. If we force them to rely solely on gambling, then

they are going to rely on gambling, and that’s going to create, I

think, long-term problems.
22

For one thing, there is the danger that those operations will be

infiltrated, as this report suggests is a possibility, and I’m not certain that those kinds of operations with that large amount of cash

aren’t particularly susceptible to exploitation.

Mr. WATKINS. I look forward to working with you maybe on some

other things dealing with the problem.

Thank you.

Chairman SHAW. Mr. Ensign.

Mr. ENSIGN. No questions.

Chairman SHAW. I thank this panel, and now invite the next

panel to come to the table. Eric Oxfeld is president of UBA, Inc.,

of Washington, DC; Mark Wilson, labor policy fellow at the Heritage Foundation; Kenneth Simonson, vice president and chief economist of the American Trucking Associations; Dr. Janet Norwood,

senior fellow at the Urban Institute; and the gentleman from Georgia who will be introduced by Mr. Collins.

Mr. COLLINS. Thank you, Mr. Chairman. It’s with pleasure that

we welcome again David Poythress, the commissioner of the Georgia Department of Labor.

Mr. Poythress has been involved in State business for a long

time, having once served in the capacity as Medicaid director, and

medical services director in Georgia, and also Secretary of State,

and for some time has been commissioner of the Department of

Labor. He does an outstanding job, and I welcome David Poythress.

STATEMENT OF DAVID B. POYTHRESS, COMMISSIONER,

GEORGIA DEPARTMENT OF LABOR, ATLANTA, GEORGIA

Mr. POYTHRESS. Thank you, Mr. Collins. Mr. Chairman, I appreciate the opportunity to be here.

Chairman SHAW. The Subommittee has all of your full testimony

which will be made a part of the record. Please feel free to summarize. We have several other panelists today, so we would appreciate

your sticking with the 5-minute rule.

If you tend to go over, I will very politely go like this. If you continue to go over, I will very rudely go like that. So if you would

continue.

Mr. POYTHRESS. Thank you, Mr. Chairman. I will, indeed, summarize.

As Mr. Collins implied, and as I think most Members of the Subcommittee know, I have been pushing this rope for the last 3 years,

and have briefed this Subcommittee before, and testified last year.

Since then I am pleased to tell you that the proposal we discussed then has been essentially adopted intact by nine States as

well as UBA. It has been renamed from devolution, which we discussed last year, to administrative reform, and it is essentially a

composite proposal.

I think I can say that it has been studied in great detail by lots

of people in the private sector, as well as in government, who are

thoroughly familiar with this. While it is a complex proposal, it is

fairly simple to administratively implement, if the Congress approves the legislation.

It is fiscally sound, and I think it is politically realistic to see it

accomplished.
23

The proposal does essentially four things. It combines the FUTA

administrative tax with the State benefit tax, to be collected by the

States. The savings to the Federal Government and to the private

business sector are very, very consequential—about $100 million a

year in IRS costs would be eliminated simply by their duplicate collection of the tax. At least $500 million would be saved by the private sector not having to fill out duplicate forms and undergo duplicate audit procedures.

Our proposal likewise eliminates or allows the two-tenths Federal surtax on FUTA to expire at the projected December 31, 1998,

deadline. Third, it lays the foundation to significantly downsize the

U.S. Department of Labor.

We are very mindful, as was pointed out, that there needs to be

a national system. There must be Federal oversight. But we feel it

can be done in a more general way than the current level of micromanagement.

Finally, we believe, and we are quite confident that this proposal

lays the foundation for very, very significant tax cuts at the State

level in terms of both benefits and administrative costs.

Mr. Chairman, again, in summary, I think it is a very practical

and a very opportune moment to truly return responsibility to the

States, to lighten the paperwork burden on the private sector, to

save millions on tax dollars, and to lay the foundation for future

tax cuts.

[The prepared statement follows:]

Statement of David B. Poythress, Commissioner, Georgia Department of

Labor, Atlanta, Georgia

Mr. Chairman and Members of the Subcommittee, my name is David Poythress,

and I am Commissioner of Labor in Georgia.

I appreciate the invitation to appear today and present my views on both a multistate Proposal to Restructure the Employment Security System and my support for

passage of H.R. 125 introduced by Congressman Phil Crane in response to a recent

Illinois Federal court ruling in the Pennington Case.

RESTRUCTURING OF THE EMPLOYMENT SECURITY SYSTEM

I testified to this Committee on July 11, 1996 in support of my proposal as Georgia’s Labor Commissioner to transfer the Administration and Financing of the Employment Security System to the States. I am pleased to announce that, subsequent

to that hearing, agreement has been reached to combine my proposal with proposals

from New Hampshire, Virginia and the UBA into a single proposal to Restructure

the Employment Security System. A copy of this proposal has previously been submitted to the Committee and distributed for today’s hearing. Since this agreement

in early March, at least 9 sates have endorsed the proposal and, based on discussions with administrators in other states, I expect the majority of the states to be

formally on board by mid-year. A brief overview of the current system and the proposed changes are included below.

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.

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 (UTF). A separate federal

payroll tax, collected by the Internal Revenue Service (IRS) under the Federal Un-
24

employment 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 used only for unemployment and employment services.

The concept of transferring 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. As I said last July, I believe the time to implement

it is now.

This very straightforward proposal does four main things.

1) It establishes a single payment, 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 costs;

—Eliminating IRS collection of the federal payroll tax, thus saving $100 million

each year;

—Making the marginal additional costs to the states to collect ‘‘both’’ taxes negligible.

These savings could begin as soon as states—instead of the IRS—begin collecting

the FUTA tax. State FUTA 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 programs by the U. S. Department of

Labor (USDOL) and establishes the foundation to downsize the USDOL bureaucracy

by 50% to 75%.

3) It 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.

4) It allows the 0.2 percent Federal surtax, currently authorized through December 31, 1998, to expire.

Mr. Chairman, as I stated in July 1996, this is a wonderful opportunity to:

—Truly return responsibility to the states;

—Lighten the paperwork burden on American business;

—Save millions in wasted tax dollars; and

—Lay the foundation for future tax cuts.

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

SUPPORT OF H.R. 125

The Social Security Act of 1935 gave states 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 (Pennington v.

Doherty) 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 programs. I urge you to support H. R. 125

making congressional intent clear that states are responsible for determining the

terms and conditions under which unemployment benefits are paid including the establishment of base period.

Thank you for this opportunity to present my views on both Restructuring the

Employment Security System and H.R. 125. I respectfully request your favorable

consideration of these matters and welcome any questions you may have.

Mr. Oxfeld.

Chairman SHAW. Thank you.

f
25

STATEMENT OF ERIC J. OXFELD, PRESIDENT, UBA, INC.

Mr. OXFELD. Thank you, Mr. Chairman. My name is Eric Oxfeld.

I’m the president of UBA. We’re a business association specializing

in unemployment and workers’ compensation.

We also head the Coalition for UC Tax Reform, which we founded in 1995 to oppose the administration proposals to extend the

two-tenths FUTA surtax, and to require monthly instead of quarterly payment of unemployment taxes.

We appreciate your commitment to strongly oppose those objectionable proposals.

UBA supports a sound unemployment compensation program

which provides short-term wage replacement to individuals with a

strong attachment to work who involuntarily lose their jobs.

We think Congress can best help meet this objective by restructuring the Federal and State roles in administrative financing of

the unemployment program rather than by increasing FUTA taxes.

Legislation is also urgently needed, and I know it’s the subject

of the second panel, to keep Federal courts from preempting State

discretion to efficiently determine the base period used to measure

eligibility for State benefits. That’s the Pennington-Bradshaw issue.

Restructuring administrative financing is a win/win/win. It will

improve services for workers who lose their jobs. It will cut redtape

for State unemployment agencies. We estimate it will save about

$4 billion for employers.

Now, payroll taxes, as this Subcommittee knows, make it more

costly to hire new workers. That’s why it’s especially troublesome

that the FUTA is already at a rate that is far higher than necessary.

Currently, the Federal Government returns to the States only

about 60 cents on the dollar. Mr. Chairman, in your State it’s less

than 40 cents on the dollar. And for all the Members who are here,

it’s in the range of 60 to 40 cents on the dollar, returned to the

States. The rest piles up in the Unemployment Trust Fund where

it’s improperly used to disguise the true extent of the Federal budget deficit.

This money can only be spent on unemployment compensation.

Despite the large surpluses in FUTA, States are getting less in

grants than they need to administer the program properly. As a result, this has led to a cutback in services to jobless workers. It’s

no coincidence to us that the average duration of an unemployment

claim has been steadily getting longer, even as unemployment has

gone to record low levels.

That’s driving up the expense of unemployment claims, which is

also included in the Federal budget. And many States have made

up the shortfall in money for administration by imposing supplemental State taxes on employers. There are 18 States that have

done that.

We think it’s time to clean up this mess, and we recommend

that—as Commissioner Poythress has mentioned—that each State

should decide and determine how much it needs to run its own unemployment agency.

We reached agreement with nine States on a compromise plan to

do this. We can talk about how we did that and the compromise,

but in effect this will put the decisionmaking closest to where it
26

can be best made as to how much money a State needs to run its

program correctly.

Each State would have its own account for administration. Surpluses in that account would automatically flow into the State benefits account where it could be used to further reduce unemployment taxes. And under this plan there are no reductions in protections for workers, not one. In fact, some present Federal restrictions would be repealed.

Although employers think that unnecessary taxes should be returned to taxpayers, I should also point out that having additional

money in the State trust funds would give States the opportunity,

if they wish, to improve benefits for workers.

Another advantage would be tax simplification, because as the

Commissioner says, employers would only have to complete a single form instead of the two. That would also improve FUTA tax

compliance.

The proposal would shorten unemployment claim duration by not

only increasing funding for administration to the proper levels, but

by tying employment services more closely to unemployment claimants.

Using a very conservative estimate, if we could reduce duration of claims by just 1 week on average, it would save more than $1.5

billion a year, more if unemployment rates are higher.

In addition to restructuring, we are strongly supportive of Congressman Crane’s bill on Pennington, H.R. 125.

Today the unemployment compensation program is at a turning

point. We can keep the status quo which ill serves workers and employers. We can accept the administration’s proposals to increase

the FUTA tax, or we can adopt legislation restructuring the administrative financing of the unemployment system and help keep it

sound into the 21st century.

Mr. Chairman, and Members of the Subcommittee, thank you.

[The prepared statement and attachment follow:]

Statement of Eric J. Oxfeld, President, UBA, Inc.

Good morning, Mr. Chairman and members of the committee. My name is Eric

Oxfeld, and I am President of UBA. UBA is a national association specializing exclusively in public policy issues involving unemployment and workers’ compensation.

Our members are employers across the country of all sizes and industries, who pay

federal and state unemployment taxes. UBA advocates a sound unemployment compensation program for workers and employers. We appreciate the opportunity to appear before you this morning to discuss the need for U.C. legislation relating to several important issues, principally administrative financing of state U.C. administrative agencies and clarification of federal law governing U.C. eligibility (the Pennington issue).

From the inception of the unemployment compensation program, there has been

debate about the optimum role for the states and the federal government. A significant part of that debate has been whether states or the federal government should

be responsible for financing the state unemployment agencies which administer the

program. We believe that we have a need—and a historic opportunity—to restructure the financing of unemployment compensation administration, and thereby, improve services for jobless workers, reduce taxes on employers, and alleviate the financial pinch on administrators. Now that’s what I’d call a ‘‘win/win/win’’ situation.

UBA has developed a proposal to do just that. Before I describe it, however, I

would like to comment on terminology. For better or for worse, and we think mostly

for worse, the short-hand name for this topic has come to be known as ‘‘devolution.’’

I believe, however, that there have been so many different devolution concepts that

the very word may deter consideration of helpful changes in administrative financing. For example, the word ‘‘devolution’’ inevitably seems to distract attention to
27

questions about ‘‘winners and losers’’ and ‘‘federalism’’ when what we should be

thinking about is really, how can we make sure the state unemployment agencies

have adequate but not excessive funds to provide high quality services to jobless

workers, while making sure that the tax burden on employers is both fair and no

more than necessary. Consequently, we use the term ‘‘administrative financing reform’’ rather than ‘‘devolution’’ as a more neutral description of what we seek to accomplish.

Now I’d like to describe our proposal. First, let me observe that it is a departure

from past tradition at UBA that we have decided to advance a ‘‘UBA proposal.’’ I

would be the first to acknowledge that there are several other ‘‘devolution’’ proposals, and I want to say that we have found much of merit in all of them. We wanted

to develop a proposal that drew on the excellent work and thought that had already

been done. We sought to borrow the best of what we found. Sensitive to what is

politically and fiscally feasible, we formed a representative working group from

among our members and asked them to focus on the bottom line for employers.

In preparing the proposal, we were guided by 3 principles:

1. Eliminate the 0.2% FUTA surtax on employers (rather than extend it through

the end of 2007, as recommended in the administration’s FY 1998 budget proposal).

2. Impose employer taxes to finance the system consistent with sound unemployment compensation operations rather than federal deficit reduction.

3. Provide financing for the unemployment program at levels that are neither excessive nor inadequate.

Following the development of the original UBA proposal, we entered into discussion with representatives of a number of state officials who shared our interest in

improving U.C. administrative financing. In March, UBA and 9 states reached

agreement on a common proposal closely resembling the original UBA plan—we

refer to this agreement as the UBA/states proposal.

Under the UBA/states proposal, the basic framework of the federal-state U.C.

partnership would remain intact, and all benefits and legal protections for jobless

workers would be unchanged. There would be no change in the rules governing the

state unemployment trust accounts used to finance U.C. benefits. The 0.2% surcharge would expire, and employers would continue to pay FUTA and state unemployment taxes quarterly. However, instead of pooling all FUTA payments in a single national U.C. administration account (ESAA), FUTA taxes paid by employers in

each state would be credited to a new administration account to be set up for each

state. Each state legislature, rather than Congress, would determine how much it

needs to administer its U.C. program. A small amount would be transferred into a

special account to be used for additional grants to states which require additional

funds to administer their program. Funds that are not needed for administration—

about half or less of present FUTA revenues in many states, as shown in the attachment—would automatically flow into the state’s U.C. benefit account. Employers

would no longer be required to fill out separate FUTA and state unemployment tax

forms. This approach would simplify tax payment and collections for employers and

states, as well as the federal government. Each state would also be responsible for

financing the portion of federally mandated extended unemployment benefits (EB)

now financed out of the Federal Unemployment Tax. Accountability for use of the

money would be enhanced by requiring each state agency to report annually to its

legislature and the public on services provided to U.C. claimants.

We believe our proposal would have many advantages over the present system,

under which the federal government collects 100% of FUTA receipts but returns

only 60% back to the states—in effect, keeping the remainder to disguise the true

extent of the federal budget deficit in general revenue funded programs, and leading

to enactment of many state add-on taxes on employers to make up for the shortfall

in federal grants. These advantages are as follows:

• More resources for administration of the U.C. program. Nearly all states would

be ‘‘winners’’ in a financial sense, because few states currently receive administrative grants equal to the amount of FUTA paid by employers in that state.

• Greater responsiveness to local needs and circumstances. State legislatures,

rather than federal Department of Labor and OMB personnel in Washington, D.C.,

would determine how much is needed to run their U.C. programs, resulting in greater flexibility for state U.C. agencies and greater accountability for states, which already are responsible for establishing benefit levels and eligibility, salaries of state

employees, and other factors that affect the cost of administering the state program.

• Jobless workers will receive better service because states will have the necessary resources and flexibility—as well as greater oversight by worker and employer groups at the state level.

• Less paperwork for employers, who would need to complete a single unemployment tax form rather than separate state and federal unemployment tax forms.
28

• Greater accuracy in collection of the administrative tax. Currently enforcement

efforts relating to the FUTA are low priority, but states would be motivated and

have the ability to catch delinquents more easily.

• Savings to the Federal government. Staffing levels at DOL and the Treasury

Department would be reduced.

• Lower net taxes on employers. Currently the federal government keeps 40% of

the FUTA contributed by employers. If the additional revenue flows into state benefit trust accounts, employers will pay lower state U.C. taxes, in some cases automatically, and in other cases through reductions in state U.C. tax rates.

• Greater employment opportunities. Because U.C. taxes are based on payroll, a

reduction in these taxes will make it easier for employers to hire additional workers—such as individuals coming off welfare rolls.

• Currently the federal government keeps 40% of the FUTA contributed by employers. If the additional revenue flows into state benefit trust accounts, employers

will pay lower state U.C. taxes, in some cases automatically, and in other cases

through reductions in state U.C. tax rates.

• Elimination of the 0.2% FUTA surtax, which would save employers $1.5 billion

a year.

• Additional savings are possible through release of surpluses in FUTA receipts

into state benefit accounts and through repeal of state tax diversions, which would

no longer be necessary.

• There would be no diminution in legal rights or unemployment benefits for

workers. However, better service to U.C. claimants would reduce U.C. claim duration, which has been growing as a result of the squeeze on state U.C. agencies. An

average reduction of as little as 1 week would save another $1.5 billion a year for

employers by reducing their state unemployment tax. To many of our members, this

is the element—along with elimination of the 0.2% FUTA surtax—that offers the

greatest promise of future savings.

We recognize that today the U.C. program is not in a ‘‘crisis’’ mode and therefore

may not be high on the agenda for immediate action by Congress. However, this

is the most propitious time to institute meaningful reforms that can save money for

the federal government, free resources for the states, reduce the tax burden on employers, and improve service to jobless workers. The UBA/states administrative financing reform plan is sound public and fiscal policy, and we respectfully urge your

support for it. Of course, we also urge that Congress approve adequate funding for

system administration until a restructured system can be implemented.

Alternate Base Period Issue

We would also like to address another, more immediate concern—the Pennington

decision, which misinterpreted federal law to require that states expand eligibility

despite the additional burden on state agencies and employers. This problem was

created by the U.S. Court of Appeals for the Seventh Circuit, which has recently

ruled that federal law requires Illinois to expand eligibility. Pennington is not only

a dramatic expansion of the federal role in determination of basic unemployment

benefits after 60 years in which this was considered a state issue, but—unless corrective action is taken—it will add more than $1 billion a year to federal spending

and to the federal budget deficit. A similar lawsuit has now been filed in federal

court in California, California AFL-CIO v. Bradshaw.

The specific issue in Pennington and Bradshaw is whether the federal government

can override state laws that govern the qualifications for benefits. Under the U.C.

program, an eligible worker must demonstrate sufficient attachment to work in

order to qualify. In most states, a worker must have sufficient wages during a specific period of employment as provided in state law—the ‘‘base period’’—typically the

first 4 of the most recent 5 completed calendar quarters. This method is an efficient

means of making these determinations, because states do not have more recent

wage information, and it is prohibitively costly to collect it, while comparatively few

individuals would be affected. In Pennington, the court held that Illinois must adopt

an ‘‘alternate base period’’ (ABP) that would result in payment of benefits to workers who did not qualify under the present test but who might qualify if more recent

wages were considered. The court failed to take into account the large administrative costs to state unemployment compensation agencies and employers in attempting to collect more recent wage information. These added costs are estimated to be

more than $1 billion annually, if Pennington were applied nationwide, as is likely

to be the case. The added costs incurred under Pennington will be reflected in the

federal budget because federal and state unemployment compensation taxes and

state unemployment benefits are accounted for in the unified federal budget. Any

added costs, therefore, will add directly to the task of balancing the federal budget,
29

as well as adding to the tax burden on employers and upsetting the balance at the

state level in making benefit determinations.

Historically, states have been given the responsibility for determination of who is

eligible for unemployment compensation, along with other basic benefit design

issues. We believe that this decision should remain at the state level, because states

are closest to striking an appropriate balance between benefits for workers and cost

to employers, as well as efficient administration of the program.

Employers, including our members who have operations in California, feel strongly that the decision to use an alternate base period should not be imposed by the

courts. Legislation clarifying that use of an alternate base period remains a state,

rather than federal, decision has been introduced as H.R. 125. We respectfully urge

that the Congress give expedited consideration to the enactment of this legislation.

State

FUTA Grants and Taxes by State (FY 1995)

f

FUTA

Contributions

Federal

Grant

% Grants/

Contributions

ALABAMA ................................................................. 86.9 41.5 47.8

ALASKA .................................................................... 11.4 29.5 258.8

ARIZONA ................................................................... 90.2 39.1 43.3

ARKANSAS ............................................................... 49.9 27.2 54.5

CALIFORNIA ............................................................ 645.5 500.6 77.6

COLORADO .............................................................. 91.6 43.1 47.1

CONNECTICUT ........................................................ 74.2 63.7 85.8

DELAWARE .............................................................. 18.2 10.7 58.8

DIST. OF COL. ......................................................... 18.1 15.4 85.1

FLORIDA ................................................................... 319.1 113.8 35.7

GEORGIA .................................................................. 170.5 66.3 38.9

HAWAII ..................................................................... 25.6 17.8 69.5

IDAHO ....................................................................... 22.9 20.5 89.5

ILLINOIS ................................................................... 278.3 151.5 54.4

INDIANA ................................................................... 136.5 50.0 36.6

IOWA ......................................................................... 62.6 29.0 46.3

KANSAS .................................................................... 57.1 25.2 44.1

KENTUCKY .............................................................. 77.7 33.3 42.9

LOUISIANA .............................................................. 82.4 37.3 45.3

MAINE ....................................................................... 24.5 20.6 84.1

MARYLAND .............................................................. 101.7 67.6 66.5

MASSACHUSETTS .................................................. 139.1 84.3 60.6

MICHIGAN ................................................................ 210.5 127.0 60.3

MINNESOTA ............................................................ 114.9 51.8 45.1

MISSISSIPPI ............................................................. 53.4 25.8 48.3

MISSOURI ................................................................. 121.9 57.9 47.5

MONTANA ................................................................ 14.2 14.1 99.3

NEBRASKA ............................................................... 34.8 18.7 53.7

NEVADA .................................................................... 42.7 25.3 59.3

NEW HAMPSHIRE .................................................. 26.6 14.1 53.0

NEW JERSEY ........................................................... 169.5 113.0 66.7

NEW MEXICO .......................................................... 30.0 19.2 64.0

NEW YORK ............................................................... 345.7 241.2 69.8

NORTH CAROLINA ................................................. 174.3 63.8 36.6

NORTH DAKOTA ..................................................... 11.8 14.0 118.6

OHIO .......................................................................... 259.4 101.6 39.2

OKLAHOMA ............................................................. 59.9 30.9 51.6

OREGON ................................................................... 70.0 47.8 68.3

PENNSYLVANIA ...................................................... 251.0 166.9 66.5

PUERTO RICO ......................................................... 34.7 39.0 112.4

RHODE ISLAND ...................................................... 20.8 20.3 97.6

SOUTH CAROLINA ................................................. 80.1 36.8 45.9

SOUTH DAKOTA ..................................................... 13.7 10.9 79.6

TENNESSEE ............................................................. 123.3 43.6 35.4

TEXAS ....................................................................... 400.0 167.3 41.8

UTAH ......................................................................... 42.3 30.3 71.6

VERMONT ................................................................ 12.3 10.5 85.4

VIRGIN ISLANDS .................................................... 1.7 3.2 188.2
30

FUTA Grants and Taxes by State (FY 1995)—Continued

State FUTA

Contributions

Federal

Grant

% Grants/

Contributions

VIRGINIA .................................................................. 148.7 57.9 38.9

WASHINGTON ......................................................... 115.1 89.4 77.7

WEST VIRGINIA ...................................................... 30.5 20.3 66.6

WISCONSIN .............................................................. 125.0 63.2 50.6

WYOMING ................................................................ 9.3 13.1 140.9

TOTAL ................................................................ 5731.7 3227.3 56.3

Dollars in Millions.

Source: U.S. Department of Labor

Mr. Wilson.

Chairman SHAW. Thank you, Mr. Oxfeld.

f

STATEMENT OF MARK WILSON, REBECCA LUKENS LABOR

POLICY FELLOW, HERITAGE FOUNDATION

Mr. WILSON. Mr. Chairman, and Members of the Subcommittee,

thank you for inviting me to testify on unemployment insurance reform. Thank you for accepting my written testimony into the

record. Obviously, I’d like to summarize some of the key points that

I would like to make, summarize the key principles I think are necessary for UI reform, and then highlight some important differences between the two major competing reform plans that are

out there. And I’d also like to note that the following testimony is

my own view, and does not necessarily reflect the views of the Heritage Foundation.

As the 105th Congress begins its debate over the unemployment

insurance system, legislators should consider three important principles to ensure that both workers and employers receive the greatest benefit from any reform.

Number one, the taxing and spending authority for the UI/ES

system should be at one level of government, and not split between

the Federal Government and the States. Effective program accountability requires States to be responsible for both raising and

spending the revenue to run the UI/ES system.

Maintaining the current bifurcated taxing and spending authorities diminishes direct responsibility and accountability.

Number two, ensure and maintain the integrity of the national

employment security system by continuing the FUTA offset for

States that provide public employment services with universal access where individuals can file UI claims and receive reemployment

services.

National standards regarding benefit coverage, FUTA conformity

standards, benefits for out-of-state claimants should continue.

Number three, there should be, however, a minimum of Federal

control and a maximum of flexibility for the States. Burdensome

Federal mandates that cause inefficiencies and impose increased

costs on the States should be eliminated. And States should be empowered to provide programs that improve both employment services for job seekers and employers and have the flexibility to address the needs of workers that may be unique to their State.
31

These principles form the foundation of sensible employment security reform that will improve UI/ES services while reducing administrative and payroll taxes.

Two separate plans to reform the employment security system

have come forward in the past year. The principles that I have

summarized and the recommendations that are outlined in my

written testimony have been endorsed by ALEC, the American Legislative Exchange Council, and form the foundation of the ALEC

plan.

Another plan that is supported by UBA and several State employment security administrators represented by Dave is presented

in their written testimony.

Although there are some similarities between the ALEC plan

and the UBA ES administrators’ plan, three fundamental differences separate them. The most important distinction is that the

UBA ES plan maintains the FUTA, while the ALEC plan effectively eliminates it.

Under the ALEC plan, the taxing and spending authority for the

UI/ES system would be transferred to one level of government,

thereby improving accountability.

Each State would have direct control over their taxes, rather

than continuing to receive revenue from a fixed Federal FUTA tax

that is set in Washington and rarely changed.

Governors and State legislatures are in the best position to determine the needs of their unemployed workers and to establish

the appropriate wage base and tax rate to meet those needs.

Moreover, the employee security agencies would have to justify

their budgets directly to the citizens of those States. Under the

UBA ES plan, the current bifurcated tax and spending arrangement between the Federal and State governments would continue

indefinitely.

For many States, the UBA ES plan does not solve the problem

of over taxation, over FUTA taxation. For example, Mr. Chairman,

in your home State of Florida, employers would continue to send

over $230 million to Washington in FUTA taxes.

But with even a 30-percent increase in the State UI/ES agency’s

budget, Florida would spend only $150 million.

This means that over $80 million per year would be pulled from

Florida workers and employers and continue to build up in Washington trust funds. Eventually they would roll over into the State

benefit accounts, but here, too, they would continue an unwanted

buildup.

Under the ALEC plan, Florida would have direct control over the

level and rate of both the administrative and benefit taxes. In fact,

Florida’s legislature recently passed a benefit tax moratorium explicitly to limit the size of their benefit trust funds.

Only the ALEC plan would enable them to do so on the administrative side of the ledger. Under the ALEC plan, workers and employers would be saving over $1 billion each year in payroll taxes.

And by maintaining the FUTA tax rate, UBA and the ES plan also

preserves the continued mountain of burdensome paperwork requirements that are required because of the current Federal/State

grant process and the overregulation of State programs.
32

1The Social Security Act provided business a competitive disadvantage if their state did not

enact UI. The tax for employers in states that meet all federal requirements is 0.8 percent. The

tax for employers in states that don’t meet federal requirements is 6.2 percent. 2The current FUTA tax rate is 6.2 percent, but employers in states with programs approved

by the federal government receive a credit of 5.4 percentage points, making the effective FUTA

tax rate 0.8 percent. 3 Half of the revenue to pay for extended benefits comes from FUTA. The other half comes

from the state benefit taxes. The extended benefits program provides for an additional 13 weeks

after a recipient has exhausted regular UI benefits, but is only available if a state’s unemployment rate rises significantly.

The UBA ES plan does not eliminate the FUTA grant process.

It only changes the grant formula to 100 percent passthrough.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Mark Wilson, Rebecca Lukens Labor Policy Fellow, Heritage

Foundation

Mr. Chairman, Members of the Committee, thank you for inviting me to testify

on unemployment insurance reform. Today, I would like to discuss how transferring

the administration and financing of the Employment Security system to the states

would reduce payroll taxes, increase jobs and take-home pay, reduce paperwork burdens, improve services for unemployed workers, and more effectively decrease the

duration of unemployment. Please accept my written testimony and enter it into the

record. It should also be noted that the following testimony is my own view and does

not necessarily reflect that of The Heritage Foundation.

BRIEF OVERVIEW OF THE EMPLOYMENT SECURITY SYSTEM

The Employment Security (ES) system consists of the Employment Service and

unemployment insurance programs. The Employment Service was created in 1933

by the Wagner-Peyser Act to make available, free of charge, job search and placement assistance to individuals, and recruiting and referral services to employers.

Services are available in more than 1,800 Employment Service offices nationwide.

More than 18 million people were served by the Employment Service system in 1996

with about 8 million referred to jobs. Over 3 million individuals found jobs after receiving re-employment services at a cost of about $250 each. In 1982, Congress

amended the Wagner-Peyser Act to devolve most Employment Service administrative responsibility to the States. Financial responsibility (revenue and appropriations) for the Employment Service, however, remains with the Federal government.

The unemployment insurance (UI) system was federally mandated on the states

by the Social Security Act of 1935.1 Together the Federal Unemployment Tax Act

(FUTA) and the Social Security Act established the framework for administering

and financing the UI system. FUTA generally determines covered employment, and

imposes certain requirements on state programs, but states generally determine eligibility, weekly benefit amounts, and the duration of benefits.

The UI/ES system 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 wages. 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.2 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. The revenue raised by FUTA is designated for UI

administration and maintaining a system of ES offices. Portions of FUTA revenues

also fund the federal half of the Extended Benefits Program.3

The state unemployment insurance tax varies from state to state, is paid by employers on behalf of their employees, 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.

State UI 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 1997, state accounts in the UI Trust Fund are fore-
33

4 U.S. Department of Labor, ‘‘UI Outlook,’’ February 1997.

5The balance in the Employment Security Administration Account will be $2.7 billion in September 1997. This is $1.3 billion more than the statutory limit. There is also a $6.7 billion balance in the Federal Unemployment Account that has been built up using surplus FUTA payroll

taxes. In fiscal year 1997, Congress will withhold over $1.3 billion in FUTA revenues. 6Lawrence 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 from 6 months to 1 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. 7Daniel 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.

cast to have balances totaling $42.9 billion and the three federal accounts had balances totaling $18.8 billion.4

Like the Social Security Trust Fund, any positive balance in the UI 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.

WHY THE UI/ES SYSTEM SHOULD BE TRANSFERRED TO THE STATES

When the UI/ES system was created in the 1930’s, 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. Over the years, several serious problems have developed with this divided arrangement.

Overtaxation. In FY 1996, only $3.38 billion, or 58%, of $5.85 billion in FUTA tax

collection was actually returned in federal grants to administer state unemployment

offices. The rest was spent on DOL bureaucracy, IRS tax collection, and labor market information programs; or deposited in two seldom-used federal accounts to pay

for extended unemployment benefits and make loans to state unemployment benefit

trust funds. For example, in FY 1995, employers in Tennessee paid $120.8 million

in FUTA taxes but the state received only $43.6 million in FUTA grants to administer their UI/ES program, a loss of $77.2 million. Employers in Florida paid $309.9

million in FUTA taxes but the state received only $113.8 million back from the federal government, a loss of $196.1 million. In 1995, 19 states receive less than half

the FUTA they sent to Washington. All told the federal government collected $5.85

billion in FUTA taxes in FY 1996 and after skimming money off the top for bureaucracy, demonstration projects, and federal trust funds, it then returned on average

56 percent back to the states.

Unnecessary paperwork. Employers now have to fill out both a federal and a state

unemployment tax return, the federal return for the administrative tax and the

state return for the benefits tax. This costs employers an extra $291 million in costs

associated with double filing, when all taxes could be paid on a single state return.

It also costs employers $70 million per year for the IRS to process all of the FUTA

forms.

Unused funds. Years of overtaxation have caused an immense amount of money

to pile up in Washington trust funds: $18.8 billion.5 Even though FUTA revenues

collected for UI and ES administration have been more than sufficient, Congress

continues to extend the 0.2 percent FUTA surtax on jobs and limit UI and ES administration appropriations. This effectively masks the true size of the federal deficit. Moreover, federal budget constraints have had a detrimental effect on the services provided to unemployed workers by the state UI system and ES offices. This

in turn has led to longer periods of unemployment for workers 6 and unnecessarily

high payroll taxes—contrary to the primary purpose of the UI/ES system.7

Inefficient service delivery. When the federal government raises tax money from

the states and it is transmuted into ‘‘federal funds,’’ hosts of rules, restrictions, and

requirements suddenly appear that hinder efficient service delivery. The federal

government has also used the state conformity process to frequently upset the balance of administrative funding and workloads by dictating that states absorb the
34

8 Edwin M. Kehl, ‘‘Administrative Simplification of Unemployment Compensation Programs,’’

in W. Lee Hansen and James F Byers eds., ‘‘Unemployment Insurance: The Second HalfCentury,’’ The University of Wisconsin Press, 1990. 9This is already in the CBO baseline budget.

costs of administering additional programs.8 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.

THE KEY PRINCIPLES FOR REFORM

As the 105th Congress begins its debate over the UI/ES system, legislators should

consider three important principles to ensure that both workers and employers receive the greatest benefit from any reform.

1. The taxing and spending authority for the UI/ES system should be at one level

of government and not split between the federal government and the states. Effective program accountability requires the states to be responsible for both raising

and spending the revenue to run the UI/ES system. Maintaining bifurcated taxing

and spending authorities diminishes direct accountability.

2. Assure the maintenance and integrity of a national ES system by continuing

the FUTA offset credit for states that provide public employment services with universal access where individuals could file UI claims and receive re-employment services. National standards regarding benefit coverage, FUTA conformity standards,

benefits for out-of-state claimants should continue.

3. There should, however, be a minimum of federal control and maximum flexibility for the states. Burdensome federal mandates that cause inefficiencies and impose

increased costs on the states should be eliminated. States should be empowered to

design programs that improve employment services for job seekers and employers,

and have the flexibility to address the needs of workers that may be unique to their

state.

These principles form the foundation of sensible Employment Security reform that

will improve UI/ES services while reducing administrative payroll taxes. To implement these principles Congress should:

• Allow the temporary 0.2 percent FUTA surtax to expire at the end of 1998.9

This will remove an unnecessarily high payroll surtax that limits job growth and

workers’ take-home pay and return $1.4 billion each year to workers and employers.

This revenue loss is already accounted for in the CBO baseline budget and will not

effect the deficit.

• Increase the FUTA employer offset credit from 90 to 100 percent, and transfer

the taxing authority for administrative purposes to the states.

This will effectively eliminate the FUTA tax for states that continue to maintain

conformity with the amended FUTA requirements. The taxing and spending authority for the UI/ES system would be transferred to one level of government. Each state

would then be responsible, and accountable, to their workers and employers for the

UI payroll tax dollars and for the administration and effectiveness of their UI/ES

system. The combined state tax would remain dedicated to funding only those activities covered by the UI/ES system.

This will also save employers $291 million per year in paperwork costs associated

with filing the FUTA tax returns and an additional $70 million per year for the IRS

to process all of the FUTA forms.

• Establish 53 new ‘‘state’’ administrative accounts in the U.S. Treasury. States

would be required to deposit revenue raised for ES administration into their federally managed administrative account. Each state would be permitted to pay for their

administrative expenses from their new accounts. States would continue to pay for

their UI benefit expenses from their benefit accounts. States would, however, be permitted to make withdrawals only to pay for benefits and administration of its UI

law.

