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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

  PRESIDENT'S UNEMPLOYMENT ADMINISTRATIVE FINANCING REFORM INITIATIVE

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 5, 2002

                               __________

                           Serial No. 107-62

                               __________

         Printed for the use of the Committee on Ways and Means

79-437              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    Subcommittee on Human Resources

                   WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut        BENJAMIN L. CARDIN, Maryland
WES WATKINS, Oklahoma                FORTNEY PETE STARK, California
SCOTT McINNIS, Colorado              SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  LLOYD DOGGETT, Texas
PHIL, ENGLISH, Pennsylvania
RON LEWIS, Kentucky

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.

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of February 26, 2002, announcing the hearing............     2

                               WITNESSES

U.S. Department of Labor, Hon. Emily Stover DeRocco, Assistant 
  Secretary, Employment and Training Administration..............     8

                                 ______

American Federation of Labor and Congress of Industrial 
  Organizations, Christine Owens.................................    49
National Association of State Workforce Agencies, and Oklahoma 
  Employment Security Commission, Jon Brock......................    42
National Federation of Independent Business, Dan Blankenburg.....    55
UWC--Strategic Services on Unemployment & Workers' Compensation, 
  and Tyson Foods, Inc., Chuck Yarbrough.........................    36

                       SUBMISSION FOR THE RECORD

American Federation of State, County and Municipal Employees, 
  AFL-CIO, statement.............................................    70

 
  PRESIDENT'S UNEMPLOYMENT ADMINISTRATIVE FINANCING REFORM INITIATIVE

                              ----------                              

                         Tuesday, March 5, 2002

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 12:00 p.m., in 
room B-318 Rayburn House Office Building, Hon. Wally Herger 
[Chairman of the Subcommittee] presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
February 26, 2002
No. HR-10

   Herger Announces Hearing on Unemployment Administrative Financing 
                           Reform Initiative

    Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human 
Resources of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the Nation's Unemployment 
Compensation system and the Administration's proposal for reform. The 
hearing will take place on Tuesday, March 5, 2002, in room B-318 
Rayburn House Office Building, beginning at 12:00 p.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 representatives from the U.S. Department of 
Labor, employer and employee organizations, and State workforce 
officials. However, any individual or organization not scheduled for an 
oral appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Unemployment Compensation (UC) program provides benefits to 
unemployed workers who have a history of employment. Within a broad 
Federal framework, each State designs its own benefit program and 
imposes taxes on employers to pay for regular unemployment benefits. A 
Federal tax also is imposed on employers to fund the Federal 
responsibilities under the system, including certain administrative 
expenses, loans to States, and the Federal half of extended 
unemployment benefit costs for certain workers. Taxes collected are 
kept in Federal unemployment compensation trust fund accounts that are 
part of the unified Federal budget. Since the 1950s, ``surplus'' 
Federal balances have transferred to State accounts (called ``Reed Act 
transfers''). In recent years, a provision in the 1997 Balanced Budget 
Act (P.L. 105-33) retained most surpluses in Federal accounts in an 
effort to reduce Federal deficits. While this provision expires at the 
end of fiscal year 2002, the House has passed three ``economic 
stimulus'' bills in recent months to accelerate the transfer of at 
least $8 billion in Federal surpluses to States to assist in their 
administration of unemployment benefits and reemployment efforts.
      
    In addition to accelerating the transfer of surplus Federal funds 
and temporarily extending unemployment benefits by up to 13 weeks in 
every State, President Bush's fiscal year 2003 budget proposes 
additional reforms of the administrative financing of the UC and 
Employment Service programs. The Administration's proposal would 
gradually reduce the current Federal Unemployment Tax Act payroll tax, 
while also lowering Federal transfers to States for the administrative 
costs of their unemployment insurance systems. Federal funds available 
for loans and extended benefits and remaining Federal administrative 
responsibilities are projected to continue to rise under the proposal. 
As under current law, States would have authority to raise taxes to 
provide for targeted administrative funding needs.
      
    In announcing the hearing, Chairman Herger stated: ``The 
unemployment compensation program provides much-needed relief to 
millions of hardworking Americans, especially in tough economic times. 
The Administration has built on proposals developed in recent years to 
improve the administrative financing of these programs so States can do 
a better job getting unemployed workers back to work. I am excited to 
have the Administration come and explain the benefits of their proposal 
for employees, employers, and the economy.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on proposals in the President's fiscal year 
2003 budget to reform the administrative financing of the nation's 
Unemployment Compensation and Employment Security programs.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Tuesday, March 19, 2002. 
Those filing written statements who wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver 200 copies to the Subcommittee on Human Resources in room B-317 
Rayburn House Office Building, in an open and searchable package 48 
hours before the hearing. The U.S. Capitol Police will refuse sealed-
packaged deliveries to all House Office Buildings.
      

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. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    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. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov
      
    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) 226-3411 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 
Committee as noted above.

                                

    Chairman Herger. The Committee on Ways and Means, 
Subcommittee on Human Resources, will come to order. Good 
afternoon and welcome to our hearing. Today's hearing is on the 
Administration's proposal to improve the administrative funding 
of our Nation's unemployment insurance system. The unemployment 
insurance (UI) program provides relief to millions of 
hardworking Americans, particularly in tough economic times. 
This Subcommittee has spent several years considering whether 
to reformulize administrative funding and if so, how. 
Organizations representing workers, employers, States, and now 
two separate administrations have devoted considerable time and 
effort to exploring that question. Here is a major reason why.
    Let us say an employer pays $1 in Federal unemployment 
taxes. Washington is supposed to send most of that dollar back 
to the States to administer the UI programs. This money pays 
for costs of providing unemployment checks, supports anti-fraud 
efforts, and helps workers find new jobs. But here is what 
actually is sent back to the State and for the record, I have 
46 cents here. Forty-six cents is what actually reaches the 
States, less than half.
    Literally, billions of dollars each year remains in 
Washington accounts instead of serving workers and employers as 
intended. That is just not right. Under the current program 
rules, employers pay too much in taxes, workers give up too 
much in wages, and jobless workers get too little help finding 
new jobs because too many tax dollars sit unused in Washington 
accounts.
    To his credit, President Bush has proposed a serious plan 
for reform. The Administration's plan is ambitious. It would 
reduce Federal unemployment taxes by 75-percent overtime. 
States would fill in some of the difference, but it is 
reasonable to assume that overall, taxes can fall while still 
providing better service to workers given the 54 cents out of 
every program dollar that sits idle today. And lower taxes mean 
more jobs, which is the UI's program's goals. States would also 
get $14 billion in special transition funds as well as 
additional funds for smaller States.
    More extended UI benefits would be available in States with 
higher unemployment rates, making permanent a change that 
already has passed the House in our most recent economic 
stimulus bill. Federal responsibilities such as providing loans 
to States in need would continue. All the while, today's large 
Federal unemployment balances would continue to grow. Joining 
us today to review this plan are experts representing Federal 
and State governments, businesses and workers, who all have a 
stake in this debate. We look forward to everyone's testimony, 
which will help guide us as we consider the details of the 
President's proposal and the next steps we would take.
    [The opening statement of Chairman Herger follows:]

    Opening Statement of the Hon. Wally Herger, a Representative in 
 Congress from the State of California, and Chairman, Subcommittee on 
                            Human Resources

    Good afternoon and welcome to our hearing. The subject of today's 
hearing is the Administration's proposal for reform of the 
administrative financing provisions of the nation's unemployment 
system.
    Our unemployment compensation program provides much-needed relief 
to millions of hardworking Americans, particularly in tough economic 
times. It operates as a unique partnership between the Federal 
Government, states, employers, and workers to help those who lose their 
jobs through no fault of their own as they transition to new jobs.
    It is not a perfect system, and as Committee Members and those of 
you in the audience who follow the unemployment issue know, a series of 
hearings on this issue have been held over the past few years.
    You also know that Members of this Committee have, over a number of 
years, introduced a variety of bills developed to improve the system 
and have a number of views on the best way top accomplish that goal.
    With unemployment rates high, state trust fund balances shrinking, 
and a shaky economy, it is more important than ever that we take a look 
at the current system and find ways to make it better.
    I was very encouraged when the President's fiscal year 2003 budget 
included a proposal to improve the administrative financing of our 
unemployment system and I am looking forward to the Administration's 
presentation.
    The plan as outlined in the fiscal year 2003 budget material will 
allow payroll taxes to flow more directly to states, give states more 
flexibility to run their unemployment and employment services programs, 
lower the tax burden for businesses so they can create more jobs, 
continue federal support for the extended benefit and loan programs, 
and help workers by making the extended unemployment program more 
responsive.

                                

    Chairman Herger. Without objection, each Member will have 
the opportunity to submit a written statement and have it 
included in the record at this point. Mr. Cardin, would you 
like to make an opening statement?
    Mr. Cardin. Thank you, Mr. Chairman, and thank you for 
holding this hearing today. Holding up the dollar, I thought we 
were going to do one of those ads for the long distance 
carrier. I was going to grab it because I know the value of the 
dollar. I think I should point out, though, that the whole 
concept of the Federal Government's participation in 
unemployment insurance is to create a reserve to use during 
recessionary times. And your 46 cents may speak to what we have 
been doing.
    But if we extend the 13 weeks of additional unemployment 
benefits, the States will actually be getting back a dollar and 
a half for every dollar that we collect in Federal Unemployment 
Tax Act (FUTA) taxes. And the reason for that is because we are 
in a recession, and that is why we are trying to accumulate 
some funds in order to be able to respond to that recession. 
That is the partnership between the Federal Government and our 
States to make sure there are adequate resources to meet the 
unemployment insurance needs in all regions of our country, 
those particularly the most hardest hit as a result of the 
economic activities.
    I guess, though, Mr. Chairman, my major concern is that we 
are holding this hearing today under a very dark cloud because 
we have not acted to deal with the extended benefits. The 
United States Senate has passed the 13-week extension. We have 
not seen fit to pass a clean 13-week extension bill. I regret 
that. Every week we wait, 80,000 more Americans exhaust their 
unemployment insurance benefits. We shouldn't be mixing that 
issue with other controversial issues that divide us. We should 
look for ways that we can work together in order to deal with 
the people who are hurting out there, the people, through no 
fault of their own, cannot find employment because of the 
economy.
    Regarding the Administration's long-term proposals on 
administrative funding for the unemployment insurance system, I 
am concerned the plan would begin to dismantle the current 
Federal-State partnership in responding to unemployment. The 
proposal would eliminate payments now sent by the Federal 
Government to the States for administrative costs for the UI 
programs, and would eliminate three-quarters of the Federal 
FUTA tax, which finance extended unemployment benefits and 
loans to the States in addition to the administrative ground.
    The Administration's plans leaves States with three options 
to make up for the loss of administrative payments they now 
receive from the Federal Government. They could raise taxes. 
That is certainly not a very pleasant option. They could cut 
benefits. That is not a very pleasant option, or they could 
reduce the solvency of their UI trust fund. That is also not a 
very pretty option. So none of these options are particularly 
attractive.
    In addition, by draining money of Federal UI accounts and 
by eliminating the Federal authority to disburse grants, the 
plan may reduce the Federal Government's ability to respond to 
rising unemployment during recessions. I am very troubled that 
the Administration's proposal ignores one of the biggest 
problems of the UI system, the lack of coverage for many low 
wage and part-time workers. And we have had several discussions 
about that.
    The U.S. General Accounting Office has informed us that low 
wage workers are only one half as likely to receive UI benefits 
compared to higher wage workers even when employed for similar 
periods of time. This inequity not only hurts many workers, but 
also has troubling implications for our welfare reform efforts. 
Congress and the States spent considerable time, money and 
efforts in attempting to break the cycle of dependency on 
welfare, but the UI system forces too many low wage workers 
back onto the welfare rolls when they are let off.
    Let me conclude by urging both this Committee and the 
Administration to review the consensus proposal developed 18 
months ago by the major stakeholders in the UI system. The plan 
would have guaranteed States mandatory spending for their 
administrative grants, but have eliminated one quarter of the 
FUTA tax on employers and would have improved UI coverage for 
low wage workers and would have allowed more people to collect 
unemployment insurance by using the most recent wage quarter.
    Mr. Chairman, we could have passed those recommendations a 
year ago and have them in place for this current recession. I 
stated that in a previous hearing that we had. It was a major 
accomplishment to get the stakeholders to reach an agreement. 
We should have moved on those proposals well before now in the 
midst of a recession. In my opinion, such a balanced proposal 
has a better chance of achieving bipartisan support and 
eventual enactment, and I urge us to consider that proposal. 
Thank you, Mr. Chairman.
    [The opening statement of Mr. Cardin follows:]

 Opening Statement of the Hon. Benjamin L. Cardin, a Representative in 
                  Congress from the State of Maryland

    Mr. Chairman, a dark cloud hangs over this committee today as we 
discuss possible reforms to our Nation's unemployment insurance system.
    We have yet to enact an extension of unemployment benefits, despite 
the fact that more than 1.5 million jobless workers have had their 
regular benefits expire since September 11th, and despite the fact that 
Congress has routinely provided extended benefits during past 
recessions.
    It is far past time to separate a simple extension of unemployment 
benefits from discussions about more controversial items. Every week we 
delay consideration of this issue, another 80,000 Americans exhaust 
their regular UI benefits. They do not need any more empty promises. 
Unemployed workers need and deserve immediate assistance in paying 
their bills and buying food for their families.
    Regarding the Administration's long-term proposal on administrative 
financing for the unemployment insurance system, I am concerned the 
plan would begin to dismantle the current Federal/State partnership in 
responding to unemployment. The proposal would eliminate the payments 
now sent by the Federal Government to the States for the administrative 
cost of their UI programs, and it would eliminate three-quarters of the 
Federal FUTA tax, which finances extended unemployment benefits and 
loans to the States, in addition to the administrative grants.
    The Administration's plan leaves States with three options to make 
up for the loss of the administrative payments they now receive from 
the Federal Government--raise taxes, cut benefits, or reduce the 
solvency of their UI trust funds. None of these options are 
particularly attractive. In addition, by draining money out of the 
Federal UI accounts and by eliminating the Federal authority to 
disburse grants, the plan may reduce the Federal Government's ability 
to respond to rising unemployment during recessions.
    I am also very troubled that the Administration's proposal ignores 
one of the biggest problems with the UI system--the lack of coverage 
for many low-wage and part-time workers. The Government Accounting 
Office has informed us that low-wage workers are only half as likely to 
receive UI benefits compared to higher-wage workers, even when employed 
for similar periods of time. This inequity not only hurts many workers, 
it also has troubling implications for our welfare reform efforts. 
Congress and the States have spent considerable time, money, and effort 
in attempting to break the cycle of dependency on welfare, but the UI 
system forces too many low-wage workers back on to welfare when they 
are laid off.
    Let me conclude by urging both this Committee and the 
Administration to review a consensus proposal developed 18 months ago 
by the major stakeholders in the UI system. The plan would have: (1) 
guaranteed States mandatory spending for their administrative grants, 
(2) eliminated one-quarter of the FUTA tax on employers, and (3) 
improved UI coverage for low-wage and part-time workers.
    In my opinion, such a balanced proposal has a better chance of 
achieving bipartisan support and eventual enactment. Thank you.