• Use the existing balance in the federal Employment Security Administration

Account (ESAA) for transition purposes. Set aside $150 million in the old federal

ESAA to ‘‘hold harmless’’ for 5 years those states that receive more in FUTA grants

than their employers pay in FUTA taxes in FY 1995. Transfer the remaining ESAA

balance to the new 53 state administrative accounts in proportion to their share of

covered employment. Distribute the hold harmless set-aside into the states’ administrative accounts in proportion to their most recent FUTA revenue/FUTA grant

shortfall. Eliminate ESAA after a 5 year hold harmless period.

This will hold-harmless those states that do not have a sufficient tax base to fund

their UI/ES system for a 5 year transition period.
35

10FUTA funds are indirectly deposited the FUA when the EUCA and Employment Security

Administration Account (ESAA) have reached their statutory limits.

• Repeal the federal-state extended benefit program and discontinue the Extended Unemployment Compensation Account (EUCA). Transfer the EUCA balance

to the 53 state benefit accounts in proportion to their share of covered employment.

Amend FUTA to enable States, at their option, to provide their own extended benefit program with their own triggers.

States currently have the responsibility to determine the number of weeks regular

UI benefits are paid. State legislatures should be able to establish an extended benefits program that best meets the needs of their workers and determine the duration

of those extended benefits as well. As it is, the current extended benefit program

‘‘trigger’’ requirements are so high, few states qualified for activation of the program

during the last recession. There will be no impact on the federal budget because the

state benefit accounts, like EUCA, are included in the federal budget.

• Discontinue the Federal Unemployment Account (FUA) and distribute the balance to the 53 state benefit accounts in proportion to their share of covered employment. Provisions should be made for interest bearing loans from federal general revenues to state trust funds with the same repayment provisions that currently exist.

States should, at their option, be able to borrow from other sources as well.

Funds in the FUA come from a portion of the FUTA payroll tax on jobs.10 When

the FUA is not being used for state loans, the surplus that builds up in the account

is essentially used to fund other government programs and amounts to a tax on jobs

to reduce the deficit. At the end of September 1998 there will be a $7.0 billion surplus in the FUA. In recent years, states have borrowed from other sources to obtain

lower interest rates and avoid losing the FUTA offset credit. Provisions should be

made, however, for interest bearing loans from federal general revenues if they are

needed quickly. There will be no impact on the federal budget because the state benefit accounts, like FUA, are included in the federal budget.

• Ensure state trust fund security and accuracy by continuing to require the deposit of all state unemployment insurance taxes in the federal Unemployment Trust

Fund accounts. Funds should be deposited on a timely basis and be invested by the

U.S. Treasury in federal securities. Interest earned would accrue to the appropriate

state trust fund account.

• Repeal Title III of the Social Security Act (Grants to States for UI Administration) and transfer certain requirements to FUTA.

Full payment of benefits when due (prompt and accurate) and the opportunity for

a fair hearing when claims are denied would be moved to FUTA.

Title III elements that would be eliminated include provisions that: Make the Secretary of Labor the judge of what constitutes the proper and efficient administration

of a state’s UI law; requiring states to replace and administrative moneys lost or

improperly expended; requiring states to provide information to federal agencies administering public works or assistance through public employment; and requiring

cooperation with federal agencies administering any UI law.

Requirements to disclose authorized information to the Food Stamp program,

child support agencies, and other agencies, as well as deducting child support payments from UI checks would remain in other statutes after their repeal in Title III.

• Amend FUTA to require states to provide public employment services with universal access where individuals could file claims for unemployment benefits and receive re-employment services.

To assure the maintenance and integrity of a national ES system FUTA should

be amended to require states to provide the UI and employment services currently

required under the Wagner-Peyser Act. National standards regarding benefit coverage, FUTA conformity standards, benefits for out-of-state claimants should continue. Each state, however, should have the flexibility to deliver employment services in a manner which meets the needs of its job seekers and employers.

• Repeal the Wagner-Peyser Act.

By amending FUTA to include the provision of employment services (section 7 of

Wagner-Peyser) the act would no longer be necessary.

• Repeal the Disabled Veterans’ Outreach Program and Local Veterans’ Employment Representative program and amend FUTA to require states to provide preferences to veterans seeking unemployment insurance benefits and re-employment

services consistent with Title 38 of the United States Code.

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
36

11From Red Tape to Results, Creating a Government That Works Better and Costs Less, Department of Labor, Accompanying Report of the National Performance Review, Office of the Vice

President, September 1993, p. 80.

the removal of barriers,11 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.

• Require state laws to conform to certain provisions that would remain, or be

added to, FUTA. These include:

To qualify for the FUTA tax credit, states must cover:

Employers who paid at least $1,500 in wages during any calendar quarter or who

employed at least one worker in at least one day of each of 20 weeks in the current

or prior calendar year; Employers who paid cash wages of at least $20,000 for agricultural labor in any calendar quarter or who employed 10 or more farmworkers in

at least one day in each of the 20 different weeks in the current or prior year; domestic service employers who paid cash wages of $1,000 or more during any calendar quarter in the current or prior year.

FUTA would also continue to require coverage of nonprofit organizations who employed at least four workers for one day in each of the 20 different weeks in the

current or prior year, and state and local governments without regard to the number of employees.

• Amend Title IX to eliminate the general UI and ES administrative grants to

the states and reflect the elimination of the EUCA and FUA accounts.

• Amend Title IX of the Social Security Act to eliminate restrictions on Reed Act

funds previously distributed and allow states to retain administrative funds used for

real estate as well as equity.

Current rules are so restrictive they act against the efficient operation of the state

UI/ES systems. The states are in the best position to determine the use of capital

equipment and local facilities that will best serve the needs of their workers and

employers.

• Permit states to carry out certain national activities, with costs reimbursed by

federal general revenues. These include:

Federal unemployment claims (UCFE, UCX, TAA, DUA); BLS cooperative programs (ES–202, CES, LAUS, OES); Compilation of economic data (initial claims,

continued claims, covered employment); ensuring state statutes conform to FUTA

requirements; and Alien Labor Certification.

• States would share in the cost of contracts for some activities maintained by

a consortium of states include: Interstate and combined wage claim coordination,

and America’s Job Bank.

• Any remaining Department of Labor and Department of Treasury oversight

would be funded with general revenues.

KEY POINTS OF COMPARISON BETWEEN THE TWO EMPLOYMENT SECURITY SYSTEM

REFORM PROPOSALS

Two separate plans to reform the Employment Security system have come forward in the past year. The principles and recommendations that I have outlined

today have been endorsed by the American Legislative Exchange Council (ALEC)

and form the foundation of the ALEC plan. Another plan is supported by UBA Inc.,

and several state Employment Security Administrators (UBA/ES plan) and has been

presented in the testimony of the other panelists. Although there are some similarities between the ALEC plan and the UBA/ES plan, three fundamental differences

separate them.

1. The most important distinction is the UBA/ES plan maintains FUTA while the

ALEC plan effectively eliminates it.

• Under the ALEC plan the taxing and spending authority for the UI/ES system

would be transferred to one level of government thereby improving accountability.

Each state would have direct control over their taxes rather than continuing to receive revenue from a fixed federal tax (FUTA) that is set in Washington and rarely

changed. Governors and state legislators are in the best position to determine the

needs of their unemployed workers and establish the appropriate wage base and tax

rate to meet those needs. Moreover, Employment Security agencies would have to

justify their budgets (and thus the administrative tax level) directly to the citizens
37

12David B. Poythress, Statement before the House Committee on Ways and Means, Subcommittee on Human Resources, July 11, 1996.

of their states. Under the UBA/ES plan the current bifurcated tax and spending arrangement between the federal and state governments would continue indefinitely. • Under the ALEC plan, workers and employers may be able to save over $1 billion each year in payroll taxes since many states would be able to equal or exceed

their current federal grant revenue with lower tax rates. Under the UBA/ES plan,

many state Employment Security agencies could receive substantial revenue windfalls of over 50 percent before any taxes are cut. • By maintaining FUTA, the UBA/ES plan also perseveres the mountain of burdensome paperwork required by the current federal/state grant process and the

over-regulation of state programs by Washington bureaucrats. The ALEC plan, on

the other hand, would free up these resources for state Employment Security agencies to use to improve re-employment services.

2. Unlike the UBA/ES plan, the ALEC plan would eliminate the unnecessary Fed- eral Unemployment Account (FUA) and distribute more than $7.1 billion proportionally to the state benefit accounts. This would significantly improve the solvency of

the state benefit trust funds and may trigger automatic benefit tax cuts under existing state law. It may also encourage some state legislatures to reduce benefit tax

rates or even declare a benefit tax moratoria (as North Carolina has already done).

At the least, these funds will permit the absorption of benefit increases without raising taxes.

3. Only the ALEC plan provides states with the flexibility to establish their own

extended benefit programs that will best meet the needs of their workers. The UBA/

ES plan continues the extended benefit program as an unnecessary mandate on the

states.

CONCLUSION

The recommendations presented here for transferring the Employment Security

system to the states constitutes a modest, achievable proposal that will not unduly

affect the federal budget. In fact, they were characterized by one state Employment

Security Commissioner as ‘‘fiscally sound, administratively simple, and politically

realistic.12 If enacted such a transfer will enable states to reduce payroll taxes, increase jobs and take-home pay, reduce paperwork burdens, improve services for unemployed workers, and more effectively decrease the duration of unemployment.

Mr. Simonson.

Chairman SHAW. Thank you, Mr. Wilson.

f

STATEMENT OF KENNETH SIMONSON, VICE PRESIDENT AND

CHIEF ECONOMIST, AMERICAN TRUCKING ASSOCIATIONS,

ALEXANDRIA, VIRGINIA

Mr. SIMONSON. Good morning, Chairman Shaw and Members of

the Subcommittee. Thank you for the opportunity to testify. You

may not see them on my head, but I am actually wearing three

hats today.

Besides speaking for the 35,000 trucking businesses that belong

to the American Trucking Associations and its State and national

affiliates, I’m appearing on behalf of the UI Tax Working Group,

an informal coalition of employers, service providers, and State

governments whose focus is the FUTA proposals in the administration’s budget and their relationship to UI reform.

In addition, I’m appearing as chair of the tax Committee of the

Small Business Legislative Council, a permanent independent coalition of nearly 100 trade and professional associations that share

a common commitment to the future of small business.

The administration’s budget contains two FUTA proposals that

can only be described as gimmicks. One is yet another extension,
38

this time through 2007, of the so-called temporary 0.2-percent surtax, first enacted in 1976, to eliminate an unemployment trust fund

deficit that was retired a decade ago.

This budget proposal comes despite an unemployment rate that

has thankfully stayed below 6 percent for over 21⁄2 years, and

which the budget, naturally, forecasts to stay there as long as the

budget window is open.

In fact, a straight extension of the surtax this time would create

an embarrassment of riches in the form of surpluses in the various

unemployment trust fund accounts that would have to be forwarded to the States, and therefore not help make the deficit look

smaller.

To avoid this result, the administration proposes to raise the levies around these funds so the money won’t spill over outside the

budget.

The second proposal is even more shameless, to the point that it

gives the word gimmick a bad name. This proposal would require

employers to pay both Federal and State unemployment taxes

monthly rather than quarterly.

It’s no coincidence that the plan would start up just in time to

accelerate payments otherwise due in fiscal year 2003 into fiscal

year 2002. While the Treasury would get help that year from a onetime speedup of 2 months’ worth of unemployment tax receipts,

employers, the IRS, and State governments would be saddled with

higher filing and processing costs every year.

I would direct your attention to the charts distributed with my

testimony. The first charge shows the current system, in which employers make a total of eight quarterly submissions per year—four

each to the IRS, and four to a State agency.

The second chart vividly shows that the administration would

triple this burden to 24 monthly filings each year. Similarly, the

processing and reconciliation burden would triple for Federal and

State agencies. That’s what makes this proposal even more objectionable than the other tax speedup gimmicks considered in the

past.

The only rationale offered for this idea is that it might enable the

IRS to identify nonpayers more rapidly. But as ICESA, the Interstate Conference of Employment Security Agencies, points out,

State agencies do nearly all of the unemployment tax enforcement.

The more resources they must devote to processing payments,

many of which would be for very small amounts, the less they

would have available for compliance. In any case, ICESA finds that

compliance is high and would not be improved by speeding up payments without documents to reconcile them.

The administration has not suggested that it would support higher spending by either Federal or State authorities to process these

additional tax filings. Clearly, the extra work would be burdensome. Even their proposal includes an exemption for some small

employers with limited FUTA liability. But many smaller businesses that add or replace employees, or hire seasonal workers,

would not qualify for the exemption, since new FUTA liability accrues with each new hire, including replacement employees.
39

This deposit acceleration rule makes no sense for businesses,

large or small, and an exception for small business won’t fix this

fundamentally flawed concept.

I was pleased, Mr. Chairman, that you addressed those in your

floor statement earlier this year.

This proposal doesn’t seem to pass anyone’s straight face test.

When representatives of the UI Tax Working Group visited the administration offices before the budget came out, both OMB and

Labor Department staff disavowed authorship of the speedup proposal in unusually candid terms.

Even the Treasury staff presented no defense other than to ask

us to propose another revenue idea if we wanted this one dropped.

They did not suggest IRS would be given extra funds, or was capable of handling the additional work without them.

Rather than move forward with complicated budget gimmicks, as

proposed in the administration’s budget, Congress should seek to

streamline and consolidate the tax consolidation process. There are

many UI reform proposals, as you’ve heard this morning.

Let me call attention to just the tax piece. Instead of the toothy

tangle shown on my second chart, we believe now is the time to

adopt a combined quarterly submission that would enable employers to file taxes quarterly with just one agency, as shown on the

last chart.

Being flanked by experts on unemployment insurance reform

plans, I will not try to address those, believing that devolution is

in the details.

Instead, let me close by urging you to stay away from these two

budget gimmicks that will cause genuine, long lasting pain, in exchange for unjustified or one-time fiscal gain.

Thank you.

[The prepared statement and attachments follow:]

Statement of Kenneth Simonson, Vice President and Chief Economist,

American Trucking Associations, Alexandria, Virginia

Thank you, Mr. Chairman and Members of the Subcommittee, for the opportunity

to testify today on selected unemployment insurance (‘‘UI’’) issues. I am Vice President & Chief Economist of the American Trucking Associations, the national trade

association for over 35,000 trucking businesses of all sizes, types and regions. I am

appearing on behalf of the UI Tax Working Group, an informal coalition of employers, service providers and state governments whose focus is the Administration’s

Budget Federal Unemployment Tax Act (‘‘FUTA’’) proposals and their relationship

to UI reform. In addition, I am appearing as Chair of the Tax Committee of the

Small Business Legislative Council (‘‘SBLC’’), a permanent, independent coalition of

nearly 100 trade and professional associations that share a common commitment to

the future of small businesses.

Our working group has involved a broad array of organizations: the American

Payroll Association, the American Society of Payroll Management, the American

Trucking Associations, the Interstate Conference of Employment Security Agencies,

Inc., the National Association of Manufacturers, the National Federation of Independent Business, the Service Bureau Consortium, the Society for Human Resource

Management, and UBA, Inc. These organizations oppose the Administration’s FUTA

proposals and believe that any restructuring of the FUTA/State Unemployment Insurance (‘‘SUI’’) tax rules should only be considered in the context of broad-based

UI programmatic reforms such as those now being considered by the Subcommittee.

Furthermore, we believe any reform of the UI system should include a streamlining

of the FUTA/SUI collection system, thereby creating greater efficiencies and reduced

costs for the federal and state governments and for employers.

We are deeply concerned that the FUTA proposals contained in the Administration’s FY 1998 budget would create substantial new burdens for both taxpayers and

state government administrators. If enacted, the budget scoring of these proposals
40

1 Ironically, the amount of revenue recorded through this one-time accounting speed-up results

from yet another budgeting device. State UI tax revenues are included as assets of the federal

government for budget-scoring purposes, notwithstanding the fact that the federal government

does not mandate the rate of this tax, collect it, or even have the right to use the proceeds.

All state monies in these Trust Fund Accounts are automatically transferred back to the states

to pay UI benefit obligations as they occur. In the interim, they cannot be used by the federal

government for any other purpose.

would make meaningful UI reform more difficult to achieve. Mr. Chairman, we applaud your publicly stated opposition to the Administration’s FUTA proposals and

your commitment to consider FUTA restructuring only in the broader context of UI

reform.

Recommendations to reform the UI system and the collection of unemployment

taxes address a wide range of issues related to the goals, financing and administration of the system. With respect to tax collection issues, there is broad agreement

that the current duplicate collection system results in unnecessary expense for federal and state government administrators. For employers, this system is both expensive and complex. They must deal with two levels of tax administration for payments, record keeping and audit. Furthermore, they must confront varying FUTA/

SUI tax rate structures and wage bases, as well as definitions of covered employment that differ between the federal system and the states—and among the states.

For multi-state employers, like many in the trucking industry, the system has become extremely complex.

At hearings before this Subcommittee last summer, witnesses estimated that the

present system of collecting separate state and federal unemployment taxes each

quarter costs employers up to $500 million more per year in processing and related

administrative costs than would be required under a unified collection system.

Clearly reform is needed.

THE ADMINISTRATION’S FY 1998 UI PROPOSALS

The Administration’s FY 1998 budget contains two FUTA tax proposals: the first

proposal would extend the current .2 percent FUTA surtax scheduled to expire at

the end of 1998 through the year 2007; the second would accelerate, from quarterly

to monthly, the collection of most federal and state UI taxes beginning in the year

2002.

Surtax Extension. The FUTA surtax was enacted in 1976 to eliminate a deficit in

the Unemployment Trust Fund. Although that debt was retired in 1987, the surtax

has not been allowed to expire. The proposal to again extend the tax was designed

to respond more to out-year budget considerations than to demonstrated UI funding

needs. It must be evaluated with full appreciation of the significant current balances

in the federal UI trust funds and the continuing state frustration with federal practices regarding reimbursement of administrative expenses. We doubt that you will

find any justification for a further extension of this ‘‘temporary’’ tax. Private sector

employers are unanimous in opposing it.

UI Tax Deposit Speed-Up. Accelerating the collection of existing federal and state

UI taxes is a device that generates a one-time artificial revenue increase for budgetscoring purposes and real, every year increases in both compliance costs for employers and collection costs for FUTA and SUI tax administrators. The Administration’s

proposal is fundamentally inconsistent with every reform proposal that seeks to

streamline the operation of the UI system and with its own initiatives to reduce paperwork and regulatory burdens.

The proposal would increase federal revenues in FY 2002, as taxes scheduled to

be collected in FY 2003 are accelerated into the previous year.1 No new revenues

would be collected by the federal or state governments by virtue of this proposal—

the federal government would simply record, in FY02, revenues that would otherwise be received a year later.

This proposal is even more objectionable than other tax speed-up gimmicks considered in budget reconciliation proposals in the past. For example, proposals that

might move an excise tax deposit date forward by one month into an earlier fiscal

year make little policy sense, but also do not create major additional administrative

burdens. This particular proposal would result directly in significant and continuing

costs to taxpayers and to the federal and state governments. By tripling the number

of required UI tax collection filings from 8 to 24 per affected employer each year,

the proposal would exacerbate current inefficiencies and substantially raise costs to

employers and both federal and state UI tax administrators. Tripling the required

number of deposits can only dramatically escalate the cost to employers of the duplication inherent in the current separate FUTA/SUI quarterly collection practices—

now estimated to cost employers several hundred million dollars a year.
41

2The Administration’s budget does not appear to factor in such increased federal and state

collection costs as an outlay offset to the increased FUTA revenues projected.

Furthermore, the one-time, budget score-keeping gain will be far more than offset

by the real, every year administrative costs of additional FUTA tax collection to the

IRS and SUI tax collection to the states. Monthly submission requirements can only

increase the $100 million to process and verify the quarterly FUTA deposits the IRS

now receives from the UI Trust funds.

In addition, since the federal government is required to reimburse states for their

UI administrative costs, reimbursement of states for the added costs of monthly SUI

collection is another hidden federal outlay cost in this ill-conceived proposal.2 To the

extent the federal government does not reimburse the states for these higher SUI

collection costs, the states will experience yet another form of unfunded mandate.

The Administration implicitly recognizes that the added federal and state deposit

requirements would be burdensome, at least for small business, since the proposal

includes an exemption for certain employers with limited FUTA liability. Many

smaller businesses that add or replace employees or hire seasonal workers would

not qualify for the exemption since new FUTA liability accrues with each new hire,

including replacement employees. Further, this new exemption would add still another distinction to the many already in the tax code as to what constitutes a

‘‘small’’ business. This deposit acceleration rule makes no sense for businesses large

or small, and an exception for small business does nothing to improve this fundamentally flawed concept.

THE NEED FOR REFORM

Rather than move forward with complicated budget gimmicks as proposed in the

Administration’s budget, Congress should seek to streamline and consolidate the tax

collection process as has been proposed in the various reform proposals that have

been presented to you.

State governments collected approximately 80 percent of the $28.6 billion in the

total federal/state UI taxes collected in FY96. Transfer of the FUTA tax collection

to the states would place responsibility for the collection of the entire tax on the

administering authority having the most compelling interest in maintaining an efficient and comprehensive collection system. Consolidation would also eliminate the

need for duplicate tax submissions by every employer, the redundant verification of

tax deposits, and multiple audits now necessitated by two separate collection systems.

The notion of consolidating tax collection with state administrators is neither new

nor radical. The 1980 UI Commission chaired by the late Wilbur Cohen proposed

the concept. The 1995 Advisory Council chaired by Janet Norwood endorsed it.

CONCLUSION

UI reform should focus on simplifying the system, reducing the burden of our employers and reducing the costs of administration to federal and state governments.

Transferring FUTA tax collection to the states would dramatically simplify the system and save hundreds of millions of private and public sector dollars annually.

Mr. Chairman, as you evaluate the tax collection aspects of these reforms, we

would ask that you keep in mind the three charts that the UI Tax Working Group

has supplied to the Subcommittee. They contain a simple but important message:

• Where we are;

• Where we need not go; and

• Where simplification can take us.

Thank you.

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Chairman SHAW. Thank you, sir.

Dr. Norwood.

STATEMENT OF JANET L. NORWOOD, SENIOR FELLOW, URBAN

INSTITUTE

Ms. NORWOOD. Thank you, Mr. Chairman, and Members of the

Subcommittee. As you know, I spent 3 years after having left the

Bureau of Labor Statistics studying the unemployment insurance

system with a council that represented labor, management, the

States, and the public.

We found a number of things that I think are terribly important.

The first point is that the unemployment insurance system, which,

as you know, is 60 years old, was set up at a time when the labor

market was very different from what it is today.

We have a lot more people in services. The unemployment insurance system was set up really for a manufacturing work force with

recessions that were short lived, and the people who lost jobs were

rehired. And we have a large number of part-time and contingent

workers.

The council found that there was a long-term, downward trend

in recipiency, since 1947; the unemployment insurance program

really has been serving a decreasing proportion of the unemployed.

In fact, the range of unemployed receiving UI that we found was

about 17.6 percent in one State to 65 percent in another. So there

is a big difference among the States.

But what I would like to do today is to focus basically on two

issues. The first is the Federal and the State role in unemployment

insurance. The Nation’s unemployment insurance system is one of

shared responsibilities and powers.

And I think it’s important that those responsibilities be shared

effectively. We must maintain the interests of the States, but we

must also maintain the national interest.

We spent a good deal of time looking at the basic concepts that

ought to be the basis of a Federal/State cooperative program, and

although we had very differing views on the council, we unanimously agreed that where the interests of the States and the Federal Government coincided, which are many in the unemployment

insurance system, the Federal Government does not need to be involved.

But where the interests are different, it is important for there to

be a Federal presence.

We found seven areas in which we felt that the Federal Government needed to protect the national interest. The first is to ensure

there is a UI system in all States.

The second is to promote forward-funding of the unemployment

insurance system, and that’s terribly important, because there are

two purposes of this system. One is to pay workers who lose their

jobs through no fault of their own, to tide them over until they find

employment.

But the other is to prime the economy. It’s a pump-priming effect

in a period of economic downturn. And you can’t do that if you

don’t have adequate State trust funds at the time of a recession.
46

1 Any opinions expressed herein are solely the author’s and should not be attributed to the

Urban Institute, its officers, or funders.

The third is to coordinate the collection of information and to

monitor developments. The fourth is to maintain supplemental benefit programs that trigger on automatically in recessions, and

avoid, therefore, the costly Federal emergency benefits.

The fifth is to coordinate a more efficient pooling of risk through

loans to the States with serious recessions, and change the way in

which interest rates are paid. And finally, ensuring the eligibility

of workers with strong labor force attachment with some minimum

level of benefits.

In other areas, the programs should be left to the States. And we

had a list of areas where we thought the Federal Government

should leave issues to the States.

The second point I want to make is that we did find there was

a race to the bottom among the States. And the reason for that is

basically that there is a lot of competition among the States for

lower taxes. The easiest way for a State to handle trust fund inadequacy is, we found, to raise eligibility requirements.

We found some real discrimination against low-wage workers.

I’m particularly concerned about that, because as we move forward

toward more and more workers coming into the labor force as a result of welfare reform, we’re going to have people with much less

labor force attachment, much less experience and training, who will

have more spells of unemployment.

If we continue to tighten eligibility and have workers—and there

are some figures in my statement—if we have workers who work

half the year, say, part time, or work a full year part time at the

minimum wage, cutoff for unemployment compensation, even

though they have worked and have strong attachment to the labor

force, I think we’re going to have some serious difficulties in coping

with this group of the labor force.

Mr. Chairman, we made 52 recommendations. I’m proud to say

that most of them—not quite all—but most of them were unanimous, and I would ask that this pamphlet summarizing them be

noted in the record.

Thank you very much.

[The prepared statement follows:]

Statement of Janet L. Norwood, Senior Fellow, Urban Institute 1

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to discuss the nation’s unemployment insurance program with you this morning. As you know, I chaired the Advisory Council on Unemployment Compensation (ACUC), having been appointed to the Council by both

Presidents Bush and Clinton. The Council, established in Section 908 of the Social

Security Act as amended, had 11 members appointed by the Congress and the President who, by law, were representatives of state governments, business, labor, and

the public. The ACUC reviewed the entire Unemployment Insurance program (UI),

held meetings and public hearings in different parts of the country, visited state offices, and met with groups of businessmen and with workers seeking benefits. Members of the Council also visited a number of state UI offices and staff at the U.S.

Department of Labor. The Council convened two economic research conferences and

sponsored a legal symposium to facilitate the exchange of ideas and to ensure a full

understanding of the operation of the UI program. The three reports of the Council

contain, I believe, a useful summary of the operation of the program—both the parts

that are working well and areas which could be improved. Although many different
47

perspectives were represented on the Council, most of the recommendations were

unanimous.

The nation’s system of unemployment insurance is now more than 60 years old.

As the oldest federal-state cooperative program, it has served the nation well and,

in fact, should be seen as a prime example of cooperation between the states and

the federal government. The UI program provides economic security to millions of

American workers who, through no fault of their own, are temporarily laid off or

permanently lose their jobs. We should ensure that the program continues to meet

the needs of workers in a labor market that is considerably different from that of

the past.

Our country’s labor force today is much more diverse, made up of men and

women, skilled and unskilled, minorities and immigrants. More than 136 million

people are in the labor force, and the labor force participation rate has climbed to

over 67 percent. Almost 8 out of every 10 workers are employed in a service-producing industry. Factory workers, who were the prime recipients of UI benefits when

the program began, today make up only 20 percent of nonagricultural employment.

Part-time work has become more prevalent, much of it because people prefer it, but

more than 4 million workers are forced to work part-time because full-time jobs are

not available. In addition, nearly 8 million workers (6.1 percent of all employed

workers) were multiple jobholders, that is, they held more than one job.

The fact that the unemployment rate—at 5.2 percent—is relatively low and that

job creation continues makes this a very good time to review the UI program. This

is a period when the demands on the UI system are relatively low and when, therefore, we should be planning for the future. It is important to note that according

to data for the first week in March, only 37.4 percent of the unemployed in our labor

force survey are receiving UI benefits. There are many reasons for this discrepancy,

of course, since the UI system does not cover new entrants to the labor force or

those long-term unemployed who have already used up their benefits. Nevertheless,

the long-term downward trend in recipiency since 1947 shows that the UI program

has been serving a decreasing proportion of the unemployed.

The ACUC made a number of recommendations for improvement of the system,

and they are all useful. But I would like to focus my testimony this morning on two

issues that I consider especially important. The first is the sharing of responsibility

between the federal government and the state governments and the solvency of the

UI trust funds. The second is the treatment of part-time and low-wage workers.

Defining the Federal and State Roles in the Unemployment Insurance System

The nation’s unemployment insurance system is one of shared responsibilities and

powers. It is important that those responsibilities be shared effectively so that the

interests of the states and of the nation as a whole are best served. The federal government has a responsibility to protect the national interest in cases where the interests of the states do not coincide with those of the federal government. In cases

where the interests of the two levels of government coincide—which is very often

the case—the program should be left to the states. The ACUC made a number of

specific recommendations about activities in the program which should be left to the

states. Our report laid out a useful conceptual foundation for dealing with the responsibilities of the two levels of government in programs which must have the cooperation of both to succeed. I believe that the research that we did on this issue

can be applied to many other programs and that the UI system should be seen as

a useful model as we move more responsibility to state governments.

The Council found that the federal government had a responsibility to protect essential national interests in seven areas and to leave most responsibility for other

areas to the states. The recommendations were that the federal government should:

(1) ensure that each state maintains a UI system; (2) Promote forward funding of

the UI system; (3) coordinate the collection of labor market information and the

monitoring of developments; (4) maintain supplemental benefit programs that trigger on automatically in recessions, thereby avoiding costly federal emergency benefits; (5) coordinate a more efficient pooling of risk through loans to states with serious recessions; (6) assure the eligibility of workers with labor force attachment for

a minimum level of benefits; and (7) promote the efficiency and quality of program

outcomes.

In other areas, the Council found that program details could best be left to the

states. We recommended that many federal laws, regulations, and federal oversight

be changed to leave the states unencumbered in areas best handled by them. For

example, states should determine whether to disqualify certain groups of workers

(i.e., school employees between terms or professional athletes), whether benefits

should be reduced if workers received retirement benefits, and a variety of oversight

functions about performance outcomes.
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Our research showed that the pressures under which many of the states were operating encouraged a ‘‘race to the bottom,’’ which affected two extremely important

areas—trust fund solvency and low-wage workers. Although some states maintained

a degree of forward funding of the trust funds, others did not. Since one important

purpose of the UI program is the provision of purchasing power during an economic

downturn, the federal government has a responsibility to ensure that this is done.

State trust funds must be adequately maintained in good times so that when recession hits, payments can be made to the workers who need them. The funds needed

for these payments should be secured in periods of economic expansion and not in

the midst of an economic downturn. I am concerned that insufficient attention is

currently being given to building up the trust funds in some states now while we

are in an economic expansion for use during some future recession.

Low-Wage Workers

Research conducted by the Council staff found that the competitive pressures

among the states to attract business could well lead to a continued decline in the

percentage of unemployed workers who received benefits. We were concerned to find

that this problem disproportionately affected low-wage workers. When a state experiences insufficient trust funds to cope with the demand from workers entitled to

benefits, often the first step taken is to tighten eligibility for those benefits. The

brunt of this tightening hits especially those working part-time and those earning

low wages. For example, our research found that a minimum wage person who

worked half time or for 20 hours each week the year round would not qualify for

UI benefits in nine states. But a comparable part-time, full-year worker earning

$8.00 an hour would qualify in all states. The point is that a worker with strong

labor force attachment can be disqualified for UI because his earnings were too low.

In the same way, we found that a worker employed two days per week for a full

year at the minimum wage would not qualify for benefits in 29 states. But that

worker would be eligible in all but two states if his earnings were $8.00 per hour.

Thus, low-wage and part-time workers are disqualified either because of their low

earnings or because they work only part-time.

The ACUC report for 1995 declared: ‘‘Because of the structure of earnings eligibility requirements, low-wage, part-time workers must work more hours to qualify

than higher-wage workers.’’ This means that the system in some states discriminates against the working poor, exactly the group we most need to help in our society. I believe that this is an issue that will become more important as an increasing

number of people move from welfare to jobs as the result of the recent welfare legislation. The former welfare recipients tend to have little labor force experience and

frequently do not have much training; they can, therefore, be expected to suffer

more spells of unemployment than the rest of the labor force.

Mr. Chairman, I have focused my brief remarks on only a few of what I believe

to be among the most important issues covered by the careful study and review of

the Advisory Council. I should be happy to try to answer any questions you may

have.

REFERENCES:

Advisory Council on Unemployment Compensation, Report and Recommendations, Transmitted to the President and Congress, February 1994.

Unemployment Insurance in the United States: Benefits, Financing, Coverage, A Report to the

President and Congress, February 1995.

Defining Federal and State Roles in Unemployment Insurance, A Report to the President and

Congress, January 1996.

Collected Findings and Recommendations: 1994–1996.

Mr. McCrery.

Chairman SHAW. Thank you, Dr. Norwood.

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Mr. MCCRERY. Thank you, Mr. Chairman. This panel is a lot

harder than the first panel, and I, frankly, don’t have any questions, because I don’t know enough yet about what everybody is

proposing. So for right now, Mr. Chairman, I beg for more time to

study this issue.
49

But I do appreciate all the contributions of the folks who are

here. They’re very interesting comments. And I think that I need

more time to assimilate all of this.

Thank you.

Chairman SHAW. That is a historic comment, that a Member of

Congress doesn’t know everything about everything.

Mr. Levin.

Mr. LEVIN. Thank you, Mr. Chairman. What do you do next? I

very much, if I might say, sir, respect that approach, and I hope

we can look at this issue without kind of automatically choosing up

sides.

I think where we can simplify we should do it, and I think we

need to look at the administrative problems. I’m no longer on the

Budget Committee, but I don’t like gimmicks.

I hope we can use, Mr. Chairman, this hearing as an opportunity

to take a rather broad and perhaps a fresh look at the unemployment system. Because I think as Dr. Norwood has said, times have

changed since it was started.

And also we have, I think, some memories of the last recession.

And I hope that no one here, Republican or Democrat, thinks there

will never be another one, whatever the assumptions of CBO or

anyone else might be.

So let me just ask, for example, I’ll ask you, Mr. Wilson, What

happens under your proposal if there is no FUTA tax when there

is a recession? Where’s the supplemental benefit coming from?

Mr. WILSON. I believe the States should have control over establishing their own extended benefits program. They are in the best

position to decide the length of the duration, the eligibility for the

duration, and the trigger mechanism for the extended benefits.

As you know, in the last recession, in the early nineties, the trigger mechanism at the Federal level kicked in for very few States

and forced Congress to establish an emergency employment compensation program.

Mr. LEVIN. Let me just say, myself, I draw the opposite conclusion. And I think Mr. English’s testimony, if I might say so, points

in the opposite direction from you, from what you say.

Look, we had trouble with the EB Program, so you say don’t

make it useful. Abolish it.

Mr. WILSON. No. I’m not saying abolish it. I’m saying leave it up

to the States.

Mr. LEVIN. Well, that’s abolishing a Federal program. And we

went through the agony of trying to respond to high unemployment

levels in States, and what we’re finding is that recessions are not

national. They tend to be regional.

So you say leave it up to the States, but the States that are hit

are the ones that have the least capacity to respond. Now, you can

take 1990 or 1991 if you want. That was difficult enough.

But take 1982, 1983, 1984, and 1985 when we went through the

agony of what we were going to do about regional recessions. And

it is true, the EB program trigger did not work. We had set up a

system we thought might be operable.

But that only showed, I think, the need to have some kind of a

national system, partly because the States that are hit are the

least able to respond; and second, as we found out in the eighties,
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and again to some extent in the nineties, when there’s severe unemployment in one State, it affects other States. People go to other

States.

Mr. WILSON. But the States are currently responsible for regular

benefits. They have been able to manage those benefits, that program, fairly well over the last 60 years.

Mr. LEVIN. Within a Federal structure. But that’s assuming no

recession. So when you say Governors and State legislators are in

the best position to determine the needs of their unemployed workers and establish appropriate wage base and tax rate, even—and

I think we need to take a look at that statement honestly. But

when there’s a recession, even if they look at their needs, and if

there isn’t a Federal system they can draw upon, so they determine

their needs, they don’t have the capacity.

Mr. WILSON. I believe the States, the Governors, and the legislatures are in the best position to determine the wage level and the

tax rate for their administrative tax.