                                

    Chairman Herger. I thank the Ranking Member.
    Before recognizing the Honorable Emily DeRocco, Assistant 
Secretary of Employment and Training Administration at the U.S. 
Department of Labor, I would like to remind everyone that not 
only did this Congress pass extended benefits of 13 weeks once, 
we passed it twice, once in December 2001; again in February 
2002; and we may very well do that again today, and that is in 
addition to the stimulus bill that we passed in October 2001. 
We were working on this, but we do need some help from our good 
friends in the Senate as well.
    Mr. Cardin. Would the gentleman yield on that point?
    Chairman Herger. I will.
    Mr. Cardin. I appreciate you yielding. The problem is that 
the package that we passed cost over $100 billion? It was 
included in a huge stimulus package which has controversy. The 
unemployment provisions don't have controversy. Why can't we 
bring out the extension of the 12 weeks as the Senate did by, I 
believe, a unanimous vote, and just pass that? We can get that 
done.
    Mr. McCrery. Will the Chairman yield?
    Chairman Herger. The gentleman from Louisiana.
    Mr. McCrery. I am always impressed by Mr. Cardin's remarks.
    Mr. Cardin. Thank you. I appreciate the Chairman yielding.
    Mr. McCrery. And I would hope that the gentleman from 
Maryland would be consistent in his reasoning. It seems to me 
that there is not much controversy about the fact that States 
don't get enough money back from the Federal Government for 
administrative funding. And yet the gentleman, on the one hand, 
says we shouldn't mix something controversial with something 
that is taken for granted, and yet that is exactly what he is 
suggesting to do when those of us who want to get that money 
out to the States so they can provide employment services and 
get people back to work, you want to mix it up with 
controversial things like covering part-time workers, low wage 
workers, all those things that you know are controversial. I 
would hope that the gentleman would take a look at the 
Administration's proposal, and maybe, at least, pass it and 
then we can go onto some of those----
    Chairman Herger. I think we should press on at this point. 
The Honorable Assistant Secretary DeRocco, if you would proceed 
with your testimony, please.

     STATEMENT OF THE HON. EMILY STOVER DEROCCO, ASSISTANT 
    SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S. 
                      DEPARTMENT OF LABOR

    Ms. DeRocco. Mr. Chairman and distinguished Members of the 
Subcommittee, I appreciate the opportunity to appear before you 
today to outline the President's Employment Security Reform Act 
of 2002. And I have slides to help along the way with my 
presentation. This proposal will reform the unemployment 
insurance and employment service programs, and it represents a 
new balance.
    The Administration proposes short--and long-term strategies 
to strengthen UI and Employment Service (ES) for America's 
workers and businesses, encourage flexibility and promote 
economic growth. Our short-term strategy includes a temporary 
Federal extension of UI benefits for up to 13 weeks in all 
States and distribution of $9.2 billion in special Reed Act 
funds to States for expansion of benefits, better reemployment 
services, shoring up trust fund reserves, and/or cutting 
employer payroll taxes.
    The Administration's long-term vision includes allowing 
States to finance UI and ES administration while providing a 
very responsible transition, reforming extended benefits, and 
reducing FUTA taxes. A key component of the proposal is the 
transfer of funding authority from the Federal to the State 
level, which would be phased in over several years to give 
States sufficient time to make necessary administrative and 
legislative changes.
    As shown in the next two slides, in fiscal years 2003 and 
2004, there would be full Federal appropriations supporting the 
Administration. In 2005 and 2006, States would receive partial 
Federal funding, and full State funding would commence in 2007. 
Federal appropriations would be made throughout the transition 
period, fiscal years 2002 through 2006, and Reed Act 
distributions would be made in fiscal years 2002, 2004, and 
2005.
    The next slide speaks to the impact on the Federal 
unemployment trust fund accounts. There would be adequate 
balances in the Federal unemployment trust fund accounts to 
fund a temporary 13-week extension of extended benefits as well 
as transfer of over $14 billion to the States during the 
transition period. Under current economic assumptions, Federal 
account balances would continue to build during this transition 
period, and the reserves would be available to fund extended 
benefits and loans in future recessions. As you can see, even 
with the Reed Act distributions and the proposed tax cut to 
two-tenths percent, the accounts reach their current balance of 
$39 billion, again by 2008.
    We are proposing two important changes to the extended 
benefits program. The insured unemployment rate trigger would 
be reduced from 5 to 4 percent. With this action, extended 
benefits would be available faster in recessions, more workers 
would get up to 13 weeks of extra benefits, and extended 
benefits would be more responsive as an economic stabilizer.
    The chart to your right illustrates how the change would 
help more States and more workers. In addition to the insured 
unemployment rate change, the special Federal rules concerning 
eligibility would be repealed. States would use their existing 
eligibility requirements, and this would make extended benefits 
easier and less costly for States to administer.
    In terms of the proposed Federal unemployment tax 
reduction, we are proposing a significant reduction. The rate 
would be reduced from eight-tenths to six-tenths in 2003, 
eliminating that two-tenths surcharge we heard much about in 
past years.
    The rate would be further reduced to four-tenths in 2005, 
two-tenths in 2007, for a total tax reduction of 75 percent 
from the current level. The Federal tax savings for employers 
over a 10-year period would be $36.5 billion.
    In terms of the advantages of this proposal, we firmly 
believe that the Administration's proposal has advantages for 
all major stakeholders. For States, the distribution of $14 
billion in excess Federal funds would improve solvency, would 
cushion the administrative funding shift, and would be 
available for States to expand eligibility for, or levels of, 
benefits. The small States supplemental funding would assure 
good services and no tax increases in small States, and States 
would be able to determine administrative funding levels and 
target them where most needed.
    For workers, eligible jobless workers would get an 
immediate 13-week temporary extension of UI benefits. The lower 
trigger and repeal of restrictive Federal requirements would 
make extended benefits (EB) available earlier in more States 
and to more workers in future recessions. And adequate funding 
would surely produce better services for workers.
    For businesses, FUTA taxes would be reduced significantly. 
The shifting of administrative funding would not require a net 
unemployment tax increase in any State and streamlining 
quarterly filing of FUTA tax forms would save businesses 
valuable time.
    I want to emphasize this proposal continues to recognize 
the national interest and the important Federal role in 
unemployment insurance and employment service programs. 
Specifically, the Federal Government would supplement funding 
for small States and fund Federal activities through State 
grants on an ongoing basis. We would continue to pay 50 percent 
of extended benefits in the permanent EB program. We would make 
loans available to States, if needed, for benefits or for 
administration. The Federal Government would continue to ensure 
State conformity and compliance with Federal requirements. 
Examples of these include prompt and proper payment of 
benefits, fair hearings, broad coverage for workers and a new 
requirement that States provide a public labor exchange 
service. The Federal Government would continue to monitor State 
performance against Federal standards.
    Mr. Chairman and Members of the Subcommittee, we believe 
the States can do a better job of funding these programs and 
that the transfer of funding can be accomplished with no net 
tax increases and no State losers. Improved funding means 
better services to workers and businesses and a stronger 
unemployment insurance and employment service system.
    While the proposal shifts funding responsibility to States, 
it keeps a strong Federal-State system. We look forward to 
working with this Committee and with the stakeholders as we 
move forward. I appreciate the opportunity to speak with you 
this morning, and I will be pleased to answer any questions you 
might have.
    [The prepared statement of Ms. DeRocco follows:]

   Statement of the Hon. Emily Stover DeRocco, Assistant Secretary, 
    Employment and Training Administration, U.S. Department of Labor

    Mr. Chairman and distinguished Members of the Subcommittee, I 
appreciate the opportunity to appear before you today to outline the 
President's Employment Security Reform Act of 2002.
    This proposal for reform of the unemployment insurance (UI) and the 
employment service (ES) programs represents a New Balance. It addresses 
short-term needs and provides long-term changes to assist economic 
growth, promote flexibility, and strengthen the critical services that 
states provide to America's workers and businesses. Together, the UI 
and ES programs represent core elements of the public workforce system. 
UI is key to the economic security of our nation, acting as a 
stabilizer during economic downturns by being the primary source of 
temporary, partial wage replacement for workers who have been laid off 
and are seeking jobs. ES helps unemployed workers find jobs and 
employers find new workers; it is the backbone of the One-Stop service 
delivery system established under the Workforce Investment Act of 1998.

                               Background

    Over the past several years, all major stakeholders involved with 
the UI and ES programs have expressed dissatisfaction with some aspects 
of the present system.
     LWorker advocates are concerned about responsiveness to 
worker needs during recessions.
     LState program administrators are dissatisfied with what 
they see as continued under-funding of the UI and ES programs.
     LBusiness leaders are frustrated with the level of UI 
taxes, and what they see as complicated paperwork, opportunities for 
program fraud and abuse, and the use of revenues for other than the 
intended purposes.
    In response to these concerns, the President is proposing actions 
and reforms that would continue the federal-state partnership that has 
been responsible for these programs for nearly 70 years, but would 
strike a New Balance between the federal and state governments, 
empowering states to manage funds and direct policy with greater 
flexibility and freedom.

                           Short-Term Actions

    Short-term actions are designed to meet the present needs of 
unemployed workers during the current economic slowdown. The 
Administration's proposal includes a temporary extension of 
unemployment benefits and an immediate distribution of excess federal 
unemployment funds (commonly called a Reed Act distribution).

Temporary Extended Unemployment Compensation (TEUC)
    To aid unemployed workers who have exhausted regular state UI 
benefits during the economic downturn that began last March and to 
promote recovery, we are proposing a temporary extension of 
unemployment benefits. TEUC would be payable under agreements between 
the Secretary of Labor and states and would be in effect for weeks of 
unemployment beginning after the date of agreement and ending before 
January 1, 2003. There would be no state triggers under TEUC; benefits 
would be payable in all states. The program would be entirely federally 
financed, almost all from the federal Unemployment Trust Fund (UTF) 
accounts. Generally, benefits would be payable to individuals who filed 
an initial claim for regular compensation on or after the week 
including March 15, 2001, and have exhausted regular benefits. Eligible 
individuals would receive 50 percent of their regular compensation up 
to a maximum of 13 weeks as long as they meet the continuing 
eligibility conditions of state law.

Reed Act Distribution
    Current levels of unemployment, exacerbated by the terrorist 
attacks on September 11, have strained the capacity of states to 
provide needed benefits and services. In response, we propose to 
distribute to states about $9.24 billion in excess federal unemployment 
trust funds, some of which are otherwise scheduled to be distributed on 
October 1, 2002. These funds could be used to enhance services to 
businesses and reemployment services to unemployed workers through One-
Stop Career Centers, shore up low reserves in state trust funds 
accounts, allow a cut in state unemployment payroll taxes, or expand 
benefits. The funds would be distributed by the current-law formula, 
i.e., based on the state's share of federal taxable wages.

                           Long-Term Reforms

    Consistent with these immediate actions, the Administration is 
proposing a long-term vision that would make UI and ES programs more 
responsive to the needs of workers and business by:

     Lallowing states to control administrative funding--
helping improve the timeliness and accuracy of benefit payments, 
targeting more resources on preventing and detecting overpayments, and 
enabling improved reemployment services to unemployed workers;
     Lproviding extended benefits to more workers--making the 
program more responsive to unemployment swings; and
     Lreducing employers' federal unemployment taxes--spurring 
economic expansion.

Administrative Funding
    To address state concerns about inadequate federal funds for UI and 
ES services, we are proposing to transfer the administrative funding of 
UI and ES programs to states. Under current law, the Federal Government 
collects a federal unemployment tax, holds some of the revenue in 
reserve, and sends the rest back to states to operate their UI and ES 
programs. States have long complained that inadequate funds were 
returned to provide the services needed by employers and workers with 
ES levels basically ``frozen'' since 1984 and with UI levels falling 10 
percent or more below need in the 1990's, even though plenty of money 
was available in the UTF. States already collect state unemployment 
taxes to fund benefits, so it makes sense to give the states 
responsibility for and control of administrative costs as well.
    A question has been raised whether this could cause states to cut 
benefits and services to workers to achieve lower taxes for employers. 
States, under current law, already have the responsibility to determine 
UI eligibility for benefits and to set and collect experience-rated 
taxes, which will total about $30 billion for fiscal year 2003, for 
financing these benefits. Our proposal shifts administrative funding 
responsibility of about $3.5 billion to the states while also shifting 
a federal payroll tax cut of over $5.5 billion to their employers. We 
believe that the states have sufficient incentives to adequately fund 
the UI and ES benefits and services that assist workers and employers, 
and therefore, that the transfer of responsibility will have absolutely 
no negative effect on such benefits and services.
    To give states sufficient time to make any necessary administrative 
adjustments or law changes, the transfer of funding authority from the 
federal to the state level would be phased-in over several years. 
Special Reed Act distributions would be provided in fiscal years 2004 
and 2005. Federal transition grants would be provided in fiscal years 
2005 and 2006. Beginning in fiscal year 2007, states would be 
responsible for full funding of state UI and ES programs.
    We understand that small states are concerned that the proposed 
FUTA tax savings for a small state's employers may not equal the amount 
of the current federal UI and ES grants for such states. Our proposal 
would address these concerns by providing federal supplemental funding 
in such cases to states with a civilian labor force of fewer than 
1,000,000. Currently 17 states meet this criteria. This funding would 
be available during the transition and thereafter.

Extended Benefit Program
    We are also proposing two changes in the extended benefit (EB) 
program. The insured unemployment rate required to make EB available in 
states would be lowered from 5.0 percent to 4.0 percent. Also, the 
special federal EB eligibility requirements would be eliminated. State 
requirements for regular compensation would then apply, simplifying 
state administration and cutting ``red tape'' for workers. These 
changes combined would improve recession readiness and economic 
stabilization by making EB available sooner and to more workers in an 
economic downturn. Extending benefits when unemployment is high helps 
keep money flowing into local economies. Research shows that each $1.00 
in benefits generates $2.15 in economic activity.

Federal Unemployment Tax Act (FUTA)
    Employers have long complained that FUTA taxes are too high and too 
little of FUTA revenues are used for their intended purposes. Indeed, a 
0.2 percent FUTA surcharge that was levied in 1977 fulfilled its 
purpose of repaying general revenue loans to the UTF in 1987. However, 
this ``temporary'' tax, which generates about $1.8 billion annually, 
has been extended through 2007. This has produced very healthy reserves 
in the UTF accounts of about $39 billion. These reserves would allow us 
to cut taxes without risking the availability of funds to make advances 
to states needing money to pay UI benefits or to pay the federal share 
of extended benefits.
    The tax rate would be reduced to 0.6 percent in 2003, cutting taxes 
by 25 percent. The rate would be further reduced to 0.4 percent in 
2005, and to 0.2 percent in 2007, and thereafter, for a federal 
unemployment tax cut of 75 percent from the current level. The 0.2 
percent remaining FUTA tax would be used to make federal loans 
available to any state that runs out of funds to pay UI benefits or 
administrative costs, pay the federal share of extended benefits (EB), 
make state grants for, and pay for federal administration of, certain 
federal activities, and supplement administrative funding for ``small 
states.'' In addition to the tax reduction, FUTA forms and filing 
requirements would be streamlined through a technical change to federal 
law, and employers would be required to deposit unemployment taxes no 
more frequently than quarterly.

                The Federal Role in the ``New Balance''

    At this point, I want to emphasize that the New Balance proposal 
continues to recognize the important national interest in the 
performance of these programs; they are critical to our economy, and 
the proposal maintains a strong role for the Federal Government in 
their oversight. Examples of federal requirements that would be 
retained are, for the UI program, prompt and proper payment of 
benefits, impartial hearings, and broad coverage for workers who are 
subject to involuntary unemployment. For the ES program, states would 
be required to administer a free public labor exchange and deliver 
employment services for the benefit of businesses and job seekers.
    States would have to meet federal requirements for UI and ES in 
order for their businesses to qualify for a substantial credit against 
FUTA. Failure by a state to comply with the requirements would (after 
due process) result in employers in the state losing the tax credit. 
The potential for a large increase in employer rates is the current 
means by which many federal UI requirements are enforced. This proposal 
maintains this tax credit mechanism and extends it to the UI 
requirements currently applicable only to administrative grants and to 
the ES program. Specifically, the current total FUTA tax is 6.2 
percent, the maximum credit is 5.4 percent, and the net tax is 0.8 
percent. In 2007, the total tax and the net tax drop to 5.6 percent and 
0.2 percent, respectively, but the maximum credit remains at 5.4 
percent.
    As noted previously, federal grants to states would continue for 
certain federal activities, such as federal unemployment claims, alien 
labor certification, various required reports, and to supplement small 
states.

                               Conclusion

    Mr. Chairman, we hope that we can count on your support for these 
reforms that, with federal assistance and commitment, provide 
sufficient funding and give states the autonomy to customize programs 
that best serve their businesses and workers.
    Thank you for the opportunity to testify today. I will be happy to 
answer any questions you may have about the New Balance proposal.

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    Chairman Herger. I thank you, Madam Assistant Secretary, 
and now we will turn to questions. I would like to remind the 
Members that they each have 5 minutes for witness questioning, 
and with that, would the gentleman from Louisiana, Mr. McCrery 
like to inquire?
    Mr. McCrery. Yes. Thank you, Mr. Chairman.
    Ms. DeRocco, let us talk about the need for administrative 
financing reforms. I said in my little conversation with Mr. 
Cardin that it is apparent to any of us who have looked at 
this, that the States are not getting back from the Federal 
Government sufficient funding for administrative purposes of 
the program, and some States like mine have had to exact 
additional taxes in order to fund administrative expenses 
because we are getting, I think, back 41 cents on the dollar 
for administrative expenses.
    So I think that is apparent. But in your proposal, you 
shift really the responsibility to the States for collecting 
those taxes and using them for either administrative funding or 
increases in benefits or any of the other things they can use 
the money for. Some people say that this would destroy the 
safety net of the unemployment insurance system. How would you 
respond to that complaint?
    Ms. DeRocco. I think States have both the responsibility 
and the capability to ensure a strong safety net program for 
their workers and businesses. They have a tremendous incentive 
to continue a strong unemployment insurance program, because UI 
benefit payments enable workers who are temporarily unemployed 
to maintain their opportunities to look for new jobs, maintain 
their families, maintain stable communities at the same time 
stronger employment services could more readily move unemployed 
workers back to work into productive employment and livable 
wages. This UI and ES system is a critical component of every 
State's economic development agenda, and it is critically 
important for their employers as well. I spoke about the 
requirements that we would continue to impose on the States to 
maintain a quality unemployment insurance program, and we would 
do so by not changing the offset credit mechanism that is 
currently in place.
    Employers would not want their State to lose the offset 
credit against the Federal tax and therefore, there would be 
tremendous interest and pressure on State legislators and 
Governors to ensure that the safety net program was strong in 
the State.
    Mr. McCrery. So in other words, the safety net won't be 
gone under the Administration proposal. There will be Federal 
regulations that States will have to comply with. Is there any 
penalty under the Administration's proposal for States failing 
to comply with Federal regulations?
    Ms. DeRocco. Again, failure to comply jeopardizes the 
employer's offset credit (i.e., 5.4 percent). Although we talk 
about a reduction in the Federal unemployment tax to two-
tenths, in fact the tax would be set at a rate which allows the 
employers in each State, which are adequately funding and 
supporting an unemployment insurance and employment system, to 
achieve that offset credit.
    Mr. McCrery. Is the penalty for failure to comply with 
Federal regulations any different under your proposal than it 
is under current law?
    Ms. DeRocco. No, sir, it is not.
    Mr. McCrery. And you talked about what employees or former 
employees would lose because of lack of administrative 
financing. They would lose access to good employment services. 
What about employers? If the State doesn't have an adequate 
employment services administration, what do the employers lose?
    Ms. DeRocco. As you know, I worked for 10 years under the 
State unemployment insurance and employment service system, and 
employers support a very, very strong system and an effective 
labor exchange. It is their source for new employees. It is a 
service that they need for their continued growth as they 
create jobs; they turn to the employment service for new 
employees, for a productive workforce, and they are most 
interested in a stronger employment service and the Federal 
Government has allowed them to maintain it through the return 
on their investment.
    Mr. McCrery. What about their tax rate? Is it affected by 
poor employment services?
    Ms. DeRocco. Under our proposal?
    Mr. McCrery. Under current law or your proposal.
    Ms. DeRocco. Actually, the employment service would be much 
stronger under the proposal.
    Mr. McCrery. Are employers experienced rated?
    Ms. DeRocco. Yes.
    Mr. McCrery. If they have laid off employees that get jobs 
more quickly it affects their tax rate?
    Ms. DeRocco. Absolutely.
    Mr. McCrery. Both workers and employers have an interest in 
strong employment services?
    Ms. DeRocco. Absolutely they do.
    Mr. McCrery. Unfortunately, Mr. Chairman my time has 
expired.
    Chairman Herger. I thank the gentleman. Now we will turn to 
the gentleman from Maryland, Mr. Cardin, to inquire.
    Mr. Cardin. Thank you, Mr. Chairman. First, let me say that 
last year, we were given certain projections on the state of 
our economy and what we thought was going to happen with the 
projected surplus, and Congress and our Committee, the 
Committee on Ways and Means, took definitive action based upon 
projections. So excuse me for being a little bit concerned 
about some of the projections that are currently being made.
    You showed a chart on the impact on the Federal accounts 
based upon the enactment of the recommendations, and although 
the chart was difficult to read at the quick review, it looked 
like a healthy line for the reserves that were being held in 
case of need at the national level for a recession. Do you know 
how much you assume would be consumed during that period of 
time by the Federal Government on extended benefits shared with 
the States?
    Ms. DeRocco. For the 13-week extended benefits?
    Mr. Cardin. Not the 13 weeks of new benefits, the current 
extended benefit program that is in law with the easier 
trigger. How much are you projecting that the Federal 
Government FUTA taxes will be used or consumed during that 
period of time in that chart on the Federal share of the 
extended benefits of current law, not the 13 weeks additional?
    Ms. DeRocco. One-point-seventy-five billion dollars, which 
is on the far right on this chart. The cost that is under the 
proposal, for 2 years.
    Mr. Cardin. I am asking you how much do you assume during 
the next 5 years in your chart. Not that chart.
    Ms. DeRocco. You are talking about the----
    Mr. Cardin. You had a 5-year projection where you showed 
the Federal FUTA funds staying healthy, and I guess if you 
could make available to our Committee how much you assume will 
be used for extended benefits and/or loans to the States in 
order to meet the needs during the next 5 years, I think that 
would be helpful.
    I am concerned that you are taking a very rosy projection, 
and in fact, are not being realistic as to the need of that 
fund if our economy does not perform as well as you think it is 
going to perform, which was the case we saw a year ago. My 
second question deals with why is the Administration ignoring 
or walking away from the stakeholders' agreement of 18 months 
ago? I mean, that agreement dealt with the administrative 
costs. I agree with the gentleman from Louisiana. I think we 
have to do something about the administrative costs and 
predictability.
    The stakeholders' agreement provided predictable financing. 
It reduced the surtax and the FUTA tax, and it also dealt with 
some issues that my friend thinks is controversial, but quite 
frankly the elimination of the surtax in some quarters is 
considered to be controversial but dealt with the fact that so 
few people unemployed receive unemployment benefits today--less 
than half. So it dealt with the part-time and dealt with more 
recent wage quarters. Why?
    I mean, here you have people with different views who are 
the stakeholders in the system at last coming to an agreement, 
and the Administration walks away from it.
    Ms. DeRocco. This Administration was not part of the 
deliberations on that agreement, but let me give you two 
failings of that agreement. I think incredibly good work was 
done, in fact, hundreds of proposals were looked at by the 
stakeholders who eventually developed that particular proposal 
in 2000. But there are two principal problems from this 
Administration's standpoint. One, we stand on the principle of 
the unemployment insurance system as it was originally 
designed, which leaves to the States responsibility for 
determining eligibility for benefits and benefit levels.
    We continue to believe that is a State prerogative and 
should remain a matter of State law, and we believe that the 
national association representing the States in this matter 
believe that as well.
    Secondarily, that proposal for an administrative financing 
fix essentially moved to a very, very robust workload type 
formula, and then moved it to the mandatory side of the Federal 
budget. And both the Administration and many, many Members of 
Congress have essentially told us that they would not consider 
putting administrative funding on the mandatory side of the 
budget as an entitlement program. So those were the two 
principal failings in that proposal.
    Mr. Cardin. I am glad you didn't mention the expansion--
well you did mention flexibility. I regret that. Let me ask one 
more question for the record, because my time is expiring, and 
the Chairman is very strict on the clock. If you could make 
available for our Committee how many States you think would 
actually reduce their funding for the administrative side, 
assuming the Federal Government uses the .2 for the Federal 
functions which is what you are assuming. I think the States 
would have to impose a .4 in order to stay about equal on their 
administrative support. How many States you project would 
actually have less funds available to deal with the more 
complicated administrative side of the UI system?
    Ms. DeRocco. We have done that analysis, and I will be glad 
to provide it for the Committee.
    [The information follows:]

    It is in a state's best interest to provide good service to its 
citizens, so they have motivation to properly fund administration of 
the Unemployment Insurance (UI) and Employment Service (ES) Programs. 
Combining that observation with the fact that administrative funding 
has not kept pace with the cost increases since at least the middle 
nineties for UI and the middle eighties for ES, it is not clear that 
any state would reduce funding for administration.
    If states had to rely on the revenue equivalent of 0.4% on a $7,000 
wage base, 26 states would not have generated enough revenue in 2001 to 
cover the grants they received from the FY 2001 appropriation. However, 
14 of those states are ``small'' states which would be given 
supplemental funds under the proposal. While all 26 states would need 
to increase taxes above the 0.4% level, only 12 would do so without any 
supplemental funding from the Federal Government.

                                