Mr. LEVIN. Let me ask Dr. Norwood if she would comment.

Ms. NORWOOD. I would just point out that one of the specialists

on UI, Wayne Vroman, at the Urban Institute, tells me the State

trust funds today are growing at only about one-half the rate of the

previous recovery, and the aggregate of State trust funds is now

only about three-quarters of the amount of 1989, the last big expansion.

The point that needs to be made is that you cannot raise taxes

in a period of recession. That’s the worst thing you can possibly do.

You’re going to hit business when it is down and cause it to go

down further. You’ve got to find the resources in good times to fund

those trust funds.

So if the States are determining this completely, and there has

been a lot of evidence of reductions in many States now, which do

not have very much forward funding—not all States certainly, but

in many of them—if there isn’t any kind of Federal oversight for

that, I think the Congressman is quite right that you will not have

those workers served.

Mr. WILSON. There was a lot of money that was sitting in the

Federal extended benefit account that went unused in the last recession because of the trigger levels. Devolving that trust fund to

the States would increase the solvency of the State benefit trust

funds and enable them to establish extended benefit programs with

the trigger levels in their individual States. That may be able to

help workers.

Ms. NORWOOD. But it would just result in the States reducing

the tax further. So you would end up in a situation where you

didn’t have those resources. That’s what has happened if you look

at the history. We have studied this since 1947.

Mr. LEVIN. My time is up. I just urge everybody to read the report of the advisory council. Look at the membership which

spanned the labor movement to Governor Thompson, and I just

think we need to take a hard look at this.

Thank you, Mr. Chairman.

Chairman SHAW. Mr. Collins, I see the witness from Georgia

would like to be recognized. Perhaps you would recognize him

under your time.
51

Mr. COLLINS. That was my intent, Mr. Chairman.

Chairman SHAW. I knew that.

Mr. COLLINS. I appreciate that very much, because I, too, am

very interested in his answer, and I’m sure he’s thought this thing

through well, because we’ve talked about it for a number of years.

Mr. Oxfeld also wanted to make some comments.

So, Mr. Poythress.

Mr. POYTHRESS. Mr. Chairman, our recommendation is that Federal fiscal accountability standards be established. And that the

State trust funds for both benefits and administration be subject to

that fiscal responsibility standard, so that you don’t have a race to

the bottom and empty it out in good times and have no money in

bad times.

I would like to go back to another point that was made about the

phenomenon of regional State-level recessions, because I think

that’s what we had in the early nineties. The response, as my

friend, Mark, pointed out was not the extended benefit system

kicking in. It is so complex and so, in my view, nonresponsive. It

didn’t kick in.

What happened was a blanket Federal response, which was very

generous. And I think, frankly, we, the taxpayers, spent a lot more

money in places that we didn’t need to spend it then under that

approach, whereas if the States had been fiscally responsible and

had the money to respond, those States that needed to respond

could respond, as a State, and deal with the recession in their locality.

And then as a final matter, our recommendation includes the

maintenance of what we call the loan account, or what we call the

FUA account, so that if a State hit the wall and there was no way

to go, they could come to the Federal Government and borrow at

interest.

Mr. COLLINS. Mr. Oxfeld.

Mr. OXFELD. I have a couple of observations pertinent to the discussion. One is I think it’s fair to observe, as I have discovered over

the many years I’ve been involved with this program, that no matter what type of extended benefits law there is, the Congress is

likely to respond politically with supplemental compensation in

order to address the political need, if not the financial need, of people who are unemployed.

The second is the incentives in the unemployment law today for

States to maintain fiscally sound and responsible balances in their

trust funds are far greater than they were ever in previous history

or recessions, because of the requirements that States have to pay

market-level interest rates when they borrow.

As a result, States are much more acutely aware of the need to

be fiscally responsible in their trust fund balances. That’s new. We

have not had that in a recession previously.

Finally, I would like to comment on the idea that there is a race

to the bottom, which we think is a total myth. In fact, if anything,

there is a race to the middle. Some degree of competition among

the States, we believe, is healthy.

But if you look at the record, even the advisory council said there

is little empirical research to demonstrate any race to the bottom.
52

Some States have reduced benefits, but other States have expanded

benefits.

Today, eligibility is broader than it was just a few years ago. If

you’re a full-time worker, on minimum wage, in every State you

can now qualify for benefits. Some States have raised benefits. Others have reduced them.

But the idea that employers are going to locate in a State that

has low benefits, or one that is very parsimonious in its unemployment program, simply isn’t borne out by the facts. Otherwise, I

think every manufacturing facility in the country after 60 years

would be located in Alabama and Mississippi.

Although there are plenty there, there are plenty in other places

as well.

Thank you.

Mr. COLLINS. I think you make a good point. I think businesses

look more at workman’s compensation than they do at unemployment insurance.

Mr. Poythress, you mentioned returning responsibility to the

States, lightening the paperwork burden on American business to

save millions in wasted tax dollars, laying the foundation for future

tax cuts.

But if I just understood your comments, those tax cuts could not

come unless there were certain requirements met by those States

to ensure those funds were adequate to meet the requirements of

the unemployed.

Mr. POYTHRESS. Yes, sir. That’s correct.

Mr. COLLINS. Very good.

Thank you.

Chairman SHAW. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman. Mr. Wilson, why

shouldn’t we simply make the extended benefit triggers more sensitive, and therefore make the program easier for States to access,

just as a followup to Congressman Levin’s exchange with Dr. Norwood?

Mr. WILSON. That is an option. I think I would prefer actually

that the FUTA tax be—the employer offset credit be raised to 100

percent, and allow the States to establish their own administrative

tax rate.

And I think that’s a better option, in my personal point of view.

You are correct, though. That is a possibility, of changing the Federal trigger level.

Mr. COYNE. Dr. Norwood, did you want to respond to an earlier

exchange?

Ms. NORWOOD. Well, I’d like to say first that the council did consider EB at some length, as the law required, and we made some

recommendations about the kind of trigger that should be used.

There should be an automatic trigger so that you don’t have all of

the discussion that makes the EB come on late, and sometimes

stay on too long.

I think there are ways to handle that by refining and revising

the extended benefit program.

Obviously, I disagree with my friend here from UBA about competition among the States. I would just point out that we did a
53

great deal of research using a good bit of data that had not been

used before.

And we did find very real differences, and then we did a complete search of all kinds of records and statements by State officials, and they all were advertising that if a company came to their

State, not all of them, but most of them, the entrance of a business

to their State would result in lower unemployment taxes.

Mr. WILSON. I would just like to comment that, as Dr. Norwood

correctly points out, there are ways to establish a Federal extended

benefits trigger level. But for it to be able to adequately handle all

of the unique situations for all 50 States, through one trigger formula, I can’t imagine that.

I can’t imagine that the same trigger formula that would be good

and suitable for Georgia would be the same trigger formula that

could be found for Nevada or Florida or Michigan. And to be able

to come up with a formula, a national, one size fits all formula,

would be extremely problematic in my point of view.

Mr. OXFELD. Just a further point on Commissioner Norwood’s

comment. You would expect that if there was a real race to the bottom, all States would be rushing to have low new employer tax

rates.

But in the past 2 years, four States raised their new employer

tax rates and four States lowered them. The fact is that employers

respond to many, many different issues. Their experience and layoffs have much more to do with their tax rates. And they know

that.

They’re not looking at the unemployment tax rate. There may be

States who tout it, but employers are not responding to that.

They’re much more likely to be concerned about locating in a State

that has a deficit in its unemployment trust fund than they are

about a race to the bottom.

Ms. NORWOOD. I’m just very pleased to know that you know

what’s in the minds of employers. What we did——

Mr. OXFELD. We represent them.

Ms. NORWOOD [continuing]. We tried to do was to look at the

data that was available. I would also point out that there has been

a significant number of States, particularly southern States, as

well as Massachusetts, Kansas, several others, who have reduced

their unemployment tax in recent times.

Mr. OXFELD. With very healthy surpluses in their trust funds.

Ms. NORWOOD. Not all of them. That’s the issue.

Chairman SHAW. Thank you, Mr. Coyne.

Mr. English may inquire.

Mr. ENGLISH. Thank you, Mr. Chairman. Mr. Chairman, my first

job out of school was working as the research director of the Senate

Labor and Industry Committee, working on UC, as I noted in my

testimony.

My last job in State government was working as staffer for the

State Senate Finance Committee. And I have to tell you, Mr.

Oxfeld, tax rates matter in locational decisions.

Mr. Wilson from the Heritage Foundation would certainly concede that it is their view that State tax rates have a direct impact

on a State business climate.
54

And certainly in Pennsylvania, UC taxes have been a major part

of the business climate, particularly as in the early eighties we

came out of a recession, and we had a large deficit—a $1 billion

hole in our UC system that hung like a sword of Damocles over the

economy.

Now, unless I’m missing something, UC benefits are directly tied

to UC taxes, tax rates, and tax levels. And so it strikes me that

if States are able to lower their UC taxes through lowering UC

benefits, in good times, that will have a very substantial effect on

their economic strategy.

I am concerned because in the late seventies, Pennsylvania was

running a deficit in a very different climate. In a situation where

they didn’t have to pay market interest rates, and for strategic reasons, Pennsylvania tried to hold down its taxes in order to remain

more attractive to businesses.

I think there is a direct linkage here. I’d welcome your response

on this, but my sense is that if States are able to reduce their benefits dramatically and reduce their taxes accordingly, there will be

some incentive for them to do that, again, as Dr. Norwood indicated, by tinkering with eligibility.

Why shouldn’t there be a race to the bottom when most of the

States that I’m aware of, particularly Pennsylvania, are looking for

advantages to lower their State tax rates on business in order to

attract more jobs?

Mr. OXFELD. Well, I’m familiar with the situation in Pennsylvania. For years, but prior to the requirement that States pay interest when they borrow when their trust accounts run low, Pennsylvania had exceptionally generous benefits compared to most

States, and broader eligibility than most States did.

And they knew that if they borrowed, they had interest-free

loans, and if they didn’t pay it back, it was the Federal tax that

would increase through——

Mr. ENGLISH. Mr. Oxfeld, we all know that. I’m speaking to a

more general situation. Why wouldn’t there be a race to the bottom

if you can lower your tax rates by reducing benefits?

Mr. OXFELD. I can appreciate your point, and I hope I don’t

sound argumentative with you. I would say that the evidence is

that very few Members, whether on the congressional level or in

State legislatures, are eager to vote for reductions in benefits for

people who are out of work.

The fact is I would say the evidence shows that there is a race

to the middle. That the States that had more generous duration

and higher benefit levels, that had greater than average—easier access to the system——

Mr. ENGLISH. Mr. Oxfeld——

Mr. OXFELD [continuing]. Cut back more toward the center, but

not toward the bottom.

Mr. ENGLISH. What evidence? You had cited there were four

States that had raised their business taxes, but States are under

terrific financial pressure. Others have tried to lower them.

I think given what we know about State finance, isn’t it very difficult to draw conclusions from that?

Dr. Norwood, would you like to comment on this?
55

Ms. NORWOOD. Well, it’s quite clear the issue is the funding of

the trust funds. States are under pressure, and we found quite a

bit of evidence—we’d be glad to send you people papers which used

real data.

[The report was sent to all Members of Congress.]

The State has only three options. It can raise the base wage,

which, by the way, has not been raised for years, and most States

are above it except for a few. We do have a recommendation in our

advisory council report on that. That’s one way.

The other way is to raise taxes, and the third way, which is really what has been happening, is to restrict eligibility. And I think

that’s what’s happened to the lower wage workers who, I might

point out, are the people we most need to protect. It is also possible, of course, to reduce benefit payments.

Mr. ENGLISH. Mr. Chairman, may I ask one more question? My

time has expired.

Chairman SHAW. Certainly.

Mr. ENGLISH. Mr. Wilson, on the notion of having the States run

extended benefits programs, if you have a regional recession of

some duration, won’t States be under terrific pressure to dismantle

extended benefits for the simple reason that extended benefits are

a very substantial expense in an extended recession?

And if a State in that situation, where you have declining revenues coming in because of the recession, is called upon to pay out

dramatically more in benefits just because of economic conditions,

doesn’t that put terrific fiscal pressure on States in a way that welfare doesn’t as directly?

Because at least there is a lapse time in a recession when welfare costs increase. There is a direct increase in how quickly unemployment benefit costs go up. So doesn’t this hit States when they

are at their most vulnerable, if you dismantle the Federal extended

benefits program?

Mr. WILSON. I think the bottom line here, Congressman, is the

solvency issue. That’s what we’re all trying to address here. And

I think we all agree at this table that there needs to be some solvency standards at the Federal level on States so that States maintain solvent—not only solvent regular benefit trust funds, but also

if they are——

Mr. ENGLISH. I quite agree. And that is in my proposal, too.

Mr. WILSON [continuing]. Give them the power to develop and establish their own extended benefit trust funds, that the solvency

requirements also carryover into the extended benefits side of it.

I think what we’re trying to talk about here is the administrative

tax side of the issue. I don’t think we have any quarrels here about

the benefit side of the program at all. The issue we’re trying to address here in these reform proposals relates to the administrative

tax, and how the FUTA tax is handled.

Mr. ENGLISH. I understand.

Thank you, Mr. Chairman.

Chairman SHAW. Mr. Ensign.

Mr. ENSIGN. Thank you, Mr. Chairman. I would like to first talk

a little bit about the whole, almost from a practical standpoint, but

also from a philosophical standpoint, the idea of what Mr. English

was talking about.
56

He proposed a scenario to where States try to attract businesses

through lower taxes, and I think that is one of the reasons my

State has been so effective in attracting a lot of new businesses,

simply because of our low tax base.

I think that that’s a good thing. I don’t think this is something

to be criticized. I think that’s a good thing. And he painted the scenario to where if that’s done in the manner—if politicians do that

in a manner that they allow those trust funds, whatever you would

call them, to be depleted, now they get into trouble.

This gets back for me to a question of accountability. If it’s the

Federal Government that does it, then we can now just borrow.

Therefore, we pass this debt on to our children, which is basically

what we do. When we get extended benefits, when we get into recession times, the Federal Government just borrows it and goes

into debt.

Why shouldn’t—and this is where the philosophical point of view

comes in—why shouldn’t States and State-elected officials be held

accountable if they get into that recession and they did not have

a rainy day fund—like the Federal Government doesn’t have—be

held accountable by their local voters?

Yes, Mr. Oxfeld.

Mr. OXFELD. I have to observe, as a matter of Federal law, under

the FUTA, States now are required to pay market interest rates if

they have to borrow from their trust funds as Congressman

English remembers too well.

That is a new provision of the law. It was only enacted in the

early eighties as a reaction to the huge deficits many States had,

particularly in the Northeast and in the Midwest, and which provide powerful incentives to be responsible in funding their trust accounts that didn’t exist before.

We couldn’t agree with you more.

Mr. ENSIGN. Would you care to respond, Ms. Norwood?

Ms. NORWOOD. Yes. I disagree with you. It seems to me that

every unemployed worker in this country, through no fault of his

own, who loses a job needs some temporary help. He’s got to get

back into work, and there are a whole series of things that need

to——

Mr. ENSIGN. Well, I’m not disagreeing with you on that. What

I’m talking about is whether it’s the States’ responsibility or whether it’s the Federal Government’s responsibility. Because the Government that is closest to the people is the most accountable.

Ms. NORWOOD. Certainly. But there ought to be some very strict

and automatic requirements.

Mr. ENSIGN. Why not from the State level and not the Federal

level, though?

Ms. NORWOOD. Because every State will have different levels,

and we’ve had a lot of experience that that doesn’t——

Mr. ENSIGN. What’s wrong with that?

Ms. NORWOOD. What’s wrong with it is that you have 17 percent

of the workers who are unemployed receiving unemployment compensation in some States, and that’s not very much. What happens

to the others?

Mr. ENSIGN. What’s wrong with a State becoming more efficient,

maybe providing, because they’re more efficient, providing more
57

benefits? Another State is not efficient, therefore it can’t afford to

pay as much benefits. Or another State that chooses not to pay as

much benefits. What is wrong with that?

Just like one company pays more money than another company

pays.

Ms. NORWOOD. What’s wrong with it is that in the past, many

of those States, instead of using unemployment benefits have had

those workers, particularly the lower paid workers, handled

through food stamps, and other Federal programs, and that safety

net is being reduced.

Mr. ENSIGN. Well, I would just close with this, as my time is

about to expire—I think this gets back to the whole question of

whether or not we believe the Federal Government has the answers, whether or not we believe that the Federal Government

knows better than people that are more accountable.

I believe the more local the power is, the more it’s accountable.

I think that that is clearly what our Founders saw as a great vision, because you can hold people more accountable.

Somebody from New York cannot hold me accountable. Somebody

from Las Vegas can hold me accountable. And I think that if I’m

not meeting the needs, if I’m a local, State elected official, they can

hold me accountable. And I think that that is certainly the direction we need to be going.

Maybe not all the answers are there, and maybe it is a slow

devolution, but we certainly need to be going in that direction.

Thank you, Mr. Chairman.

Chairman SHAW. Mr. Watkins.

Mr. WATKINS. I have no questions, Mr. Chairman.

Mr. LEVIN. Mr. Chairman, could I just——

Chairman SHAW. Certainly, Mr. Levin.

Mr. LEVIN. I think the last discussion with Mr. Ensign has been

very useful. And it’s hard for me to bite my tongue and say nothing.

But I want to just say to Mr. Oxfeld so you’re not under a

misimpression about the Congress and our political response to unemployment in the nineties.

True, we fought about extension of benefits. True, it would have

been better if there had been a trigger mechanism so extended benefits would not have had to be adopted through specific legislation,

three or four times.

But I think you sell short Republicans and Democrats by just

saying or implying it was a very political response, because it

wasn’t. And we spent a lot of time—Mr. English’s predecessor, as

I remember it, was one of those who was very much involved in

this on the Republican side.

We had a disagreement over redoing the EB formula, between

the administration and the majority here. And so we acted not

mainly because there were votes out there, but because there were

hundreds and hundreds of thousands of people who were laid off

through no fault of their own.

And we in Michigan and Pennsylvania responded when people

were laid off in Texas, and in Oklahoma, and in other places

through no fault of their own, and no fault of us in Michigan.

So it was not basically a political response.
58

Mr. OXFELD. May I respond. I don’t mean to suggest that UBA

or employers don’t believe that it’s appropriate to have an extended

benefits program at the Federal level. And I think there are honest

disagreements over designing the trigger levels, which is a very difficult task to do, given all the differences among the States.

The compromise restructuring plan preserves the extended benefits program. In fact, it relaxes a little bit some of the present restrictions in Federal law on collecting extended benefits, unlike the

Heritage plan or the ALEC plan.

We felt it was important in getting more money to have good administration, that we not even deal with that issue. And I respect

your opinion. I don’t mean to say that Members are only interested

in political solutions, but it’s been our observation over the years

that no matter what type of system has been in place already,

there is a degree of political interest among many Members of Congress in doing something additional beyond what is already there.

Mr. LEVIN. Let me just say, the trigger system wasn’t working.

By the way, I don’t think we got very much help from a lot of organizations in redoing it. The trigger system wasn’t working. No

State was triggering on.

And there were millions of unemployed people in this country.

Chairman SHAW. Before this panel is dismissed, let me just toss

another ball in the air and see if somebody wants to jump after it.

In the Green Book, some of the studies that we have, would indicate that people are much more likely to intensify their job search

toward the end of their benefit period than they are toward the beginning of the benefit period.

What have any of your studies indicated with regard to that?

Mr. POYTHRESS. Mr. Chairman, let me respond to you in a slightly different way. I have heard that story. I have never seen it documented, but lest it be true, we in Georgia adopted a profiling system at the suggestion of the U.S. Department of Labor some years

ago.

We identify, immediately, at the time of filing for a claim, people

who we believe are, based on empirical observations, likely to run

out their entire period of time of benefits.

And we immediately place them in a reemployment program,

providing training and intensive high-touch job placement services.

Works great. We get those people hired very quickly.

Chairman SHAW. Dr. Norwood, you’re nodding affirmatively.

Ms. NORWOOD. Yes, I would agree with that. There is some evidence in the literature that those who have longer spells of unemployment tend to remain unemployed a little bit longer.

And that’s one of the reasons that in Canada and in Western Europe, which have very long spells in which workers receive benefits,

we see extended unemployment, much more long duration unemployment.

But I would agree with my colleague that what is really needed

is a recognition of the people who really have the need and are

going to be there for a longer time, and the pulling together of the

resources of the employment security agencies and others to see to

it that they get the kind of training and help in applying for jobs

that they really need.
59

The council met with employers and we met with State agency

people in all kinds of labor markets, and we also met with unemployed workers and had held a number of public hearings. And we

heard a great deal about this.

But mainly about the need to bring all of these kinds of services

together.

Chairman SHAW. Yes, sir.

Mr. POYTHRESS. If I could just add one final point about it, because I think we may have come full circle here. We have been

doing that, and we do other kinds of employee service activities on

a starvation budget for the last 3 years.

And it’s been that starvation budget, really, which triggered this

entire talk about devolving this system, because the current administrative funding mechanism simply does not work.

As the Doctor pointed out, it is inequitable, it is inadequate. And

all the States are really struggling to keep our heads above water,

to do the administrative things, the employment service things that

we are charged to do.

And it was the inadequacy of those funds that has really triggered this whole discussion.

Mr. WILSON. Mr. Chairman, I’d just like to point out that the

former chief economist of the Department of Labor, Larry Katz,

published some research for the National Bureau of Economic Research that concluded that extending the duration of unemployment benefits from 6 months to 1 year increases the mean duration

of unemployment by 4 to 5 weeks.

So there is, as Ms. Norwood correctly pointed out, a wealth of literature and studies on this that indicate that’s the case.

Chairman SHAW. Looks like we have agreement among the

panel, and so we will end with that. And I thank all of you for

being here. You’ve given excellent testimony, and I’ve enjoyed some

of the disagreement.

The next panel will be made up of Lynn Doherty, who is the director of the Illinois Department of Employment Security in Chicago, Illinois; Gay Gilbert, deputy administrator of the Ohio Bureau of Employment Services, on behalf of the Interstate Conference of Employment Security Agencies; Jonathan Hiatt who is

the general counsel of the AFL–CIO here in Washington, DC; and

Albert R. Miller, who is the president and chief operating officer of

Phoenix Closures, Inc., in Naperville, Illinois.

The two witnesses from Illinois, I know that Mr. Crane wanted

to be here to personally introduce you. He has been summoned by

the Speaker which is a higher calling, I believe, and if he comes

in during the hearing, I know he would like to make some personal

comments about both of you.

Ms. Doherty.
60

STATEMENT OF LYNN QUIGLEY DOHERTY, DIRECTOR, ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY, CHICAGO,

ILLINOIS; ON BEHALF OF HON. JIM EDGAR, GOVERNOR,

STATE OF ILLINOIS

Ms. DOHERTY. Thank you, Mr. Chairman, and Members of the

Subcommittee.

Once again the State of Illinois is here asking for your help in

passing legislation to overturn the Federal Appellate Court decision

in Pennington v. Didrickson. That decision represents a 180-degree

turnaround from how the Federal Government and the States have

construed the Social Security Act since that statute’s inception

more than 60 years ago.

It involves unelected Federal judges in tax and spending policy

better suited for Governors and State legislatures. Left standing, it

would have a costly impact upon employers and State government

in Illinois, and its impact is being compounded across the country.

Pennington is a class action lawsuit brought under the Social Security Act challenging the provision of the Illinois law that establishes the State’s base period. The base period is the period of time

examined to determine whether an individual is in fact eligible for

unemployment benefits, and, if so, the amount of the individual’s

weekly unemployment check.

The plaintiffs in Pennington are demanding an alternate base period for individuals who don’t qualify under the State’s standard

base period. More than 40 States have virtually the same base period system as Illinois.

In Pennington v. Didrickson, the Federal Appellate Court reversed the ruling of the Federal District judge, and held that individuals could, in fact, sue under the Social Security Act to broaden

eligibility for unemployment insurance by requiring States to adopt

multiple base periods.

As a consequence of this decision, Illinois and other States may

soon be forced to implement multiple base periods.

With all due respect, the Appellate Court was wrong. Its ruling

contradicts the legislative history of the Social Security Act, Supreme Court precedent, and the longstanding position of the U.S.

Department of Labor.

Beyond all that, however, it has very expensive consequences.

The multibase period scheme sought by the plaintiffs would involve

millions of dollars in one-time administrative costs, and ongoing

costs of $2.5 million a year, with absolutely no identified source of

funds to cover those costs.

So far, the courts have limited their analysis to comparing the

advantages of multiple base periods against the increases in State

government’s operating costs.

However, the ramifications extend well beyond that argument.

Pennington could also raise employer taxes from somewhere between $10 to $40 million per year in Illinois. Alternately, the State

could face pressure to offset the increased payouts resulting from

Pennington by cutting benefits elsewhere.

In either case, determining eligibility based on wages earned

during the proposed alternate base period would require additional

reporting from employers to verify those earnings.
61

Beyond all that, the scheme the Pennington plaintiffs are after

would only be the beginning. A Pennington-type lawsuit has now

been filed against the State of California as well.

In the California case, however, the plaintiffs are demanding a

difficult, even more costly alternate base period scheme than in the

Pennington case. So consequently, even if Illinois were to adopt

what the Pennington plaintiffs are after, the State would still be

exposed to further lawsuits by different plaintiffs who wanted still

another alternate base period to accommodate their particular

needs.

Last year the Congressional Budget Office estimated that if implemented nationally, the multiple base period scheme the Pennington plaintiffs are seeking could raise outlays from the Federal Treasury by more than $350 million a year.

That figure would rise dramatically as litigants’ demands for different base periods multiply.

In a friend of the court brief submitted in Pennington v.

Didrickson, the U.S. Department of Labor said, 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 systems.

The type or number of base periods a State uses is not a litmus

test of its fairness to the unemployed. For example, eight States

use the alternate base period sought by the Pennington plaintiffs.

In each of those States, however, the amount necessary to qualify

for benefits is substantially higher—up to twice as much.

A State’s base period structure is simply a partial reflection of

how State policymakers have decided to allocate limited resources

to serve best the interests of everybody the unemployment insurance was established to serve.

I am not asking to prohibit the use of multiple base periods, or

to take away any rights now enjoyed by any claimant. I am asking

that as the decisions to the State’s base period scheme are made,

all of its ramifications are fully considered and that the people who

make the decisions continue to be accountable to the people who

will be impacted by the decision.

Thank you very much.

[The prepared statement and attachment follow:]

Statement of Lynn Quigley Doherty, Director, Illinois Department of

Employment Security, Chicago, Illinois; On Behalf of Hon. Jim Edgar,

Governor, State of Illinois

Thank you, Mr. Chairman and members of the Subcommittee, for the opportunity

to testify before you today. Once again, the State of Illinois is 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 involves

unelected federal judges in tax and spending policy that should be reserved to elected officials. Left standing, it could soon have a costly impact upon employers and

state government in Illinois and aggravate the federal deficit by hundred’s of million’s of dollars. Its impact is already being compounded across the nation.

Background—State Base Period

Pennington is a class action lawsuit, challenging the provision of Illinois 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
62

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 filing an initial claim. To

qualify for unemployment insurance in Illinois, 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, it is 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 Illinois’ 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.

Pennington Lawsuit

The plaintiffs in Pennington are demanding that the federal court broaden eligibility for unemployment insurance by requiring Illinois to adopt multiple base periods. They argue the Social Security Act grants federal judges the authority to do

so. Specifically, they 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, Illinois’ base period

could not be challenged in litigation under the Social Security Act. However, in Pennington v. Didrickson, the appellate court reversed and remanded the case, to determine whether Illinois had to adopt multiple base periods.

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 Illinois had to adopt the alternate base period. Just recently, the appellate court affirmed the district judge’s determination.

Illinois will petition the Supreme Court to hear the case. That petition will include

the same argument I make to you today.

With all due respect, the appellate court was wrong when it held federal judges

could decide the type and number of base periods a state was to have. It 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 Social Security Act as it pertains to unemployment insurance—as considered a base period of

the first four of the last five quarters to be consistent with the Act. As you will recall, the last time this Subcommittee considered the consequences of Pennington,
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the Labor Department did not depart from its longstanding position that the type

and number of base periods employed by states are matters for state policy makers.

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 its decision vests

unelected federal judges with the authority to substitute their judgment for governors and state legislatures with regard to tax and spending policy. 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 Illinois Impact of Pennington

In deciding the case on remand, the district judge noted that the administrative

costs of the alternate base period sought by the plaintiffs could be substantial—million’s of dollars 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.

Besides finding the money to implement the plaintiffs’ scheme, Illinois would also

have to find the time and personnel, inasmuch as the State is already in the middle

of two major automation projects for the benefit of claimants: overhauling its extensive mainframe computer system to enable it to continue running in the year 2000

and beyond and implementing a telephone certification system. The telephone certification project is a streamlining initiative that will eliminate the need for claimants to mail paper forms to the State to certify as to their continued eligibility for

benefits. As an aside, implementation of the plaintiffs’ multiple base period scheme

would negate most, if not all, of the cost savings anticipated from telephone certification. The year 2000 project is necessary to ensure the State remains able to pay

benefits at all.

In addition to the administrative burden it would impose on state government,

Pennington could also 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 Department study indicates alternate base periods raise state Trust Fund

outlays by four to six percent. A 1.5-percent increase in outlays from Illinois’ Trust

Fund account would on average amount to around $20 million per year; a sixpercent increase would approach $100 million, annually.

As state law is currently written, additional outlays would automatically trigger

tax increases for Illinois business. A 1.5-percent increase in outlays would result in

an employer tax hike averaging nearly $10 million per year. A six-percent increase

in outlays would raise employer taxes by over $40 million each year.

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—more than $100-million increase over the next eight

years if outlays rose by 1.5 percent; a $400-million increase if outlays rose by six

percent..

Alternatively, the State could face pressure to offset the increased payouts resulting from Pennington by cutting benefits elsewhere.

In any case, determining eligibility based on wages earned after the first four of

the last five quarters would require additional reporting from employers to verify

the earnings, thereby imposing substantial new ‘‘paperwork burdens.’’

Potential National Impact of Pennington

Pennington’s impact in Illinois, 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 Illinois, and can be used as precedent to attack other states’ unemployment insurance laws. As you know, a Pennington-type suit has now been brought against the State of California, as well.

The California litigation demonstrates the inherent difficulty of leaving to judicial

fiat the type and number of base periods a state is to use. In the California case,

the plaintiffs are demanding an alternate base period of the last 52 weeks. Consequently, even if Illinois were to adopt the multiple base period scheme the Pennington plaintiffs are after, the State would still be exposed to further lawsuits by
64

different plaintiffs who wanted still other alternate base periods to accommodate

their particular needs.

Moreover, Pennington’s use as precedent will not necessarily be limited to cases

where an alternate base period is the difference between eligibility and ineligibility.

States can expect the argument that the Social Security Act 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 Social Security Act.

Last year, as you know, the Congressional Budget Office estimated that, if implemented nationally, the multiple base period scheme the Pennington plaintiffs are

seeking could raise outlays from the federal treasury by more than $350 million per

year. That figure would rise dramatically as litigants’ demands for different base periods multiplied.

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 Illinois 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 in Pennington

v. Didrickson.

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. For example, in each of the

eight states that have adopted the alternate base period sought by the Pennington

plaintiffs, the amount necessary to qualify for benefits is substantially higher than

in Illinois—up to twice as much. A state’s base period structure is simply a partial

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 legislation to clarify the Social Security Act does

not govern state base periods. I am not asking you to prohibit the use of multiple

base periods or to take away any rights now enjoyed by any claimant. The legislation I am seeking will simply 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.

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Mr. C

We’ll hear now from Gay Gilbert.

OLLINS [presiding]. Thank you.

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STATEMENT OF GAY GILBERT, DEPUTY ADMINISTRATOR,

OHIO BUREAU OF EMPLOYMENT SERVICES; ON BEHALF OF

INTERSTATE CONFERENCE OF EMPLOYMENT SECURITY

AGENCIES

Ms. GILBERT. Thank you, Mr. Chairman and Members of the

Subcommittee. My name is Gay Gilbert. I am deputy administrator

of the Ohio Bureau of Employment Services, and I am here today

representing the Interstate Conference of Employment Security

Agencies, or ICESA.

ICESA is the national organization of State officials who administer the States’ public employment service, unemployment insurance laws, the labor market information programs, and in many

States, job training programs.

And I would like to thank Chairman Shaw for the invitation to

present ICESA’s view here today.

As Lynn Doherty has mentioned, the issue in the Pennington

case has to do with the State’s right to determine its own base period as part of the eligibility structure for unemployment compensation.

Just a short review of what a base period is—it’s the period of

time in which we look at a claimant’s wages to determine if they’ve

had some attachment to the labor force. And that becomes part of

our eligibility determination.

And as Lynn mentioned, 48 States, including Ohio, use the same

period as Illinois. To make this eligibility determination using the

base period, almost all States collect wage information from employers on a quarterly basis.

To maintain that data base of information requires a certain

amount of technology and a lot of time to do the data entry.

The Pennington lawsuit involves the Social Security Act’s ‘‘when

due’’ clause. The Social Security Act requires that States utilize administrative methods designed to ensure benefits are paid when

due; i.e., as quickly as possible.

The issue in Pennington is whether or not the base period is a

State eligibility requirement or an administrative method that’s

subject to the ‘‘when due’’ clause. ICESA strongly supports the argument that Illinois has made, that a State’s base period is a State

eligibility requirement and not an administrative method subject to

the ‘‘when due’’ clause.

And there are some fairly persuasive reasons for why we look at

it that way. From the very inception of the UI Program, the ‘‘when

due’’ clause has been interpreted by the executive branch and the

courts to mean that benefits should be paid when due, but under

the terms and conditions of the State laws.

And States have been given broad discretion in developing their

State UI laws.

One of the indicators that the executive branch has endorsed this

position is that when the UI Program first began, the Department

of Labor issued some draft bills that were model legislation for

States to look at in developing their laws, and one of those draft

bills included the base period we all use.

In addition, every year, the Department of Labor is required to

certify that each State’s law is in conformity with Federal law, and
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for 60 plus years they have done that with the base periods we all

use.

Some States, like Ohio, have chosen to use an alternative base

period. It is ICESA’s position that States should continue to have

the latitude to use either alternate base periods or whatever base

period is appropriate for their State’s needs.

I would say that as technology begins to advance, we may have

the opportunity to move the base period closer to the time of when

the claimant is actually making his/her application. But technology

is expensive, as Lynn pointed out, and at this point in time the unemployment insurance system is already underfunded. We are not

in a position to spend large amounts of money making huge technological changes.

We are also currently hampered by the fact that we’re all having

to transition our computer systems to the year 2000 to make our

systems compliant.

Lynn mentioned being concerned about additional lawsuits. We

believe that this case opens the door not only to lawsuits like Pennington, but to other eligibility issues that States determine as

part of their unemployment insurance laws.

Policy issues of this kind should be dealt with in the legislative

process, and not in the courts. H.R. 125 has been introduced by

Congressman Crane, and ICESA supports that legislation and encourages you to do so.

Before concluding I would like to mention two other items very

quickly that relate to unemployment insurance. The President’s

budget for 1998 includes a proposal to double, from roughly $7 to

$14 billion, the amount that can be held in the unemployment

trust fund account from which loans are available.

There are no projections at this point that States are going to

need those loans, and at this point the rules are such, as was mentioned earlier, that there is a great incentive for States to avoid

borrowing money. And so we see no policy basis for extending this

limit, and we would encourage you to consider possibly not supporting that.

Also, as you develop legislation relative to unemployment insurance, we urge you to look at the national new hire directory which

is currently being developed for child support enforcement purposes. States currently have access to this information in their own

States, but they do not have access to other States’ information. We

believe that such access is desirable for our program, and H.R. 125

may provide you with a vehicle to do that.

Again, ICESA would be happy to provide you with more information on that subject.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Gay Gilbert, Deputy Administrator, Ohio Bureau of

mployment Services; on Behalf of Interstate Conference of Employment

Security Agencies

Mr. Chairman and members of the Subcommittee, my name is Gay Gilbert. I am

Deputy Administrator of the Ohio Bureau of Employment Services, and I 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.
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I would like to thank Chairman Shaw for the invitation to present ICESA’s views

about the federal court’s ruling in the Pennington case.