    Chairman Herger. I thank the gentleman. I just might note 
for the record that my understanding is that currently we have 
14 States that have special State taxes to pay for the 
administration because the average is only 46 cents out of the 
dollar that they are receiving. Those States include Alabama, 
California, Colorado, Georgia, Idaho, Kentucky, Louisiana, 
Minnesota, Montana, North Carolina, New York, South Carolina, 
and Washington.
    So it would seem to me that if we go ahead with this, those 
States will be able to lower, if not eliminate, those extra 
taxes that they already have. With that, I turn to the 
gentlelady from Connecticut, Mrs. Johnson to inquire.
    Mrs. Johnson. Thank you and welcome. This is a very 
important subject and has received a lot of attention both in 
the private sector and by this Committee over a number of years 
now, and so I welcome your work in this area. The States, 
however, have raised a number of questions, which I am sure you 
must have seen about your proposal. Would you like to comment 
on any of them? Are you familiar?
    Ms. DeRocco. I am aware that they have a list of questions. 
I don't have them in front of me.
    Mrs. Johnson. I thought maybe you might have seen them 
because they are substantial, and one of them does go to this 
issue of whether the funds--you know, how they would do over 
time under this funding change. And I think all of us will need 
to understand that.
    Ms. DeRocco. Is the question related specifically to the 
small States? I know there was a misunderstanding that the 
commitment to supplementing the small State funding was only 
for a 10-year period, and that was a misunderstanding. We have 
a commitment to continue the grants to small States to ensure 
that they are not in a position of having to have tax 
increases.
    Mrs. Johnson. And while I appreciate your comments about 
part-time employees and feeling that States should be setting 
those standards, we do have a number of States that have been 
covering part-time employees. And I would hope that, and I 
would ask that you do some research on what might be the 
definition of permanent part-time employee. I personally think 
it is extremely important that we allow, for example, a parent 
who is working part-time, desperately needs to work because one 
salary is no longer enough. But by working part-time, can 
adjust the schedule, so that the couple together do not have 
babysitting or day care costs.
    You know that is better for the children. It is far more 
economical, and it is the only way that a lot of young families 
are surviving. So if you get laid off from your part-time job 
to be required as a condition of receiving compensation to be 
available for full-time work is counter effective to many of 
society's long-term goals.
    So I would hope that you would begin looking at, do any 
States provide special benefits to someone who has small 
children or a disabled person at home. There are definable 
circumstances, at the very least, that I think if the Federal 
Government helped define, we could make progress on it. We 
could determine whether that should be mandatory or voluntary, 
but at least we need better criteria.
    And I wonder on your work in unemployment compensation, you 
have done any review of how effective State standards are in 
overseeing whether people are really looking for work? Given 
our experience now with welfare reform, we have much better 
ways of helping people into the workforce, overseeing their 
progress in the workforce. And I know when I look at the new 
information management system that my Commissioner of Labor in 
Connecticut wants to put together. I mean, he has got it 
integrated in his computer, and it is going to cost $4 million. 
He could do a much better job in helping people in any 
situation into the workforce and then moving up the wage 
ladder.
    I think that is an aspect of this whole system that your 
proposal doesn't focus on and that I think any reform needs to 
focus on. So while we may want to step back, I think there are 
standards that we need to begin to think about for States that 
will address the kind of workforce development that we need in 
the future. We don't just need unemployment compensation. We 
need workforce development. And so to make this big a change 
without any mandate on the States, so to speak, for which we 
are going to hold them accountable, is, in my estimation, not 
adequate to the future.
    Ms. DeRocco. If I may comment, Mrs. Johnson, on two points. 
One, I believe the State commissioners of Labor and the 
Governors have a very, very strong interest in taking a system-
wide approach to serving workers and businesses in their 
States. And our proposal, in fact, provides to the States a 
greater opportunity to integrate and work through both the 
Workforce Investment Act and the unemployment insurance, and 
employment services to build an integrated service system that 
speaks to the very issues you are speaking to.
    Mrs. Johnson. Does it, in any way, strengthen that mandate 
in the law? Does it change wordings because I think that is 
what you need to get back to us on.
    Ms. DeRocco. Absolutely. We are proposing to make the 
employment services a conformity issue. We are continuing all 
the requirements of the Social Security Act, vis-a-vis the 
workers that are covered by unemployment insurance, and we are 
continuing the strong Federal role of oversight, national 
standards, and moving to a much more fully integrated system on 
behalf of businesses and workers in the country.
    I think you will find that under this proposal, Connecticut 
and your Labor Department would take a very, very strong role 
in that integrated service, and in better recognizing the 
demographics of your worker population and better serving those 
workers who have family requirements or challenges be they 
physical or otherwise among the disabled community. We are 
cognizant of all of those and we are eager to work with the 
States to move to a much more integrated and effective system.
    Chairman Herger. Thank you very much. I thank the 
gentlelady from Connecticut. Now the gentleman from Michigan, 
Mr. Levin, to inquire.
    Mr. Levin. Thank you. By the way, Mrs. Johnson, I very much 
agree with your statement about the need for unemployment comp 
to have a broader focus. But let me ask you this, who controls 
the expenditures for administrative expenses now, the Congress?
    Ms. DeRocco. Yes.
    Mr. Levin. Now if the Congress wanted to appropriate 
adequate funds, it could do so, right?
    Ms. DeRocco. I assume it could, yes.
    Mr. Levin. So one alternative is for you to come here and 
say to Congress, spend trust fund moneys the way they were 
supposed to for administrative expenses, right?
    Ms. DeRocco. I think every administration makes a request 
for administrative dollars for the system.
    Mr. Levin. You can do that without talking about 
devolution, right?
    Ms. DeRocco. I don't believe I am talking about devolution 
now, but yes.
    Mr. Levin. So essentially, it has been the failure of 
Congress to appropriate adequate funds, right?
    Ms. DeRocco. I think there has been a shared responsibility 
of the Administration and the Congress to make a determination 
on the amount of money that is returned to the States from this 
payroll tax.
    Mr. Levin. Well, you have the irony that a lot of those who 
had responsibility for appropriating adequate funds in this 
Congress are now suggesting that we do something else instead 
of appropriating adequate funds. We don't need to change the 
system to appropriate adequate funds, do we? We just 
appropriate them.
    Ms. DeRocco. Well, I don't envy you the budget pressures 
that you have to deal with every year.
    Mr. Levin. So, the answer is avoid the budget pressures and 
simply let the States do it?
    Ms. DeRocco. I believe the answer is let the States be the 
taxing authority on their employers and keep their payroll 
taxes from their employers at home.
    Mr. Levin. So that is your basic assumption, and I am glad 
you stated that boldly. Now what happens when there is a 
recession nationally and there is a need for very substantial 
funding from one State to another? Let me just give you an 
example, and I use Michigan. In 1992, the Federal unemployment 
taxes were $188 million. The Federal--this is during the last 
recession--spent $719 million. That is in 1 year. Now if we 
have a serious recession, where is the funding going to come 
from Federally to help the States?
    Ms. DeRocco. We are proposing to maintain the unemployment 
trust fund, which is what you saw on the slide; it continues to 
grow even at a two-tenths FUTA tax; we retain the Federal 
unemployment account, which Congress created in order to make 
loans available to States when they ran into difficulties and 
deep recessions.
    Mr. Levin. And this is Mr. Cardin's question. We need a 
very, very clear-cut answer. You are saying now we are taxing 8 
percent, we can reduce it to 2 percent and that will have 
enough money in it to handle all of the functions including 
unemployment comp extension. We are now talking about a 
federally funded unemployment extension, a redone, extended 
benefit structure that with two-tenths of 1 percent that you 
can say to this Congress for the next 5 to 10 years that we are 
going to have adequate moneys?
    Ms. DeRocco. That is presently what our actuaries have 
reported to us.
    Mr. Levin. You should give us all of the assumptions.
    Ms. DeRocco. We will do that.
    Mr. Levin. Do you have them here?
    Ms. DeRocco. I will be more than glad to.
    Mr. Levin. Have you made them part of your presentation?
    Ms. DeRocco. They were represented by one slide, yes.
    Mr. Levin. It just stated the conclusion.
    Ms. DeRocco. It illustrated by a bar chart, the level of 
the unemployment trust funds Federally held through, I believe 
2012.
    Mr. Levin. Let me ask you this in terms of leaving it to 
the States. On the average today, what percentage of the 
unemployed people that become employed are covered for 
unemployment comp under State standards?
    Ms. DeRocco. Nationally--we have another chart that 
illustrates this. The number of job losers who are those, as 
you know, who are eligible for unemployment insurance, 83 
percent in UI claimants.
    Mr. Levin. No. But those who become unemployed, what 
percentage receive unemployment compensation?
    Ms. DeRocco. That is the figure that I believe someone 
heard used that was in the neighborhood of 40 percent, but that 
is really a misrepresentation of the unemployment insurance 
system which was designed as temporary wage replacement for 
individuals who are in the ``covered'' workforce; how many of 
those individuals are eligible for unemployment insurance.
    Mr. Levin. So you are saying it is irrelevant that on 
average nationally, 40 percent for those----
    Ms. DeRocco. Forty-nine percent.
    Mr. Levin. I am not sure. There is dispute about that. But 
that is the latest. It has been low, as low as 40 percent, has 
it not? You say it is irrelevant that 40 percent, or now 49 
percent of the people who become unemployed, are covered with 
unemployment compensation?
    Ms. DeRocco. I am not saying it is irrelevant at all. I am 
saying that job leavers, people who leave their jobs, new 
entrants who don't have work attachment, the unemployment 
insurance system was not designed to cover that, never has 
been. And if there is a different design sought for an 
unemployment insurance system that would cover even a new 
entrant that spends a couple of weeks on the job and decides to 
leave and look for a different kind of job, that is not what 
the unemployment insurance system is all about.
    Chairman Herger. The gentleman's time has expired. Again, I 
want to thank you. I think the purpose of this hearing is to 
show and emphasize how inefficient the current system is. For 
example, the gentleman who was just inquiring in his State of 
Michigan of every dollar that is paid in unemployment taxes, 
only 50 cents is returned to your State.
    Mr. Levin. Will the gentleman yield? What was the 
percentage in 1992?
    Chairman Herger. I don't know that, but we can certainly 
find out?
    Mr. Levin. Is it relevant? Yes. And I will ask Ms. DeRocco, 
what is your hunch in 1992, what percentage of the dollars sent 
in from Michigan was returned to the State?
    Ms. DeRocco. I am sorry----
    Mr. Levin. It would be several hundred percents, wouldn't 
it?
    Chairman Herger. Reclaiming my time, in my own State of 
California, we don't get as much back. Only 46 cents.
    Mr. Levin. When California was in a recession in 1991, 
1992, what percentage----
    Chairman Herger. Again reclaiming my time, the point is the 
system is not working. It should not be that only 46 cents out 
of a dollar is returned on average to a State, and that we 
actually have 14 States who were forced to put in their own tax 
and make up the difference--to be able to implement their 
unemployment programs. It shows that we have a major problem. 
And Ms. DeRocco, I would like to ask a question if I could, the 
President's plan calls for reducing Federal unemployment taxes. 
These Federal unemployment taxes are payroll taxes, which means 
they tax and thus discourage employment.
    What effect would you project reducing these payroll taxes 
might have on businesses and their ability to hire new workers? 
And I might mention, you had a graph up here a little earlier 
when you were testifying, and maybe we could put that back up.
    Ms. DeRocco. This is the extended benefits graph.
    Chairman Herger. Why don't we address the first question 
first.
    Ms. DeRocco. Clearly, and employers, as I know you will 
have represented on the next panel, will speak to their 
opportunities for job creation and job growth as payroll taxes 
on employers are lessened. And although we are shifting 
responsibility to the States for approximately $3.5 billion in 
administrative costs, that is about what it runs now, the 
payroll taxes we are reducing amounts to about $5.5 billion.
    There is a lot of buffer in there for States to have the 
option of increasing extended benefits if, in fact, that is the 
State's decision or to further reduce the employer taxes, which 
gives to the employers the opportunity to expand production, to 
increase jobs and to be an economic development factor in their 
States. And I think that is an important opportunity that this 
proposal opens. Specifically, on the extended benefits chart 
you asked about, this depicts the number of States and workers 
that would be impacted by the proposal to lower the extended 
benefit trigger from 5 percent to 4 percent.

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    Chairman HERGER. Thank you. The gentlelady from 
Connecticut.
    Mrs. Johnson. I just want to follow up on some information 
that it would be helpful if you got back to us. This chart that 
you have, impact on Federal accounts, that really needs to show 
what under current law the Federal Government would collect and 
what portion of what we would collect would automatically be 
returned to the States, because I think that goes to my 
colleague from Michigan's question. If collections are going to 
go up, but they will automatically go back out to the States 
under the Reed Act, then what is the remainder and what will be 
the impact of your tax reductions? And then you will be down to 
that bar chart. And then if you could further accommodate that 
bottom line below the bar chart for--if there is a recession 
or, you know, various factors, at what point--how much economic 
damage would we have to sustain before we would not only begin 
to touch the growing reserves which will continue to grow but 
deplete them? So I think that is where we--because that is one 
of the big issues the States are asking you to know of. So 
thank you.
    Chairman Herger. I thank the gentlelady, and now the 
gentleman from Texas, Mr. Doggett, to inquire.
    Mr. Doggett. Thank you so much and thank you for your 
testimony.
    Do you share the general view of some that if unemployment 
and health care benefits for the unemployed are too generous it 
will discourage people from seeking employment?
    Ms. DeRocco. I know we have some studies that indicate more 
benefits or higher unemployment benefits tend to increase 
duration. But, however----
    Mr. Doggett. You mean to increase the----
    Ms. DeRocco. Duration on unemployment. The extended benefit 
provision sometimes increases duration in unemployment. I would 
like to believe, however, that most people would much prefer a 
job.
    Mr. Doggett. Can you forward those studies to the----
    Ms. DeRocco. Yes.
    Mr. Doggett. Committee?
    Ms. DeRocco. Yes, sir, we will.
    [The study is being retained in the Committee files.]
    Mr. Doggett. Do you believe that it is prudent for a State 
to cut taxes during periods of prosperity and to double them 
during periods of recession on their unemployment tax?
    Ms. DeRocco. That is a very general question, and I do 
believe that States are competent administrators of their 
financial situation and that some choose to leave money in the 
economy to keep their businesses growing and create jobs. 
Others might choose to----
    Mr. Doggett. It is actually intended to be a very Texas-
specific question.
    Ms. DeRocco. I thought it might.
    Mr. Doggett. And not general, and I guess you have answered 
the question, that you consider a program of cutting taxes, 
unemployment taxes at the State level, during periods of 
prosperity and doubling them during periods of recession, which 
appears to be what it is going to take in Texas, is an example 
of prudent administration of the State plan by the State?
    Ms. DeRocco. I am not aware that the State of Texas needs 
to double its taxes, but you are probably better----
    Mr. Doggett. That is what is reported on Texas, but then 
just take it as a hypothetical. Do you think if a State cuts 
taxes on unemployment during periods of prosperity and doubles 
them during periods of recession that is an example of prudent 
administration?
    Ms. DeRocco. I think that, particularly as it relates to 
the State unemployment tax and the level of the State's 
reserve, that should be and has been a State decision. And if 
it was Texas' decision or New York's decision to keep money in 
their economy rather than to increase the taxes on businesses 
in order to keep their economy growing and then to take 
advantage of the fact that the Congress and the Administration 
created a loan account for the very purpose of those States who 
chose to seek a loan during periods when their reserves did 
not--were not adequate to----
    Mr. Doggett. Then you applaud the decision and cite it as 
an example of their competence?
    Ms. DeRocco. That is not the Employment and Training 
Administration's preferred approach to trust fund reserves. We 
do have guidance that indicates that there should be an average 
high-cost multiple in their reserves of 1.0. There are many 
States who do not maintain that.
    Mr. Doggett. I believe that is true, and given the short 
time that I have, is it correct, then, that under the 
Administration plan, that in less than 5 years when States like 
Texas assume all the administrative cost, unless they choose to 
raid their trust fund, regardless of the economic conditions 
that exist in 2007 and beyond, that they will have a choice of 
either cutting benefits or raising taxes?
    Ms. DeRocco. No, I do not believe that. As I indicated 
earlier in answer to another question, we are shifting 
responsibility to the States for about $3.5 billion in 
administrative costs. Sixty-five percent of those 
administrative costs are not related to benefit levels. We are 
at the same time reducing the payroll tax at the Federal level 
by $5.5 billion. So there is ample opportunity for the States 
to adjust their tax level to ensure they can provide the same 
level of service.
    Mr. Doggett. So you think basically a little like last 
year's budget proposal. They can have it all, they can keep 
taxes low, they can provide the same level of benefits and 
satisfy all of their administrative needs?
    Ms. DeRocco. I believe States have the fiscal capability 
and the administrative capability to manage administrative 
funding for this system.
    Mr. Doggett. As to the point that Mr. Levin was just 
making, isn't it correct that taking a snapshot of a State's 
return on its unemployment tax dollars in a single year without 
regard to the economic conditions is not very insightful, since 
the entire purpose of having a Federal backstop involves the 
Federal Government sometimes providing hundreds of percent 
return on the Federal unemployment tax dollars and sometimes 
providing only a fraction of the return of the dollars, 
depending on economic conditions?
    Ms. DeRocco. I can only tell you that for 10 years of 
working with the States, specifically on their return on the 
dollars their employers are putting in the Federal Unemployment 
Trust Fund, that they have spoken for a decade about inadequate 
return of their payroll dollars.
    Chairman Herger. I thank the gentleman, and I can see why 
the gentleman from Texas is concerned. Currently the State of 
Texas is only receiving 32 cents out of every dollar of the 
FUTA taxes collected in Texas. So there would be money left 
over so that even if Texas was to begin collecting their own 
taxes there would still be a lot of money left over.
    Mr. Cardin. Would the gentleman yield?
    Chairman Herger. Yes.
    Mr. Cardin. I know you keep and will continue to mention 
the impact on each of one of our States. I would just ask that 
we have made available for the record the last 10 years, the 
last 20 years how much money has been returned to the States 
through these funds. If you pick 1 year where there has been 
very little use of the funds for dealing with a recessionary 
problem, obviously it is going to be impacted in a negative 
way.
    Also I might say, Mr. Chairman, many of us have been 
urging, including, I believe, the gentleman from Louisiana, 
that the Congress do the right thing on the administrative 
cost, and we haven't done the right thing on the administrative 
cost. One thing is clear, that if this proposal were to be 
enacted, it would mean a $16 to $18 billion loss of revenues at 
the Federal level.
    The question whether the States will make that up or not is 
uncertain, and I know we can keep on talking about our 
individual States. Many of us are concerned that our individual 
States have enough administrative support, and we don't know 
what is going to happen. We know under current law the 
structure is in place. It has not worked the way it should, but 
I think it is just unfair to keep on mentioning 1 year we 
should have the historical number.
    Mr. McCrery. Would the Chairman yield?
    Chairman Herger. Yes.
    Mr. McCrery. I appreciate the gentleman's point, and I 
don't think anybody would deny you that information. However, I 
do believe it is irrelevant. The system is designed to provide 
States much more money during times of high unemployment. 
Extended benefits shouldn't be in the mission of administrative 
funding for the States. Year after year after year after year 
there is inadequate administrative funding for the States, and, 
yes, it is our fault, we the Congress, because we have not 
appropriated sufficient funds for them, but don't mix that up 
with the extended benefits program, which is designed to be 
Federally funded to the tune of 50 percent. So it is just 
mixing apples and oranges. So----
    Mr. Cardin. I agree.
    Mr. McCrery. You all can keep making that point. It is 
irrelevant. I object.
    Mr. Cardin. I agree with you.
    Chairman Herger. I would like to request that information.
    Ms. DeRocco. Yes, sir.
    [The information is being retained in the Committee files.]
    Chairman Herger. The fact that we do know is that these 
numbers are accurate now. They are numbers that would appear to 
be growing. It would appear that the trust fund, rather than 
becoming smaller, continues to grow, and with that, I will turn 
at this time to the gentleman from Michigan----
    Mr. Doggett. Could I just inquire of you, Mr. Chairman, to 
broaden the request to include one other factor? And that is 
along with that, in that same table, that she would give us for 
however many years you are going to do it, show as to each 
State how many of the people who are actually unemployed in 
that State are covered by the system. In Texas it is about one 
out of four, and since the administrative costs are related to 
the workload, one of the reasons we have such a low return is 
that we are covering so few people that are unemployed and it 
would be useful to have that----
    Chairman Herger. Again, reclaiming my time, that is the 
State's decision to make that. If we could just get the 
original question answered, we would appreciate it.
    Again, now I turn to the gentleman from Michigan, Mr. Camp, 
to inquire.
    Mr. Camp. Thank you, Mr. Chairman. I have a question really 
that kind of follows up on Mr. McCrery's comments, and that is 
that the President's budget is making suggested changes in the 
administrative financing of the unemployment insurance program. 
Is there any discussion of changing the benefit levels 
involved?
    Ms. DeRocco. The weekly benefit levels? Again, we believe 
that is a matter of State law, has always been a matter of 
State law, and should continue to be a matter of State law.
    Mr. Camp. The only change would be then in changing the 
rate at which the extended benefits would be triggered. Is that 
correct?
    Ms. DeRocco. Correct. We do propose lowering the trigger 
rate for extended benefits.
    Mr. Camp. From 5 to 4 percent?
    Ms. DeRocco. Correct.
    Mr. Camp. And would that be a permanent change under the 
President's plan?
    Ms. DeRocco. Yes.
    Mr. Camp. So that would then incorporate the temporary 
extension of unemployment benefits that were in the House-
passed stimulus bills in December and February?
    Ms. DeRrocco. Yes. The President has supported the 13-week 
temporary extension of benefits as a short-term strategy. The 
long-term strategy envisioned is to lower the trigger rate so 
that more States trigger on in a recession, covering more 
workers.
    Mr. Camp. All right. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Herger. I thank the gentleman from Michigan. The 
gentleman from Oklahoma, Mr. Watkins.
    Mr. Watkins. Mr. Chairman, I don't have any questions. I 
will apologize to you and the panel and all. I just got here 
just a while ago on the airplane. I normally leave at a 3:00 
a.m. flight out of--I leave Stillwater about 3:00 a.m. and get 
to Oklahoma City, but this morning after the snow and ice I 
scraped a little bit of that before I left, and I left on the 
5:00 a.m. something flight or a little later flight. So I 
apologize. I don't have any questions. Glad to be here, though.
    Chairman Herger. I thank the gentleman from Oklahoma. Your 
participation is always appreciated. With that, we thank you, 
Assistant Secretary.
    Mr. Cardin. Mr. Chairman, I know you have been very 
generous of time. Could I just ask one more question today? 
Would that be possible?
    Chairman Herger. Yes, a quick question.
    Mr. Cardin. It will be a quick question. The question will 
be very quick. But my question is, if the House were to pass 
the exact same bill the Senate has passed on the 13-week 
extension, would the Administration sign it?
    Ms. DeRocco. I am sorry. I am not here to state the 
Administration position on the ultimate result of the economic 
security deliberations.
    Chairman Herger. Again, for the record we have passed it 
out of the House three times, almost four, and the Senate is 
yet to act. With that, I would like to excuse you and thank you 
for your testimony and ask our next panel to come to the 
witness table, please.
    On the second panel this afternoon we will be hearing from 
Chuck Yarbrough, Chairman, Board of Directors of UWC--Strategic 
Services on Unemployment and Workers' Compensation; Christine 
Owens, Director of Public Policy, American Federation of Labor 
and Congress of Industrial Organizations, AFL-CIO; Dan 
Blankenburg, Manager, Legislative Affairs, National Federation 
of Independent Business; and we also, I understand, have a 
constituent of the gentleman from Oklahoma. Would you like to 
introduce the witness, Mr. Watkins?
    Mr. Watkins. Mr. Chairman, Members of the Committee, it is 
my honor, really very much so, to introduce the gentleman. He 
is our Executive Director of the Oklahoma Employment Security 
Commission, but Jon Brock is more than that this year. He is 
now President of the National Association of State Workforce 
Agencies. So I am very proud of the fact of his position and of 
the distinction there. I think it shows what credibility he has 
got and the reputation he has got with his colleagues in the 
workforce area.
    So I am very pleased that he is with us today. Jon, I am 
glad that plane got down so I could get here.
    Chairman Herger. Thank you, Mr. Watkins. With that we will 
begin the testimony with Mr. Yarbrough.

    STATEMENT OF CHUCK YARBROUGH, DIRECTOR, CORPORATE HUMAN 
    RESOURCES, TYSON FOODS, INC., SPRINGDALE, ARKANSAS, AND 
   CHAIRMAN, BOARD OF DIRECTORS, UWC--STRATEGIC SERVICES ON 
              UNEMPLOYMENT & WORKERS' COMPENSATION

    Mr. Yarbrough. Thank you, Mr. Chairman, and members of the 
panel. I appreciate the opportunity to be here today.
    My name is Chuck Yarbrough, and we were very pleased to 
learn that the Committee was having hearings today on President 
Bush's proposal on Administration finance reform.
    We hope to acquaint you with some of the employer concerns, 
and as Chairman of UWC, I would like to first talk about a few 
things that we support. First of all, we do support a strong 
unemployment insurance and employment service system with a 
limited Federal role.
    Second of all, we support a strong UI/ES system that 
provides fair and affordable benefits to the citizens of our 
State. UWC supports moving the FUTA trust fund moneys to the 
States so that we can have more local control regarding how 
benefits are determined and taxes are assessed.
    The UWC supports a two-tenths reduction in the FUTA tax 
rate. This two-tenths surtax has been in effect for more than 
25 years and is due to expire in 2007. But UWC members are 
concerned that many States may increase their UI taxes to 
compensate for the six-tenths reduction in FUTA taxes contained 
in the Bush Administration proposal. The UWC wanted to amend 
the proposal to prohibit the States from increasing their UI 
taxes by more than $28 per year.
    In general, we support the Administration's proposal to 
transfer the financial responsibility for administering the UI/
ES system to the States. But we also believe that including any 
expansion of benefit eligibility in the proposal will threaten 
the solvency of State trust fund accounts. A risk of insolvency 
will create pressure to decrease benefits.
    I am a member of the Governor's Workforce Agency Advisory 
Council at home, where it is made up of business and labor and 
public members. I have a letter of support from our Governor on 
the President's proposal. One issue that our State, Workforce 
Investment Agency, and employers have experienced is that while 
we have continued to pay a 25-percent surtax, our employment 
service staff has been reduced. We have seen our State UI 
agency lay people off in order to give other employees merit 
increases.
    Employment offices are also no longer certifying that the 
workers they refer to us are eligible to work in the United 
States. We have seen continued limited monies for services, 
both for employees and employers who go to UI offices for help. 
We have had to open up our own Main Street recruitment offices 
to provide the labor and workforces that we need, while UI 
offices continue to reduce the number of their employees who 
could refer trained workers to us.
    And again some employer communities have struggled with the 
employment verification process that has been delegated to us 
when the States could have definitely provided that service for 
us.
    We also support allowing States access to the National 
Director of New Hires to prevent fraud. We feel like that would 
certainly help us, but also I would like to say if they could 
use--the agency could use that, the wage history that is 
involved and the person's work history that has a claim and 
also add the basic pilot program from the Justice Department, 
then that would ensure that all workers referred by the 
Employment Security Department would be eligible to work in the 
United States. That would be a real plus for the Employment 
Service to be able to hang that banner outside. This means that 
all work being performed on government contracts would be done 
by workers who are eligible to work in the United States.
    We have been here several times to talk about many 
different proposals in the last 10 years, from Shaw, to McCrery 
1, to McCrery 2, to the current President's reform. All I can 
say, help. We are overtaxed. We are understaffed. We are 
underequipped. And 50 percent of our employment security 
employees will be retiring within the next 2 or 3 years. Some 
agencies haven't made hires in over 15 years, and they are not 
going to have anybody or any knowledge to carry on the system. 
We have got to cut some money loose.
    We need to elevate the statewide services of first choice 
to refer trained workers coming out of the Workforce Investment 
Act 1998. We need to be able to refer laid off workers as soon 
as possible as a first choice, and we need to be able to 
guarantee the eligibility of the workers that they refer.
    Three things I want to leave with you: Universal agreement 
to reform administrative funding. Everyone agrees that needs to 
happen. Congress should take a strong look at the 
Administration's proposal, because it does bring a workable 
solution to this problem, as have many other things brought to 
this panel.
    We have sought reform for 10 years, but don't let this 
Congress close without taking action on behalf of the workers 
and the business community, because we are waiting. Because my 
Governor said in his last paragraph to the Secretary this 
proposal is not only good for States but, more importantly, it 
is good for American workers and business.
    As a debate on the reform for UI insurance and unemployment 
insurance proceeds, I hope that we can all work together to 
benefit America's workers and business. Thank you.
    [The prepared statement of Mr. Yarbrough follows:]

  Statement of Chuck Yarbrough, Director, Corporate Human Resources, 
    Tyson Foods, Inc., Springdale, Arkansas, and Chairman, Board of 
     Directors, UWC--Strategic Services on Unemployment & Workers' 
                              Compensation

    Good afternoon, Mr. Chairman and Members of the committee. My name 
is Chuck Yarbrough, and I am Director of Corporate Human Resources for 
Tyson Foods, Inc., the nation's leading producer of protein consisting 
of poultry, beef and pork, as well as other convenience food products.
    I am testifying on behalf of UWC--Strategic Services on 
Unemployment & Workers' Compensation. I am proud to serve as the 
Chairman of the UWC Board of Directors. UWC, which was founded in 1933, 
is the only business organization specializing exclusively in public 
policy advocacy on national unemployment insurance (UI) and workers' 
compensation issues. UWC is intimately acquainted with UI laws; our 
research arm, the National Foundation for Unemployment Compensation & 
Workers' Compensation, publishes numerous materials on UI, including 
the annual Highlights of State Unemployment Compensation Laws. I have 
also been a member of the National Employers Council (NEC). I served as 
NEC's elected representative for employers in the Department of Labor's 
Region VI (Arkansas, Louisiana, New Mexico, Oklahoma, and Texas). In 
this capacity, I represented employers before the Department of Labor 
(DOL) and state employment security administrators.
    We are pleased that the Human Resources Subcommittee is holding 
these hearings today on the Bush Administration UI reform proposal. We 
appreciate the opportunity to acquaint you with the concerns of 
employers and provide our recommendations on how to maintain a sound UI 
and employment services system, especially relating to proposals for 
administrative financing reform.
    UWC supports a strong UI/ES program through which employers provide 
fair and affordable insurance benefits for a temporary period of time 
to workers with a strong attachment to work who are temporarily and 
involuntarily jobless when suitable work is no longer available. UWC 
believes that a sound UI program is best embodied through the state UI/
ES system, with a limited federal role where uniformity of state law is 
considered essential.
    The principal federal role in the UI system is to provide 
administrative financing. Unfortunately, the present administrative 
financing system is not working effectively. Workers are under-served, 
employers are over-taxed, and state UI/ES agencies are under-funded. 
Under the current system the Federal Government holds 100% of Federal 
Unemployment Tax Act (FUTA) receipts but returns only 50% to the 
states.
    Major employer concerns with the present federal role in the UI 
system can be summarized as follows:

  The FUTA tax rate is excessive and resulting FUTA surpluses 
 are not being returned to state UI trust accounts as required by the 
                               Reed Act.
    Under current law, the Federal Unemployment Tax Act (FUTA) rate is 
0.8%. This rate is 25% too high as the result of a 0.2% ``temporary'' 
surtax which is no longer needed. Although FUTA funds are held in a 
trust account and may be expended only for limited purposes spelled out 
by statute, the surtax is now being maintained only because inclusion 
of FUTA funds in the unified federal budget makes more money available 
to meet budget targets for other spending programs. The practice of 
counting FUTA funds for spending on other programs, leaving only an IOU 
and an accounting entry behind, is contrary to the very reason why 
Congress placed these funds in the Unemployment Trust Fund in the first 
place. In effect, the budget rules allow the misuse of FUTA funds for 
purposes unrelated to the UI/ES system.
    Congress originally imposed the surtax more than 25 years ago to 
pay for a temporary federal program of supplemental unemployment 
benefits. The surtax was to expire upon the retirement of this deficit. 
The deficit was paid off in 1987 but the surtax has been extended 4 
times and now expires at the end of 2007.
    Despite the fact that the ceilings on the FUTA accounts in the 
Unemployment Trust Fund were doubled when the surtax was last extended, 
balances in these accounts now far exceed their statutory ceilings. 
When the FUTA accounts are all at their maximum, as they are today and 
into the foreseeable future, a law known as the ``Reed Act'' requires 
any amount above the ceiling to be distributed into the state UI 
benefits accounts. Last October DOL reported to Congress that over the 
next 10 years, Reed Act distributions will total $43 billion. While 
these projections have now been somewhat reduced, a substantial Reed 
Act distribution of $3.2 billion is projected for FY 2003. These Reed 
Act funds are urgently needed to replenish state UI benefits trust fund 
balances that have been drawn down in the aftermath of September 11 and 
the recession. Reed Act funds may also be used by states, upon state 
appropriation, to supplement state UI/ES administrative funding, 
eliminating or reducing the need for supplemental state UI taxes.
    Let me repeat: The revenue from the FUTA surtax is not needed for 
the UI program. Only 50 cents out of every FUTA dollar is being spent 
as intended on administration of the UI program and state employment 
services. Furthermore, no additional accumulation of funds in the 
account used to pay the 50% federal share of extended benefits (EB) is 
necessary to meet foreseeable needs, including temporary extensions of 
UI duration that have recently passed the House and Senate.

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

    To effectively serve their customers, UI/ES agencies must be 
efficiently administered. In recent years, this goal has been 
frustrated because federal appropriations for state UI agencies have 
been inadequate, leading to a reduction in services for jobless workers 
and employers. UI claimants in turn draw additional weeks of UI 
benefits. This situation results in higher state UI benefit costs and 
in turn, higher payroll taxes to finance the additional weeks claimed. 
Because state UI taxes and benefit payments are also included in the 
unified federal budget, inadequate funding for administration also 
increases federal outlays.
    The hidden consequences of inadequate administrative funding also 
results in more fraud and abuse. The latest Department of Labor 
statistics show that 9.5% of UI payments are estimated to be improper. 
Last year the Senate Government Affairs Committee issued a report 
called ``Government at the Brink'' that included UI fraud as one of 
``The Federal Government's Top 10 Worst Examples of Mismanagement.''
    Because of inadequate federal administrative grants for state UI/ES 
agencies, employers have been asked to pay a second, third, and fourth 
time for the same service for which FUTA taxes are assessed--amounting 
to  quadruple taxation. The inadequate federal grants have directly 
increased the state tax burden on employers in several ways.