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 period consisting of the first four of the last five completed

calendar quarters. For example, if the claim were filed today, April 24, 1997, the

base period would be January 1, 1996, through December 31, 1996. Even if the individual had worked during all of the period from January 1, 1997, through April 23,

1997, 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. It 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 eligible 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

UI benefits are paid ‘‘when due.’’

In 1994, the Seventh Circuit Court of Appeals reversed the district court and

ruled that individuals could sue under the ‘‘when due’’ clause to challenge a state’s

base period. The appellate court remanded the case to the district court for a determination as to whether the ‘‘when due’’ clause required Illinois to adopt an alternate

base period for the plaintiffs. 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. The U.S. Department of Labor

submitted an amicus brief to the court supporting the Illinois Department of Employment Security’s position.

The Illinois DES appealed the seventh circuit’s ruling to the Supreme Court

which declined to hear the case in November 1994. 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) the 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 IDES’ 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’ benefit and outweighed

the fourth. Accordingly, the court ruled that Illinois had to adopt an alternate base

period for the plaintiffs.

Illinois appealed the district court’s ruling; however, just a few weeks ago the U.S.

Court of Appeals for the Seventh Circuit affirmed the district court’s judgement.

ICESA’S VIEWS

Our 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 to 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 to mean that benefits should be paid as promptly as is feasible administratively under the terms and

conditions of state laws.
69

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 earnings necessary to qualify for 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 Illinois 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 to

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.

A number of states have put alternative base periods in place to address the circumstances 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 periods—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 has been reduced substantially in recent years,

and increases in the future to support practices such as alternative base periods do

not appear likely. Right now states are directing scarce resources to making unemployment insurance computer systems Year 2000 compliant. Both UI benefit and tax

systems contain numerous date-sensitive calculations which, if not modified to accommodate the century change, will have devastating consequences.

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

Earlier this year, California was sued in a Pennington-type suit. Other states may

face similar lawsuits very soon. Losing a Pennington-type case would mean that if

claimants do not qualify for UI benefits under the standard base period, an alternative period, such as the most recent 52 weeks or the most recent 4 quarters,

would be used. Pennington could also be used as a precedent for lawsuits arguing

that the ‘‘when due’’ clause requires an alternative base period whenever inclusion

of more recent wages would yield a higher benefit amount. Pennington blurs the line

between what SESAs can and cannot be sued for, 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 pre-
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empts the democratic process and, as a result, is likely to erode public support for

the program.

In the legislative process, discussions about qualifying 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 outcome. For example, in a state where individuals in the same

circumstances as the plaintiffs 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 their unemployment taxes 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

In early January, Congressman Phil Crane (R–IL) introduced H.R. 125 which

clarifies that individuals cannot file ‘‘when due’’ lawsuits to force changes in state

base periods. It does not prohibit a state from adopting an alternate base period and

does not take away from any claimant any right now enjoyed with respect to unemployment insurance.

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 H.R. 125

making clear Congressional intent to leave establishment of base periods to the

states.

Mr. Hiatt.

Chairman SHAW. Thank you very much, Ms. Gilbert.

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STATEMENT OF JONATHAN HIATT, GENERAL COUNSEL,

AMERICAN FEDERATION OF LABOR AND CONGRESS OF

INDUSTRIAL ORGANIZATION

Mr. HIATT. Thank you, Mr. Chairman. Mr. Chairman and Members of the Subcommittee, I thank you for the opportunity to comment today. I have submitted written testimony for the record, but

in the interests of time I’ll just highlight some of the points from

those remarks.

The Pennington case was not brought in a vacuum. Throughout

the last 25 years, State and Federal legislators have instituted a

distressing array of barriers to access to unemployment benefits:

higher earning requirements, tougher disqualification penalties,

waiting weeks, artificially high triggers for extended benefits, taxes

on benefits, and administrative complications which delay or eliminate access to benefits, the problem that led to the Pennington

case.

State and Federal legal restrictions on eligibility have reduced

the percentage of unemployed receiving benefits from 75 percent in

1975 to only 32 percent for the most recent figures.

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 explaining this decline.

The categories of workers affected by enforcing the statutory

‘‘when due’’ standard are precisely those which represent the fastest growing segments of the labor market: contingent workers,

lower wage workers, women workers.
71

Amidst this decline in access to the system, the Pennington case

highlighted an administrative procedure that has eligibility implications. Legally, the distinction between an administrative issue

with eligibility implications and a pure issue of eligibility is pivotal.

The court, in Pennington, determined, not surprisingly, and, indeed, most logically, that a procedure which is used to measure eligibility is clearly an administrative procedure, even if it obviously

has eligibility ramifications.

The court went on to find that in Illinois an administrative procedure which requires claimants to wait up to 6 months solely so

that the State can maintain an outmoded administrative system

violated the ‘‘when due’’ clause, the provision which requires the

States to pay unemployment benefits as soon as possible once an

unemployed claimant is entitled to them.

In Illinois the court found that between 13,800 and 40,000 unemployed workers who were otherwise eligible now lose out or face extreme delay and our impacted in any given year by the failure to

consider the lag quarter.

In seeking to reverse the court and alter the Social Security Act,

the Crane bill oversteps the boundaries of the Federal/State division of functions. The Supreme Court has twice ruled unanimously

on cases where administrative concerns had eligibility implications.

In the Java case, they defended the primacy of the ‘‘when due’’

clause against an administrative procedure which existed in 48

States. Most recently, the Supreme Court declined to reconsider

the issue in the Pennington case.

The Federal Government has a longstanding responsibility to enforce the ‘‘when due’’ clause. In fact, Federal activity, through the

unemployment insurance service, has improved the functioning of

wage record systems, while simultaneously expanding the range of

procedures which are administratively feasible and reducing the

time lag which is justifiable under ‘‘when due’’ considerations.

Eight States currently account for the most recent quarter of

earnings, the lag quarter, in some way, despite Illinois’ protests

about the difficulty of achieving this administrative goal. In Maine,

Massachusetts, New Jersey, Ohio, Rhode Island, Vermont, Washington, and Michigan, States use a base period which includes

earnings of the most recent quarter.

The most common strategy is to use existing wage record data

for the first four of the last five quarters to initially determine eligibility, and if a claimant fails the monetary eligibility test, the

State issues a wage request to secure the more recent data.

Implementation of a such a movable base system does not require a complete revamping of administrative procedures, nor does

it invalidate previous efforts to develop wage record data bases.

The movable base procedure more accurately measures earning

history, and more promptly pays benefits to eligibility claimants

without imposing undue additional costs.

Technological and history change in administration are essential

to the findings in Pennington. Many States fear that they will be

forced to implement administrative procedures that are defined by

courts and rigidly enforced.

That is not our interpretation of what the court in Pennington

has said. We believe the principle stated in the Java Supreme
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1 Bassi, et al. (1996), ‘‘The Evolution of Unemployment Insurance,’’ Advisory Council on Unemployment Compensation, Background Papers, Volume III, January; Anderson and Meyer (1994),

‘‘Unemployment Insurance Benefits and Takeup Rates,’’ Working Paper 4787, National Bureau

of Economic Research; Baldwin (1993), ‘‘Benefit Recipiency Rates Under the Federal/State UnCourt case provides for a balancing act to measure administrative

feasibility as against timeliness standards. And that’s what the

Pennington court—all Reagan appointees, incidentally—did in simply applying this balancing test.

States can account for most recent earnings either through existing wage reporting systems or by supplementing those systems

through a wage request procedure following initial determinations.

The court, in Pennington, specifically did not tell Illinois what

system had to be followed, or that any particular system was the

only appropriate one. What States cannot do, and what they should

not be allowed to do through congressional reversal of Pennington

is to ignore the national interest in timely benefit payment to individuals who have worked, paid taxes, and earned enough money to

be eligible for benefits.

Thank you.

[The prepared statement follows:]

Statement of Jonathan Hiatt, General Counsel, American Federation of

Labor and Congress of Industrial Organization

Last year, the AFL–CIO testified before this Subcommittee that the Pennington

lawsuit and the proposed legislation to reverse it were vital issues for unemployed

workers in the United States. We believe the federal courts have spoken forcefully

and correctly in their assessment of Illinois’ administrative procedures. They have

demanded a reasonable remedy and stayed within the bounds of the current federalstate division of responsibilities under the Social Security Act. It would be misguided and unfair for Congress to reverse the court decision, deny claimants the

right to timely benefit payments, alter the Social Security Act, and restrict access

for hard-working claimants who happen to work in labor markets or industries

which offer only irregular work. We believe the district court and appeals courts in

Pennington—though, incidentally, were all appointed by President Reagan—have

rendered a fair and accurate judgement which should not be overturned through

legislative action.

Although we are here to testify on the Pennington panel, we must voice some concerns regarding devolution. The AFL–CIO encourages Congress to fashion a consensus response to UI administrative financing problems. Labor, employers, and federal

and state administrators can be brought together around shared principles for administrative financing without fundamentally altering the current federal/state programs. The existing range of devolution proposals, however, has nothing to do with

consensus. These proposals only delay the process which should be moving forward

to fix administrative problems. We will outline the principles which should guide

administrative finance discussion, looking forward to the day when devolution efforts are put aside in favor of more appropriate, consensus-building policies.

The following statement addresses Pennington and devolution, in that order.

Pennington v. Illinois

Unemployment Insurance and the New Labor Market

The Pennington case is a pivotal event for unemployed workers because it addresses one aspect of the disjunction between current UI administrative practices

and underlying changes in the labor market. At a time when the economy is increasingly creating low-wage and contingent jobs, the UI system has been moving

further and further toward serving only higher-wage, more stable employees.

State and federal legal restrictions on eligibility have reduced the percentage of

the unemployed receiving benefits from 75 percent in 1975 to only 32 percent for

the most recent figures. 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 percentage of the unemployed who receive benefits.1
73

employment Insurance Program: Explaining and Reversing Decline,’’ Ph.D. Dissertation, M.I.T.;

Corson and Nicholson (1988), ‘‘An Examination of Declining UI Claims During the 1980s,’’ UI

Occasional Paper 88–3, US Department of Labor. 2 Yoon, Spalter-Roth, Baldwin (1995), ‘‘Unemployment Insurance: Barriers to Access for

Women and Part-Time Workers,’’ National Commission for Employment Policy.

Amid this national decline in the counter-cyclical and insurance functions of the

system, Pennington highlighted the inequitable treatment of claimants subject to

the hurdles posed by the Illinois UI system. These administrative hurdles, which

the court has strongly rejected, impose a particular burden on workers who are either least able to bear economic uncertainty (due to their low prior earnings) or not

responsible for the irregularity of the work patterns (such as construction labor).

The overall decline in the effectiveness of the UI system is due in large measure

to its insufficient treatment of low-wage and contingent workers.

Unemployment Insurance and Part-Time Work

As discussed below, the Pennington case addresses an administrative procedure

issue with eligibility implications. The core issue is whether a state’s administrative

process, which disadvantages workers with irregular work patterns, can be allowed

to stand. Congress must appreciate the full extent to which current UI practice

across the country disadvantages low-wage workers in a variety of ways, particularly through monetary eligibility requirements.

Monetary eligibility requirements do not simply set a threshold earnings level for

eligibility. Most states require a set amount of earnings for a given 52 week period,

but also specify a ‘‘high quarter’’ earning threshold. These high quarter thresholds

reduce eligibility on the basis of the distribution of earnings over time, not just the

total level of earnings. The non-partisan National Commission for Employment Policy measured the impact of state monetary eligibility requirements—and particularly high quarter requirements—on UI recipiency rates for various population

groups.2 This research duplicated the screening process which unemployed workers

face after applying for UI. It compared the earnings history of individuals against

the monetary eligibility requirements for the states in which the surveyed individuals lived.

The Commission found that women are twice as likely as men to fail state requirements for high quarter earnings and that only nine percent of all unemployed

workers who worked part-time received benefits. State monetary eligibility requirements, particularly high quarter earnings requirements, pose a significant hurdle

for the unemployed seeking UI 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. Thus, by asserting the federal obligation to enforce standards of timeliness, the Pennington case also represents a

small, vital step toward reversing years of backsliding under state UI law.

Pennington and HR 125

In Luella Pennington v Lynn Doherty, Director of the Illinois Department of Employment Security, 22 F.3rd 1376 (7th 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 Illinois

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. Illinois filed an appeal. On April 4, 1997, the Republican-appointed United

States Court of Appeals for the Seventh Circuit again rejected Illinois’ arguments.

Representative Crane has offered HR 125 to remove state base period determination issues from federal scrutiny under the Social Security Act. This action would

strip claimants of their right to legal recourse where state accounting procedures

neglect to count most recent earnings and, in the process, delay timely payment of

benefits. In effect, HR 125 reverses the court decision and implies that a six month

delay for benefits is within the bounds of ‘‘timely’’ payments.

Claimants’ and States’ Rights: HR 125 Reverses Historic Federal Role

Illinois’ case against Luella Pennington and Representative Crane’s effort through

HR 125 assert that the state right to set eligibility is paramount. But for over 60

years, the federal government has had the right to insist that benefits be paid in

a timely manner (under the statutory ‘‘when due’’ clause). Indeed, in its most recent

decision the Pennington court states that:
74

3Statement on Behalf of Mrs. Luella Pennington and the Pennington Class Opposing Legislation to Reverse Pennington v. Didrickson.

The [U.S. Secretary of Labor’s] regulations provide some guidance in this endeavor. But they could provide a great deal more, and perhaps they should.

We believe they should. The federal role in overseeing administrative fairness and

efficiency was codified in the Social Security Act. Federal agencies have a unique

responsibility to ensure against fraud, to promote timely benefit payments, and to

advance system integrity. Congress should resist pressure to alter the federal-state

relationship on behalf of the state of Illinois.

The Supreme Court has twice ruled unanimously that state authority over eligibility determination did not have precedence over the federal responsibility to guarantee timely payment of benefits under the ‘‘when due’’ requirement. In perhaps the

most important case, California Department of Human Resources Development v.

Java, 402 U.S. 121 (1971), the Supreme Court struck down an administrative provision that was in use in 48 states, citing violation of the ‘‘when due’’ clause during

pendency of an appeal. This case established the framework for the court’s decision

in Pennington, namely that ‘‘when due’’ must mean ‘‘at the earliest stage of unemployment that payments were administratively feasible.’’

It is Administratively Feasible to Protect Claimants’ Rights

Eight states currently account for the most recent quarter of earnings in some

way, despite Illinois’ protests about the difficulty of achieving this administrative

goal. In Maine, Massachusetts, New Jersey, Ohio, Rhode Island, Vermont, Washington and Michigan, states use a base period which includes earnings in the most recent quarter. The most common state strategy is to use existing wage record data

for the first four of the last five quarters to initially determine eligibility. If a claimant fails the monetary eligibility test, the state issues a wage request to secure the

most recent data. Alternatively, given current technological advances, many states

can easily meet higher timeliness standards by simply speeding their existing wage

reporting systems. Thus, implementation of a moveable base does not require a complete revamping of administrative procedures nor does it invalidate previous efforts

to develop wage record databases. In fact, efforts to expand wage record reporting

systems have laid the groundwork for higher timeliness standards. The moveable

base procedure more accurately measures earning history and more promptly pays

benefits to eligible claimants without imposing undue additional cost.

The administrative procedures followed in these states show how the cost accounting which Illinois has provided vastly overstates the administrative burden which

the state would bear. Loleta Didrickson, Comptroller of the State of Illinois, provided cost estimates that include creating a wage request system and reachback

funding to cover previous denials. When these provisions are removed from the cost

estimates for alternate base implementation, the additional administrative cost to

Illinois drops to just $400,000 per year.3

It must be remembered that the Federal government has played an active role

in making alternate base procedures administratively feasible. The federal Unemployment Insurance Service has actively promoted technology upgrades which facilitate the timely collection of wage record data and rapid sharing of information. The

federal partner in the UI system has a responsibility to demand timely payments

and an obligation to make those timeliness standards reachable through system integrity funding and best-practice information. We believe the Department of Labor

and state administrators have been working together for years, laying the groundwork for a higher standard of timeliness in benefit payments. Congress should not

intervene against claimants to defend outmoded administrative procedures.

Pennington Takes the System Further From Welfare, Not Closer

Last year, opponents of the Pennington decision argued that moveable base provision made UI too much like welfare. This is badly misleading. In fact, by forcing

Illinois to accurately account for a worker’s earnings, Pennington make unemployment insurance a more effective form of social insurance for individuals with work

histories. Workers found eligible under a more timely accounting standard have

paid in to the UI system through indirect taxes on themselves and direct taxes on

their employers. They have worked, paid UI taxes, and lost their jobs. They are

guilty only of earning that income during a quarter which the state chooses not to

count unless the worker waits and reapplies.

By promoting a more timely and accurate accounting of workers’ earnings, moveable base procedures keep workers from slipping into welfare after they lose their

jobs. State Senator Patrick Johnston of California recently asked the State of California to provide an estimate of the number of workers who would not slip into wel-
75

4Letter from Chief Deputy Director of the California Health and Welfare Agency to the Honorable Patrick Johnston, California State Senate.

fare if an alternate base period administrative procedure were enacted. The state

made estimates based on the last four completed quarters and on the prior 52

weeks. The state found that 16,357 and 28,200 workers, respectively, would be kept

out of welfare because their UI eligibility would be more accurately accounted for

and welfare savings of $23.7 million and $40.9 million, respectively, would be realized.4 Ironically, in the absence of moveable base administrative procedures, states

are forcing unemployed workers to reduce their connection to the labor market

while awaiting benefit eligibility or, worse, falling into the welfare system.

Summary Arguments: Pennington and HR 125

The Department of Labor is currently sponsoring research into the administrative

and eligibility issues relating to moveable base period administration. In an earlier

study, Wayne Vroman (1995) found that UI eligibility would increase by six to eight

percent and benefit outlays would increase four to six percent under alternate base

period programs. Clearly, there are far reaching effects to demanding that states

pay benefits in a timely manner.

But these eligibility implications should not cloud Congress’ deliberations around

HR 125. The Pennington case is first and foremost a case about whether states

should be allowed to delay payment of UI benefits, sometimes to the extent that

claimants fall out of the system. The courts have emphatically stated that states

do not have this right. Congress should not now step in to limit the rights of the

unemployed.

DEVOLUTION

In the absence of specific legislative language, we can only speculate about the

full effect of the current devolution proposals. However, we have deep concerns

about the impact of devolution on vital elements of the current system. Moreover,

we fear the attention which is being focused on devolution only serves to delay the

development of less fundamental but more practical solutions to administrative financing problems which many constituencies can agree upon.

The AFL–CIO is uniquely representative of various elements of the employment

security system in the United States. We represent unemployed union members who

remain connected to the labor movement and we try to further the prospects of all

unemployed workers as a basic principle of social justice. We also represent employees in human service and unemployment insurance agencies. And representatives

of organized labor serve in various capacities on federal, state, and local advisory

boards dealing with unemployment insurance related issues. In short, our concern

for effective administrative financing runs deep.

We believe administrative financing reform should be guided by basic principles.

These shared principles can form the basis for a discussion of alternatives, but devolution efforts fail on virtually all counts.

States Should Receive Adequate Administrative Funds

Current practice starves state agencies of the funds they need to administer programs. Some devolution proposals suggest using general revenue for some functions,

a suggestion which imposes a new burden on the tax system without improving the

flow of funds. Instead, administrative finance reform should ensure that funds for

benefits and funds for administration are more closely linked and made available

as needed by state agencies.

Funds Should Go to States on an Equitable Basis

Both the problems with the current system and the virtues of devolution are overstated in this regard. The states which most strongly advocate devolution are also

less likely than other states to pay benefits to the unemployed. They receive less

in administrative funds because they pay fewer of the unemployed benefits. At the

same time, the distributional effects of devolution have yet to be fully explored. We

suspect that small states and states with limited tax bases will come up short under

devolution. Hold harmless provisions may only forestall the day of reckoning.

Funds Should Account for Fluctuations in Workload

Just as the trust fund for benefits must allow for unpredictable changes in demand, so too should the administrative accounts provide for spikes in administrative

requirements. Any proposal which suggests that these peak loads can be covered by

borrowing from general revenue should be viewed with great skepticism.
76

Tax Reporting Should be Simplified

No one would argue that complex tax procedures should be maintained. As part

of any consensus package of administrative financing reforms, employers should expect to see simplified reporting procedures which maintain revenue and still provide

necessary information and data. Despite claims to the contrary, we believe devolution may actually increase the complexity of the tax system both for multistate employers and within a given state as new demands result in unique funding mechanisms.

Conclusions

With the effort to reverse Pennington and the effort to devolve UI financing, Congress faces two issues which threaten the social insurance system in the United

States. The effort to reverse Pennington would strike down over 60 years of commitment to reducing the anxiety of waiting to receive UI benefits which a worker has

earned. The boundaries of what is ‘‘administratively feasible’’ have shifted in favor

of claimants; Congress should not resist this important advance.

On devolution, advocates are developing their case as a response to the problems

which exist under current financing arrangements. There can be no doubt that such

problems exist. There can also be no doubt that solutions short of devolution should

be pursued before the current federal/state division of functions is discarded in favor

of uncertain, dramatic change.

Thank you for the opportunity to raise these concerns.

Mr. Miller.

Chairman SHAW. Thank you.

f

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

Subcommittee. My name is Bert Miller, and I am 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.

I am here today to express my strong support for the legislation

Governor Edgar and Director Doherty are seeking in connection

with the Pennington case. There are problems both with the alternate base period itself, and the manner in which it would be implemented if Pennington stands.

The Pennington alternate base period would provide for payments of unemployment benefits financed exclusively by employers

to individuals with no established connection to the work force. To

that extent, it would begin to 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 something employers cannot afford.

Director Doherty has already discussed the potential impact on

employers—annual tax increases of as much as $40 million, and

more government imposed paperwork. To put that into context,

permit me to discuss briefly my company’s situation.
77

Phoenix Closures is a longtime Illinois business run by a longtime Illinois family. Our success is built on a strong partnership we

have with our employees and their union, the textile workers,

AFL–CIO.

The company’s employees are also its neighbors, and Phoenix

Closures intends to remain committed to them in its home in Illinois. However, we face intense competition from businesses whose

roots are not firmly fixed.

Many of our competitors have moved to more rural parts of the

country to take advantage of low wages. In the past 3 years, four

of our competitors have established plants in Mexico.

Phoenix Closures has remained competitive by substantial investments in high-tech equipment, in training our employees to run

that equipment, and in doing our level best to keep the line on

costs whenever possible.

In that environment, court orders that raise taxes by as much as $40 million per year, and compound government-imposed paperwork, are not just dispiriting. For many businesses like ours, a system that allows things like that will ultimately be deadly.

The alternate base periods costs, however, would not just fall on

employers. I am also troubled by the potential impact on government—millions of dollars in startup costs, and $2.5 million in annual costs, according to the Department of Employment Security,

with no identifiable source to cover those costs.

I have been a consistent advocate of the idea that government

needs to work a lot smarter and cheaper than it does right now.

However, no entity can achieve that result if it just keeps taking

on more and more things to do.

The alternate base period just gives government one more thing

to do, and takes us further in the wrong direction. Besides the

problems with the idea of an alternate base period, I am deeply

troubled by the fact that, as the Pennington case has transpired,

employers have been completely shut out of the process. As things

stand now, most of my concerns will never enter into the debate.

According to both the District and Appellate Courts, the only relevant considerations in deciding whether a State is to be ordered

to 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 simply will not count.

Employers will not have the satisfaction of voting against the

judge who ordered the alternate base period.

Mr. Chairman, employers are the ones who pay for the system.

Our concerns should at least be considered relevant to the discussion.

The legislation Illinois is seeking is simple. It will make sure the

decision as to whether or not the benefits of an alternate base period justify its costs remains one for policymakers who will be accountable to the people the decision will affect.

It will also ensure as costs and benefits are weighed, all sides’

concerns are given their due. I respectfully ask you to support it.

Thank you for taking the time for having this hearing and considering my views.

[The prepared statement follows:]
78

Statement of Albert R. Miller, President and Chief Operating Officer,

Phoenix Closures, Inc., Naperville, Illinois

Thank you, Mr. Chairman and members of the Subcommittee. My name is Bert

Miller. 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 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.

I am here today to express my strong support for the legislation Governor Edgar

and Director Doherty are seeking in connection with the Pennington case.

There are problems both with the alternate base period itself and the manner in

which it would be implemented if Pennington stands. 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 begin to 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 something employers cannot afford.

By increasing outlays from Illinois’ 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 around $10 million per year. 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 $40 million each year.

The alternate base period’s cost to employers, however, would not be limited to

higher taxes. I understand employers would 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.

To put that into context, permit me to discuss briefly my own company’s situation.

Phoenix Closures is a longtime Illinois business run by a longtime Illinois family.

Our success is built on the strong partnership we have with our employees and their

union—the United Needle and Textile Employees Union, AFL–CIO. The company’s

employees are also its neighbors, and Phoenix Closures intends to remain committed to them and its home in Illinois. However, we face intense competition from

businesses whose roots are not as firmly fixed. Many of our competitors have moved

to more rural parts of the country, to take advantage of low wages. In the last three

years, four of our competitors have established plants in Mexico.

Phoenix Closures has remained competitive by substantial investments in hightech equipment, in training for our employees to run that equipment and in doing

our level best to hold the line on costs whenever possible.

In that environment, court orders that raise taxes by as much as $40 million per

year and compound government-imposed paperwork are not just dispiriting. For

many businesses like ours, a system that allows things like that will ultimately be

deadly.

The alternate base period’s costs, however, would not just fall on employers. I am

also troubled by the potential impact on government—million’s of dollars in startup 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 have been a

consistent advocate of the idea that government needs to work a whole lot smarter

and cheaper than it does right now. However, no entity can achieve that result if

it just keeps taking on more and more things to do. The alternate base period just

gives government one more thing to do and takes us further in the wrong direction.

Besides the problems with the idea of an alternate base period, I am deeply troubled by the fact that, as the Pennington case has transpired, employers have been

completely shut out of the process. As things stand now, most of my concerns will

never even enter into the debate. According to both the district and appellate courts,

the only relevant considerations in deciding whether a state is to be ordered to

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

ordered the alternate base period. Mr. Chairman, employers are the ones who pay

for the system; our concerns should at least be considered relevant to the discussion.

The legislation Illinois is seeking is simple. It will just make sure that the decision as to whether the benefits of an alternate base period justify its costs remains
79

one for policy makers who will be accountable to the people the decision will affect

and that, as the costs and benefits are weighed, all sides’ concerns are given their

due. I respectfully ask you to support it.

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

my views.

Mr. Collins may inquire.

Chairman SHAW. Thank you, Mr. Miller.

f

Mr. COLLINS. I have no questions, Mr. Chairman.

Chairman SHAW. Mr. Levin.

Mr. LEVIN. I think the panel, Mr. Chairman, has laid out the

issue pretty clearly. I just wanted to ask Ms. Gilbert—Ohio now

uses a system that’s consistent with Pennington?

Ms. GILBERT. That’s correct.

Mr. LEVIN. Ms. Doherty, do you know what percentage of the

workers laid off today in Illinois are covered by unemployment

compensation?

Ms. DOHERTY. I can tell you that of the people who apply on a

yearly basis with us, 93 percent of them are monetarily eligible.

And that’s the first thing we look at, is monetary eligibility. Seven

percent would apply most likely in this Pennington case.

Now, from the 93 percent, though, there are reasons that they

may not get unemployment benefits after that. I don’t know overall

how many workers are not covered in Illinois. No. I can get you

that information, though.

Mr. LEVIN. OK. Thank you.

[The information was not available at the time of printing.]

Mr. LEVIN. Yes.

Ms. GILBERT. Congressman Levin, I would like to respond to

your issue that Ohio has the Pennington base period. Basically, the

concern that States have is that States have the right to determine

whatever base period that is, and even Ohio would face similar litigation to the Pennington litigation potentially for base periods even

sooner than what the Pennington folks are seeking.

So the concern is that States have the right, that this is a State

issue. States have the right to determine their own base period.

Mr. LEVIN. Thank you.

Mr. Hiatt.

Mr. HIATT. Congressman Levin, I believe that in response to your

question to Ms. Doherty, the District Court, as upheld by the Appeals Court decision that just came down a couple of weeks ago in

the remand in the Pennington case, had found that under an alternative base system in Illinois, there would be some 13,800 to

40,000 workers in a given year who would be eligible for benefits

if the lag quarter wages were considered.

So other issues of eligibility or ineligibility aside, they found that

range would be directly affected by this one change.

Ms. DOHERTY. Congressman, could I also respond? One of the

points of interest that we did not bring up here is what it takes

for somebody to be eligible. And basically what we look for in a

four-quarter period, the first four quarters of the last five completed, is $1,600 in wages.
80

That’s how much they have to make in a year to be eligible for

unemployment insurance benefits. That should be noted.

Mr. LEVIN. And how is that responsive to Mr. Hiatt?

Ms. DOHERTY. Well, it’s probably a combination of both. Because

I think Ohio’s monetary eligibility is a bit higher. So we could

change our base period, and if we raised monetary eligibility, we

could actually cut people out.

You have to look at the whole law, not just one piece, and I think

one of the things that happens in Illinois which I think has been

fairly effective for us the last 10 years is our law is negotiated between the business and the labor community before it goes in front

of our general assembly.

So that both those groups are accountable to the people that they

represent. And it’s been a fairly effective process for us. We haven’t

always used that in Illinois, but the last 10 years, with the exception of one or two times, we have stuck with the new agreed bill

process, which basically takes both sides of the equation into effect.

Mr. HIATT. If I may, I really think it’s apples and oranges to confuse the monetary eligibility requirements, on the one hand, with

the ‘‘when due’’ issue, on the other.

As Congressman Ensign pointed out before, ultimately with respect to the eligibility requirements, it’s going to be the State officials who are going to be accountable. All that the Pennington case

addresses is how quickly are unemployed workers who are otherwise eligibility for this unemployment money going to get their

money.

And if the State is saying, Well, we’ll get it to you when it’s owed

to you, but as a result we’re going to have to raise eligibility requirements, with fewer unemployed workers eligible, well, that’s

the State’s prerogative, and then they’ll have to take the heat when

the citizens in the State complain about it.

But that shouldn’t have an impact on unemployed workers who

are eligible by everybody’s definition under a given State standard,

getting their unemployment check when it’s due. That’s the only

issue that Pennington is addressing.

Mr. LEVIN. Thank you.

Chairman SHAW. Mr. English.

Mr. ENGLISH. Thank you, Mr. Chairman.

I’m kind of interested in the Pennington issue, because Pennsylvania’s current UC system, I think, does conform to Pennington,

as it’s structured. So some of these issues are relatively new to me.

Mr. Hiatt, with regard to multiple base periods, and I’d like to

move at least my part of this discussion away purely from the cost

side of it. Because too much of the debate on UC is cost driven,

without fully considering all of the other implications.

In moving toward multiple base periods, what kinds of claimants

benefit from that change in the structure of benefits? I know the

structure of UC benefits has different effects for different kinds of

work patterns.

Can you describe the sorts of workers that you have found would

benefit from multiple base periods, as opposed to the system that

Illinois has had in place?

Mr. HIATT. Well, a good example that you would find everywhere

would be construction workers. Construction workers who are con-
81

tingent or temporary in the sense that typically their employment

on one particular project, with one particular employer, is not going

to be of a long-term, ongoing, factory-type pattern.

And so they may not have worked five quarters ago, but they

may very well have been working in the quarters two through five.

And five is the quarter immediately preceding their unemployment.

As our economy has changed from one where almost everybody

worked for one employer for his or her whole working life, to one

where an average worker now has, whatever it is, 11 or 12 employers over the course of their lifetime employment, it is not at all

atypical that, whether construction workers or other kinds of seasonal or temporary workers who are employed for most of the time,

but may have time off in between jobs, many will not be working

five quarters ago, but may very well have been working in quarters

two through five.

That would be, I think, a typical example.

Mr. ENGLISH. One of the other issues—would you like to speak

to that as well?

Ms. DOHERTY. Just that I guarantee you most construction workers, if they worked the second through the fifth quarter, would

most definitely be eligible. There are not very many construction

workers in Illinois that are not eligible for unemployment insurance.

Mr. ENGLISH. OK. Do you want to comment?

Mr. HIATT. Just that there was a Department of Labor study, the

Vroman study, 11⁄2 years ago or so, that found that indeed there

is a construction worker impact, that that is one of the groups that

would be impacted.

I can’t speak to the specific number of construction workers in

Illinois who would be affected by this difference, but across the

board that was, in fact, cited as a good example in response to exactly the question you’re asking.

Mr. ENGLISH. Mr. Chairman, would it be appropriate if the staff

of the Subcommittee were to provide the Members with a copy of

that study from the Department of Labor?

Chairman SHAW. That certainly can be done.

Mr. ENGLISH. Thank you. Mr. Miller, in your testimony you also

focused on the additional reporting requirements that would be imposed on businesses moving toward a Pennington implementation.

And I wonder, can you quantify that paperwork burden, and

what sorts of businesses would the additional regulations have

some impact on?

Mr. MILLER. Well, I think the timeliness issue is such that virtually every employer in Illinois is going to have to come up with

a way to accumulate their payroll data radically faster, and move

it to the State of Illinois to get on their computers.

And we’re going from a situation where we have—and I don’t

work in my accounting department and so I don’t know the exact

amount of time that we have to get our numbers into the State of

Illinois——

Mr. ENGLISH. Surely.

Mr. MILLER. But from what I understand on Pennington, our

timeframe is going to be literally several days to get the State computers updated on our payroll, which we don’t do.
82

I have a reasonably good IS department in our company, and we

use a payroll service. So it may very well be that my company

would be able to respond reasonably well. But I can only imagine

that companies that have 50 employees, 75 employees, 100 employees that do their own payroll will absolutely have nuclear meltdown over this kind of thing.

And relative to this whole unemployment issue, there’s one company in Illinois that manufactures gowns, graduation gowns. They

basically run their business about 90 days a year. If they wind up

paying unemployment on all of their employees because of the

changes in the base period, the changes that are being discussed,

I think it’s a safe bet you can expect to see that business move offshore.

And these are the real problems. I am struck by the fact that no

one has talked about the costs to manufacturers and employers in

the State of Illinois or any other State. I think the numbers that

are talked about here are remarkably low compared to what the

employers are going to have to do to respond to the more timely

reporting requirements.

Mr. ENGLISH. Mr. Chairman, if I could just ask a quick followup.

If I am correct, Ms. Gilbert, you had indicated that your State currently is fairly close to being in conformity with Pennington.

Ms. GILBERT. We do have an alternate base period.

Mr. ENGLISH. Do you see those additional costs now within your

State?

Ms. GILBERT. I don’t have them quantified, but it does require

employers not only to do their quarterly wage reporting as they do

in most States, but at a time when a claimant files for unemployment, if the claimant qualifies under the alternate base period, we

must go back to the employer and ask for additional reports at that

time.

So it is an additional burden.

Mr. ENGLISH. Thank you. Mr. Chairman, this has been a wonderful panel, and I appreciate their contribution.

Chairman SHAW. Mr. Coyne.

Mr. COYNE. No questions, Mr. Chairman.

Chairman SHAW. Well, I’d like to thank this panel. Thank you

very much for being with us.

Mr. COLLINS. Mr. Chairman, I know I passed a minute ago, but

I would like to enter something into the record. And I would like

to ask Ms. Gilbert a question before she leaves, if you don’t mind,

sir.

Chairman SHAW. You go right ahead.

Mr. COLLINS. Ms. Gilbert, Members of this Subcommittee received a copy of a letter to the President, dated April 22 of this

year, asking his support in fixing the Pennington problem. Those

States were Illinois, California, Wisconsin, Delaware, Minnesota,

Ohio, Georgia, and Iowa.

Can you give us a sense—and Mr. Chairman, I’d like to enter a

copy of that letter into the record, please.

Chairman SHAW. Without objection.

[The information follows:]
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84

support legislation to clarify the longstanding intent of the Social

Mr. COLLINS. Can you give us a sense of how many other States

f

Security Act that States do have the right to set their own base periods?

Ms. GILBERT. Can you repeat the question one more time?