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

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

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

    Freeing FUTA funds already contributed by employers for the very 
purpose of providing efficient and effective UI and ES services will 
eliminate the need for supplemental taxes and unnecessary indirect 
expenses.
SOLUTIONS
    To fix these problems, UWC has been a staunch advocate of reform of 
the administrative financing system for state UI and employment 
services (ES) agencies. This reform is urgently needed to strengthen 
the state unemployment insurance and employment services (UI/ES) system 
and deliver the services for which business has paid through our 
Federal Unemployment Taxes. Reform will also provide funds needed to 
implement the Workforce Investment Act.
    Although there is great controversy regarding proposals for federal 
expansions of UI eligibility and benefit levels, there is a consensus 
in support of administrative financing reform. Reform will help jobless 
workers return to employment more quickly, reduce payroll taxes, and 
alleviate the financial pinch on state administrators. Now that's what 
I'd call a ``win-win-win'' situation.
    However, while there is agreement on the need for administrative 
financing reform, a consensus regarding the right way to achieve it has 
not yet formed. There are several proposals to improve and simplify UI/
ES administrative financing reform which recently have been under 
active consideration.
    In evaluating these proposals, UWC believes there are 3 core 
ingredients:

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

    Specific criteria which should be applied in implementing these 
principles are attached to this state.
    One approach, on which we testified before this subcommittee on 
February 29, 2000, was introduced in the 105th Congress and 
reintroduced in the 106th by Rep. Jim McCrery, with bipartisan support. 
This approach had the support of an informal coalition of more than 100 
business organizations and 34 states and is therefore known as the 
Coalition approach. UWC launched and served as the business leader of 
this coalition.
    The McCrery bill eliminated the 0.2% FUTA surtax but preserved the 
remaining 0.6%. However, instead of pooling all FUTA payments in a 
single federal UI/ES administration account (ESAA), subject to 
Congressional appropriations and an allocation among the states 
theoretically based on workload, FUTA taxes paid by employers in each 
state are credited to a new administration account set up for each 
state. Each state legislature, rather than Congress, determines how 
much it needs to administer its own UI/ES program. A small amount is 
transferred into a special account to be used for supplemental grants 
to small states which need additional funds to administer their 
program, and a small amount is set aside for U.S. Labor Department 
operations related to UI. Under this approach, FUTA funds that are not 
needed for administration--and excess FUTA funds that have already been 
accumulated--automatically flow into the state's UI benefits account.
    The Department of Labor (DOL) has now proposed another approach to 
administrative financing. We are looking forward to seeing the actual 
DOL proposal and all of its elements, but we can make some general 
comments about the DOL approach pending our review of bill language. 
DOL proposes to reduce the FUTA tax rate to 0.2% and states will be 
responsible, after a transition period, for raising the revenue needed 
for system administration.
    The DOL approach has the potential for significant benefit to the 
UI program. We are pleased that it includes a repeal of the FUTA surtax 
and believe it will provide the opportunity to improve funding needed 
for state UI/ES agencies. It is a great virtue that the DOL approach 
eliminates the fatally flawed federal appropriations mechanism. We 
believe adequate funding for administration is much more likely to 
occur using this approach, because state legislatures are of necessity 
closer to their own state agencies and UI programs than Congress, and 
because UI/ES administrative funding will no longer have to compete 
with other federal spending priorities. Additional savings are possible 
through the release of surpluses in FUTA receipts into state benefit 
accounts and through the repeal of state tax diversions and add-on 
taxes on employers, which will no longer be necessary. A reduction of 
as little as one week will save another $1.5 billion a year for 
employers by reducing their state unemployment tax.
    There are two respects where we believe refinements to the DOL 
approach are necessary. While giving states the responsibility for 
administrative funding provides an opportunity for a net reduction in 
the total administrative cost burden on employers, it may also allow 
states to impose higher administrative taxes on some or all employers 
than under current law. For example, if states levy a new 
administrative tax using their existing wage base, many employers in 
states with a wage base over $7,000 could face a significant tax 
increase.
    The DOL approach also leaves open the possibility of commingling UI 
benefits and administrative revenue. Such commingling could lead to the 
diversion of revenue needed for benefit payments and ultimately lead to 
higher benefits payroll taxes.
    UWC will work with Congress to provide appropriate protections 
against net increases in administrative taxes and against commingling 
of benefits and administrative moneys.
CONCLUSION
    UWC supports a strong UI system and the concept of a federal-state 
partnership, under which the UI system has been a general success. 
However, the present UI/ES administrative financing mechanism is not 
working effectively. The federal budget process as now applied to FUTA 
taxes and UI/ES administrative funding is detrimental to a sound, 
efficiently administered program. Considering that federal stewardship 
of program administration now over-taxes employers and yet under-
finances UI/ES administrative agencies, we believe that workers, 
employers, and the public will be better served if states are allowed 
greater control over administrative funding. There are several 
different ways to accomplish this objective. The Department of Labor 
has made a significant proposal with potential to solve the problem, 
and UWC looks forward to working with the Bush Administration and 
Congress to enact positive administrative financing reform this year.

                               Attachment
              UI/ES Administrative Financing Reform Policy
                           February 28, 2002
    Proposals to reform the state unemployment compensation and 
employment services (UI/ES) administrative financing system have the 
potential for significant cost savings for employers while improving 
the integrity of the unemployment insurance (UI) system, which is also 
important to employers. To satisfy those objectives, administrative 
financing reform must be in accordance with the following principles:

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

    IMPLEMENTATION PRINCIPLES

    Any new administrative financing system must include the following 
protections:
      1. Federal law must continue to require that states maintain a 
UI program and a public employment service.
      2. Federal requirements for due process, payments when due, 
etc., are retained.
      3. States are required to continue responsibility for the 
interstate compact.
      4. To the extent that states are responsible for imposing and 
collecting an employer payroll tax to finance their own administrative 
agencies

          1. The tax should be collected as a line item on the state 
UI tax form.
          2. To maintain the relative share of contributions from 
high-wage and low-wage employers, the state tax rate for this purpose, 
when applied to the taxable wage base, shall not generate an amount 
exceeding $28 per full-time employee/year.
          3. States are required to reserve for future administrative 
needs but must have the right to borrow from federal general revenues 
(with interest) if necessary.
          4. Funds for administration are not commingled with revenue 
used for benefits.
          5. Dedicated funding must be maintained for essential 
federal UI/ES functions, such as Department of Labor oversight, the 
federal share of extended benefits (EB), and supplemental funding for 
small states. This amount could be collected by continuing a reduced 
FUTA tax which we estimate should not exceed .2% on the $7,000 FUTA 
wage base, or a comparable amount collected as a surcharge on state UI 
taxes.

      5. To enhance the accountability of state UI agencies, states 
must provide to the state legislature, the U.S. Department of Labor, 
and the public annual data and reports on employment services provided 
to UI claimants. The initial report would be due within 90 days after 
completion of the first fiscal year in which the new administrative 
financing system is implemented, and then annually thereafter. UWC 
believes that rather than impose federal performance standards, it is 
preferable to give each state the maximum latitude to determine how 
best to serve its own claimants, while providing information on agency 
performance needed by employers and others interested in the UI program 
through these reports.
      6. The full cost (including administrative costs) of Federal 
programs such as Trade Adjustment Assistance, emergency unemployment 
assistance, and UCFE and military programs should be funded by the 
Federal Government out of general revenues rather than FUTA revenue. 
Congress has recognized that benefits under these program should not be 
an employer financial responsibility and has provided general revenue 
funding. UWC believes that it is also inappropriate to tax private 
employers for the administrative costs of these programs.
      7. There is no need for a pre-funded loan account. States may 
borrow from federal general revenues, subject to interest, or borrow 
from other sources.
      8. The Reed Act should be maintained, allowing FUTA dollars 
exceeding an actuarially determined cap based on UI program needs to be 
returned to state UI benefits trust accounts.
      9. UI taxes may be collected no more often than quarterly.

                                

    Chairman Herger. Thank you, Mr. Yarbrough. Now we will hear 
from Mr. Jon Brock, President, National Association of State 
Workforce Agencies. Mr. Brock.

STATEMENT OF JON BROCK, EXECUTIVE DIRECTOR, OKLAHOMA EMPLOYMENT 
  SECURITY COMMISSION, AND PRESIDENT, NATIONAL ASSOCIATION OF 
                    STATE WORKFORCE AGENCIES

    Mr. Brock. Mr. Chairman, Members of the Subcommittee on 
Human Resources, I am Jon Brock, President of the National 
Association of State Workforce Agencies (NASWA) and Executive 
Director of the Oklahoma Employment Security Commission. Thank 
you for inviting me to testify today for NASWA and its members.
    The NASWA represents 53-State and territorial workforce 
agencies in general, and the Unemployment Insurance and 
Employment Service programs in particular.
    Most of our State members also administer the programs 
authorized under the Workforce Investment Act and welfare-to-
work programs.
    I thank the Chairman for scheduling a hearing on President 
Bush's New Balance proposal. The NASWA stands ready to begin 
work immediately on enacting reform legislation this year.
    Mr. Chairman, NASWA believes there are five major problems 
that call for Unemployment Insurance and Employment Service 
reform legislation. First, the Federal Government has been 
overtaxing employers under the Federal Unemployment Tax Act.
    Second, the Federal Government has been underfunding 
employment services, labor market information services, and 
unemployment insurance administration.
    Third, the permanent Federal-State Extended Benefits 
program barely works.
    Fourth, States need certain technical amendments to Federal 
law.
    And, fifth, worker representatives believe the unemployment 
insurance recipiency rates and wage replacement rates are too 
low in many States, and they want the Federal Government to 
expand eligibility and benefit levels.
    In addressing these problems, NASWA believes in the 
following principles: That the Federal Government should 
collect only enough Federal unemployment tax revenue to fund 
the system and maintain solvent trust fund accounts. The NASWA 
strongly supports repeal of the temporary .2 percent Federal 
unemployment surtax.
    Unemployment taxes should fund fully employment services, 
labor-market information services, unemployment insurance 
administration, and the Federal half of the Extended Benefits 
program. This funding should be stable, predictable, and 
equitable. States have been struggling to stay afloat in this 
system. In fiscal year 2001 alone, they added nearly $300 
million to our system from their own funds.
    Mr. Chairman, at this time I would like to ask permission 
to submit for the record a copy of the NASWA State supplemental 
funding survey which shows the contributions to this system 
made by each State in their own funds in fiscal year 2001.
    Chairman Herger. Without objection.
    [The information follows:]

                                                                         NASWA STATE SUPPLEMENTAL FUNDING SURVEY SUMMARY
                                                                                     Final Results June 2001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                   Job Trng. and/or
                                                         Unemployment         Employment         Labor Market          One Stop            One Stop          All Programs*        Grand Total
                                                           Insurance           Services           Information       Implementation      Implementation
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FY94
  State Penalty and Interest Funds..................         39,332,955          38,952,596             983,645                  --                  --                  --          79,269,196
  State General Funds Appropriated..................            231,800           5,127,609           2,424,229                  --                  --                  --           7,783,638
  State Administrative Tax Revenues.................         16,617,534          54,998,329           3,924,130                  --                  --                  --          75,539,993
  Other Sources.....................................            266,575             153,200              45,300                  --                  --                  --             465,075
    Total for State.................................         56,448,864          99,231,734           7,377,304                  --                  --                  --         163,057,902
 
FY95
  State Penalty and Interest Funds..................         45,608,874          50,449,154           1,353,873                  --                  --                  --          97,411,901
  State General Funds Appropriated..................            231,800           4,050,039           1,943,315                  --                  --                  --           6,225,154
  State Administrative Tax Revenues.................         13,101,378          50,706,946           4,179,190                  --                  --                  --          67,987,514
  Other Sources.....................................            713,268             376,100           4,179,190                  --                  --                  --           1,402,668
    Total for State.................................         59,655,320         105,582,239           7,789,678                  --                  --                  --         173,027,237
 
FY96
  State Penalty and Interest Funds..................         42,945,536          56,154,594           1,219,084                  --                  --                  --         100,319,214
  State General Funds Appropriated..................          7,469,372           3,737,098           1,625,381                  --                  --                  --          12,831,851
  State Administrative Tax Revenues.................         11,188,751          47,297,773           5,129,667                  --                  --                  --          63,616,191
  Other Sources.....................................          2,044,745             401,800              48,900                  --                  --                  --           2,495,445
    Total for State.................................         63,648,404         107,591,265           8,023,032                  --                  --                  --         179,262,701
 
FY97
  State Penalty and Interest Funds..................         43,838,305          41,478,113             796,394           3,929,113             796,666           5,212,806          96,051,397
  State General Funds Appropriated..................         12,994,348           8,449,124             451,300          14,972,282             843,100             550,500          38,260,654
  State Administrative Tax Revenues.................         10,519,433          30,401,249             485,144              16,806                  --           3,942,000          45,364,632
  Other Sources.....................................          1,443,500          20,280,568             561,428             500,000             356,492          16,470,347          39,612,335
    Total for State.................................         68,795,586         100,609,054           2,294,266          19,418,201           1,996,258          26,175,653         219,289,018
 
FY98
  State Penalty and Interest Funds..................         52,383,481          41,797,237             660,209           6,088,374             606,156           8,007,332         109,542,879
  State General Funds Appropriated..................         13,978,493          17,227,236           1,358,900          10,868,549           6,577,035           4,002,693          54,012,906
  State Administrative Tax Revenues.................         14,803,927          37,719,957             728,736          17,500,000             173,839           8,425,575          79,352,033
  Other Sources.....................................          1,711,803          31,170,742             868,677           5,800,750              46,092           2,150,058          41,748,122
    Total for State.................................         82,877,704         127,915,172           3,616,612          40,257,673           7,403,122          22,585,658         284,655,940
 
FY99
  State Penalty and Interest Funds..................         53,322,298          51,661,400           1,158,050          12,276,225             776,943           7,443,310         126,638,226
  State General Funds Appropriated..................         15,947,031          15,609,761           1,361,558          12,320,470           4,150,000           4,649,321          54,038,141
  State Administrative Tax Revenues.................         39,491,786          43,258,391           1,147,526          24,500,000              60,182           1,792,155         110,250,040
  Other Sources.....................................          3,313,463          26,646,158           1,054,839           6,625,940                  --           2,954,600          40,594,999
    Total for State.................................        112,074,578         137,175,710           4,721,973          55,722,635           4,987,125          16,839,386         331,521,407
 
FY00
  State Penalty and Interest Funds..................         46,604,531          57,455,166           1,392,635          26,490,885             700,000           6,178,122         138,821,339
  State General Funds Appropriated..................         24,234,384           9,950,723           3,207,769         120,827,171           4,597,998           9,993,393         172,811,438
  State Administrative Tax Revenues.................         66,536,223          54,139,765           1,217,306         125,899,617           1,298,428           4,035,709         253,127,048
  Other Sources.....................................          3,691,919          30,092,881           1,288,298           4,617,100           4,899,799           1,715,305          46,305,302
    Total for State.................................        141,067,057         151,638,535           7,106,008         277,834,773          11,496,225          21,922,529         611,065,127
 
FY01
  State Penalty and Interest Funds..................          56,548445          52,993,792           1,732,000          20,968,239                  --           6,006,844         138,249,320
  State General Funds Appropriated..................          5,362,516          15,970,307           3,053,348         114,137,665           4,874,000           2,632,490         146,030,326
  State Administrative Tax Revenues.................         65,100,812          52,656,392             989,665         133,830,889           1,273,444           4,323,108         258,174,310
  Other Sources.....................................          1,800,427          31,286,500           1,380,664           7,683,800                  --           4,056,267          46,207,658
    Total for State.................................        128,812,200         152,906,991           7,155,677         276,620,593           6,147,444          17,018,709         588,661,614
 
TOTAL FY94-01
  State Penalty and Interest Funds..................        380,584,425         390,942,052           9,295,980          69,752,836           2,879,765          32,848,414         886,303,472
  State General Funds Appropriated..................         80,449,744          80,121,897          15,425,800         273,126,137          21,042,133          21,828,397         491,994,108
  State Administrative Tax Revenues.................        237,359,844         371,178,802          17,801,364         301,747,312           2,805,893          22,518,547         953,411,761
  Other Sources.....................................         14,985,700         140,407,949           5,561,406          25,227,590           5,302,383          27,346,577         218,831,604
    Total for State.................................        713,379,713         982,650,700          48,084,550         669,853,875          32,030,174         104,541,935       2,550,540,946
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Denotes that funding could not be broken out

                                

    Mr. Brock. Continuing with NASWA's principles, the Extended 
Benefits program should be reformed as proposed previously by 
NASWA and now President Bush. The Federal Government should 
enact technical amendments as proposed previously by NASWA and 
now President Bush. States, not the Federal Government, should 
make decisions about benefit eligibility and benefit levels.
    The NASWA strongly supports an immediate extension of the 
unemployment insurance benefits for up to 13 weeks, and a $9.2 
billion Reed Act distribution to the State accounts in the 
Unemployment Trust Fund.
    Many of those who claimed unemployment insurance benefits 
in September or later are now beginning to exhaust their 
regular State benefits. They need additional help, and many 
States need additional help with funding State benefits and 
administrative costs of their programs.
    Mr. Chairman, it is imperative that you enact the proposed 
Reed Act distribution. If the Federal Government enacts only 
the 13-week extension, it will consume projected Reed Act 
distributions for at least the next 2 years and make it very 
hard for the Federal Government to reform this system in the 
future.
    Under the President's long-term reform, NASWA strongly 
supports many specific provisions, such as giving States access 
to the national directory of new-hires.
    Now, with respect to the .4 percent cut in the Federal 
unemployment tax rate and administrative funding reform, our 
Members have a number of questions. After the Federal 
unemployment tax rate is cut by .4 percent, will State law 
require States to enact new State unemployment taxes to fund 
the system? Will certain States such as California, Colorado, 
and Washington be required by their State Constitutions or laws 
to hold a voter referendum on the new State taxes to fund the 
system and can the Federal Government assure small States will 
receive the funding they need if the small State supplement is 
discretionary spending? Could the Administration and Congress 
accept treating the small State supplement as mandatory 
spending?
    Mr. Chairman, on behalf of the State workforce agencies, we 
thank you for the opportunity to testify. The enactment of 
unemployment insurance and employment service reform is 
critical. We want to work with all interested groups in coming 
up with meaningful reform. Please do not let this vital 
Federal-State system wither any further. Please act now.
    Thank you.
    [The prepared statement of Mr. Brock follows:]

    Statement of Jon Brock, Executive Director, Oklahoma Employment 
   Security Commission, and President, National Association of State 
                           Workforce Agencies

    Mr. Chairman and Members of the Subcommittee on Human Resources, I 
am Jon Brock, President of the National Association of State Workforce 
Agencies (NASWA) and Executive Director of the Oklahoma Employment 
Security Commission. Thank you for inviting me to testify today for 
NASWA and its Members. NASWA represents 53 state and territorial 
workforce agencies in general and Unemployment Insurance and Employment 
Service programs in particular. Most of our state members also 
administer the programs authorized under the Workforce Investment Act, 
welfare-to-work programs and some administer public assistance 
programs, such as Temporary Assistance for Needy Families or ``TANF.''
    I want to thank and commend the Chairman for scheduling a hearing 
on President Bush's ``New Balance'' proposal. NASWA appreciates the 
attention the Administration has brought to this critical issue through 
its effort to develop this proposal and stands ready to begin work 
immediately on enacting reform legislation this year.
    Mr. Chairman, NASWA believes there are five major problems that 
call to the need for Unemployment Insurance and Employment Service 
reform legislation:

       The Federal Government has been overtaxing employers 
under the Federal Unemployment Tax Act (FUTA).
       The Federal Government has been under funding 
employment services, labor market information services, and 
unemployment insurance administration for many years.
       The permanent federal-state Extended Benefits program 
barely works. States need certain technical amendments to federal law to 
help them better administer their unemployment insurance programs.
       Worker representatives believe the unemployment 
insurance recipiency rate and wage replacement rates are too low in 
many states and they want the Federal Government to expand eligibility 
and benefit levels.