Mr. COLLINS. Can you give us a sense of how many other States,

I named eight, that support legislation to clarify the longstanding

intent of the Social Security Act that States have the right to set

their own base periods?
85

Ms. GILBERT. Well, the Interstate Conference of Employment Security Agencies is a consortium of the States. And it is ICESA’s position at this point in time to support that legislation.

Mr. COLLINS. How many?

Ms. GILBERT. ICESA currently represents 53 jurisdictions. So all

50 States and the three additional jurisdictions that we serve, the

District of Columbia, the Virgin Islands, and Puerto Rico.

Mr. COLLINS. Very good.

Thank you, Mr. Chairman.

Chairman SHAW. Thank you, Mr. Collins.

Our next panel will be made up of Thomas Nagle, undersecretary

of health and welfare, the State of California in Sacramento; Hon.

Bobby Whitefeather, chairman of the Red Lake Band of Chippewa

Indians Tribal Council, Red Lake, Minnesota, and he’s accompanied by Mr. Peterson whom I have lately seen on television looking at the devastation. And our concern, sympathy, and prayers go

out to you and your constituents for what they’re suffering.

William Bentley Ball, Esq., Harrisburg, Pennsylvania, on behalf

of the Association of Christian Schools International; and Richard

Masur, who is the president of the Screen Actors Guild, Los Angeles, California.

Mr. Peterson, you may have to go. Would you like to go ahead

and introduce Mr. Whitefeather? I know you’re busy today.

STATEMENT OF HON. COLLIN PETERSON, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MINNESOTA

Mr. PETERSON. I’d very much appreciate that, Mr. Chairman. I,

as you can imagine, am a little busy—the supplemental that is

dealing with the flood situation right now, and we’re scrambling.

So we appreciate those kind words, and my constituents appreciate

that.

I’ll be very brief. We’ve been working on this issue for some

time—I have and a number of us. And, there’s a long history in

this country that Indian nations and tribes and bands be treated

the same as State governments, and there’s been litigation on this.

It’s been upheld time and time again.

All we’re asking for with this bill is that the Indian tribes be

treated the same way as States be treated on unemployment. And

there’s been a dispute here that we’ve been trying to resolve for

some time.

They’ve been trying to collect, I think, from you a certain amount

of money, and Bobby will tell you about that.

But all we’re trying to do is just have the tribes be treated the

same as the States when it comes to unemployment. That they not

have to pay unemployment, that they can take care of it themselves. And apparently there was some discussion earlier about the

fact that somebody had said that they would support the tribes activities being exempt, but not the business activities of the tribes.

And I would like to point out that States run a lot of businesses.

They run lotteries, other kinds of things that are, in my view, business enterprises, and those are exempt from this unemployment.

And there’s no difference with what the tribes do when they run

a casino or some other operation that basically is the same thing

that a State is doing.
86

So what we’re asking for, and we hope that you would consider,

is that you treat the tribes appropriately, the same way as we treat

State government. And resolve this, and with that I would turn it

over to Chairman Whitefeather who has been working long and

hard on this, and we really appreciate you taking the time to hear

about this today. We very much appreciate it.

Chairman SHAW. Good luck with the emergency supplemental.

Mr. PETERSON. Thank you. We’re going to need it. We have a lot

of problems. I’ll wait for the Chairman to say his word, and then

I’ll have to leave.

Chairman SHAW. All right. Mr. Whitefeather, and then I’ll go

back into order.

STATEMENT OF BOBBY WHITEFEATHER, CHAIRMAN, TRIBAL

COUNCIL, RED LAKE BAND OF CHIPPEWA INDIANS, RED

LAKE, MINNESOTA

Mr. WHITEFEATHER. Thank you, Congressman Peterson.

Good afternoon, Mr. Chairman, and Members of the Subcommittee.

My name is Bobby Whitefeather. I am the tribal chairman of the

Red Lake Band of Chippewa Indians, and we are located in northern Minnesota, not quite in the flood plain as some of our neighbors to the west. So we’re fortunate in that regard.

Our reservation comprises of 8,000 members, and we are charged

with full governmental functions of providing services to those people.

The Red Lake Band of Chippewa Indians is here today in support of H.R. 294, the Indian Tribal Government Unemployment

Tax Act Relief Amendment of 1997. I would first of all like to acknowledge again Congressman Peterson for his previous efforts in

introducing a similar measure in the 103d Congress. Also Senator

McCain, last year, and, of course, Congressman Shadegg with his

measure this year.

We support H.R. 294 on the basic premise of establishing fairness and equity to FUTA with respect to treatment, and lack of

clear, consistent classification of tribal governments under FUTA.

I think it also should be noted, interestingly, that States, some

States treat tribal governments as exempt employers, Minnesota

being one of them.

Over the last several years, the Internal Revenue Service has

been very inconsistent in the practices and the classification and

assessment of the FUTA tax laws.

Reports that the Red Lake Tribe has received from some tribes

vary in instances where some tribes were assessed the FUTA taxes,

and later, to their surprise they received a refund. There have been

also instances such as in Red Lake where we were informed that

we were exempt employers, and during the interim of several

years, the agents for the Internal Revenue Service changed, and

therefore their interpretation of the treatment of tribal governments has changed. And we are under this current dilemma at this

point.

Several years ago we were informed that we were exempt, later

to find out that a new agent said that was a wrong interpretation,

and the typical story is, you should have gotten it in writing.
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But be that as it may, I think also it should be noted that the

Congressional Research Service has performed various surveys

with respect to treatment of Indian tribes with respect to FUTA.

And the research and the survey has confirmed that there is inconsistent treatment throughout the country.

The enactment of FUTA over 60 years ago, as in several other

pieces of legislation that come up from time to time, does not specifically identify Indian tribes as a unit of government.

Therefore, it results in varied treatments and interpretations, especially in FUTA where even country governments and municipalities are treated as exempt organizations, and, for that matter,

charitable organizations as well.

To be fair, tribal employees that are engaged in activities that

are similar to State governments, local governments have to be

considered. Because we operate a nursing home. We operate a hospital. We provide police protection, fire protection, and all the typical public service functions that any government provides.

In conclusion, I think the application of FUTA to tribal governments as private employers, the government to government principle that we all recognize from nation to nation, is contrary to current understanding of that relationship.

The assessment of FUTA on the Red Lake Band of Chippewa Indians will have a very devastating effect on our tribal economy.

We’ve been informed now that we will be assessed in excess of $2.5

million. In comparison to that assessment, that is about 40 percent

of our annual operating budget.

And so I would urge the Subcommittee’s support and the Red

Lake Band of Chippewa Indians, like I said, we’re 8,000 strong.

And I am fortunate to have a group of young people with me here

today to attend the hearing from the Red Lake High School.

And we stand with you to urge your strong support for the enactment of H.R. 294.

Thank you.

[The prepared statement follows:]

Statement of Hon. Bobby Whitefeather, Chairman, Tribal Council, Red

Lake Band of Chippewa Indians, Red Lake, Minnesota

Mr. Chairman, and distinguished members of this Subcommittee, thank you for

this opportunity to comment on behalf of the Red Lake Band of Chippewa Indians,

a federally-recognized tribal government, in support of the amendments proposed in

H.R. 294, the ‘‘Indian Tribal Government Unemployment Compensation Act Tax Relief Amendments of 1997.’’

Since the early 1990s our Tribe has actively sought administrative and legislative

relief from a very unfair interpretation and application of the Federal Unemployment Tax Act (FUTA) to tribal governments recently made by the Internal Revenue

Service (IRS).

We are indebted to Members like the Honorable Rep. John Shadegg (H.R. 294 in

the 105th), the Honorable Rep. Collin Peterson (H.R. 838 in the 104th, H.R. 1382

in the 103rd), and the Honorable Sen. John McCain (S. 1305 in the 104th; S. 391

in the 103rd) who have pressed forward on this issue, year after year. We are now

also indebted to you, Mr. Chairman, for including this matter for hearing today.

My Tribe testifies today in strong support of H.R. 294. This bill has the active

support of many Indian tribes as well as the National Congress of American Indians. [See attached NCAI Resolution SPK–95–060 on predecessor bill H.R. 838].

We support H.R. 294 because it would foster:

(a) fairness and equity—H.R. 294 would treat tribes like all other governments

and non-taxable entities are treated for purposes of unemployment insurance;

(b) orderly and efficient FUTA administration—H.R. 294 would save federal, tribal, and state governments significant sums of governmental revenue by resolving
88

uncertainties that cause sporadic enforcement, coverage, and expensive disputes;

and

(c) government-to-government relations—H.R. 294 would require a consistent application to the FUTA tax laws of the government-to-government relationship that

has been recognized by the Federal Courts and by the Congress to exist between

the United States and federally-recognized Indian tribal governments.

A. BACKGROUND ON THE RED LAKE TRIBAL GOVERNMENT AND RESERVATION.

Our Tribe’s Red Lake Indian Reservation is a relatively large, rural Reservation

with over 800,000 acres of tribal trust land and water within the boundaries of the

State of Minnesota. Most of our lands are located within the boundaries of our diminished Reservation, which has never been broken into individual allotments and

lost to non-Indians. Our Reservation is not governed by Public Law 83–280. This

means the Red Lake tribal government and the United States government have full

civil and criminal enforcement responsibilities for the Red Lake Reservation. As a

consequence, our tribal government provides a full range of governmental services

to Reservation residents. We administer police, judicial, penal and fire protection

services, natural resource protection and management, social services, health and

other emergency services, economic development and planning, and many other governmental activities. Although we are somewhat isolated by our rural location, the

Tribe has a variety of economic enterprises which serve the community and provide

important governmental revenue to the Tribe. The State of Minnesota has neither

civil nor criminal enforcement responsibility or authority over our Reservation.

A December, 1995 study carried out by the Department of Economics, Bemidji

(MN) State University found that approximately 6,130 of our tribal members live

on the Reservation in 1,560 households. A majority of Reservation households (59%)

have incomes below the federal poverty line for a family of four. Forty percent of

all Reservation households receive income from employment with our tribal government, making tribal government jobs the single most important source of income on

our Reservation. Our Tribe employs approximately 2,400 workers in its governmental programs and enterprises, for a total annual payroll of $17.4 million. In addition, many of our tribal members survive on a traditional subsistence economy of

fishing and small-scale timber cutting.

B. FUTA AND TRIBAL GOVERNMENTS.

Introduction. H.R. 294 would correct a serious oversight in the way Indian tribal

governments like Red Lake have been treated by the IRS in recent years for unemployment tax purposes under the unique, state-federal unemployment program authorized by FUTA. Red Lake and other Indian tribes are governments. We deserve

consistent treatment as governments. The changing IRS practice is based on a fundamental disregard for, or lack of knowledge of, what tribes like Red Lake do as

governments.

How FUTA Works. FUTA involves a joint federal-state taxation system that levies

two taxes on most non-governmental and taxable employers: An 0.8 percent federal

unemployment tax (after credit for state taxes that are paid) and a state unemployment tax ranging up to more than 9.0 percent of a portion of an employer’s payroll.

Since its enactment in the 1930s, FUTA has treated foreign, federal, state, and

local government employers differently from private commercial business employers.

FUTA exempts all foreign, federal, state, and local government employers from having to pay the 0.8 percent federal tax that is used to administer the FUTA system

nation-wide. It allows state and local government employers, as well as tax-exempt

charitable organizations, to contribute into the state unemployment funds on a reimbursable basis, meaning they reimburse the State funds only for those claims actually paid out to former employees. All other private sector employers pay both the

federal and state FUTA tax rates in advance without reimbursement. The FUTA

statute does not expressly mention tribal government employers within the definition of governmental employers.

How the IRS Treatment of Tribes, for FUTA Purposes, Has Changed. In a turnabout from historical practice, but with increasing frequency over the past decade,

the IRS has begun to treat tribal governments as if we are private-sector commercial business employers for purposes of determining how we must participate in unemployment insurance programs under FUTA.

The IRS has begun to try to retroactively collect federal and state FUTA taxes

from tribal governments, even though, as is the case with Red Lake, to our knowledge all of the employees our tribal government laid off before 1995 were denied

unemployment insurance payments from the State fund because the State has treated our Tribe as an exempt governmental employer.
89

Red Lake’s experience is not unusual. At the request of Senator McCain and the

Senate Committee on Indian Affairs, the Congressional Research Service (CRS)

issued a report on October 1, 1993 of a telephonic survey it conducted of all state

unemployment programs. The report concluded that state treatment of tribal governments under FUTA was uneven and varied widely. Some states considered tribal

governments exempt. Some treated them as governmental entities and allowed them

to reimburse the state fund on a claims-made basis. Some states accepted tribal contributions at commercial rates. The treatment of tribes has lacked any rational consistency.

The Red Lake Tribe conducted its own survey of other tribal governments experience with FUTA. We learned that IRS policy has varied widely from region to region

during the 1990s and even up to this day. Some tribes who have paid FUTA taxes

have received their tax payments back from the IRS with the message that tribal

governments were exempt. Many tribes who have not paid FUTA taxes have contributed to state funds and have not been challenged. Others have not paid either

the federal tax or the state contribution and gone unchallenged. Still others, like

Red Lake, have been told they are exempt and then have been vigorously pursued

by the IRS for huge, retroactive assessments at the full federal FUTA tax rate

(there is no credit because no contributions were made to the state fund) for many

years into the distant past.

Tribes Like Red Lake Have Suffered Inequitable Treatment At the Hands of the

IRS. My Tribe has suffered great legal and programmatic costs as a result of the

changing IRS interpretations of FUTA. The IRS has come against us for several million dollars worth of what it calls back taxes, interest and penalties that reach back

as far as 1989. Red Lake was completely surprised by this change of position by

the IRS in the early 1990s. We had on file two exempt letters from the IRS for several of our Red Lake programs. We had never paid into the State fund. Indeed, the

federally-approved Minnesota Unemployment Insurance Plan specifically described

Red Lake and other tribal governments as ‘‘exempt.’’ The relatively few tribal employees we laid off in prior years were always denied benefits because they worked

for what was deemed an ‘‘exempt employer.’’ Our Tribe did not cost the FUTA system anything. Suddenly we were ordered to pay huge amounts of money for no benefit.

Faced as we were with the threat of millions of dollars in IRS taxes, penalties

and interest continuing to mushroom at an exponential rate, about two years ago

our Tribal Council decided under protest to begin to pay into the State unemployment fund in order to contain our costs and at least get something (employee coverage) for our money. We continue to refuse to pay the federal portion of the tax

the IRS considers remaining due after a credit is calculated for our contributions

to the State fund.

A total in excess of $2.5 million remains at issue for tax years 1989 through 1994,

adding up all the tax amounts, penalties and interest that IRS is trying to get from

the Red Lake tribal government. Should the IRS succeed, none of these funds will

ever return to benefit any former employees of our tribal government. None of these

funds will ever return to the State of Minnesota or its unemployment insurance

fund.

Analysis of the FUTA Law and Practice. It is well-settled that Indian tribal governments like Red Lake are not taxable entities under the federal tax code because

of our status as governments. Until the late 1980s, this same interpretation was applied uniformly by the IRS to its collections under the somewhat ambiguous language of FUTA.

While FUTA expressly exempts all Section 501(c)(3) tax-exempt organizations and

all state and local units of government from paying the federal portion of the FUTA

tax, the New Deal-era statutory language of FUTA does not expressly mention tribal governments. Based on a re-reading of the statute, the IRS has changed course

over the past decade and begun to pursue a number of tribal governments for FUTA

taxes as if we are taxable for-profit commercial enterprises rather than governments. This change of interpretation and practice has proven to be quite burdensome to tribal governments like Red Lake who were caught unawares by the change

in IRS policy.

The IRS has chosen in recent years to pursue some tribal governments for unpaid

FUTA taxes who had proceeded on the good faith assumption that we were immune,

as governmental employers, from the federal portion of the tax. Some tribal governments also chose not to participate in the state unemployment programs. Red Lake’s

experience with the State of Minnesota is not unique. We have learned that other

tribes in other states have likewise laid off employees who were subsequently denied

benefits by the state unemployment program solely because they had worked for

what the states deemed was an ‘‘exempt’’ employer—a tribal government. While this
90

caused hardship on the former employees of tribal governments, it meant that the

state unemployment funds paid out no benefits and experienced no loss.

The change in this IRS interpretation of the FUTA statute has not been uniform.

The resulting unevenness has caused additional problems for Red Lake and other

tribal governments as we have been subject to differing interpretations over whether and how we are covered under FUTA. Compounding this problem have been the

varying views of different state governments and the U.S. Department of Labor. As

a result, different tribes have been treated differently in different periods of time.

This has led to considerable confusion among tribal governments about whether

they are covered and how much they are supposed to pay.

Tribal Experience With the Changing IRS Practice. In the past decade, some

tribes have paid the federal FUTA tax and then enjoyed the unusual experience of

having the IRS return their payments to them with the notation that the IRS considered them to be exempt employers. Other tribal governments have not paid any

FUTA contributions in a good faith and reasonable belief that they were exempt.

For example, two employer subdivisions of our Red Lake tribal government, the Red

Lake Tribal Job Training Partnership Act Program and the Red Lake Tribal Comprehensive Health Services Program, received written communications from the IRS

treating them as if they were tax exempt.

IRS Collection of Unpaid FUTA Contributions is Punitive. The IRS effort to collect

unpaid FUTA assessments is the equivalent of a punitive tax under FUTA’s unique

enforcement mechanisms. The statute permits the IRS to collect the full tax from

a non-paying commercial business regardless of its experience rating. These provisions act as ‘‘teeth’’ designed to encourage private sector businesses to pay the tax

in advance.

However, now that the IRS interpretation of the law has changed, the IRS effort

to collect back taxes from Indian tribal governments like Red Lake means that none

of the funds assessed and collected by the IRS will ever be paid out as unemployment benefits to former employees of a tribal government like Red Lake that has

not participated under FUTA. Nor will these dollars return to the state funds in

which Red Lake and other tribal governments did not participate. Instead, the federal IRS will collect the highest possible state and federal unemployment taxes and

place all of these funds directly into the U.S. Treasury without credit or benefit to

any workers, tribal employees or otherwise, in Minnesota. The IRS approach would

result in a windfall for the United States Treasury, and break the back of our

Tribe’s government and Reservation economy.

How can it be fair to impose this kind of taxation without benefit on the meager

funds of an Indian tribal government like Red Lake simply because we have followed an interpretation of FUTA that some regional offices of the IRS and the states

previously followed but now have abandoned?

H.R. 294 Would Fairly Resolve the Problem. H.R. 294 would amend existing

FUTA tax statutes to clarify expressly that tribal governments should be treated

just as state and local units of government are treated for FUTA unemployment tax

purposes.

Under H.R. 294, the IRS would have no authority to assess federal FUTA taxes

against tribal governments, just as it cannot do so against like state and local governments and tax-exempt organizations. In addition, H.R. 294 would expressly authorize tribal governments, like state and local governments and tax-exempt organizations, to contribute to a state unemployment insurance fund on a reimbursable

basis for unemployment benefits actually paid out to former employees.

If a tribal employer does not lay off employees, under H.R. 294 there would be

no reimbursements owed because no benefits have been paid out. If a tribe does lay

off someone for whom benefits are paid, the tribe pays the benefits, dollar for dollar.

In contrast, private sector employers typically must pay an advance unemployment

tax. The FUTA law spreads the insurance costs across the private sector, with commercial employers paying flat rates only partially adjusted by their experience rating. The public policy underlying this approach seems to be that the burden of unemployment insurance should be borne somewhat evenly by all private sector interests.

The rationale for public sector employers having a reimburser status is that governmental employers, such as Indian tribes and states, have a far more stable employment environment than that of the private sector. Equally important is the rationale that governmental revenue, whether it be federal, state or tribal, should not

be ‘‘spent’’ in advance of when an obligation to pay actually arises.

Finally, H.R. 294 would also remove a theoretical unemployment tax liability of

tribal governments like Red Lake who did not pay unemployment compensation

taxes in the past in the good faith and reasonable belief that we were exempt, provided that no benefits were paid to their former employees. If former employees
91

were paid benefits by a state fund, the tribal government would be obliged to reimburse the state for those benefits actually paid out.

This last point is very important to Red Lake and to other tribes who have been

caught in the net cast by the changes in IRS policy and practice. It is our understanding that Section 2(e) of H.R. 294 (transition rule) would assure that federal

and state portions of the FUTA tax for years prior to the effective date of H.R. 294

could not be asserted or collected except to the extent that benefits have been paid

out by a state fund for service attributable to the tribe for such period. If this is

not your reading of this language, we would want to work closely with your staff

to amend the language to ensure that IRS is prohibited from collecting the unfair

windfall it is seeking to gain from our Tribe and others similarly situated for past

years.

Questions That Have Been Raised on H.R. 294. Three years ago, the U.S. Department of Labor raised a concern that, because tribal governments, like all governments, are immune from suit by virtue of their sovereignty, a state fund may not

be able to force a participating tribal government to reimburse the state fund for

money it has paid out to a former tribal employee. There do exist several ways by

which a state in such a situation could collect the necessary reimbursements from

a tribe (for example, it could reduce other funds going to a tribe for other state-funded services administered by the tribe). However, a provision was added to the bill

that would allow a state to insist that any tribe wanting to have ‘‘reimburser’’ status

post a payment bond to assure that reimbursements will be made. Section 2(c) of

H.R. 294 contains this provision and of course has our support.

A second question has been raised about whether H.R. 294 should be amended

to address only those tribal government employees who carry out what are seen as

‘‘traditional’’ governmental activities like law enforcement, judicial services, social

services, or natural resource protection, removing from H.R. 294 those tribal government employees of tribal enterprises wholly-owned and controlled by an Indian tribal government. Tribal governments and their employees do engage in business-type

activities in order to generate governmental revenue and provide jobs and services

in what are, more often than not, rural and isolated economies. But it should be

noted that State governments do the same thing. Any effort to exclude certain tribal

government employees in this way would be patently unfair. State and local government employees throughout America are engaged in a wide variety of business-type

activities that are wholly-owned and controlled by state and local governments. A

recent CRS survey preliminarily concluded that state governments annually raise

$46.5 billion from business-type activities. That is $46.5 billion, not million, in revenues from the direct operation of business-type activities by State government employees. All of these state government employees, from the liquor store stock clerks

in Pennsylvania to the massage therapists in the State park resorts of West Virginia to the lottery gambling clerks in dozens of states, are treated as governmental

employees for purposes of FUTA. To be fair, our tribal government employees who

are engaged in business-type activities run by the tribal governments should be

treated no differently than these State and local government employees. Like states,

Indian tribal governments dedicate the revenues from these business-type activities

to governmental purposes. This is consistent with the longstanding Federal policy

that encourages tribal government self-determination and self-sufficiency. It would

be the height of unfairness for the United States to discriminate against Indian

tribes who do the same thing that state governments are doing.

C. CONCLUSION.

The Red Lake Band of Chippewa Indians, along with other federally-recognized

Indian tribal governments, seeks prompt enactment of H.R. 294. H.R. 294 would restore fairness to the administration of the FUTA program and tax structure, because it proposes to once again have the United States uniformly treat each Indian

tribal government the same as it treats state and local governments and tax exempt

organizations for purposes of FUTA. Our participation as tribal governments in the

FUTA program under H.R. 294 would be on the same terms that all other governments and non-taxable organizations participate. There is no special favor or special

treatment involved. H.R. 294 would simply clarify that tribal governments like Red

Lake should be treated for what we are—governmental employers.

My Tribe stands ready to assist the Subcommittee in refining and securing passage of H.R. 294. Thank you for this opportunity to be heard.

f
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Attachment

Resolution SPK–95–060

TITLE: SUPPORTING LEGISLATION DESIGNED TO EXCLUDE TRIBES FROM BEING

ASSESSED UNDER ‘‘FUTA’’

WHEREAS, we, the members of the national Congress of American Indians of the

United States, invoking the divine blessing of the Creator upon our efforts and purposes, in order to preserve for ourselves and our descendants rights secured under

Indian treaties and agreements with the United States, and all other rights and

benefits to which we are entitled under the laws and Constitution of the United

States to enlighten the public toward a better understanding of the Indian people,

to preserve Indian cultural values, and otherwise promote the welfare of the Indian

people, do hereby establish and submit the following resolution; and

WHEREAS, the National Congress of the American Indians (NCAI) is the oldest

and largest national organization established in 1944 and comprised of representatives of and advocates for national, regional, and local Tribal concerns; and

WHEREAS, the health, safety, welfare, education, economic and employment opportunity, and preservation of cultural and natural resources are primary goals and

objectives of NCAI; and

WHEREAS, the Internal Revenue Service has taken the position that federal unemployment tax act assessments will be applied to tribes; and

WHEREAS, other governmental units and non-profits are specifically exempted

from such assessments; and

WHEREAS, member tribes view their resulting treatment as a ‘‘private employer’’

as an infringement upon tribal sovereignty; and

WHEREAS, legislation entitled ‘‘Indian Tribal Government Unemployment Compensation Act Amendments of 1995’’ has been introduced in Congress as H.R. 838;

and

WHEREAS, the legislation, if passed, would include ‘‘an Indian tribe’’ along with

other governmental and political subdivisions now specifically exempt from the assessment.

NOW THEREFORE BE IT RESOLVED, that the NCAI go on record as supporting legislation designed to exclude tribes from being assessed under ‘‘FUTA’’ and

thereby retain for tribes their status of being exempt from such federal taxation.

CERTIFICATION

The foregoing resolution was adopted at the 1995 Mid-Year Conference of the National Congress of American Indians, held at the Sheraton Spokane in Spokane,

Washington, on June 6–8, 1995 with a quorum present.

gaiashkibos, President

ATTEST:

S. Diane Kelley, Recording Secretary

Adopted by the General Assembly during the 1995 Mid-Year Conference of the National Congress of American Indians, held at the Sheraton Spokane in Spokane,

Washington, on June 6–8, 1995.

Mr. Nagle.

Chairman SHAW. Thank you.

f

STATEMENT OF THOMAS P. NAGLE, UNDERSECRETARY,

HEALTH AND WELFARE AGENCY, STATE OF CALIFORNIA,

SACRAMENTO, CALIFORNIA

Mr. NAGLE. Thank you, Mr. Chairman, and Members of the Subcommittee. Thank you for the opportunity to appear before you

today. I shall be brief. I have two issues. The primary issue is the

one referred to by Congressman Thomas earlier this morning, involving the payment of unemployment benefits to inmates upon release from prison.
93

In 1990 California voters passed a ballot initiative which required the State to establish the joint ventures 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.

In terms of the inmate income, part of the income goes for Federal, State, and local income taxes, for support of the prisoner’s

family, a restitution for the crime victims, reimbursement to the

State for the cost of room and board, and approximately 20 percent

is held in an escrow account and made available to the individual

upon release.

An unintended consequence of this employer participation in the

joint ventures is that employers are required to pay unemployment

taxes for the inmates they hire for employment. Consequently, inmates are eligible for unemployment benefits when they are paroled or released from prison.

We believe this distorts the intention of both programs. Unemployment insurance was not intended to be a support program for

inmates.

The California legislature, to correct the situation, passed a bill,

S.B. 103, which placed a second initiative on the ballot that would

specifically deny unemployment benefits to inmates upon their release from prison.

The ballot initiative, which was Proposition 194, was overwhelmingly passed by the California voters in March 1996.

The U.S. Department of Labor has threatened to deny California

companies $1.7 billion in unemployment insurance tax credits as a

result of Proposition 194.

We basically support the legislation introduced by Congressman

Thomas, H.R. 562. This bill would exempt services performed by

inmates who participate in the joint ventures programs, and similar programs in other States from unemployment taxes and the resulting benefits.

Inmates who provide services currently and historically in the

prison system, such as doing work in the prison laundry or kitchen

or cabinet shops, make furniture that’s used by State offices. This

program has been in existence for at least 20 or 30 years, and they

have been exempt from unemployment taxes under the current

law.

Congressman Thomas’ bill merely extends that exemption to inmates to work in these relatively new private sector agreements.

The other issue is that we are in support of the ICESA position

on the Pennington situation. We feel the issue is one of State discretion. We’ve been legally challenged in the courts. The AFL–CIO

v. Lee in California. And so we’re intimately involved in this.

We believe it should be resolved through legislative process in

the Congress, and not by the courts. Our preliminary estimate is

that it will cost California businesses, employers, approximately

$93 million annually.

The increasing cost to administer the program in California

alone, if it’s court mandated, we establish to be approximately $12

million.
94

So we do support the legislation introduced by Congressman

Crane, H.R. 125. This bill would affirm that the base period determination should be decided by the States and not as an administrative consideration.

Thank you, sir.

[The prepared statement follows:]

Statement of Thomas P. Nagle, Undersecretary, Health and Welfare Agency,

State of California, Sacramento, California

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity

to appear before you today to bring to your attention two very important unemployment insurance issues which are of great concern to the State of California.

The first issue concerns a situation that has arisen in California involving the

payment of unemployment benefits to inmates upon release from prison. We believe

immediate action is required by Congress to prevent the misuse of taxpayer dollars

for that purpose.

In 1990, California voters passed a ballot initiative which required the State to

establish 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 been established in several other states.

The Joint Venture Program provides an opportunity for inmates to learn important work skills and also generates revenues for crime victims and savings for federal, state and local governments. Up to eighty percent of an inmate’s income is

withheld to pay for federal, state and local income taxes; support of the prisoner’s

family; restitution to crime victims; and reimbursement to the state for the cost of

room and board.

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 are required to pay unemployment taxes for

the inmates they hire for employment. Consequently, inmates are now eligible for

unemployment benefits when they are paroled or released from prison. Governor

Wilson believes that employers and taxpayers never intended the unemployment insurance program to be an ex-inmate support program.

In an attempt to resolve this issue, the California Legislature passed, and the

Governor singed a bill, S.B. 103, which placed 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.

Recently, the U.S. Department of Labor (DOL) has threatened to deny California

companies $1.7 billion in unemployment insurance tax credits as a result of Proposition 194. One option offered by the DOL to avoid this action is to make the inmates employees of the State, and then exempt them from benefits. Not only is this

option an insult to the hardworking California correctional staff, it is unacceptable

to California employers and taxpayers and inconsistent with the intended purpose

of the unemployment insurance program.

To prevent DOL sanctions and to ensure that inmates do not qualify for unemployment benefits upon release from prison, Governor Wilson supports legislation

introduced by Congressman Bill Thomas, H.R. 562. This bill would exempt services

performed by inmates who participate in the Joint Venture Program, and similar

programs in other states, from unemployment taxes and the resulting benefits.

Such an exemption is not unprecedented. Inmates who provide services directly

to the prison by work in the prison laundry or kitchen or cabinet shop are already

exempt from unemployment taxes under current law. Congressman Thomas’ bill

merely extends that exemption to inmates who work in these relatively new private

sector arrangements.

California voters have already made a clear statement that they do not want their

tax dollars used to pay unemployment benefits to inmates released from prison.

Governor Wilson urges the Subcommittee to act quickly to resolve this issue by

passing Congressman Thomas’ bill when it considers unemployment insurance reforms.

The other important issue I would like to bring to your attention today is the impact on California and other states of the Pennington v. Doherty case out of Illinois.

That case interpreted existing federal law to substantially change the manner in

which most states have calculated the base period for the award of unemployment

benefits since the beginning of the program in 1935.
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From the inception of the Unemployment Insurance Program the base period for

the purposes of determining monetary eligibility for unemployment benefits has

been determined by each state, most of which have opted for a base period similar

to that chosen by California. The unemployment compensation program is a federalstate partnership, with certain basic requirements imposed by federal law as a condition of participation. The specific eligibility standards and amount of benefits payable have generally been considered to be within the discretion of the individual

states.

California considers the choice of base period to be an eligibility criteria solely

within each state’s discretion. This is the central issue in a lawsuit currently pending in California, AFL–CIO v. Lee. The plaintiffs in that lawsuit are asking the federal courts to follow the Pennington decision and to order California to adopt a specific base period, one that would impose a very significant administrative and monetary burden upon both the state and employers.

The Department of Labor (DOL) participated in the Pennington case in Illinois

by filing a brief in support of the State of Illinois. DOL’s position agreed that the

base period is a matter of a state’s rights. The most recent decision in that case was

unfavorable to the State of Illinois and Illinois has stated that it will be filing a

petition in the U.S. Supreme Court. To date, DOL has not taken a position in California’s pending lawsuit.

Congress can and must resolve this issue because the consequences of a court-imposed base period are severe. The cost to California employers alone will be $93 million annually. The cost to Illinois employers will be from $30 to $40 million annually. This, ultimately, will translate into increased employer taxes.

The increased costs of administration to implement a court-mandated alternative

base period in Illinois includes an annual administrative cost of $2.6 million. In

California, the annual administrative cost alone would be $12 million.

If California and Illinois are required by these lawsuits to implement a new base

period, the other states won’t be far behind. When the costs experienced by California and Illinois are extrapolated to all of the other states, it’s apparent that an alternative base period requirement is going to impose a very significant fiscal burden

upon employment security agencies and employers nationwide.

The additional administrative costs of an alternative base period will have to be

absorbed within existing budgets, which can only mean services in other areas will

have to be cut. The unemployment compensation system has worked well for 60

years with the existing base period. There is no valid reason to remove this eligibility determination from the state domain.

Governor Wilson believes that Congress must act to take this issue out of the

court system and reaffirm that this is a matter for each state to decide through open

debated and the legislative process. In this regard, the Governor supports H.R. 125,

the legislation introduced by Congressman Phil Crane that would affirm that the

base period determination is a matter that should be decided by each state. Governor Wilson strongly urges Congress to pass H.R.125 quickly and relieve states of

the potential administrative and fiscal burden that would be imposed upon them if

they are mandated to adopt a specific base period.

Mr. Chairman, this concludes my prepared statement. At this time, I would be

pleased to answer any questions that you or other Subcommittee Members may

introduced by our colleague, Mr. Crane, who is back from the

have.

Chairman SHAW. Thank you, Mr. Nagle. The next witness will be

f

Speaker’s office. Congratulations on your escape.

Mr. CRANE. The beginning, not the end.

Mr. Chairman, I want to thank you for including in this hearing

another bill I introduced, H.R. 124, which would exempt religious

schools operated by lay board of believers from the Federal Unemployment Tax Act, FUTA.

Currently, the exemption extends only to schools directly operated by churches. It’s estimated that 20 percent of Protestant evangelical schools in our country fall in this nonexempt category, as

well as many Catholic and Jewish schools.
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Yet such schools would not even exist if they didn’t have a strong

religious mission. Therefore, it’s only fair these schools be allowed

to decide whether or not they’ll participate in the unemployment

system.

Today the Subcommittee will hear from William Ball, representing the Association of Christian Schools International. Although

I’ve worked in support of this effort for a number of years, Mr. Ball

has devoted his career to being an advocate for religious freedom.

He has argued some of the landmark religious freedom cases before the U.S. Supreme Court, and many State supreme courts

around the country. He has defended those who because of religious beliefs cannot defend themselves from the intrusion of government in their religion and in their daily lives.

Because he has tirelessly fought in the name of religious freedom

for students, parents, schools, or entire religious communities, Mr.

Ball is uniquely qualified to speak to the issue raised by H.R. 124,

and I commend his testimony to my colleagues on the Subcommittee, and again thank you, Mr. Chairman.

Chairman SHAW. Mr. Ball.

STATEMENT OF WILLIAM BENTLEY BALL, ESQ., HARRISBURG,

PENNSYLVANIA; ON BEHALF OF ASSOCIATION OF CHRISTIAN SCHOOLS INTERNATIONAL

Mr. BALL. Mr. Chairman, Members of the Subcommittee, I want

to thank you very much for having me appear here today. As Congressman Crane said, I represent the Association of Christian

Schools International, which is a nonprofit organization representing some 3,000 nonprofit, nonracially discriminatory evangelical

Christian schools in our country, serving some 570,000 students.

Parents, who are the main supporters of these schools, and the

school administrators are deeply interested in H.R. 124. And why?

Well, the answer is simple. Congressman Crane has just expressed

it.

Section 3309(b)(1) of the Internal Revenue Code says that schools

controlled by churches and are operated primarily for religious purposes are exempt.

I think the Congress did not intend at that time to exclude religious schools run by lay board. They focused on church schools, and

they said, Well, it’s obvious that we’re covering the religious

schools of the country when we speak of church-controlled schools.

Now, in the Association of Christian Schools International, there

are quite a number of church-controlled schools. But there are also

a significant number of schools not operated by churches but which

are governed by dedicated evangelical Christian boards of

laypeople.

If you would permit me to just take you in your imagination to

a town somewhere in the country where you see Grace Academy,

which is controlled by Grace Church. A couple of miles down the

street, another school called Lake View Christian School is operated by a lay board of evangelical Christians.

As you go into each of these schools, you’ll find a religiously oriented curriculum. You’ll find teachers of evangelical faith imparting the evangelical faith to their children. You’ll see prayer, a

strong spiritual atmosphere. You’ll find the same moral training.
97

You’ll see religious symbols in each. And when you leave, you won’t

be able to tell which was which. They are indistinguishable.

As Congressman Crane mentioned, too, there are Orthodox Jewish schools which—and I don’t speak for them—but which I understand to be in the same category as maintaining lay board religious

schools.

It’s obvious then that there is a need here for this measure, H.R.

124, and the exemption it would then extend to the remaining

number of religious schools.

I want to conclude by drawing to your attention something I

think would be significant to you, if not critical, which is the question of tax impact.

There are three impacts of this measure. First of all, it is virtually revenue neutral. This same measure, in the form of amendment 3443, came before the 100th Congress, and the Joint Committee on Taxation said that the net budget gain would be less than

$5 million in that fiscal year, and negligible in the years thereafter.

The second impact which I would refer to, tax impact, is that it

will help the parents who are supporting these lay board religious

schools. And the third impact relates to what you stated in your

advisory statement, that you’re interested in increasing employment and interested in business growth.

The ACSI schools produce highly literate graduates, who are

trained in civic responsibility. And that, I think, in this day, is a

boon to the country, and these schools, therefore, should be encouraged in their efforts and not penalized.

Thank you.

[The prepared statement follows:]

Statement of William Bentley Ball, Esq., Harrisburg, Pennsylvania; on

Behalf of Association of Christian Schools International

I speak for the Association of Christian Schools International (ACSI), which

thanks you for this opportunity to address the important measure which is H.R.

124. The Association is the largest organization of evangelical Christian schools in

the nation, with more than 3000 schools and colleges. It now serves about 570,000

students.

The sponsors of H.R. 124 are to be congratulated because your bill will, if enacted,

correct a serious defect in our tax laws. Let me spell out that defect. The Federal

Unemployment Tax Act (FUTA) provides exemption for services performed by employees

in the employ of (A) a church or convention or association of churches, or (B) an

organization which is operated primarily for religious purposes and which is operated, supervised, controlled or principally supported by a church or convention or

association of churches.

A religious school controlled by a church is not covered by the Act, and the school

is not required to pay the FUTA tax.

But many religious schools are not such schools. Fifteen percent of ACSI schools

are not. Indeed one out of five religious schools in the USA are not. They are indeed

operated (by lay boards) ‘‘primarily for religious purposes’’ but are not controlled,

or principally supported, by a church or association of churches. Under the present

law, those schools are liable for the tax. Yet they are absolutely indistinguishable

from church-operated schools. You could readily find this out by visiting both types

of school. They are equally religious in curriculum, program and spiritual life. So

it is seriously discriminatory to say that one shall be taxed but the other not taxed.

It is clear, from examining the history of FUTA, that the Congress intended no

such discrimination but simply was unaware of the relatively small number of nonchurch, religious schools. The Congress readily concluded that it had exempted all

religious schools when it exempted the church schools. That oversight was understandable. But no longer is it reasonable to maintain that unfortunate mistake. Let

me conclude by pointing out three important facts:
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First, no non-church school would be exempt unless it would have proven to IRS

that it is ‘‘operated primarily for religious purposes.’’ Our non-church religious

schools do not seek any open-ended exemptions.

Second, the change effected by H.R. 124 will be revenue-neutral. The previous effort to remove the present inequity (Amendment 3443 (100th Congress)) was held

by the Joint Committee on Taxation to be so, stating that the ‘‘net budget effect of

this bill would be a gain of less than $5 million in the fiscal year and a negligible

effect each year thereafter.’’ (Congressional Record, 100th Congress, S14861–2).

Third, ACSI’s plea is on behalf of the parents who sacrifice to afford the education

which ACSI’s schools provide. This plea is also on behalf of our society, because

ACSI knows that its schools are providing excellent education and moral training

for young Americans in a caring environment. Schools which do that should be encouraged in their efforts, not penalized under our tax laws.

Thank you for hearing this testimony. It is to be hoped that you will now see fit

to move decisively to remove a serious inequity by voting favorably on H.R. 124.

ard Masur of the Screen Actors Guild.

Chairman SHAW. Thank you, Mr. Ball. Our last witness is Richf

STATEMENT OF RICHARD MASUR, PRESIDENT, SCREEN

ACTORS GUILD, LOS ANGELES, CALIFORNIA

Mr. MASUR. Good afternoon. My name is Richard Masur, and I

am the president of the Screen Actors Guild.

Mr. Chairman, I would like to thank you and the Members and

the staff of this Subcommittee for giving me the opportunity to testify in support of Congressman English’s bill, H.R. 841.

Today I am speaking on behalf of my colleagues in the entertainment industry, in particular, the senior performers represented by

the Screen Actors Guild, the American Federation of Television and

Radio Artists, and our colleagues in the Directors Guild of America.

By way of brief introduction, please allow me to explain the predicament that is faced by seniors in our industry as a result of section 3304 of FUTA. While some actors are financially well off, most

are not. Entertainment professionals work many short-term jobs

and face prolonged periods of unemployment.

But like many other hardworking Americans, some senior members of the entertainment community manage to earn a modest

pension after working 20 or more years. Still, they have years of

productive work ahead of them, and often seek roles, which we encourage them to take, portraying senior citizens in a positive, active, and vigorous light.

Actors, writers, and other workers in the entertainment industry

are participants in various multiemployer pension plans which

were established through collective bargaining.

Under the terms of those plans, a worker who has met the minimum requirements to qualify for benefits can take normal retirement at age 65, or an early retirement option with reduced benefits

as early as age 55. It is very common for an actor, once he or she

has begun to receive a modest monthly pension, to continue to seek

work in motion pictures or television to supplement that fixed income.

When such work is obtained, the actor’s employer will, in compliance with the collective bargaining agreement, contribute to the

pension plan. Now, under the plan’s rules, such contributions will

result in an increase in the actor’s monthly pension check.
99

Subsequently, while the actor has otherwise met the qualifications for unemployment benefits, section 3304 of FUTA requires

that an individual’s unemployment insurance benefit be offset by

the pension benefit when, one, that person works for any employer

member of a multiemployer unit which contributed to the pension;

and, two, where that work results in an increase in benefits.

Section 3304, as currently written and interpreted, requires the

unemployment benefit be offset not simply by the amount of the

benefit increase, but by the total amount of the pension.

In this way, senior actors and other industry professionals are

being penalized for remaining active workers simply because they

have accepted a short-term job to supplement their fixed incomes.

For example, assume that as a result of a short-term acting job

a worker’s monthly pension benefit increases by $7, from $400 to

$407 per month. Also assume that the unemployment insurance

benefit is determined to be $450 per month.

Under current law, the monthly unemployment benefit of $450

would be reduced by $407, leaving a net benefit of only $43 per

month. Now, it would be reasonable, or certainly more reasonable,

if the unemployment benefit offset were limited to the amount of

the pension increase.

H.R. 841 does just that. Using my example, the change encompassed in the bill would reduce the monthly unemployment by $7,

leaving a net benefit of $443 a month.

This change to FUTA is noncontroversial, and it enjoys bipartisan support. We have also been told that it is supported by the

AMPTP, that is, the Alliance of Motion Picture and Television Producers, and the Motion Picture Association of America, which represent many of our employers.

As you may recall, this bill was first introduced in the last Congress as H.R. 3677 by Congressman English, and at that time my

colleague and former Guild President Charlton Heston testified before the Subcommittee on its behalf.

The Congressional Budget Office estimates the enactment of H.R.

841 would result in an increase in benefit outlays of $2 million, as

well as an eventual increase in revenues to pay for those outlays.

Therefore, this legislation would meet the pay-as-you-go criteria.

All of our investigation indicates this problem is unique to the

entertainment industry, so with the Chairman’s permission, I

would also like to submit a package of correspondence between our

attorneys, the California Employment Development Department

and the U.S. Department of Labor, which shows that attempts

were made to correct this problem at the State level through administrative means.

This correspondence supports the need for congressional action at

the Federal level.

The pension offset rule was designed to prevent abuses such as

when a person who is retired attempts to collect unemployment

benefits by returning to their original employer for enough time to

qualify for those new benefits.

The current law does, however, allow a person collecting a pension to work for a different employer without losing subsequent unemployment benefits if laid off.
100

The law did not contemplate an adverse effect on people such as

actors who receive a pension increase from the same pension plan,

not the same company. In the entertainment industry, workers

who become eligible for a pension under the industry’s multiemployer plans have subsequently returned to work under the

same multi-employer plan.

In the eyes of the law, these actors are returning to the same

company, when in fact they are merely doing short-term work in

a diverse industry with many employers.

At a time when we are encouraging older people to work and

asking experienced actors and actresses to project positive role

models on television and film, the current pension offset provision

acts as a discouragement to those seeking employment.

Passage of H.R. 841 would restore the integrity of the unemployment law to its original intent. It would protect the well-being of

senior workers, while also encouraging them to continue contributing to the entertainment industry and American culture.

On behalf of all of the senior workers in the entertainment industry, I would especially like to thank Representative English for

authoring this bill, and Representatives Matsui and Royce for

being the chief cosponsors.

We appreciate the Subcommittee’s consideration of this legislation, and stand prepared to assist you as your deliberations move

forward.

Thank you very much, Mr. Chairman.

[The prepared statement and attachments follow:]

Statement of Richard Masur, President, Screen Actors Guild, Los Angeles,

California

Good day. My name is Richard Masur, and I am President of the Screen Actors

Guild.

Mr. Chairman, I would like to thank you and the members and staff of this Subcommittee for giving me the opportunity to testify in support of H.R. 841. Today,

I am speaking on behalf of my colleagues in the entertainment industry, in particular the senior performers represented by the Screen Actors Guild, the American

Federation of Television and Radio Artists and the Directors Guild of America.

Your actions affecting unemployment insurance policy have a direct impact on

many people’s lives. I am here today to speak to you about some of them—senior

members of the entertainment community who have been affected adversely, and we

believe unintentionally, by Section 3304 of the Federal Unemployment Tax Act. As

currently written and interpreted by the Department of Labor and state employment offices, that Section deprives senior workers of unemployment insurance benefits for which they have otherwise qualified.

By way of brief introduction, please allow me to explain this predicament—which

is caused by a combination of the unique nature of entertainment work, the rules

of the pension plan under which we operate, and the current interpretation of federal law.

While some actors are financially well off, most are not. Entertainment professionals work many short-term jobs and face prolonged periods of unemployment.

But like many other hard-working Americans, some senior members of the entertainment community have earned a modest pension after working 20 or more years.

Still, they have years of productive work ahead of them and often seek roles we encourage them to take—portraying senior citizens in a positive, active and vigorous

light.

Actors, writers and other workers in the entertainment industry are participants

in various multi-employer pension plans which were established through collective

bargaining.

Under the terms of those plans, a worker who has met the minimum requirements to qualify for benefits can take normal retirement at age 65, or an early retirement options with reduced benefits as early as age 55. It is very common for

an actor, once he or she has begun to receive a modest monthly pension, to continue
101

to seek work in motion pictures or television to supplement that fixed income. When

such work is obtained, the actor’s employer will, in compliance with the collective

bargaining agreement, contribute to the Pension Plan. Under the plan’s rules, such

contributions will result in an increase in the actor’s monthly pension check. Subsequently, while the actor has otherwise met the qualifications for unemployment benefits, Section 3304 of the FUTA requires that an individual’s unemployment insurance benefit be offset by the pension benefit when:

(1) that person works for any employer-member of a multi-employer unit which

contributed to the pension, and

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

Section 3304, as currently written and interpreted, requires that the unemployment benefit be offset—not simply by the amount of the benefit increase—but by

the total amount of the Pension. In this way, senior actors and other industry professional are being penalized for accepting a short-term job to supplement their

fixed incomes.

For example, assume that as a result of a short-term acting job, a worker’s monthly pension benefit increases by $7, from $400 to $407 per month. Also assume that

the determined unemployment insurance benefit is equal to $450 per month. Under

current law, the monthly unemployment benefit of $450 would be reduced by $407,

leaving a net benefit of only $43 per month.

It would be reasonable if the unemployment benefit offset were limited to the

amount of the pension increase. H.R. 841 does just that. Using my example, the

change encompassed in the bill would reduce the monthly unemployment benefit by

$7, leaving a net benefit of $443 per month. This more-reasonable offset in benefits

would be accomplished by amending Section 3304 of the FUTA to simply limit the

unemployment benefit offset to the amount of the pension increase for workers in

the entertainment industry.

This change to the FUTA is non-controversial and enjoys bi-partisan support. As

you may recall, this bill was first introduced last Congress as H.R. 3677 by Congressman English, and my colleague Charlton Heston testified before this subcommittee on its behalf. The Congressional Budget Office estimates the enactment

of H.R. 841 would result in an increase in benefit outlays of $2 million, as well as

an eventual increase in revenues to pay for those outlays. Therefore, this legislation

would meet ‘‘pay-as-you-go’’ criteria.

All of our investigation indicates this problem is unique to the entertainment industry. With the Chair’s permission, I would also like to submit a package of correspondence among our attorneys, the California Employment Development Department and the U.S. Department of Labor, which shows that attempts were made to

correct this problem at the state level through administrative means. These correspondence essentially support the need for Congressional action at the federal

level.

The pension offset rule was designed to prevent abuses, such as when a person

who is legitimately retired attempts to collect unemployment benefits by returning

to their original employer for enough time to qualify for unemployment benefits. The

law does, however, allow a person collecting a pension to work for a different employer without losing subsequent unemployment benefits if laid off. The law did not

contemplate an adverse affect on people such as actors who receive a pension increase from the same pension plan—not the same company. In the entertainment

industry, workers who become eligible for a pension under the industry’s multiemployer plan have subsequently returned to work under the same multi-employer

plan.

In the eyes of the law, these actors are returning to the same company, when in

fact they are merely seeking short-term work in a diverse industry with many employers.

At a time when we are encouraging older people to work—and asking experienced

actors and actresses to project positive role models on TV and film—the current pension offset provision discourages them from seeking employment. Passage of H.R.

841 would restore the integrity of unemployment law to its original intent. It would

protect the well-being of senior workers while also encouraging them to continue

contributing to the entertainment industry and American culture.

We appreciate your consideration of this legislation and stand prepared to assist

you as your deliberations move forward. Thank you.
f

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tioned. Why don’t you inquire?

Chairman SHAW. Thank you. Mr. English, your name was menf

Mr. ENGLISH. Thank you. Mr. Masur, I very much appreciate

your testimony here today, because I think you brought before the

Subcommittee in fairly vivid and specific terms how this perverse

pension offset which was put in with perhaps the right intentions

particularly affects some people involved in your profession.

The only question I have, and this is something I’ve been trying

to puzzle through the last few days, is how this pension offset

would also potentially interact with the Social Security earnings

limitation, which is an offset in part.

It seems to me there might be some people in the age bracket

of 65 to 69 who would be hit with two offsets at the same time,

and, in effect, would be invited to go to work, take a substantial

cut in the Social Security benefits, and after work, qualifying for

unemployment benefits, would in effect lose the bulk of those as

well.

So this would be a huge disincentive for people to work. Have

you run into instances where actually for this reason motion pic-
123

ture association members are unable to attract as many actors as

they would like for these sorts of roles?

Mr. MASUR. Well, actors, as I’m fond of telling people, never retire. They don’t fade away. They just work until they drop or can’t

do the work anymore.

So it takes a lot of discouragement to keep our senior performers

from going to work.

Mr. ENGLISH. I understand.

Mr. MASUR. But I don’t know that there have been any cases

where they haven’t been able to attract the appropriate people for

the work.

I do know there has been extreme concern about this new burden

caused by a thoughtful action by our pension plan which didn’t use

to credit current work in terms of increased benefits, but now senior actors fall under this harsh offset.

So when the plan changed the way we did our business, unfortunately it put all of our members in a situation where suddenly they

lost nearly all their unemployment benefits.

So they’ve been very upset about this for about 8 or 9 years now.

Mr. ENGLISH. Well, we appreciate your coming before the Subcommittee again following up on Mr. Heston’s testimony last year.

This is something, Mr. Chairman, I’d very much like to see addressed this year, if we have the opportunity.

And again, I yield back the balance of my time. And I also want

to thank the other panelists, because this is a very good panel.

Chairman SHAW. Mr. Levin.

Mr. LEVIN. No questions. I think everybody has presented their

case very well, Mr. Chairman.

Chairman SHAW. Thank you. Mr. Whitefeather, I want to also

point out that Mr. Ramstad also encouraged your appearance here

today. I’d like to also note the appearance of our former colleague,

Mr. Sikorski. Welcome back. Nice to see you.

Then I’d thank all the members of this panel for being with us

this afternoon. I think it has been a very enlightening few hours

here.

Thank you very much, and the hearing is concluded.

[Whereupon, at 1:12 p.m., the hearing was adjourned.]

[Submissions for the record follow:]
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1 A separate state tax finances actual benefit payments to the unemployed.

2 Under the EB program, individuals who have exhausted their benefit eligibility may receive

an additional 13 weeks in payments, but only when the unemployment level in their State

reaches a ‘‘trigger point.’’

Statement of Duane Parde, Executive Director, American Legislative

Exchange Council

I. BACKGROUND

The employment security system, created in the 1930s, consists of three programs,

unemployment insurance, labor exchange (employment service), and labor market

information. Unemployment insurance is designed to alleviate hardship with temporary benefits for workers who have lost jobs without fault on their part. The labor

exchange (available to benefit recipients as well as others looking for work) seeks

to match job seekers with openings listed by employers. Labor market information

programs provide useful labor statistics, including data on unemployment levels.

These services are provided through state employment security agencies (SESAs),

staffed by state employees, who take and pay unemployment claims, run the labor

exchange, and collect and disseminate labor market statistics. Unlike the typical

state agency, which is supported by state general revenue, SESAs rely for their administrative funding primarily on federal grants received from the U.S. Department

of Labor (DOL).1 As with most federal grants, many conditions are attached and

regulatory oversight from DOL is intense.

These administrative grants are funded by a federal employer payroll tax, collected by the IRS, under the Federal Unemployment Tax Act (FUTA). The tax is

levied at a rate of 0.8% on the first $7,000 of each worker’s wages. Included in the

present 0.8% rate is a 0.2% surtax scheduled to expire December 31, 1998. Some

of the FUTA funds are deposited into separate federal trust accounts to pay for extended benefits (‘‘EB’’),2 the ‘‘EUCA’’ account, and to make loans to insolvent state

jobless trust funds, the ‘‘FUA’’ account.

II. PROBLEMS

The present bifurcated employment security system has created serious problems

in the eyes of ALEC’s public and private sector members:

Overtaxation. The main purpose of the FUTA tax is to finance salary and overhead expenses for the SESAs. But in FY 1996, only $3.38 billion, or 58 percent, of

$5.85 billion collected under FUTA was returned to the States to run their agencies.

The rest was not appropriated by Congress (to offset the federal deficit); spent on

IRS and DOL bureaucracy; or deposited in the rarely used EUCA and FUA accounts. The federal government thus removed $2.5 billion from the private sector,

which could have put those dollars to work—in capital reinvestment, in hiring more

workers, in increasing employee pay or benefits, or in dividend distribution.

Unnecessary Tax Paperwork. The IRS spends $70 million each year in collecting

the FUTA tax, and business spends more than $290 million annually in filling out

FUTA forms. This is because employers must complete both a federal unemployment tax return (to pay for SESA administrative costs), and a state return (to finance jobless benefits), rather than using a single form.

Shortchanging of States. Not only is less than 60% of FUTA revenue given back

to the States, but esoteric allocation formulas devised by DOL compound the problem. All but five States and the Virgin Islands received less money in FY 1995 (the

most recent information available) than their employers paid in FUTA taxes. And

20 States got back 50 percent or less of the FUTA tax money they sent to Washington.

For example, Tennessee, which paid in $120.8 million and received grants worth

just $43.6 million, or 36.1 percent. Other States with eye opening grant-to-tax ratios

are North Carolina, 36.6 percent; Florida, 36.7 percent; Indiana, 37 percent; Georgia, 38.9 percent; Virginia, also 38.9 percent; and Ohio, 39.2 percent.

Unproductive Federal Trust Accounts. At the end of FY 1997, the EUCA account,

which pays for EB benefits, will contain $9.43 billion; the FUA account’s balance,

from which loans to state trust funds are made, will be $6.72 billion. The EB program has rarely been used, even during the early 1990s recession, resulting in large

balances. The loan program has seen little activity since the early 1980s, when the

federal government began charging interest for loans not repaid within the same fiscal year.

The effect of these large balances is to conceal the true size of the federal deficit,

since the trust fund accounts exist within the unified budget, and, in essence, to fi-
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3This would be accomplished by permitting the 0.2% surtax to expire, and raising from 90%

to 100%, the credit received against the actual 6.0% tax rate by employers in States with programs conforming to remaining federal standards.

nance other government spending—which the FUTA tax was never intended to

cover. Inefficient Service Delivery. The present employment security system promotes inefficient service delivery by SESAs in several ways: • distinct federal funding streams for different activities (unemployment insurance, labor exchange, labor market information) inhibit economies of scale by making it difficult or impossible to pool monies for personnel and overhead expenses. • burdensome DOL rules, restrictions, and requirements result in ‘‘bean counting’’

and paperwork proliferation. This has been estimated to consume not less than four

percent of a SESA’s personnel resources. • states receive grant amounts based on archaic DOL formulas; there is no incentive for economy or better performance since these do not affect funding levels.

Most important, however, America’s state legislatures have no role in the employment security system. This is because the federal government sets both the administrative tax rate and the grant amounts which state agencies receive to run their

programs. SESA program priorities thus are set on a ‘‘one-size-fits-all’’ basis in

Washington, rather than by legislators who know the most about designing an employment security system that meets local needs. Likewise, employers and citizens

are denied an effective voice in the system, because their local elected representatives lack any real authority.

III. THE ALEC REFORM PLAN

The ALEC plan for employment security system reform embraces three simple but

essential elements captured by the words ‘‘replacement,’’ ‘‘repeal,’’ and ‘‘redistribution.’’

Replacement of FUTA with State-set administrative taxes.3 Most of the problems

in the present system can be erased by this single reform. If state legislators were

permitted to set an administrative tax rate to finance their SESAs, the following

beneficial changes would occur.

• Overtaxation of employers, caused by the federal government’s failure to return

to the States more than two-fifths of the FUTA revenue collected each year, would

end. Most States would be able to set an administrative tax rate far lower than the

current FUTA level without reducing agency operating budgets. Annual savings:

$2.5 billion.

• Unnecessary paperwork for employers would be done away with, since they

could file a single state return for both administrative and benefit taxes. Annual

savings: $290 million.

• States would no longer be shortchanged by DOL administrative grants, since

each State would set a tax rate commensurate with the funds it wants to spend on

its agency.

• State agencies would be able more efficiently to allocate resources with the disappearance of separate funding streams.

• Budget, taxing authority, and program oversight responsibility would be lodged

in a single level of government closer to the citizens. This would encourage more

efficient operation, and enable States to set agency priorities and performance

standards consistent with the needs of their employers and workforce.

Repeal of burdensome DOL grant conditions. The DOL rules, restrictions, and requirements that currently accompany federal grants and hinder effective agency operations would be replaced with substantive oversight from state legislators. Of

course, some basic federal protections would remain, like uniform minimum employer coverage standards and due process safeguards for persons whose claims are

denied.

Redistribution of EUCA and FUA funds. By terminating the unnecessary federal

EB program (and letting States enact their own), and using general revenue to back

the current loan program for state trust funds, more than $16 billion could be redistributed to state jobless trust accounts. With vastly increased trust assets, States

would have a menu of attractive options: cutting benefit taxes (or in some cases

even enacting moratoria), improving benefits, or just bolstering trust fund solvency.

ALEC also advocates using $2.7 billion in unappropriated administrative revenues

to hold harmless for five years those few States that now receive more in federal

grant money than is attributed to employment in their States; to provide a one-time

enhancement of administrative revenue for other states; and to pay for necessary

transition costs. Also, to limit any impact on the national deficit, state administra-
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4 Both plans contemplate some tax relief when the 0.2% FUTA surtax expires at the end of

1998.

tive funds would continue to be deposited in Washington-based accounts, except that

each State would have its own dedicated account into which to deposit tax revenue

and make withdrawals to pay for SESA salaries and overhead costs.

IV. THE ‘‘UBA–ES ADMINISTRATORS’’ PLAN

At ALEC, we have also had an opportunity to review the draft of another plan

calling for changes in the employment security system. This plan is supported by

UBA, Inc., and several state employment security administrators.

On the whole, the ‘‘UBA–ES’’ proposal offers only minor improvement in some

parts of the system; in other respects, it actually makes things worse. Unless the

Subcommittee is willing to make changes going beyond those recommended by

‘‘UBA,’’ we would urge retention of the status quo.

This statement is not the place for a detailed analysis of the ‘‘UBA–ES’’ plan, but

ALEC does wish to draw the Subcommittee’s attention to fundamental differences

that separate the two plans.

Unlike the ALEC plan, the ‘‘UBA–ES’’ approach maintains the FUTA tax, rather

than effectively eliminating it. As a result, employers would be denied more than

$1 billion in tax relief available only under the ALEC plan.4 Although UBA would

permit States to keep most of the revenue raised by the FUTA tax in their States,

this money would go straight to expansion of state agency budgets. Many agencies

would receive windfall increases of more than 50%.

State legislators would still have no effective control over the rate of tax and

agency . budgets. As a result, legislatures would be deprived of the ability to establish priorities and design employment security systems responsive to the needs of

their employers and their workforces. State agencies would have no incentive to become more efficient, since their funding would be guaranteed.

The ‘‘UBA–ES’’ plan increases DOL regulation by requiring state agencies to

make new reports to Washington on such matters as the proportion of claimants

using re-employment services and the proportion of employers using employment

services.

The ‘‘UBA–ES’’ proposal continues to mandate the federal EB program on the

States, even while redistributing to them funds in the EUCA account. The ALEC

plan permits states full freedom to determine the conditions, if any, under which

benefits should be extended.

The ‘‘UBA–ES’’ plan fails to redistribute $6.7 billion in assets located in the FUA

account to state jobless funds, limiting States’ ability to provide benefit tax relief,

to increase benefit payments, or to raise trust fund solvency levels.

V. CONCLUSION

In considering changes to the Nation’s employment security system, ALEC observes that a sharp contrast exists between its approach and that of UBA and the

ES Administrators.

The ‘‘UBA–ES’’ idea is that state agency bureaucracies should be arbitrarily inflated without oversight or interference from state legislators or taxpaying employers, and that Washington regulation must be intensified.

The ALEC concept promotes maximum employer tax relief, substantial deregulation and paperwork reduction, and handing back real taxing and decision-making

power to state legislators who, after all, are closest to the people the employment

security program is intended to serve.

We hope the Subcommittee will cut taxes and bureaucracy and reinvigorate our

federal system by writing legislation consistent with the principles I have described

here.

Attachment: ‘‘Resolution To Transfer the Employment Security System to the

States,’’ American Legislative Exchange Council.

[The attachment is being retained in the Committees files.]

f
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Statement of American Society for Payroll Management, New York, New

York

ASPM is a professional association of the senior managers who control the preparation of payroll and employment taxes for large employers in the United States.

We represent large employers, systems vendors and tax service providers. As a

group, we collect and account for a major proportion of the income and employment

taxes the Internal Revenue Service receives.

ASPM wishes to submit this statement for inclusion in the printed record of the

of the hearing, although ASPM will not be testifying in person. FUTA reform efforts

greatly affect the work of our members and we believe that comments from the payroll professional community should be heard.

We are writing to express our concern about the proposal under active consideration for inclusion in the FY98 budget to mandate monthly collection of both federal

and state unemployment insurance taxes. This proposal makes little economic sense

and would impose unnecessary burdens on both employers and program administrators. We find it quite inconsistent with government initiatives such the Simplified

Tax and Wage Reporting System (‘‘STAWRS’’) that was created to focus specifically

on ways to reduce tax and wage reporting burdens

Companies represented by our organization withhold, report, and deposit a large

proportion of all taxes paid to the Treasury each year. For years, we have worked

closely with the IRS and other government agencies to simplify the tax and wage

reporting process. Recently, we met with officials at the Treasury, the Department

of Labor and program officials within OMB in an attempt to understand a policy

rationale that would justify the burdens imposed by this proposal. The only justification that we heard was that, even though most of the UI taxes collected are state

revenues, the change can be ‘‘scored’’ as a one-time federal revenue raiser in the

year of implementation. This budget justification ignores the real cost of the increased financial and administrative burden imposed on both federal and state tax

administrators—and on our nation’s employers.

It was most troubling to learn from these meetings that little consideration had

been given to the additional compliance burden imposed on employers. In light of

the Administration’s commitment to both paperwork reduction and STAWRS, we

find this to be quite disappointing. Furthermore, from these sessions it became clear

that this concept was developed without significant evaluation of its potential impact on the unemployment insurance (‘‘UI’’) program. It appears to have been developed exclusively as a ‘‘revenue raiser’’ without meaningful input from the federal

agency responsible for UI program policy.

The current two-track federal/state system for collection of FUTA/SUI taxes has

been estimated by state government and employer groups to cost employers somewhere between $290 to $500 million a year in processing costs. Increasing employers’ UI filing obligations from 8 to 24 times annually will only exacerbate the problem. It would increase payroll processing costs by an amount that in the aggregate

will be measured in the hundreds of million dollars every year—all to achieve a onetime technical accounting speed-up in the year 2002. We believe the long-term burden far outweighs the short-term benefit. The burden would be especially onerous

for small business and would be inconsistent with the purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, which is intended to lessen

legal, administrative and reporting requirements imposed on small businesses by

the federal government.

In measuring the overall impact of this proposal, it is important to remember that

the increased state administrative cost is in reality a federal outlay, since such expenses must be appropriated from the Unemployment Trust Fund. To the extend

that the federal government chooses not to appropriate additional funding to cover

the states’ increased administrative burden, the states will be confronting yet another form of unfunded mandate coming to them from Washington. Moreover, any

reduction in available funds for administration of employment services would further increase outlays reflected in the federal budget, by reducing employment services to unemployment compensation claimants, who in turn would draw additional

benefit payments.

As you work to complete preparation of the FY98 budget submission, we would

ask you to give most serious consideration to the overall implications of this proposal. When evaluated with a full appreciation of (I) its impact on both federal and

state UI tax administration and (ii) its significant new administrative burden on

employers, we do not believe that it can be defended from a either a policy or budget

perspective.

When enacted, the surtax was to be a temporary surtax to help keep the FUTA

trust funds solvent. The trust funds now have substantial surplus balances. The
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funds collected in this trust fund may not be used for any other purpose, so the surtax does not really help reduce the deficit in overall spending, except on paper.

The acceleration of payments is a budget gimmick to show a first year only increase from collecting taxes two months earlier. This funding would also go into the

trust fund and would do nothing to relieve the overall deficit. More importantly, this

proposal has a very significant cost burden to both employers and to the state and

federal agencies that collect and account for these taxes. The proposal would triple

the cost of paying and collecting these taxes in exchange for a one-time paper benefit to the revenue budget. The current system could be more meaningfully reformed

by having the states collect all unemployment taxes under their own rules and forward the federal portion to the IRS

This would produce real, on-going budget savings by eliminating federal salaries

and administrative expenses presently used for collection efforts. There are opportunities for real reform of the UI system, but the budget proposals only create further

unnecessary burdens on employers. ASPM, the employer community and the state

unemployment agencies strongly oppose this proposal.

Respectfully submitted,

Clark G. Case

Vice President of The American Society For Payroll Management

Government Relations Committee Chair

Financial Systems and Employee Accounting Manager

City of Winston-Salem, NC

cc: Dan Glum, ASPM President

ASPM Board Members

Statement of Don Novey, President, California Correctional Peace Officers

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity

ASPM Government Relations Committee Members

Association, West Sacramento, California

f

to submit testimony before you regarding a serious problem with the Federal Employment Tax Act. Under this law, states are prevented from denying unemployment insurance for private sector employment during an inmate’s incarceration

when an inmate is released from prison. Failure for a state to conform with the federal statute would result in the loss of federal tax credits to all businesses in that

state.

The California Correctional Peace Officers Association (CCPOA) represents over

25,000 correctional and parole officers in the State of California. CCPOA strongly

supports passage of H.R. 562, introduced by Congressman Bill Thomas. H.R. 562

would correct this flawed law by denying unemployment benefits for hours worked

for a private sector employer when incarcerated. Since inmates are not eligible for

unemployment benefits for working for a non-profit or public sector employer while

in prison, this bill would provide this same exemption to private sector employment.

In a nut shell, prisoners should not be entitled to unemployment benefits simply

because they released from prison and therefore out of a job. These men and women

are not being laid off from a job. If prisoners are able to work while in prison, it

is a privilege he or she is being granted. Inmates are in prison to serve a debt to

society. Taxpayers already pay a high cost for their crimes—from the victims themselves who pay the ultimate price to the taxpayers who must pay for the inmate’s

incarceration. H.R. 562 needs to be enacted into law so that inmates are not entitled

to the same unemployment benefits provided to law-abiding and hard working men

and women who lose a job through no fault of their own.

In 1990, voters in California approved proposition 139, which established a joint

venture program between the private sector and the state Department of Corrections. Businesses were provided the opportunity to set up operations inside prisons.

This program generates savings and revenue for the state. Wages to an inmate are

subject to local, state and federal taxes. Twenty percent of the inmate’s salary is

used to pay restitution to victims. An inmate’s salary is also used to offset the costs

of incarceration and to support his or her family. The inmate benefits from the program by learning skills and twenty percent of his or her salary goes into a savings

account which is available to the inmate upon release.

There was a loophole in the California law that was subsequently corrected. Existing state law provided that inmates would be eligible for unemployment benefits on

the basis of his or her employment in a joint venture program once released from

prison. CCPOA was a leader in the state effort to correct this serious problem. On
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March 26, 1996, voters in California overwhelmingly passed Proposition 194, which

prevented prisoners from collecting unemployment benefits for employment in a

joint venture program once paroled.

The United States Department of Labor, however, has determined that California’s new law (Section 2717.9 of the State Penal Code) raises a conformity issue

under federal law (Section 3304(a)(10) of the Federal Unemployment Tax Act). Lack

of conformity with federal law would result in a loss to all Californian businesses

of a federal tax credit, which lowers their federal unemployment tax payments. The

Department has advised the State of California that there are various ways to get

around the conformity problem, such as making inmates participating in the program employees of the state. We find this suggestion nothing short of outrageous.

Taxpayers already pay for an inmate’s room, board, education, exercise facilities,

medical and dental expenses, and more. To make these inmates employees of the

state is a serious insult to correctional officers who are responsible for ensuring the

public is safe from this criminal element.

The Department’s response—here’s how to get around the problem—is completely

unacceptable. The issue clearly needs to be addressed and corrected by Congress.

Unemployment insurance is meant to provide assistance to working men and

women who lose their jobs through no fault of their own. It is not meant for a convicted criminal who is paroled out of a job. The prisoner was granted the job as a

privilege while serving time for breaking the law.

For these reasons, CCPOA strongly urges this Subcommittee to pass H.R. 562 and

move this bill to the floor of the House in the very near future. We commend Congressman Thomas for his leadership and the Chairman of the Subcommittee for addressing this issue at today’s hearing. Thank you again for the opportunity to

present testimony on this important issue.

Statement of Jennifer A. Vasiloff, Executive Director, Coalition on Human

f

Needs

The Coalition on Human Needs opposes the legislation (H.R. 125) introduced by

Representative Phillip Crane (R–IL) which would overturn a key court case protecting the rights of unemployed workers to collect unemployment insurance benefits

due them in a timely manner. The Coalition on Human Needs is concerned that enactment of H.R. 125 would have a particularly harmful effect on low wage workers

and former welfare recipients making the transition to paid employment. Given the

extensive changes enacted last year as part of welfare reform, efforts to delay access

to unemployment compensation could have particularly grave consequences on vulnerable workers and their families.