    In addressing these problems, NASWA believes in the following 
principles:

       The Federal Government should collect only enough 
federal unemployment tax revenue to fund the system and maintain 
solvent trust fund accounts. NASWA strongly supports repeal of the 
temporary 0.2 percent federal unemployment surtax.
       Unemployment taxes should fund fully employment 
services, labor market information services, unemployment insurance 
administration, and the federal half of the Extended Benefits program. 
This funding should be stable, predictable, and equitable. Mr. 
Chairman, states have been struggling to stay afloat in this system. In 
fiscal year 2001 alone, they added nearly $300 million to our system 
from their own funds. In fiscal year 2001, the State of California 
alone added $43 million of its own funds.
       The Extended Benefits program should be reformed as 
proposed previously by NASWA and now President Bush.
       The Federal Government should enact technical 
amendments as proposed previously by NASWA and proposed by President 
Bush that will help states better administer their unemployment 
insurance programs.
       States, not the Federal Government, should make 
decisions about benefit eligibility and benefit levels.

    In general, NASWA strongly supports the President's short-term 
reforms described in his New Balance proposal. NASWA also supports many 
of the provisions in the President's long-term reform proposal, but has 
many questions and some concerns about the proposed federal tax cuts 
and administrative financing reform.
    NASWA strongly supports an immediate extension of unemployment 
insurance benefits for up to 13 weeks and a $9.2 billion Reed Act 
distribution to the state accounts in the unemployment trust fund. We 
know the recent economic news has been promising and that many 
economists now say the recession might be over, but we also know that 
unemployment lags economic recoveries and could stay high well into 
2002. Many of those who claimed unemployment insurance benefits in 
September, or later, are now beginning to exhaust their regular state 
benefits. They need additional help, and many states need additional 
help with funding state benefits and the administrative costs of their 
programs.
    Mr. Chairman, it is imperative that you enact the proposed Reed Act 
distribution along with the 13-week extension of benefits. If the 
Federal Government enacts only the 13-week extension, it will consume 
projected Reed Act distributions for at least the next two years and 
make it very hard for the Federal Government to reform this system in 
the foreseeable future. Indeed, this could be the last year in which 
the Federal Government can reform our system during the careers of most 
of the individuals in this hearing room.
    Under the President's long-term reform, NASWA strongly supports:

       Giving states access to the National Directory of New 
Hires for quick detection of individuals who have gone back to work, 
but continue to collect unemployment insurance benefits.
       Permitting states to pay certain tax collection 
activities by maintaining compensating balances in the banks performing 
the activities.
       Making technical changes so that states will follow 
state, rather than federal requirements, for Reed Act appropriations by 
state legislatures.
       Clarifying unemployment insurance claimants are not 
required to present proof of citizenship in person when they claim 
benefits that include federal funds.
       Making technical changes to the Short-Time Compensation 
program, which will allow states to continue operating these programs 
as they currently exist.
       Permitting states to use proceeds from sale of federal 
equity in real property for program purposes.
       Repealing a provision that results in certain federal 
employees being denied unemployment insurance benefits in cases where 
other workers would be eligible.
       Prohibiting states from reducing benefits due to 
rollover of pensions.
    With respect to the 0.4 percent cut in the federal unemployment tax 
rate and administrative funding reform, NASWA has a number of questions 
before it could take an official position:
       After the federal unemployment tax rate is cut by 0.4 
percent, will state constitutions or state law require states to enact 
new state unemployment taxes to fund employment services, labor market 
services, and unemployment insurance administration?
       In the Administration's analysis of ``gains and 
losses'' to state resources in its proposal, shouldn't the 
Administration have used the 0.4 percent cut in the permanent federal 
unemployment tax rate instead of 0.6 percent? NASWA believes employers 
want a permanent 0.2 percent cut in unemployment taxes and will not 
want to give back the repeal of the temporary 0.2 percent federal 
unemployment surtax in additional permanent state unemployment taxes.
       Should the Federal Government reduce the ceiling on the 
federal loan account to a nominal amount and distribute the nearly $20 
billion in the account to state accounts? The Federal Government does 
not need these balances for the system because the loan account can 
borrow from the general fund and federal law virtually makes certain 
states will repay these loans with interest.
       Should the ultimate federal unemployment tax in the 
proposal be lower than 0.2 percent? Does the Federal Government really 
need all of that revenue?
       Will certain states, such as California, Colorado, and 
Washington, be required by their state constitutions or laws to hold a 
voter referendum on new state taxes to fund employment services, labor 
market services, and unemployment insurance administration?
       Can the Federal Government assure small states will 
receive the funding they need if the small-state supplement is 
discretionary spending under annual federal appropriations? Could the 
Administration and Congress accept treating the small-state supplement 
as mandatory spending?
       Will employers object to funding our system with state 
taxes that use a higher taxable wage base than the federal $7,000 base?
       Will co-mingling of benefit and administrative funds 
adversely affect the funding of administration or benefits?
       Are there enough federal and state benefits in the 
President's proposal to gain support from those concerned about worker 
benefits?

    Mr. Chairman, I realize this is a long list of questions, and 
normally it is the Subcommittee, not witnesses, who ask questions. 
However, NASWA needs answers to these questions from the Administration 
and other interested parties before we can say more about the New 
Balance proposal.
    On behalf of the state workforce agencies, we thank you for the 
opportunity to testify before this subcommittee today on this important 
issue. We want to work with all interested groups in coming up with 
meaningful reform.
    Enactment of unemployment insurance and employment service reform 
is urgent and critical. I hope we can find answers quickly to all of 
our questions. And, I hope Congress will consider reform immediately. 
Please do not let this vital federal-state system wither any further. 
Please act now.
    Thank you.

                                

    Chairman Herger. Thank you very much, Mr. Brock. And now we 
are pleased to hear from Ms. Christine Owens, Director of 
Public Policy, American Federation of Labor and Congress of 
Industrial Organizations, AFL-CIO.

STATEMENT OF CHRISTINE OWENS, DIRECTOR, PUBLIC POLICY, AMERICAN 
  FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

    Ms. Owens. Thank you, Mr. Herger. It is good to be here 
today with this Subcommittee and the representative of my home 
State of Maryland, though I have spent plenty of time in 
Oklahoma and Louisiana just last week. So it is nice to be here 
with all of you.
    I think we all agree that fixing the UI system is long 
overdue, and recent discussions have focused in the past 
several months and today on extension of UI benefits for 
unemployed workers. With 80,000 workers exhausting their 
benefits every week, 1,600 a day, that action is crucial and 
should be taken immediately, but it is no substitute for a 
careful and thoughtful examination of how to change the program 
to better enable it to meet its intended goals of providing 
income support for jobless workers and job search service and 
helping to stabilize the national economy during times of 
economic downturn.
    We fear that the Administration's proposal does none of 
these. The Administration's plan turns over to the States a 
primary Federal responsibility, which is the administrative 
financing of State operations. The upshot of this proposal 
could well be to place funding for benefits in competition with 
funding for administration at the State level, potentially 
imperiling both.
    The plan would also significantly reduce Federal 
unemployment insurance premiums for employers, but does so 
without insuring any corresponding increases in coverage and 
benefits for workers.
    I would like to elaborate on our concerns. First, as 
several Members have addressed, too few of today's unemployed 
workers receive too little in UI benefits for too short a 
period of time. These system inadequacies reflect the failure 
of the system to modernize in order to keep up with changes in 
the economy and in the workforce and with technological changes 
that allow for up to date reporting of workers' tenure and 
wages. And it also reflects the pressures on States to cut 
taxes and to trim budgets. Consequently, nationally fewer than 
4 in 10 unemployed workers receive UI benefits, and benefit 
levels replace only 33 to 39 percent of former earnings.
    In part to address these shortcomings, the stakeholder 
process, which Mr. Cardin has referred to several times, came 
up with a proposal which did not provide everything that every 
participant wanted, but it provided something of real value to 
every participant. For workers it provided a mechanism to 
extend coverage to low-wage workers and to women working part 
time. For employers, it cut the FUTA tax by the .2 of a 
percent, and for States it transferred administrative financing 
to the mandatory side of the budget and created a formula which 
reflected need and recipiency rates and good performance at the 
State level.
    The Administration's proposal walks away from this deal. In 
fact, the proposal will likely exacerbate the shortcomings in 
coverage and benefits for workers who are not currently 
covered. When States have to rely on their own employer tax 
base for administrative financing, as they will in 5 years, 
they will be pressured to either raise taxes or cut benefits.
    The experience of the boom times of the nineties, when we 
had nearly a full employment economy, indicate just how strong 
the pressures are to reduce taxes. Those pressures will grow in 
recessionary conditions.
    We believe that the Administration's proposal ultimately 
undercuts States. We have attached a chart to our testimony 
which shows that a number of States, if we assume that States 
were to increase their own State tax by .4 of a percent to make 
up for the loss of the FUTA tax, that a number of States that 
have high recipiency rates will actually fare less well under 
the Administration's proposal than they currently fare or than 
they would have fared under the stakeholders' proposal.
    Finally, we are concerned that by eliminating the Federal 
role, the Administration's plan would also damage the counter-
cyclical and national risk sharing elements of the national 
Federal-State partnership. Now Federal grants are allocated 
among States according to workloads, and the Federal Government 
automatically releases additional administrative funding if 
national unemployment rises above certain levels and the 
State's number of claimants also rise. Individual States would 
not have the capacity to replicate this national funding 
scheme.
    I will close now and be glad to answer questions later.
    [The prepared statement of Ms. Owens follows:]

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

    Chairman Herger, Ranking Member Cardin, and distinguished Members 
of the Human Resources Subcommittee, on behalf of the 13 million 
working men and women of the AFL-CIO, I appreciate the opportunity to 
join you today to present our views on the Administration's proposals 
for changing the nation's unemployment insurance (UI) and employment 
services (ES) system.
    The AFL-CIO believes that legislative debate about how best to fix 
the nation's unemployment system is long overdue. The only recent 
debate concerns extending benefits for workers who have exhausted their 
regular UI benefits. While such relief is critical, especially now, 
when 11,000 workers are exhausting their UI benefits daily, it is no 
substitute for a careful and thoughtful examination of the ways in 
which the program should be changed to meet its intended purposes, 
while providing greater certainty of funding and more flexibility for 
states and reducing some burdens for employers.
    Regrettably, however, the Administration's proposal--which 
gradually cuts employer federal unemployment taxes 75 percent and 
transfers the responsibility for administrative financing to the 
states--falls short of these goals. The Administration's flawed 
approach would unravel a careful balance that has served national, 
state and individual interests for over 60 years. The proposal puts 
worker benefits in direct competition with UI administration, placing 
both at risk. The plan turns over to the states a primary federal 
responsibility, the administrative financing of state operations. It 
would significantly reduce employer premiums but fails to address the 
long-term decline in coverage of unemployed workers, and, in fact, may 
exacerbate the problem. In short, instead of strengthening this 
important economic security system, the President's proposal could 
weaken it further.
The Unemployment System Fails to Meet the Needs of Today's Working

    Families

    The UI and ES systems are in substantial need of repair and reform. 
Too few of today's unemployed workers receive too little in benefits 
for too short a time with too little help in securing new employment. 
In most states, UI eligibility rules mirror decades-old labor market 
conditions, when most workers were men in full-time manufacturing jobs. 
But the workforce has changed dramatically over the past thirty years, 
with more women, more ``contingent'' workers and more part-time workers 
than ever before. The current UI system fails many of today's workers 
for three main reasons.
    First, most states do not use the ``alternative base period'' for 
determining UI eligibility and instead, continue to count only the 
first four of the last five completed quarters of employment, thus 
excluding a worker's most recent work experience and wages. As a 
result, an average of 13 to 25 weeks' pay is disregarded in eligibility 
determinations. Base period calculations disqualify not only those with 
limited work histories, but even those who work consistently but who 
cannot qualify without having their most recent wages counted. The 
impact of this method for determining eligibility falls 
disproportionately on low-wage workers. This group also includes many 
women who have recently left welfare for work, but who are among the 
first to lose their jobs during downturns.
    Second, in the majority of states (around 30), unemployed workers 
seeking part-time employment are not eligible for benefits. Again, this 
exclusion falls most heavily on women, who are 70 percent of all part-
time workers. Millions of workers who seek part-time jobs do so in 
order to accommodate family caregiving and other responsibilities. For 
many single mothers, a part-time job is the family's sole source of 
income. Individuals seeking part-time work should not be penalized with 
a denial of UI benefits simply because they are unable to work full-
time.
    Finally, UI benefits are too low. Nationally, UI benefits replace 
somewhere between 33 percent and 39 percent of recipients' former 
wages. Average weekly UI benefits range from $157 in Mississippi to 
$269 in Massachusetts, but these amounts do not take into account the 
reduction resulting from federal taxation. Estimates of the income 
needed to meet basic family needs dramatically underscore the 
inadequacy of UI benefits. A single parent family with two children in 
Biloxi needs $1153 a month to meet basic needs; average benefits equal 
only slightly more than half that amount.
    In part to address these systemic failings, a multi-year 
``stakeholder'' process produced a set of consensus UI reform proposals 
less than two years ago, which offered substantial improvements over 
the status quo for all participants: employers, workers, state UI 
administrators, and the Federal Government. The ``stakeholder'' 
consensus proposal did not contain every reform to the UI and ES 
systems sought by participants, including worker advocates. It omitted 
many crucial improvements, such as lowering earnings thresholds, 
increasing the federal taxable wage base, eliminating the federal 
taxation of UI benefits, expanding coverage of workers who separate 
from employment due to compelling personal circumstances, eliminating 
non-monetary disqualifications, and prohibiting states from tying laid-
off workers to their former temporary help agencies. Nonetheless, the 
consensus proposal offered a road-map to a fair, balanced compromise 
that would improve the UI and ES systems in many ways. It promised 
eligibility reforms that would benefit millions of low-wage and part-
time workers. It guaranteed states adequate funding by moving 
administrative financing to the mandatory side of the budget and 
applying a formula to reward states for running good programs. And it 
repealed the 0.2 percent FUTA surtax and reduced paperwork requirements 
for employers. Employer representatives, however, walked away from the 
proposal before Congress could enact the reform package.
The Administration's UI Proposal Fails Unemployed Workers