H.R. 125 is an attempt to reverse the US Court of Appeals, 7th Circuit, decision

in the Luella Pennington vs. Lynn Dohorty, Director of the Illinois Department of

Employment Securitycase. In the 1994 Pennington decision, the court ruled that the

state must count an applicant’s most recent earnings information in determining an

applicant’s eligibility for unemployment insurance compensation. In its decision, the

court affirmed the federal requirement that states must pay benefits in a timely

manner. The court rejected the state’s claim that counting the most recent earnings

was administratively infeasible.

H.R. 125 would reverse this court decision and allow Illinois to continue the administrative shell game of delaying the payment of benefits to workers that they

have already earned and are entitled to receive. Therefore, H.R. 125 must be rejected.

Current attempts to limit access to the unemployment insurance compensation

system must be considered in the context of the historic drop in the number of people able to access the unemployment system at all. In 1975, seventy five percent

of the unemployed received benefits. Today, only about a third of all unemployed

workers receive unemployment compensation. The unemployment compensation system should be reformed to cover more unemployed individuals not to impose new

barriers to accessing earned benefits.

The Department of Labor has estimated that if states used the most recent earnings information available to calculate eligibility, an additional six to eight percent

of the unemployed would receive benefits. The study also estimated that paying

these individuals the unemployment compensation they are due would only increase

the cost to states by four to six percent. This discrepancy is due to the fact that

many individuals who would qualify for benefits if their most recent earnings information were counted have below-average earnings levels and therefore would qualify for only minimal benefits.
130

The group of low wage workers who would benefit from a state using their most

recent earnings information to calculate eligibility includes higher proportions of

women, minorities, younger workers and workers with limited education. This is exactly the population that the welfare reform law, the Personal Responsibility and

Work Opportunity Reconciliation Act of 1996 (PL 104–193), targets to move into

work. Workers fitting this profile already face unemployment and underpayment

rates between four and five times the national average. Furthermore, they are more

likely to be required to leave a job due to disruptions in child care or the illness

of a family member.

The Personal Responsibility and Work Opportunity Reconciliation Act imposes on

poor individuals strict new work requirements and lifetime limits on the receipt of

cash assistance. Welfare recipients are being pushed to enter a low wage labor market characterized by high levels of volatility and contingent work in addition to low

wages and a general lack of benefits. Thus, individuals, such as former welfare recipients, working in low wage jobs are likely to face periods of unemployment

through no fault of their own.

Delaying payment of unemployment benefits these individuals have already

earned is not only unjust, but also could result in extreme economic hardship. For

example, if an individual who loses her job has worked long enough and earned

enough to qualify for unemployment benefits—but only if the state counts her most

recent quarter of earnings—she and her family could be left with no benefits for up

to six months if Pennington is reversed. If this same individual, despite having demonstrated a strong work effort, had previously exhausted her time limit of assistance

under the Temporary Assistance for Needy Families (TANF) block grant, it would

be even more important that she have prompt access to any unemployment benefits

she had earned. If these individuals cannot access their unemployment benefits

promptly, there may be no other income support available to them.

It is indefensible to refuse to pay earned unemployment benefits in a timely fashion. Significant delays in access to such benefits are very likely to force some low

wage workers onto welfare, or—if they have exhausted their TANF benefits—into

even more desperate poverty from which they may never escape. This would be a

devastating blow to poor workers who have made every effort to play by the rules

and achieve work-based self-sufficiency for their families.

In conclusion, enactment of H.R. 125 would cause grave injustices to be committed

against our nation’s most vulnerable workers. It would place additional barriers in

the way of individuals moving off of welfare and into jobs. The unemployment compensation system should be reformed to cover more workers who are clearly attached to the labor force, not to impose new barriers to accessing earned benefits.

The Coalition on Human Needs urges Congress to reject H.R. 125.

The Coalition on Human Needs is an alliance of over 170 national organizations

working together to promote public policies which address the needs of low-income

and other vulnerable Americans. The Coalition’s members include civil rights, religious, labor and professional organizations and those concerned with the well-being

of children, women, the elderly and people with disabilities. The Coalition on

Human Needs also works with grassroots groups across the country that share an

interest in the human needs agenda.

The Eastern Band of Cherokee Indians, located in western North Carolina, is

Statement of Eastern Band of Cherokee Indians, Cherokee, New York

f

pleased to have an opportunity to submit written testimony to the Human Resources Subcommittee regarding the Subcommittee’s consideration of Congressman

John Shadegg’s bill, HR 294, the Indian Tribal Government Unemployment Compensation Act Tax Relief Amendments. We were particularly pleased to learn that

the Subcommittee heard testimony from Congressman Shadegg and Bobby

Whitefeather, the Chairman of the Red Lake Band of Chippewa Indians. The Eastern Band strongly supports this legislation, and respectfully urges the Subcommittee to include it within any legislation the Ways and Means Committee reports the

House amending the Federal Unemployment Tax Act (FUTA).

Congressman Shadegg’s bill would simply amend the tax code to clarify that Indian tribal governments are to be treated in the same manner as state governments

and local governments. This bill would ensure equity, but it would not give tribal

governments any greater privileges than all other forms of government now receive.

Furthermore, HR 294 would not have any negative impact on state coffers, and

would save federal, tribal, and state government funds which are currently lost be-
131

cause of sporadic and uncertain enforcement, coverage, and expensive dispute resolution efforts.

The Constitution, the Congress, the Supreme Court, and all Administrations since

President Richard Nixon have long recognized that Indian tribes are sovereign governing entities. However, under FUTA as it now stands, ‘‘Indian tribal government

employers’’ are not expressly included within the definition of ‘‘government employers.’’ This ambiguity has been the subject of differing interpretations by the U.S. Internal Revenue Service, the U.S. Department of Labor and by state governments.

Even within the same federal agency the interpretations have differed from region

to region and state to state. Furthermore, the interpretation has varied over time.

Clearly this is not a workable situation.

In April of 1996, the Department of Labor sent out an Unemployment Insurance

Program Letter to all state employment security agencies prohibiting states from

treating the Indian tribal governments, located within their borders, as governments for the purposes of FUTA. The IRS has not taken a consistent position, but

certain regions have indicated that, for the purposes of FUTA, they will consider

tribal governments to be mandatorily covered as ‘‘private employers.’’ For the federal government to prohibit state governments from treating tribal governments as

governments violates Congressional intent, and it could unnecessarily strain and

confuse state-tribal relations.

The practical consequences of the treatment of tribal governments under FUTA

are substantial. FUTA is a joint federal-state taxation system that levies two taxes

on private sector employers: a 0.8% federal unemployment tax and a state unemployment tax ranging from near zero percent to more than 9.0% of the payroll

wages. Since the 1930s FUTA has exempted all federal, state and local government

employers from the 0.8% federal FUTA tax. Additionally, it allows government employers to contribute into the state unemployment funds on a reimbursable basis.

That is, government employers only reimburse the unemployment insurance system

for claims that are actually paid out to former employees. Whereas, private employers pay FUTA taxes in advance through a flat tax rate which runs up to 9% in some

states. Congressman Shadegg’s bill would simply extend the same status to tribal

government employers that is enjoyed by these other government employers. This

bill is all the more important, as tribal governments continue to take over more and

more of the functions that used to be provided by the federal government. As Tribes

take over these federal functions, they are being required to absorb high FUTA

taxes from which the federal government was exempt when it carried out those

functions. The bill would correct this injustice.

Just as with state and local governments, all employees of the tribal government

should be treated as government employees for the purpose of FUTA. Neither FUTA

nor the IRS distinguish between state or local government employees who carry out

‘‘traditional’’ government functions and those state or local employees who work in

business-type activities that are wholly-owned and controlled by state and local governments. Such activities provide substantial revenues to state and local governments. In fact, in November of 1995, the Congressional Research Service conducted

a survey and determined that state governments currently generate $46.5 billion in

revenues from the direct operation of business-type activities by state government

employees. As Chairman Whitefeather said in his testimony, ‘‘All of these state government employees, from the liquor store stock clerks in Pennsylvania to the massage therapists in the State park resorts of West Virginia to the lottery gambling

clerks in dozens of states, are treated as governmental employees for the purposes

of FUTA.’’ As a matter of equity, HR 294 treats all tribal government employees

as government employees, regardless of whether or not they work in tribal businesstype activities, so long as the tribal enterprise is wholly owned and controlled by

the Indian tribal government. Certainly, tribal governments should have the same

opportunities to engage in revenue generating activities as state and local governments.

The Eastern Band of Chorokee Indians provides all of the governmental services

which most major municipalities, and even some states, provide to their citizens, including law enforcement, fire department services, and utilities. Despite the fact

that the governing body of the Eastern Band of Cherokee Indians provides these

many government functions, our tribal government has paid over $131,000.00 in

‘‘private employer’’ FUTA taxes just since 1995. These monies could have been used

to fund any of the myriad of social programs which the Tribe is obligated to provide

for its members. I hope that you will give strong consideration to the information

contained within this testimony and support Congressman John Shadegg’s bill, HR

294.
f

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Statement of Robert B. Peacock, Fond du Lac Band of Lake Superior

Chippewa Indians, Cloquet, Minnesota

On behalf of the Fond du Lac Band of Lake Superior Chippewa Indians, I appreciate the opportunity to submit testimony in support of H.R. 294, a bill to amend

the Federal Unemployment Tax Act to clarify that Indian tribes are to be treated

like state and local governments with regard to this tax.

The Fond du Lac Band is a federally recognized Indian Tribe with a reservation

in northeastern Minnesota. The Band is responsible for providing a wide range of

governmental services and programs to Band members—many of whom still live far

below standards of living enjoyed by the majority of Americans. Among the governmental services provided by the Band are health care, social services, education, job

training, and housing assistance. The Band is responsible for Reservation infrastructure—schools, clinics, government offices, community centers, as well as roads,

water and sewer systems. The Band’s governmental functions also include protection and management of natural resources, planning for land use and economic development, general civil regulation and law enforcement. Income from recently established Band enterprises is being used to supplement federal funds to provide

these essential services. The Band currently has approximately 1,500 employees

working in a variety of government programs and enterprises on the Reservation.

The Federal Unemployment Tax Act imposes an excise tax on the employer-employee relationship. As a general rule, the private employers who are subject to the

Act must pay a tax equal to 6.2% of the first $7,000 in wages paid to each employee

for a calendar year. The Act gives a credit against the amount of federal tax due

for unemployment taxes paid into a state unemployment system. As a result of the

credit, most employers are effectively taxed by the IRS at 0.8%.

The Federal Unemployment Tax Act specifically provides that employment services performed for states and their political subdivisions or for the United States

government or an instrumentality of the United States are not considered employment for purposes of the FUTA. Thus, these governmental employers are not subject

to the tax. In 1978, the Act was amended to provide that a state as an employer

could either participate in the state unemployment compensation program as a private employer or reimburse the state for benefits paid to its unemployed workers.

But while it clearly exempts federal, state and local governmental employers, the

Act is silent with regard to its applicability to Indian tribes.

For many years, the Act’s silence regarding tribes was not a problem. In 1987,

the IRS took the position that Indian tribes were exempt from FUTA. The IRS specifically advised the Fond du Lac Band that the Band was not subject to FUTA and

was therefore not required to pay the Federal Unemployment Tax. The IRS refunded federal taxes that the Band had previously paid. A copy the IRS letter to

the Band is attached for the record.

While there has been no relevant change in the Act, the IRS has since completely

reversed its position. In fact, the IRS has initiated an action against the Band which

is now being litigated before an Administrative Law Judge. In these proceedings,

the IRS seeks over $2 million in back taxes and penalties from the Band—even

though the Band in good faith merely complied with the written position of the IRS

itself. The government’s change of position on the issue is grossly unfair to Fond

du Lac and similarly situated tribes, and has generated litigation that is burdensome and inefficient for both the tribes and the federal government.

Moreover, the IRS is pursuing this matter in a punitive way even though the

Fond du Lac Band has voluntarily participated in the State’s unemployment compensation plan. The Band has done so because the welfare of our employees and

our former employees is of the utmost importance to us. The IRS’ position has nothing to do with protecting Band employees, who are in fact already protected by the

Band’s voluntary action.

Congress must address the unfair and inconsistent treatment of tribes at the

hands of the IRS regarding FUTA. The pending legislation, H.R. 294, as introduced

by Representative Shadegg, would do just that. The measure would codify the position—previously espoused by the IRS—that tribes, like other governmental entities,

are not subject to the Federal Unemployment Tax. This resolution is supported by

established federal Indian policy which for more than two decades, under Republican and Democratic Administrations alike, has been directed toward encouraging

tribal self-determination, and economic self-sufficiency. Numerous federal statutes—

enacted to further these ends—recognize and confirm the status of the tribes as governments. Among other things, the IRS has never considered tribes to be taxable

entities, and Congress has expressly provided that tribes be treated like states for
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many tax purposes. See 26 U.S.C. 2871. H.R. 294 merely makes federal policy regarding FUTA—which is now unclear—consistent with federal Indian policy generally.

H.R. 294 would give Indian tribes as employers the option of either participating

in the state unemployment compensation program as a private employer or reimbursing the state for benefits paid to the tribe’s former employees. Thus, under the

measure Indian tribes would have the same options as states and their political subdivisions. The bill also provides that states may require payment bonds to assure

payment by tribes opting to reimburse states. We support this provision as well.

Finally, we understand that section 2(e) of H.R. 294 is intended to prevent the

IRS from seeking to collect FUTA taxes against any tribe for employment services

arising before the date of enactment, provided that the tribe has reimbursed the

state for benefits provided regarding employment with the tribe. In other words, it

is our understanding that under H.R. 294, the IRS would be required to discontinue

its unfair FUTA collection proceedings against the Fond du Lac Band and other

tribes.

The Band urges the Committee to act favorably on H.R. 294 to ensure that tribes

are treated equitably under FUTA.

Respectfully submitted,

Robert B. Peacock, Chairman

Fond du Lac Band of Lake Superior Chippewa

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Statement of Marge Anderson, Chief Executive, Mille Lacs Band of Ojibwe

Indians, Onamia, Minnesota

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Mr. Chairman and Members of the Committee, I am very pleased to submit the

written comments of the Mille Lacs Band of Ojibwe Indians for the Committee’s review in consideration of H.R.294, the Indian Tribal Government Unemployment

Compensation Tax Relief Amendments of 1997. I respectfully request that my full

statement be entered into the official hearing record.
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The Mille Lacs Experience:

The Mille Lacs Band of Ojibwe Indians is located on a small reservation in eastcentral Minnesota. We are a federally recognized American Indian tribal government, and our tribal membership approximates 3,000, the majority of whom reside

and work on the Mille Lacs Reservation. We are pleased very pleased to lend our

strong support to enactment of H.R.294, and urge the Committee to act as swiftly

as is possible.

H.R.294 would resolve a long-standing and very serious problem which tribal governments have been experiencing with regard to IRS policy dealing with administration of the Federal Unemployment Tax (FUTA). Until recent years, the Mille Lacs

Band believed that it was exempt from paying into the federal system which administers the FUTA tax. Since we had never paid into the State system, we had no reason to believe that we were responsible for making federal payments to the IRS for

FUTA administration. In fact, the State of Minnesota had delineated the Band and

other Minnesota tribes as being exempt within the Minnesota Unemployment Insurance Plan, a plan approved by the federal government. When this issue was questioned in the late 1980’s, the IRS confirmed that we were in fact exempt. In essence,

the Mille Lacs Band did not pay the federal FUTA share of 0.8%, nor did we pay

into state funds, nor did we have any reason to believe that we must.

In the early 1990’s, the Band was stunned to learn that the IRS had reversed its

policy toward the Mille Lacs Band of Ojibwe and some of the other Minnesota

tribes. You can imagine our reaction when the IRS began seeking immediate FUTA

payments into the federal system, along with retroactive payments for the previous

years during which time we were believed to be exempt.

Thus began a lengthy series of negotiations between the Band and the IRS, which

concluded with a final settlement agreed to by both parties, at great expense and

financial hardship to the Band. Not only are we still aggrieved today at the injustice

which we experienced at the hands of the IRS during this period, but our employees

also suffered directly. In spite of the fact that we retroactively paid the full rate for

unemployment insurance, not one former employee received any benefits. All of our

former employees who attempted to collect on unemployment insurance claims during this period were denied their claims. In essence, the IRS got what it was after,

but our employees were left out in the cold, and the Band effectively financed a federal system which would never benefit any tribal employees.

At the conclusion of our negotiations, the Band agreed to begin paying the federal

share for FUTA contributions. To this day, however, the Band does not make any

payments into the State system. The Band took the position long ago that inclusion

within the state unemployment system was a violation of tribal sovereignty and selfgovernance. As a result, we are not credited for any state contributions, and our entire contribution goes to the IRS. This inevitably means that when tribal employees

are terminated or laid off, they are still denied unemployment insurance payments

by the State, in spite of the fact that the Band is paying the full FUTA tax rate

for all employees. Today, we pay 6.2% to the IRS on the first $7,000 in wages

earned by all employees, even though our employees never get one dime of benefit.

The Position of the Mille Lacs Band of Ojibwe:

1. The Band will continue to forego employee benefits and await fair treatment

under FUTA as a government:While the Band could ensure that former employees

do receive unemployment insurance payments by simply abandoning our resolve

and paying into the state unemployment system, it has been our experience that

if one tribe holds out long enough, it can eventually bring a better day for itself and

other tribal governments and Indian people. The Mille Lacs Band is known for such

tenacity. For many years during the 1980’s, the Mille Lacs Band was the only tribal

government in Minnesota to routinely turn down State funds for energy assistance

and weatherization for tribal members. We did so because of a condition within the

state contracts requiring the Band to waive its tribal sovereign immunity. At Mille

Lacs, our sovereignty is our very identity as a tribal government, and so we refused

to waive our sovereign immunity and instead went without state funds. This policy,

of course, created some hardship for all of us during those Minnesota winter

months. Yet in 1989, our efforts paid off. After an intense campaign by the Mille

Lacs Band, the State Legislature finally dropped the requirement that tribes waive

sovereign immunity prior to entering into state contracts, and all tribes in the State

continue to benefit today from our perseverance on this matter.

2. The Band views advance payment into the State system as a violation of sovereignty: We are aware that some tribes in other regions have been forced to make

advance payments into their state system, as if they were non-governmental commercial enterprises. The Mille Lacs Band does not believe that it is appropriate for
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the Band to pay into the state system in the same way that commercial businesses

do, since we are an independent, self-governing and self-determined tribal government. The State of Minnesota does not exercise regulatory or civil jurisdiction within the reservation: these government functions are reserved for tribal government.

Therefore, the Band views participation in the state system as a commercial enterprise as a violation of our self-determination and self-governing, autonomous authority. The State apparently agreed, given that it deemed tribal governments as

exempt in its Minnesota Unemployment Insurance Plan.

3. The Band would prefer to self-insure and run its own Unemployment Insurance

Program: We firmly believe that we have the internal financial and administrative

controls to run our own unemployment insurance program, and we know that we

can do so more effectively and efficiently than can the state or federal government.

As an example, only a very few tribal government programmatic employees were

laid off or terminated in 1996. However, the Band’s contribution into the federal

system approximated $140,000, a complete windfall for the U.S. government, since

no claims were paid for former tribal employees. We clearly could have provided fair

unemployment benefits to our former employees at a fraction of that cost, and at

the same time our integrity as a sovereign government would have remained intact,

at no cost to the federal or state governments.

4. If federal law precludes the Band from adminstering a self-insured program,

then we are supportive of paying the state on a reimbursable basis for claims paid,

as is provided by H.R.294: If it is not possible for the Band to be considered wholly

exempt or to run its own self-insured program, we are supportive of being treated

in the same ‘‘reimburser’’ status as are other local governments, and as is provided

by H.R.294. The Mille Lacs Band would agree to reimburse state coffers for claims

actually paid out to former tribal employees, but would not agree to make advance

payments into the state system. H.R.294 would amend the existing statute to clarify

expressly that tribal governments should be treated just as state and local units of

government are treated for FUTA unemployment tax purposes. Further, we would

be exempt from having to make federal FUTA payments, just as state and local governments as well as tax-exempt organizations are.

5. The Band urges the Committee to ensure that the provisions of H.R.294 are

extended to all branches of tribal government, just as the provisions of FUTA are

extended to all branches of state government Most states and many municipalities

run some form of business activity. These activities include liquor stores, resorts,

race tracks, lotteries, and casinos, just to name a few, and are done in the name

of generating governmental revenue, to ease the tax burden for state citizens. Indian tribes are no different. We are governmental units, just like states, and many

of us operate various forms of business enterprises for the purpose of generating

governmental revenue to pay for our tribal programs. Because most of our population are in the midst of recovering from a lifetime of poverty, we do not yet have

a dependable citizen tax base from which we can generate government revenues.

Therefore, these enterprises are critical to our ability to run our government. Today,

the Mille Lacs Band of Ojibwe operates a gas station, a bakery, and two casinos

for the purpose of creating governmental revenue to pay for our new schools, clinic,

human service programs, roads, public works, and other governmental programs.

In the same way that the federal government does not distinguish between state

service programs and state business activities with regard to administering FUTA,

we would ask that the Congress not distinguish between service and business activities for Indian Tribes within H.R.294. To exclude some tribal activities from the

FUTA exemption provisions within H.R.294 while allowing the exemptions for the

exact same state and municipal activities would be tremendously unfair.

CONCLUSION:

In closing, we would like to extend our appreciation to the Chairman and the

Committee for taking time to study this very important matter. Further, we are

very grateful to the Honorable Rep. John Shadegg, the Honorable Rep. Collin Peterson, and the Honorable Senator John McCain, who have been staunch supporters

of tribal governments on this issue for several years.

Mr. Chairman, we also thank you for allowing the hearing record to remain open,

so that you could receive the comments of the Mille Lacs Band of Ojibwe Indians

and other tribal Nations for whom this issue is so critically important. It is our

greatest hope that H.R.294 can move ahead as expeditiously as possible. Thank you

for your consideration.

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Statement of the Navajo Nation

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INTRODUCTION

Mr. Chairman and members of the Subcommittee, the Navajo Nation appreciates

this opportunity to present our views and recommendations regarding H.R. 294 the

‘‘Indian Tribal Government Unemployment Compensation Tax Act Relief Amendments.’’

The Navajo Nation is the largest Indian nation in America with a population of

250,000 members. Our reservation extends into the states of Arizona, New Mexico,

and Utah, with an area of 17.5 million acres and is slightly larger than the state

of West Virginia. The unemployment rate on the Navajo Nation averages 38% to

50% depending on the season. Over 56% of the Navajo people live below the poverty

level. Per capita income averages $4,106, less than one third of that of the surrounding states. Basic necessities of life taken for granted elsewhere in the United States
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are sorely lacking in the Navajo Nation—for instance, 77% of Navajo homes lack

plumbing, 72% lack adequate kitchen facilities, and 76% lack telephone services.

Ironically, the Navajo Nation is viewed as one of the more prosperous Indian nations. Unfortunately, these types of conditions are mirrored at hundreds of other Indian reservations throughout the United States, with an average of 56% unemployment nationwide.

NAVAJO NATION STATUS AS A GOVERNMENT

The Navajo Nation is a government and its inherent sovereign powers have been

recognized by the United States. A number of U.S. Supreme Court cases have specifically recognized the Navajo Nation government.

The Navajo Government has been called ‘probably the most elaborate’ among

tribes. H.R. Rep. No. 78, 91st Cong., 1st Sess. 8 (1969). The legitimacy of the Navajo

Tribal Council, the freely elected governing body of the Navajos, is beyond question.

Kerr McGee Corp. v. Navajo Tribe of Indians, 471 U.S. 195, 201 (1985). See also, Williams v. Lee, 358 U.S. 217 (1959).

The Navajo Nation has a three branch government. The Legislative Branch consists of a eighty-eight member Council with a Speaker selected from among the delegates. The Executive Branch is headed by a President and Vice-President, electedat-large, who are empowered to carry out the laws of the Navajo Nation. The Judicial Branch consists of a three member Supreme Court and lower district courts.

The Navajo Nation provides essential governmental services within its territory.

These services include law enforcement, courts, social services, education, health,

natural resource protection and management, emergency services, economic development, and other governmental services. An example of the sophistication of the Navajo government is the Navajo judiciary. The Navajo Nation has an established civil

and criminal court system which operates effectively at the trial and appellate levels

as a separate branch of the Navajo Nation government. The courts of the Navajo

Nation have been in continuous operation since the early years of the Twentieth

Century. The Navajo Nation currently has seven general jurisdiction District

Courts, plus a system of specialized limited jurisdiction courts such as the Family

Courts and the world-renowned Peacemaker Court. The Navajo Nation Supreme

Court, located in Window Rock, Navajo Nation (Arizona), exercises appellate jurisdiction over all matters arising within the Navajo Nation judicial and administrative forums.

For over 200 years the United States generally has upheld the principle that each

Indian nation is a domestic dependent nation, free to manage its own internal affairs without state intervention. The right of self-government, which Indian people

share in common with all other people within the United States, and which is a constitutionally protected right of all federal citizens, dictates that it is the prerogative

of each Indian nation to determine what laws will govern its people and what rights

its members and non-members shall have within the jurisdiction of that particular

Indian nation. United States v. Wheeler, 435 U.S. 313 (1978); Worcester v. Georgia, 31 U.S. (6 Pet.) 515 (1832). See also, R. Barsh and J. Henderson, The Road: Indian

Tribes and Political Liberty (1980). With respect to the Navajo Nation, its relationship with the United States is established and governed by two treaties, the Treaty

of June 1, 1868, United States-Navajo Nation, 15 Stat. 667, and the Treaty of September 9, 1849, United States-Navajo Nation, 9 Stat. 974. The United States does

not enter into treaties with private business organizations. Treaties are entered into

between sovereign governments.

NAVAJO NATION AND FUTA

The Navajo Nation strongly supports H.R. 294, the ‘‘Indian Tribal Government

Unemployment Compensation Tax Act Relief Amendments.’’ Currently, the Federal

Unemployment Tax Act (FUTA) does not specifically include ‘‘tribal government employers’’ within the definition of ‘‘government employers.’’ H.R. 294 would allow the

Navajo Nation’s 6,242 employees to be treated the same as state and local government employees.

There are several reasons why Indian nations should be specifically included within the definition of ‘‘government employers.’’ Simply put, Indian nations should be

treated as government employers because Indian nations are governments. These

Indian nations are the primary provider of essential governmental services within

their jurisdictions, H.R. 294 simply recognizes this fact.

Various entities such as state governments, the U.S. Internal Revenue Service,

and the U.S. Department of Labor, have interpreted FUTA differently, resulting in

different treatment of tribal governments-depending in which region of the country

they are located. Federal legislation is needed to resolve this matter for every tribal
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government and to provide certainty for tribal governments. Currently, in many instances Indian nations are treated like private employers. Indian Nations, however,

are much more than private organizations; they are sovereign governments with the

inherent authority of self government. This legislation would recognize the inherent

sovereignty of Indian Nations and accord the same treatment to Indian Nations as

given to other states and local governments. Treatment as a private organization

is contrary to well established federal policy and Supreme Court decisions recognizing the inherent sovereignty of Indian nations and their right to self-government.

CONCLUSION

In closing, the Navajo Nation supports the FUTA amendments which would accord to Indian nations the proper treatment consistent with their status as self-governing and inherent powers of governing. Continued treatment as private organizations must stop. These FUTA amendments recognize the Indian nations as being a

significant component in providing the essential governmental services required

within their jurisdictions.

Statement of John E. Echohawk, Executive Director, Native American

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Rights Fund

My name is John Echohawk. I am a member of the Pawnee Tribe of Oklahoma

and serve as the Executive Director of the Native American Rights Fund (NARF).

NARF is a national, nonprofit legal organization dedicated to securing justice on behalf of Native Americans and Indian tribes—something we have been doing for 27

years. Our mission is guided by five priorities. Two of these priorities include the

protection of tribal sovereignty and holding governments accountable to Indian people and tribes. In this light, NARF joins the National Congress of American Indians,

the Ute Mountain Ute and Southern Ute Tribes, the Red Lake Band of Chippewa

Indians in support of H.R. 294, the Indian Tribal Government Unemployment Compensation Tax Relief Amendments of 1997.

H.R. 294 would resolve a long-standing problem confronting tribal governments—

inequitable and differential treatment under federal unemployment tax law. This

important legislation would effectively plug a loophole in the Federal Unemployment Tax Act (FUTA) to accord tribal government employers the same treatment

as state and local government employers for unemployment tax purposes.

FUTA was enacted in 1935. It is a joint federal-state taxation system that levies

two taxes on private sector employees throughout the Nation: a 0.8 percent federal

unemployment tax and a state unemployment tax which ranges from nearly zero

percent to more than 9.0 percent of payroll wages. However, FUTA exempts all federal, state and local government employers, as well as tax-exempt charitable organizations, from the federal FUTA tax and allows them to pay lower state unemployment taxes. While the Internal Revenue Code, 26 USC 7871, treats Indian tribal

governments as states for numerous taxation purposes, FUTA does not expressly include tribal government employers within the definition of governmental employers.

As a result, the IRS considers Indian tribal governments to be mandatorily covered

as private employers under FUTA. Therein lies the problem which H.R 294 seeks

to remedy.

While it has been long-settled that tribal governments are not taxable entities

under the federal tax code because of their governmental status, in the 1980s the

Internal Revenue Service began steps to force tribal governments to pay the federal

portion of the tax, and to pay the higher tax rates that are applied to private sector,

for-profit employers. This has imposed an unfair unemployment tax burden on tribal

government employers.

Moreover, the failure to include tribal governments within FUTA’s definition of

governmental employers has led to differing interpretations as to whether and how

tribes are covered under FUTA. State government, IRS and U.S. Department of

Labor interpretations vary from state to state and region to region, resulting in differential treatment of Indian tribal governments. H.R. 294 would resolve these disparities by providing uniform treatment of Indian tribal governments nationwide.

It has come to our attention that there is some concern that enactment of H.R.

294 would result in an unfair benefit to tribal governments with regard to businesstype activities conducted by tribes to produce revenues for tribal government services and treasuries. However, this should not be an issue. According to a November

6, 1995 Congressional Research Service study completed for the Senate Indian Affairs Committee (attached), state governments are actively involved in numerous
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business-type economic activities that produce significant revenues for state treasuries, including 34 states which conduct lotteries and 18 states engaged in the sale

of liquor, as well as a legion of other revenue-producing activities.

State governments are allowed under FUTA to treat state employees of these

business-type enterprises like all other state employees—exempt from the Federal

portion of the FUTA tax and subject only to reimbursement of FUTA claims actually

paid. As a matter of equity and fairness, tribal government employees engaged in

business-type activities should be treated the same way.

As you are aware, legislation similar to H.R. 294 was introduced in the 103rd and

104th Congresses, but did not advance. The time is long overdue for resolution of

this long-standing problem which continues to visit inequitable and differential

treatment upon tribal government employers and employees. We applaud you for

scheduling a hearing on H.R. 294, and respectfully urge your Subcommittee to

promptly take favorable action on this most important matter affecting the fundamental rights and interests of Indian tribal governments. Thank you for consideration of the views of the Native American Rights Fund.
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Testimony of Joseph Weisenburger, Deputy Commissioner, New Hampshire

Department of Employment Security, Concord, New Hampshire

Good morning Mr. Chairman and committee members. My name is Joseph

Weisenburger. I am the Deputy Commissioner of the New Hampshire Department

of Employment Security, a position I have held for over 15 years.

My comments support reforming the financial and program administration of the

Employment Security system which includes the public employment service and the

unemployment compensation system.

For over 60 years the Employment Security System and particularly the Unemployment Compensation System (UC) has served our nation well. However, in the

last 15 years or so efforts to reduce federal spending in order to reduce the federal

deficit have not considered the uniqueness of the unemployment compensation program. The result is a deteriorated program straining to meet it’s objectives.

The problem is not the availability of resources because federal unemployment

taxes, even without the .2% surtax, are sufficient to fund the proper and efficient

administration of the program. The problems are the ‘‘budget driven’’ process used

to appropriate funding and the inefficient use of administrative funds at both the

federal and state levels.

Regarding the budget, a study of the budgetary treatment of the Unemployment

Trust Funds prepared by Chambers Associates, Inc. for the Interstate Conference

of Employment Security Agencies Inc. (ICESA) in March of 1993 found the following:

‘‘Even though there is a dedicated source of funding for the administrative costs

of the Unemployment Trust Fund programs and the cost of the Employment Service, the funding levels for these programs are discretionary. Thus, they are subject

to specific or across-the-board reductions as part of the appropriations and GrammRudman-Hollings processes. In addition, the funding levels are subject to OMB review and arbitrary reductions regardless of numbers of beneficiaries being served.’’

The study also found that budget rules can prevent the Unemployment Compensation program from achieving its objectives as a counter-cyclical program.

‘‘Any legislation affecting unemployment benefits is subject to the elaborate PayGo rules that the Budget Enforcement Act of 1990 imposes. This act makes no distinction between programs financed with general revenues or programs financed

with dedicated revenue. Pay-Go subjects unemployment compensation to a form of

budgetary double jeopardy. Since its start, unemployment compensation has operated as a self-contained, self-financed system. While borrowing from the general

fund was authorized, these loans had to be repaid with interest. Revenues would

be adjusted to ensure that loans had to be repaid. Thus, it was truly Pay-Go. The

Budget Enforcement Act added a second pay-go requirement. Legislation could not

increase the deficit in the years covered by the current Congressional Budge Resolution.

To require the system be deficit neutral during a recession runs counter to the

objectives of the program. In addition, to increase the cost of labor during a recession by increasing employer taxes to finance unemployment benefits is a way to increase unemployment.’’

Finally, the report concluded that budgetary rules are inflexible and do not permit

needed exceptions for a program that is complex by statutory design.

‘‘For as complex and diverse an organization as the Federal government, it is very

difficult to develop general budget rules applicable to all programs without creating

inequities because of particular program characteristics. Even when a special rule

is developed for a few programs, it may not fit them all.’’

‘‘A recent example of a special rule that did not work is the treatment of the State

administrative costs in the Unemployment Compensation program. The Budget Enforcement Act of 1990 prescribed specific procedures for developing projections of the

baseline, the ongoing cost of government. In general, the baseline is the most recent

appropriation adjusted for inflation. For the administrative costs of certain social insurance programs, the baseline includes not only an inflation adjustment, but also,

the percentage change in the beneficiary population for the current year. Inclusion

of the Unemployment Trust Fund in this special definition works to the disadvantage of programs financed through this fund because the administrative costs include not only the processing of claims and payment of benefits, which fluctuate

with the unemployment rate, but also the collection of State unemployment taxes,

which remains relatively static. Revenue collection accounts for about one-third of

State administrative costs. As a result, the baseline can seriously underestimate actual costs.’’
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The budget process, because of the federal deficit, ignores the work load driven

and self funding methods historically used to appropriate funding for the unemployment compensation program even though the administrative trust fund account is

at its statutory ceiling and that will erode the integrity of the program.

The direct results are increased errors, longer unemployment duration and lower

tax collections, which all reduce state benefit trust fund levels and therefore add to

the federal deficit.

Eventually, employer benefit taxes will increase.

To address the funding shortfall a growing number of states are diverting money

from their state taxes to use for program administration, leaving employers to pay

twice for the program. These diversions also add to the federal deficit. The diversions have extended to fund training and other initiatives not directly related to UC

benefits. An Interstate Conference of Employment Security Agencies (ICESA) survey

estimates in FY 1997 states will supplement their programs with over $200 million

in state funds.

Program inefficiencies are the result of budget decisions, an over reaching federal

partner and outdated process. These inefficiencies waste hundreds of millions of dollars each year.

States lack the flexibility to operate an efficient program that meets the needs of

its employers and workforce. The federal government determines the level and the

use of resources available to each state. For example, over $50 million, more than

the entire amount the states receive for the Bureau of Labor Statistics (BLS) programs, is allocated to gather statistics annually about benefit payment accuracy.

While the information is important none of the money can be used to correct mistakes. The program simply identifies the same errors year after year. This relatively

useless program was forced upon the states by regulations promulgated by the Secretary of Labor because of criticism of the department in its oversight of the state

programs. States should develop their own quality assurance programs because each

has a unique state UC law.

In 1993 the administration submitted and the Congress passed legislation requiring the states to ‘‘profile’’ UC claimants who were likely to exhaust their benefits

and require them to participate in a program offering reemployment orientation and

services to the extent those services were available. No additional funding was provided for reemployment services. The purpose was clearly to score $300 million annually in budget savings by disqualifying those profiled claimants who failed to participate. The savings covered other federal spending. Many professionals argue the

deficit went up because it ensured claimants in training would exhaust their benefits.

Billions of dollars sit idly in the Extended Unemployment Benefit Account and the

Federal Unemployment Account that would be more efficiently used in the state

benefit accounts. Ironically, while these billions of dollars of employer taxes build

the federal accounts to unnecessary levels the United States Department of Commerce grants billions in federal funds to the states for economic development.

Employers are required to pay unemployment taxes to two separate government

agencies. Combining the FUTA tax report and payment with the state benefit tax

and report will save employers enormous amounts of time and money. Those FUTA

administrative funds (about $100 million) charged by the IRS to collect the FUTA

tax leveraged with state administrative funds would be used more effectively.

Finally, I believe it is important to recognize the trench work performed by the

public employment service and its potential to positively impact on the federal deficit and the goals of welfare reform.

The Alabama employment service recently completed a demonstration project designed to help unemployment compensation claimants get back to work quicker.

Over a three year period the program saved $83.4 in benefit payments at an administrative cost of $20.5 million, a savings of better than $4. for each $1. invested.

Any reform proposal should strengthen the relationship between the employment

service and the UC program.

Adequate funding for the public employment service supplemented with some welfare administrative funding can produce similar savings in public assistance programs.

In 1996, the Congress passed Welfare reform which focuses on ‘‘Work first.’’ The

States, individually have developed programs anticipating passage of welfare reform. All of these state programs have a work component as the core of their reform.

In many states the welfare agencies have contracted with the Employment Service

to provide placement and work search services for their clients.

As more and more welfare recipients transition from public assistance to work,

their safety net changes from welfare benefits to unemployment benefits. Like most

new entrants and re-entrants to the workforce these individuals will be the first af-
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fected by negative changes in the economy. Without a strong public employment

service, many will fall back on public assistance after they exhaust their UC benefits.

In 1997 employers will pay $6 billion in FUTA taxes. Only $3.4 billion will go

back to the states for program administration. If the states are expected to run efficient and effective programs with their reduced resources they will need more program authority and greater flexibility in the use of these funds.

V. Voinovich, Governor of the State of Ohio. As Ohio’s Governor, I respectfully urge

Mr. Chairman, Mr. Levin and members of the Subcommittee, my name is George

Statement of George V. Voinovich, Governor, State of Ohio

f

the subcommittee to give consideration to reforming the financing of the employment security system.

Our current system does not provide adequate funds for administration of the unemployment compensation and employment service programs by the states. It relies

on tax dollars paid by employers for funding the administration of the employment

security system. Currently, these ‘‘dedicated’’ dollars are being spent to support discretionary federal spending in other federal programs and to impact calculations of

the federal deficit.

The current system has under funded state programs and overtaxed employers for

many years. Under this system in 1995, 42 of the 53 states and jurisdictions receiving administrative funding for employment security functions received less than the

FUTA taxes collected from employers from these states and jurisdictions. 1995 was

not unusual. Since 1990, less than 59 cents of every employer FUTA tax dollar has

been returned in funding for employment security to the states.

In Ohio, this shortfall in funding has resulted in the closing of 22 local employment service offices and the planned closing of 14 more in the next two years. The

Ohio Bureau of Employment Services has cut 300 staff positions since 1993, and

now is operating at historically low staffing levels. Almost every other state has had

similar experiences as federal funding has been cut repeatedly, while large fund balances have accumulated in federal trust funds dedicated to fund the very activity

that was being cut. I repeat: these unspent balances of dedicated funds are growing,

as the very activities they are supposed to fund at the state level are being scaled

back for lack of funds.

Despite the reduction in funding for the dedicated purpose of the FUTA tax, employer FUTA taxes have not been cut. In fact, the .2 surcharge, initially enacted on

a temporary basis to fund extended benefits in 1976 has been continued, to build

up reserves in the federal trust funds that are already at historically high levels

and overflowing.

The system was originally designed as a federal-state partnership, with federal

unemployment tax rates set only as high as needed to properly fund administration

of employment security functions. The system has degenerated into one that taxes

employers but shortchanges employment security programs to make funds available

within the federal unified budget for discretionary spending unrelated to employment security.

It is time for a change! What we need is a system which properly funds states

for administration and minimizes the tax burden on the employers who pay for it

and need these state services.

In 1996, a number of state employment security agencies, including Ohio, frustrated with the current system, developed proposals for change. Simultaneously, employer representatives, including UBA, Inc., also developed proposals to change the

system. Early this year, these state agencies and employer representatives combined

their ideas into a proposal to establish a new framework for financing employment

security. Ohio supports the proposal of the coalition of states and UBA, Inc., which

I have attached for your review.

The proposal has been carefully crafted to address the federal/state partnership,

appropriate funding levels, and employer taxes. The proposal includes provisions to:

• Dedicate employer FUTA tax dollars for administration of employment security

by depositing them into dedicated state accounts within the federal unified budget;

• Transfer the responsibility for collecting and administering the FUTA tax from

the Internal Revenue Service to the states to consolidate tax functions, reduce employer reporting burden and cut federal administrative costs;

• Limit increases in appropriation of administrative funds to individual states

and the U.S. Department of Labor to 40% of the previous years appropriation to assure accountability and equitable distribution of administrative funds;
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• Redefine the role of the U.S. DOL to focus on assuring compliance with federal

requirements, performance review and oversight;

• Require that the states continue to provide public employment services in conjunction with the administration of the unemployment compensation program;

• Maintain the local Veterans Employment Representative (LVER) and Disabled

Veteran Outreach (DVOP) programs;

• Increase flexibility by states to use real property initially purchased with federal funds to administer employment security functions at the state and local level;

• Distribute the balance in the federal Extended Unemployment Compensation

Account to state unemployment compensation benefit accounts to improve state

trust fund solvency, while continuing to provide for extended benefits for unemployed workers in times of recession; and

• Supplement federal revenue with state penalty and interest funds currently

maintained outside the federal unified budget to aid in making the proposal revenue

neutral.

I believe that the proposal of the coalition of states and UBA, Inc. addresses the

fundamental issues of proper administrative financing, employer taxes to support

administration, and the role of the state and federal government in administration

of employment security. I urge you to give strong consideration to this proposal.

Should you have questions, feel free to contact my Administrator of the Ohio Bureau

of Employment Services, Debra R. Bowland, for information or help. You may contact her directly at 145 South Front Street, Columbus, OH, 43215, or by telephone

at 614.466.2100.

I appreciate your personal consideration of my thoughts on this important matter.

Thank you.
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Statement on Behalf of Luella Pennington, Chicago, Illinois, and the Pennington Class Opposing Legislation To Reverse Pennington v. Didrickson

I. 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 April 17, 1997 advisory

issued by the Ways and Means Committee’s Subcommittee on Human Resources

(the ‘‘Subcommittee’’) concerning the proposed legislation to overturn the Pennington

decision.

The Federal ‘‘When Due’’ Requirement

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 1971, when the Supreme

Court issued it unanimous decision in California Department of Human Resources

Development 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[y] insure the full payment of unemployment benefits to eligible claimants with the greatest promptness that is administratively feasible.’’ 20 C.F.R. 640.3(a); Java, 402 U.S. at 130–33. In 1975, the Court

reaffirmed those principles in a second unanimous opinion, Fusari v. Steinberg, 419

U.S. 379.

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. 507

(U.S. Sup. Ct. 1970) at 69–70. Nonetheless, 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.

The Court’s holding in Java confirms that the when due clause is not just some

technical artifice in the Social Security Clause. Indeed, the Court said that ‘‘the congressional objective of getting money into the pocket of the unemployed worker at

the earliest point that is administratively feasible ... is what the Unemployment Insurance program was all about.’’ 402 U.S. at 135. Accordingly, any change in the

requirement that states pay unemployment insurance when due constitutes an alteration of the most fundamental objective in the federal statute that governs the

unemployment insurance program.

II. THE PENNINGTON DECISION

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, Illinois’s base period is comprised 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 fifth 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 the Honorable Lynn Quigley Doherty, the defendant in the litigation

through much of its history, decry the Pennington decision. But they do so without

ever discussing its reasoning. Indeed, Gray Gilbert from the Ohio Bureau of Employment Security and ICESA concedes that the proponents have appealed to Con-
174

gress in the hopes of being heard by a forum that will not be restrained by an ‘‘intellectual exercise.’’ Statement by Day Gilbert (‘‘Gilbert Stmt.’’) at 5. In contrast, we

urge Congress to read not only the Pennington decision, but also Java and its other

progeny, and to consider the courts’ 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.

III. 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 programs, ‘‘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., Testimony by The Honorable Lynn Quigley Doherty (‘‘Doherty Stmt.’’) at

1–2; Gilbert Stmt. at 3–4. As the court of appeals noted, however, the ‘‘truism [that

the when 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 ‘‘individuals who would not qualify using the

first four of the last five quarters,’’ Gilbert Stmt. at 4, and that the Pennington decision ‘‘broaden[s] eligibility’’ to those who were not previously eligible. 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.

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.’’

Doherty Stmt at 1; see Testimony by Albert R. Miller (‘‘Miller Stmt.’’) (‘‘The Pennington alternate base period would provide for the payment of unemployment benefits ... to individuals with no established connection to the workforce’’). 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 (or alternatively, that the Pennington decision will extend eligibility to those without such 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, Ms. Gilbert 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.’’ Gilbert Stmt. at 4.
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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 [which disqualifies claimants who leave work without good cause attributable to the employer] would.’’ 22 F.3d at 1387.

IV. THE Pennington Decision Is Not Only Consistent With, But Required By The

Historic Interpretation Of The When Due Clause

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.’’ Doherty Stmt. at 1. They contend that this deviation from the historical interpretation of the when due clause was wrought by ‘‘unelected federal judges’’ intent

on usurping the legislature’s authority on ‘‘tax and spending policy.’’ Doherty Stmt.

at 1; see id. at 2 (‘‘the appellate court was wrong because its decision vests unelected

federal judges with the authority to substitute their judgment for governors and

state legislatures with regard to tax and spending policy’’).

The district judge who decided the case, and 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 ‘‘[t]he 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.’’ Doherty

Stmt. at 2. But that, too, just begs the question of whether Illinois’ base period is

an eligibility criteria or an administrative method. Moreover, as set forth in Section

I, 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: California Department of Human Resources Development v. Java, 402 U.S. 121 (1971) and Fusari v.

Steinberg, 419 U.S. 379 (1975). See 22 F.3d at 1386.

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 period is an administrative provision that delays payment to eligible claimants.

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 [Social Security]

Act.’’ Doherty Stmt. at 2; see Gilbert Stmt. at 4. 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 eligibility criteria, as to which he

has no such authority. See Pennington, 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.’’ Gilbert Stmt. at 3;

see also Doherty Stmt. at 1 (Pennington ‘‘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’’).

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 1384. The court therefore concluded that:
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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.

C. Recent history also belies the proponents’ contention that long lag periods are

acceptable. Congress recently empaneled the Advisory Council on Unemployment

Compensation (‘‘Council’’) to study the nation’s unemployment insurance program.

See P.L. 102–164. The Council was chaired by Dr. Janet L. Norwood, the former

Commissioner of the Bureau of Labor Statistics and a senior fellow at The Urban

Institute, and a witness in this Subcommittee’s deliberations. In its February 1995

report to the President and Congress, the 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 Insurance 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.

D. Ms. Doherty 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.’’ Doherty 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 1383.

V. THE USE OF AN ALTERNATIVE MOVABLE BASE PERIOD WILL NOT SUBSTANTIALLY

INCREASE THE COSTS OF OPERATING THE UNEMPLOYMENT INSURANCE PROGRAM

A. The proponents also argue that Illinois’ base period ‘‘streamlines administration and minimizes the risk of fraud,’’ Doherty Stmt. at 1, because it allows for verification of a claimant’s wages with data that ‘‘should already be in the state’s computer system when the initial claim is filed,’’ id.; whereas use of an alternative base

period would require employers to comply 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.’’ Miller Stmt. at 1. 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. Since exactly the same wage data would

be collected in exactly the same way, a movable base period would neither affect

the efficiency of the existing data collection system; nor increase opportunities to

commit fraud by submission of improper wage statements; 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.’’ Doherty Stmt. at 1. Both she and

Ms. Gilbert estimate that administrative costs in Illinois would be ‘‘million’s of dollars in one-time costs and $2.5 million in yearly operating expenses.’’ Id. at 3; see

Gilbert Stmt. at 3 (quantifying the one-time costs at $13 million). The proponents

also estimate trust fund outlays of 1.5%; but note one study that, they claim, indicates that alternate base periods could ‘‘raise state Trust Fund outlays by four to

six percent.’’ see Doherty Stmt. at 3; Miller Stmt. at 1. From these estimates,

Doherty contends, the trust fund outlays for a movable base period would be between $100 to $400 million over 8 years, which she and the other proponents claim,

would trigger automatic tax increases or rising deficits. Id. And she concludes from

all these figures that the Pennington decision will ‘‘cause nationwide disruption in

the various states’ unemployment compensation system.’’ Id. at 4.

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
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might conceive. 22 F.3d at 1380 n. 3. Furthermore, as the proponents concede, eight

states (Maine, Massachusetts, New Jersey, New York, Ohio, Rhode Island, Vermont

and Washington state) already use movable base periods, and Michigan will begin

doing so on July 1, 1997. Yet the sky has not fallen in any of those states. Indeed,

the 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 States: Benefits, Financing, Coverage,

Advisory Council on Unemployment Compensation, Feb. 1995 at 16.

Moreover, the provision that the Supreme Court struck down in Java was used

in 48 states. See Appendix to Appellants’ Brief in Java, 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. The Department of Labor has received, but not yet published, a draft of a report on administrative costs of an alternative base period. The proponents apparently hope you will pass this legislation before seeing the report. We believe that,

if you wait until it is published, it will confirm that Illinois’ estimates are wildly

inflated.

The proponents’ 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 Illinois 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.

Those 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 Paschal v. Jackson, 936 F.2d 940 (7th Cir. 1991).

The proponents’ 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

Wage Request

and ‘‘Reachback’

Estimate

Without

Wage Request

and

‘‘Reachback’’

Conversion Costs:

Non-computer ..................................................................... $4.0 million .... $411,260

Computer ............................................................................ $9.3 million .... $5.8 million

Total conversion ................................................................. $13.3 million .. $6.2 million

Operating Costs $2.6 million .... $178,615

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 an alternative

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.

The last time the proposed legislation was introduced, Illinois ‘‘high side’’ estimate

is $93.75 million per year. Its latest ‘‘high side’’ estimate is $100 million annually.

Doherty Stmt. at 3. But those figures assume that, because the percentage of claimants who receive benefits would increase by as much as 6% if the state used an alternative base period, the trust fund outlays would also increase that much. That
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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 congressional objective of getting money into the pocket of the unemployed

worker at the earliest point that is administratively feasible ... is what the Unemployment Insurance program was all about.’’ Java 402 U.S. at 135. 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. Using the estimate that recipiency would increase by as much as 6% under an alternate base period, Mr. Miller assumes that

trust fund outlays, and thus taxes, would increase by that same rate, requiring payment of as much as $40 million in additional taxes each year. Miller Stmt. at 1.

As noted, however, 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, the percentage rise in recipiency is larger than the percentage rise in trust

fund outlays. And since taxes are related to trust fund expenses, they would not rise

by 6% either.

Mr. Miller also urges that his company, Phoenix Closures, provides long-term, stable employment. Miller Stmt. 1. That being so, however, his workforce does not include Pennington class members since they are, by definition, those who do not have

less recent earnings available to qualify for benefits. Moreover, since the tax system

in Illinois, like most states, is experienced rated, employers, like Phoenix Closures,

who do not have a substantial unemployment insurance claims experience, pay substantially less taxes than employers (such as seasonal businesses) that provide

shorter, less stable employment. Thus, if we take Mr. Miller at his word, he has

little, if any concern that his company will be burdened by whatever tax increase

arises as a result of the Pennington decision.

Moreover, for many years, those employers who do employ Pennington class members have not had to finance unemployment insurance to pay benefits to the Pennington claimants. Those 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 Insurance and Employer Layoffs, 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. 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.

Unemployment Insurance: Program’s Ability to Meet Objectives Jeopardized, GAO/

HRD–93–107 (Sept. 1993). In that report, which was also 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 share of the costs

of unemployment when they lay those workers off.
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VI. THE PERCENTAGE OF UNEMPLOYED AMERICANS WHO RECEIVE UNEMPLOYMENT

INSURANCE BENEFITS IS AT AN HISTORIC LOW, MAKING THIS A PARTICULARLY IN- APPROPRIATE 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. See Java, 402 U.S. at 130–33. This 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’s Ability to Meet Objectives Jeopardized, GAO/HRD–93–107 (Sept.

1993). Moreover, in its 1996 report to Congress, the 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.’’ Commissioner Norwood’s testimony confirms

that the most recent data shows that ‘‘only 37.4 percent of the unemployed in our

labor force survey are receiving UI benefits.’’ Testimony of Janet Norwood (‘‘Norwood Stmt.’’) at 2. Even more frightening, she notes that ‘‘[r]esearch conducted by

the Council staff found that the competitive pressures among the states to attract

business could well lead to a continued decline in the percentage of unemployed

workers who receive benefits.’’ Id. at 4–5.

A recent study concludes that ‘‘[t]he presence of an alternative [movable] base period raises the number of monetarily eligible claimants by 6 to 8 percent.’’ Vroman,

Wayne, The Alternative Base Period in Unemployment Insurance: Final Report, Jan.

31, 1995. Thus, the Pennington decision offers some reversal of the precipitous drop

in the rate of unemployment insurance recipiency. And the GAO has confirmed that

‘‘[t]he receipt of [unemployment insurance] benefits [is] an important factor in keeping unemployed workers above the poverty level.’’ GAO Report at 5.

Commissioner Norwood’s testimony also confirms that the unemployment insurance system in some states ‘‘discriminates against the working poor, exactly the

group we most need to help in our society,’’ Norwood Stmt. at 5, and that the problem of insuring the working poor against unemployment will grow more acute ‘‘as

an increasing number of people move from welfare to jobs as the result of the recent

welfare legislation.’’ Id.

Now is not the time for Congress to undermine ‘‘the congressional objective of getting money into the pocket of the unemployed worker at the earliest point that is

administratively feasible’’—the very principle that defines ‘‘what the Unemployment

Insurance program was all about.’’ 

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Java 402 U.S. at 135.

Statement of Hon. Stanley Crooks, Chairman, Shakopee Mdewakanton

Sioux (Dakota) Community, Prior Lake, Minnesota

INTRODUCTION

Mr. Chairman, my name is Stanley Crooks, the duly-elected Chairman of the

Shakopee Mdewakanton Sioux (Dakota) Community, a federally-recognized tribal

government, located in Prior Lake, Minnesota.

Please accept the following as the written testimony of Shakopee Mdewakanton

Sioux (Dakota) Community in strong support of H.R. 294, the Indian Tribal Government Unemployment Compensation Act Tax Relief Amendments of 1997.

H.R. 294

First, I want to thank you for scheduling this hearing, and for inviting testimony

on H.R. 294. My Tribe also wishes to thank Representative John Shadegg of Arizona

for his introduction of H.R. 294 and his efforts to advance it and other measures

designed to stimulate economic development on Indian reservations.

For many years, my Tribe has sought legislative relief like that proposed in H.R.

294. Rep. Shadegg stands in a long line of Congressmen and Senators who have lent

their support to legislation substantially identical to H.R. 294. We are indebted to

Members like the Honorable Rep. Collin Peterson, who introduced H.R. 838 in the

104th with Representatives Minge and Kildee as co-sponsors, and who introduced
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H.R. 1382 in the 103rd with Representatives Kopetski and Richardson as co-sponsors. Likewise, we are indebted to the Honorable Sen. John McCain, who introduced

S. 1305 in the 104th, with Senators Baucus, Campbell, Domenici, Inouye, Kyl, Stevens, and Thomas as co-sponsors, and who introduced S. 391 in the 103rd, with Senators Campbell and Durenberger as co-sponsors.

We are very grateful to each of these Representatives and Senators who have

pressed forward on this issue, year after year. Today, Mr. Chairman, we are especially grateful to you for setting this hearing and focusing the Subcommittee’s attention on this problem and how H.R. 294 would resolve it.

H.R. 294 would amend existing FUTA tax statutes to clarify expressly that tribal

governments should be treated just as state and local units of government are treated for FUTA unemployment tax purposes. Under H.R. 294, no federal FUTA taxes

could be assessed against tribal governments, (the same as with state and local governments and tax-exempt organizations). The bill language would expressly authorize tribal governments, like state and local governments and tax-exempt organizations, to contribute to a state unemployment insurance fund on a reimbursable basis

for unemployment benefits actually paid out to former employees. The bill would

also eradicate any unemployment tax liability of tribal governments who have not

paid unemployment compensation taxes in the past in the good faith and reasonable

belief that tribal governments were exempt, provided that no benefits were paid to

their former employees.

OUR TRIBE’S EXPERIENCE WITH FUTA

Around 1990, Shakopee received a bill from the federal IRS demanding payment

of a substantial amount of what were called back FUTA taxes. After costly negotiating, the amount demanded was adjusted downward and we paid it in full.

Ever since the late 1980’s when IRS agents in our region began to impose a new

interpretation of the FUTA law on us, Shakopee has contributed into the State fund

and has paid, under protest, the remaining Federal portion claimed by the IRS after

appropriate credits are made for our State fund contributions. Our experience-based

tax rate as an employer, for purposes of our contributions to the State fund, is 1.3

per cent. This tax rate is calculated as if our Tribe was a for-profit, private sector

business. But we are not. We are a government.

Our participation in the State fund is now permitted only under the terms imposed upon commercial, for-profit business employers. We are not allowed to participate as governmental employers on a reimburser basis.

At no time has either our non-participation, or our participation, been a burden

on the unemployment compensation system. When we have not participated, we

have not cost anyone anything.

Indeed, our tribal government has been subsidizing the private sector’s use of the

unemployment insurance system. Here’s how the subsidy works. Under the present

IRS interpretation of FUTA, all other governments in America and income-taxexempt organizations do not pay the federal portion of the FUTA tax, and they are

allowed to contribute to the State funds only those dollars required to reimburse the

State funds for benefits paid out to their former employees. But the present federal

interpretation of FUTA requires our tribal government to pay the federal portion

of the FUTA tax that helps administer the system, and requires us to pay an advance, flat rate of tax to the State fund. In both the federal and state portions of

the FUTA tax, our payments lower the costs that are borne by private sector employers. If my Tribe was treated like all other governments, we would pay only for

the allowable benefits paid out to our former employees. But the policies being advanced by the IRS and by the U.S. Department of Labor today are forcing our tribal

government to help insure the private sector.

NEW INTERPRETATIONS OF FUTA ARE BEING UNFAIRLY IMPLEMENTED AGAINST

TRIBAL GOVERNMENTS

The policy against tribal participation as governmental employers has not been

uniformly applied. An October 1, 1993 study by the Congressional Research Service

showed a variety of approaches used by various states. Some states permitted tribes

to participate as governments. Others, like Minnesota, did not.

Only last year did the U.S. Department of Labor clarify its policy on this matter,

when it issued an unemployment insurance program letter (no. 14–96, April 12,

1996), advising state governments that——

[I]t is the Department’s position that the granting of reimbursement status to Indian tribes liable for the Federal unemployment tax is inconsistent with the experience rating requirements of Section 3303(a)(1), FUTA. However, some States have

nevertheless granted such Indian tribes reimbursement status. Although Congres-
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sional action has been anticipated on this matter for a considerable time, it does

not appear to be forthcoming. Therefore the Department is issuing this UIPL to assure consistent treatment of tribes for experience rating purposes.

The Labor Department opinion notes that since the FUTA statute does not require states to provide unemployment compensation coverage to tribal government

employers, ‘‘State UC coverage has not always been extend to the tribes... . If tribes

are not covered under State law, then they will not be eligible for any credit against

the FUTA tax.’’

Under the Labor Department’s interpretation of FUTA, a State may refuse to accept a Tribe’s contributions to a State unemployment fund. In this situation, the

Tribe has no coverage. And, the Tribe must pay the full, Federal rate under FUTA

without any offsetting credit.

The result is that, at the whim of a State, a tribal government can be forced to

pay the full Federal rate of FUTA tax and receive absolutely no benefit whatsoever.

This interpretation of the statute produces a patently unfair result at odds with the

intent of Congress in enacting FUTA.

TRIBAL SUPPORT FOR H.R. 294

Our Tribe is not alone in its support for H.R. 294. Many Tribes throughout the

United States have supported identical provisions in prior sessions of Congress.

H.R. 294 also enjoys the active support of the National Congress of American Indians, most recently in the form of NCAI Resolution SPK–95–060 on predecessor bill

H.R. 838.

H.R. 294 deserves support by the Subcommittee because the bill would correct an

inequity in the unemployment insurance tax code. In all fairness, Indian tribal governments should be treated, under FUTA, like all other governments and non-taxable entities are treated. We are not asking for more than what is fair.

H.R. 294 would remove the substantial uncertainty about tribal participation in

FUTA that persists in Indian Country, by clarifying that coverage is mandatory for

all tribal government employers on terms that are uniformly applied and administered. The bill would end the costly disputes that have erupted in some areas.

And, H.R. 294 would make FUTA consistent with the government-to-government

relationship that has existed, ever since the treaty-making era began, between the

United States and federally-recognized Indian tribal governments.

BACKGROUND ON THE SHAKOPEE MDEWAKANTON SIOUX (DAKOTA) COMMUNITY

Our Tribe has returned to an area that was once included in the millions of acres

our ancestors roamed before they were forced to relinquish them under a series of

disastrous land treaties. What remains of our lands are approximately 1,500 acres

held in trust and in non-trust status for our Tribe. Our lands are located 25 miles

south west of the Twin Cities of Minneapolis and St. Paul.

In recent years, economic development has surrounded us and our lands. And our

Tribe has been a major factor in revitalizing our region.

Our tribal government is the largest employer in Scott County, with a workforce

of approximately 3,900. Our tribal government provides a full range of governmental services to our Community residents. We administer social services for children and families, mental health and chemical dependency counseling, employee assistance, emergency assistance, public works, roads, water and sewer systems,

health programs and a dental clinic, vehicle fleet and physical plant maintenance,

membership enrollment, education assistance, regulatory commissions, economic

planning and development, enterprise management and operations, cultural programs, an active judicial system, and many other governmental activities. Our tribal

government builds all permanent Community infrastructure, including roads, water,

and sewer systems, subdivision utilities, and tribal government structures. The

Tribe also maintains a home loan program whereby any tribal member can gain access to loan money with which to build a home. And, the Tribe operates an economic

development loan program for tribal members who are starting their own businesses. Fifteen businesses are now owned by individual tribal members, including

a travel agency, a hair salon, rubber stamp shop, clothing store, and gift shop.

Our tribally-owned and controlled enterprises serve the Community and are an

important source of governmental revenue for the Tribe. These include two casinos,

a recreational vehicle campground, a hotel, a recreation facility, a children’s entertainment and daycare facility, and a convenience store and car wash.
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OUR TRIBAL GOVERNMENT ENTERPRISES CANNOT BE FAIRLY DISTINGUISHED FROM

STATE GOVERNMENT ENTERPRISES UNDER FUTA

Since the 1970’s, Federal policy makers in the White House and in the Congress

have pursued a broadly bi-partisan policy of encouraging tribal government self-determination and self-sufficiency through the development, by the tribes themselves,

of tribal economic enterprises.

At least three separate rationales have driven this Federal-Indian policy. First,

there is a desire to reverse the process that has led to considerable land loss and

resource deprivation of tribal resources over the past centuries. Second, there is an

effort to enable Indian tribes to help rid themselves of the plague of poverty and

under-development in Indian communities that has forced Native Americans, as a

group, to the bottom of every known measure of economic and social well-being in

America. And third, there is support for an approach that respects the sovereign authority of governments to set their own course and resolve their own problems in

their own way. For the Shakopee Mdewakanton Sioux (Dakota) Community that

has meant we have actively pursued the development of appropriate economic development, including gaming, in order to boost the governmental revenues of our Tribe.

In all fairness, my Tribe’s economic enterprises cannot be distinguished from

those owned and controlled by State and local governments throughout America. For

this reason alone, my Tribe would strenuously oppose any effort to exclude from the

scope of H.R. 294 those tribal government employees carrying out the economic enterprise activities of the Tribe.

State and local government employees typically are engaged in a wide variety of

business-type activities. What makes them governmental is that they are under the

exclusive ownership and control of state and local governments, and the revenues

they raise are dedicated to governmental purposes. Our tribal enterprise are no different. In fact, by federal law, our gaming revenues must be applied to statutorilyprescribed governmental purposes.

A recent CRS and U.S. Census Bureau survey provided to the Senate Committee

on Indian Affairs [attached] estimates that state governments derive $46.5 billion

each year from business-type activities. Each of the employees in these enterprises,

from lotteries to liquor stores to ferry boats to manufacturing plants, are all governmental employees who are treated as governmental employees for purposes of

FUTA. It is unfair to suggest that Indian tribal government enterprises should be

treated any differently.

CONCLUSION

On behalf of the Shakopee Community which I lead, I thank you for the opportunity to provide this testimony in strong support of early enactment of the provisions in H.R. 294.

H.R. 294 is about basic fairness, correcting an inequity that has recently arisen

in the FUTA program. As a tribal government, we ask for nothing more in H.R. 294

than to be restored to the same status that has been accorded all other units of government and tax-exempt entities.

H.R. 294 would not provide tribal governments like Shakopee any special favor

or special treatment. Instead, it would simply clarify that tribal governments like

ours should be considered, under FUTA, for what we are—governmental employers.

If there is anything we can do to assist the Congress in refining and securing passage of H.R. 294, please do not hesitate to let us know. Thank you.
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TEXAS WORKFORCE COMMISSION

May 7, 1997

The Honorable E. Clay Shaw, Jr.

United States House of Representatives

2408 Rayburn House Office Building

Washington, DC 20515–0922

Dear Congressman Shaw:

I speak for our Commissioners and many Texas employers when I tell you how

much we appreciate your interest in resolving the ‘‘Pennington’’ issue and your willingness to give a fair hearing to reform of the administrative financing for employment security programs. As part of the record of the hearing of the Subcommittee

on Human Resources on April 24, 1997, I submit the following comments.

Since Pennington v. Didrickson arose several years ago, Texas officials have been

unequivocal in supporting the State of Illinois position. The Employment Security

System federal/state ‘‘partnership’’ relegated setting of base periods to the states; for

many years the unemployment insurance program has operated successfully under

this premise. We are firm in our conviction that the federal court in Illinois decided

the Pennington case incorrectly and the states’ right to set individual base periods

is by precedent and logic the correct position. I am sending you for the record a copy

of the letter that the Texas Workforce Commissioners sent to our congressional delegation alerting them to the issue.

I also wish to state our support for administrative financing reform. Such reform

is long overdue. Employers are paying too much in FUTA taxes and receiving too

little in services. State agencies, under great pressure to deliver quality employment

and training services to hard-to-serve populations as well as traditional job seekers,

are strapped for funds. Pretending that there are legitimate reasons for excess

FUTA collections other than federal deficit reduction is a myth that contributes to

public cynicism. In particular, continuing the 0.2% FUTA surtax on wages, although

its purpose was served 10 years ago, is unjustified. These are dollars that should

be used by employers to continue economic growth, not for masking the deficit.

There are, however, many legitimate reasons to allow states to collect their own administrative taxes as several of the proposals before this committee have indicated.

For the record, I am enclosing an article that appeared in the our agency’s newsletter for employers, Texas Business Today. It describes the current situation and

the benefits states would derive from reform of the administrative financing system.

Thank you for allowing me to contribute to the record. I would be happy to respond further if any of the Committee members have questions.

Sincerely,

MIKE SHERIDAN

Acting Executive Director

[The attachments are being retained in the Committees files.]

Mr. Chairman and Members of the Committee:

Statement of Ute Mountain Ute Indian Tribe, Towaoc, Colorado; and

Southern Ute Indian Tribe, Ignacio, Colorado

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This joint statement is submitted on behalf of Colorado’s two federally recognized

Indian tribes with the longstanding hope that this honorable committee will adopt

and support legislation expressly permitting federally recognized Indian tribes to be

treated under the Federal Unemployment Tax Act in a manner similar to state and

local governments. As reflected in a Congressional Research Service study of February 16, 1989, submitted to the then Senate Select Committee on Indian Affairs,

treatment of Indian tribes for FUTA purposes under certified state unemployment

programs was a case study in confusion, inconsistency and unfairness. Even for

tribes, such as ours, that have worked with Congress and state legislatures to resolve our difficulties, the confusion reported to the Senate Select Committed in 1989

persists. In fact, under a directive issued by Director Mary Ann Wyrsch of the Unemployment Insurance Service, U.S. Department of Labor, dated April 12, 1996, it

is currently stated, under threat of decertification of state programs, that it is un-
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lawful to treat Indian tribes like other governments for FUTA purposes. In order

to correct this unfair situation, Congressman Shadegg has introduced H.R. 293. We

urge the committee to adopt this needed legislation so that the oldest governments

in our nation, Indian tribes, can extend to their employees the same unemployment

protections provided to other government workers.

Some background on this matter may be helpful. Because Indian tribes are recognized under federal law as quasi-sovereign governments, many state governments,

including Colorado, determined them to fall outside the scope of state unemployment programs. In our case, despite repeated efforts to enroll in the Colorado unemployment program, we were deemed legally ineligible to participate. Our employees

were, therefore, not able to obtain the protection provided by the state’s unemployment insurance program. Nonetheless, under FUTA, we assertedly incurred sizeable

federal unemployment tax liabilities, which the Internal Revenue Service sought to

collect during the mid 1980s.

As part of the 1986 Tax Reform Act, pursuant to an amendment introduced by

our former Senator William Armstrong, Congress provided retroactive FUTA tax exemption relief to tribes such as ours, which had not been permitted to participate

in state programs. (Pub. L. No. 99–514, 1705). That amendment, however, extended

such relief only up until January 1, 1988, by which time tribes and states were expected to have resolved their differences regarding participation in state programs.

In keeping with the opportunity provided by Congress, our tribes worked with the

Colorado General Assembly to allow for our participation in the state program. In

1987, the state unemployment insurance law was amended to include our tribes

within the definition of ‘‘political subdivision’’ for the limited purpose of our tribal

participation in the state program. This treatment allowed us to pay for unemployment insurance costs at the same level as county and municipal governments and

at a more favorable rate than would have been assigned to new employers. Between

the effective date of that legislation and issuance of Unemployment Insurance Program Directive of April 12, 1996, all proceeded well.

Without some legislative remedy, the directive of April 12, 1996 threatens to undo

all that we accomplished less than a decade ago. Threatened with decertification,

the State of Colorado has amended the state law excluding us from the governmental portion of their program. However, in recognition that we are working hard

to obtain a legislative solution, the effective date of that change has been postponed

until July 1, 1997. The increased rates that would otherwise be applied to our tribes

would multiply our unemployment insurance costs many times, and between our

tribes we estimate increased annual costs approaching one-half million dollars.

Our concerns have been discussed by Indian tribes throughout the country. Such

broadbased organizations as the National Congress of American Indians have urged

passage of legislation to eliminate discrimination against tribal governments in administration of FUTA. Fortunately, a legislative vehicle to correct the inequities of

the current system has been introduced.

As elected leaders of two affected tribes, we hope that you will respond to this

national problem by supporting H.R. 294, a bill to enact the ‘‘Indian Tribal Government Unemployment Compensation Act Tax Relief Amendments of 1997.’’ That legislation will provide states the authority to allow tribal governments to participate

in certified state programs along with other governments. The legislation also provides tribes the option to participate in state programs. With passage of H.R. 294,

we strongly believe that all concerned parties will finally have the explicit authorization apparently demanded by the Department of Labor as a condition to recognition of effective state-tribal relations.

In conclusion, we appreciate the opportunity to provide this testimony to committee, and we request that it be printed in your record of proceedings.

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