    In contrast, the Bush Administration's proposal preempts the 
consensus process and proposes changes that offer employers a 
substantial tax cut but largely ignore workers' needs. For employers, 
the President proposes to phase out 75% of the Federal Unemployment Tax 
(FUTA), which finances administration of the UI system and helps insure 
program stability. Under the Administration's proposal, states would 
have to raise the funds for UI administration on their own, with the 
federal financial role eliminated due to the proposed FUTA repeal.
    The Bush proposal contains no reforms to ensure that the UI system 
meets the needs of today's working families. There are no benefit 
increases, no coverage for part-time and low-wage workers, and no 
alternative base periods for determining eligibility and benefits. The 
Administration proposes to lower the extended benefits (EB) trigger, 
but this change will provide no assistance to workers currently unable 
to access the UI system--a major worker priority. In addition, few 
workers will benefit from the modest proposed reform of lowering the EB 
trigger from an Insured Unemployment Rate (IUR) of 5 percent to an IUR 
of 4 percent. In the 1990's recession, only 10 states triggered on to 
the permanent federal Extended Benefits program; under the Bush 
proposal, only 15 states would have been able to use this program, 
which would remain an inadequate response to national economic 
recessions.
    As the Members of the subcommittee well know, the national UI 
system is already failing to provide adequate wage replacements for 
most workers and preventing many laid-off workers from accessing 
benefits at all. The Administration proposal will exacerbate this 
problem. By eliminating the ``firewall'' between UI benefit payments 
(determined by states) and UI administration (financed with federal 
grants), the Bush plan would create a competition that would force many 
states to cut worker benefits or reduce access to the UI system in 
order to pay for administrative costs. Under the current needs-based 
allocation system, states with higher recipiency rates (those that pay 
benefits to a higher percentage of their workforce) receive a higher 
percentage of administrative dollars than those with lower recipiency 
rates. When states have to rely on their own employer tax base, 
employer interests will put pressure on these states to reduce their 
recipiency rates or cut benefits in order to avoid tax increases and 
keep administrative costs down.
    It is not mere speculation to forecast further reductions in state 
benefits as a consequence of saddling states with additional financial 
responsibilities for the UI system. During the economic expansion of 
the 1990s, far too few states acted to modernize their UI systems, 
increase benefits, or cover more workers. On the contrary, many states 
reduced employer taxes and failed to build up prudent trust fund 
surpluses during the boom years that would have been available during 
the current recession.
    Nor would the promise of a sizable Reed Act distribution, as 
contemplated under the President's plan, ensure that states enact 
legislation to treat low wage and part-time workers more fairly. In a 
recent survey by the National Association of State Workforce Agencies, 
a majority of states said they would not use funds from a Reed Act 
distribution to expand coverage to low-wage and part-time workers, even 
though these are the workers at greatest risk of being laid-off. In 
many states, these workers are now paying for a UI system from which 
they cannot benefit, since they have already had unemployment insurance 
taxes withheld from their wages (like any other payroll tax, workers 
pay in the form of reduced wages; employers simply write the check).
The UI System Will be Weakened and State Governments Will Suffer

    Over the past decades, state governments have repeatedly called 
attention to the fact that the Federal Government has been underfunding 
UI and ES administration, to little avail. The ``stakeholder'' 
consensus proposal would have provided guaranteed ``mandatory'' federal 
funding for state administrative costs. In contrast, the Administration 
proposal does not solve the problem of administrative funding and 
offers a bad deal for many of the states. Although the Administration 
proposes transferring $14 billion from the Federal trust fund into 
state trust funds during the five-year transition period, there will be 
no federal administrative funding after that.
    States would have to raise over $3.5 billion annually in new state 
revenue simply to make up for the loss in federal funding. The 
Administration promises employers a 75 percent FUTA tax cut (from 0.8% 
to 0.2% of the first $7,000 earned by each employee), but remains 
silent about the amount that states will be able to raise through 
corresponding state tax increases levied on employers to pay for 
administrative costs. Employers cannot be expected to complacently 
accept a dollar-for-dollar restoration of the federal tax on the state 
level; in fact, employers have already ``claimed'' the first 0.2 
percent reduction in the FUTA tax as a permanent elimination of the 
temporary 0.2 percent FUTA surtax. States would therefore have the 
potential of raising taxes on employers by only 0.4 percent (half the 
current FUTA rate), and will face constant employer pressure against 
the necessary taxes to pay for administration. For instance, California 
currently receives $459 million in annual federal grants to pay for 
administration costs, and it would have received $598 million under the 
stakeholder proposal. California employers currently pay $814 million 
in FUTA taxes, and thus, the most the state would likely be able to 
collect under the Administration's proposal is $407 million. To make up 
the administrative financing shortfall, the state would either have to 
cut benefits or raise taxes above the level employers expect to pay. 
Many other states would face similar prospects.
    Worse yet, many states with higher recipiency rates fare better 
under the existing financing mechanism than they would under the 
Administration's proposal, while conversely, those with lower 
recipiency rates often stand to benefit from the Administration's plan, 
assuming they impose a 0.4 percent tax on employers. (See Attachment 
1). Almost without exception, states with above-average recipiency 
rates would fare better under the stakeholder proposal than under the 
Administration's plan. For example, Texas, Oklahoma, Florida and 
Alabama have recipiency rates of less than 30 percent, and all would 
fare better under the Administration's plan (assuming they impose a 0.4 
percent tax). On the other hand, Connecticut and Massachusetts, with 
recipiency rates of 73 percent and 71 percent, respectively, would fall 
millions of dollars short of the funding they need.
    By severely curtailing the federal role in the UI system, the Bush 
plan would damage the counter-cyclical and national risk-sharing 
elements of the national federal-state partnership. The Administration 
would sever the connection between administrative funding and workload 
needs, since federal grants are currently allocated among the states 
according to their workload, and the Federal Government automatically 
releases additional administrative funding if national unemployment 
rises above certain levels and the state's number of claimants rise. 
Individual states would not be able to replicate this national 
financing mechanism effectively. Furthermore, some states have 
mismanaged their trust funds by failing to build up adequate reserves 
and choosing instead to give their employers tax cuts. Most notable are 
New York and Texas, which will be borrowing $1.5 billion from the 
Federal Government because their benefit trust funds are running out of 
money. Unless the states build adequate reserves during economic 
expansions, they will not be able to increase their administrative 
resources easily when claims surge during recessions, instead borrowing 
from the Federal loan fund with interest and unnecessarily increasing 
the cost of their operations.
    Finally, the Bush plan undercuts the primary enforcement mechanism 
for Federal protections. With the Federal Government's authority to 
award administrative grants eliminated, the justification for federal 
involvement in administrative matters will become extremely weak since 
no federal money will be involved in state operations. There will be 
irreparable damage to the Federal Government's ability to maintain and 
enforce core national standards relating to state administration of 
their programs, including requirements to maintain proper and efficient 
administration, pay benefits accurately and promptly ``when due,'' and 
provide a fair and impartial hearing process.
Conclusion

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

                              Attachment 1

                STATES WITH EFFECTIVE UI PROGRAMS LOSE MILLIONS UNDERTHE BUSH UI REFORM PROPOSAL
                                              (Millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                0.4%
                                                                               Maximum   Stakeholder  Recipiency
                             State                                  2001         Tax       Proposal      Rates
                                                                   Grants     Employees    Workload     (CY'00)
                                                                              will Pay     Formula
----------------------------------------------------------------------------------------------------------------
CONNECTICUT....................................................         57          44           73          73
 
MASSACHUSETTS..................................................         82          84          106          71
 
RHODE ISLAND...................................................         18          12           23          60
 
ALASKA.........................................................         30           7           39          59
 
NEW JERSEY.....................................................        113         105          146          54
 
PENNSYLVANIA...................................................        163         147          209          54
 
WISCONSIN......................................................         74          72           93          51
 
VERMONT........................................................         10           7           12          50
 
NEVADA.........................................................         30          29           38          49
 
IOWA...........................................................         28          36           38          48
 
OREGON.........................................................         54          43           68          48
 
WASHINGTON.....................................................         94          73          118          46
 
MICHIGAN.......................................................        132         127          169          44
 
ARKANSAS.......................................................         30          28           38          44
 
MISSOURI.......................................................         57          70           73          42
 
CALIFORNIA.....................................................        459         407          598          41
 
TENNESSEE......................................................         47          70           61          39
 
NORTH DAKOTA...................................................         14           7           17          39
 
IDAHO..........................................................         23          14           30          39
 
NORTH CAROLINA.................................................         73         104           93          38
 
PUERTO RICO....................................................         28          21           37          38
 
ILLINOIS.......................................................        150         163          196          38
 
US AVERAGE RECIPIENCY                                                                                        38
 
MAINE..........................................................         19          14           24          37
 
DIST. OF COLUMBIA..............................................         15          11           18          37
 
DELAWARE.......................................................         10          11           15          36
 
NEW YORK.......................................................        208         213          270          36
 
SOUTH CAROLINA.................................................         41          47           52          36
 
MINNESOTA......................................................         51          71           67          35
 
MONTANA........................................................         14           8           18          34
 
HAWAII.........................................................         16          13           22          34
 
INDIANA........................................................         54          75           70          32
 
KENTUCKY.......................................................         34          45           45          32
 
WEST VIRGINIA..................................................         20          16           26          31
 
OHIO...........................................................        106         149          135          31
 
KANSAS.........................................................         25          34           33          30
 
UTAH...........................................................         34          27           42          30
 
ALABAMA........................................................         45          48           58          30
 
VIRGINIA.......................................................         54           1           70          29
 
WYOMING........................................................         10           5           14          28
 
MARYLAND.......................................................         63          62           82          27
 
FLORIDA........................................................        107         194          141          27
 
NEBRASKA.......................................................         20          21           25          27
 
MISSISSIPPI....................................................         26          28           35          26
 
TEXAS..........................................................        167         257          218          25
 
OKLAHOMA.......................................................         29          35           37          25
 
COLORADO.......................................................         44          62           57          25
 
NEW MEXICO.....................................................         20          17           26          24
 
SOUTH DAKOTA...................................................         10           8           14          24
 
ARIZONA........................................................         42          62           55          23
 
GEORGIA........................................................         70         108           92          23
 
LOUISIANA......................................................         35          45           47          22
 
NEW HAMPSHIRE..................................................         12          17           16          16
 
VIRGIN ISLANDS.................................................          4          93            5         N/A
 
  TOTALS.......................................................       3171        3467         4104
----------------------------------------------------------------------------------------------------------------

                                

    Chairman Herger. Thank you very much, Ms. Owens.
    Now we will hear from Dan Blankenburg, Manager, Legislative 
Affairs, National Federation of Independent Business, NFIB. Mr. 
Blankenburg.

  STATEMENT OF DAN BLANKENBURG, MANAGER, LEGISLATIVE AFFAIRS, 
          NATIONAL FEDERATION OF INDEPENDENT BUSINESS

    Mr. Blankenburg. Thank you, Mr. Chairman. It is a pleasure 
to be here today. On behalf of the 600,000 members of the 
National Federation of Independent Business, I appreciate the 
opportunity to testify and present the views of small 
businessowners on the subject of reforming the Nation's 
unemployment system.
    The NFIB represents small employers. Our typical member 
employs five people and reports gross sales of around $350,000 
per year. Our average member's net income is about $40,000 to 
$50,000 annually, so they are pretty small guys out there.
    We believe it is important to distinguish the type and size 
of small business that NFIB represents, because too often 
Federal policymakers view the business community as one 
monolithic enterprise that is capable of passing taxes and 
regulatory costs on to consumers without suffering negative 
consequences.
    For small businesses, this is not the case. The NFIB 
members are not publicly traded corporations. They are 
independently owned and operated. They don't have tax 
departments or payroll departments or attorneys on staff. They 
are responsible for taking out the garbage and inventory and 
hiring employees.
    So for small businesses, the current system presents 
several problems. First, the tax rate is too high. We often 
hear from critics that cutting the tax will do little for small 
businessowners, since the cost per employee is only $56 per 
year.
    I would ask the Committee to consider that the average NFIB 
member has five employees, and we have 600,000 members 
nationally in our association alone. Reducing the FUTA tax as 
the Administration proposes would result in $126 million 
remaining in the hands of entrepreneurs.
    While the difference between an .8 percent tax and a .2 
percent tax sounds small, our average member would save $210 a 
year.
    Second, the unemployment system, under the current system, 
employers are required to pay two unemployment taxes to the 
State and the Federal Government. It is twice the forms, twice 
the complexity and twice the collection point. It is too many 
forms for them to handle when you consider some of the other 
forms and payroll taxes they must deal with.
    Third, the taxes raised for UI programs are rated or used 
for deficit reduction, and this fact perhaps more than any 
other infuriates small business owners. They would like to be 
taxed honestly and have their money spent on what Congress says 
they are being taxed for. As an overall package, we are pleased 
with the Administration's proposal, and NFIB strongly supports 
the proposal to cut the unemployment tax by 75 percent through 
2007.
    The tax reduction will be particularly gratifying to small 
businessowners, because as had been testified before, the tax 
was supposed to be a temporary tax in 1976, and the Congress 
promised to remove it once the loan was paid back to the 
Federal fund. And since then--well, in 1987 the loan was paid 
off and the taxes remained, and it has been extended five 
times.
    We are very pleased to see an effort to reduce the 
complexity of Form 940 in the Administration's proposal by 
eliminating many of the information requests and calculations. 
However, we think the Administration proposal could go one step 
further. Small businessowners know that a great deal of time is 
wasted by having to provide the same information on different 
forms to Federal and State agencies. We would urge the 
Administration and the Congress and this panel to consider 
eliminating all of the overlap between the State and Federal 
forms and simply coordinate the filings in a combined form that 
only needs to be filed once.
    With regard to the Reed Act transfer, NFIB believes 
returning these dollars to the State employment offices is a 
very positive decision. As mentioned, the money has been 
misappropriated for years, and we also understand the 
Administration's proposal reduces the trigger for extended 
benefits and eligibility and would allow States to determine 
extended benefits as they would apply. This change will 
increase the number of people that will qualify for benefits, 
resulting in higher demand on the program in an economic 
downturn.
    While we are not comfortable with these provisions 
entirely, we view this in the context of the compromise and we 
would be willing to accept them if the Congress chose to move 
in that direction.
    So those are our main points, and I would be happy to take 
any questions.
    [The prepared statement of Mr. Blankenburg follows:]

 Statement of Dan Blankenburg, Manager, Legislative Affairs, National 
                   Federation of Independent Business

    On behalf of the 600,000 members of the National Federation of 
Independent Business (NFIB), I appreciate the opportunity to present 
the views of small business owners on the subject of reforming the 
nation's unemployment system.
    NFIB represents small employers. Our typical member has five 
employees and reports gross sales of around $350,000 per year. Our 
average member nets $40,000 to $50,000 annually. While there is no 
benchmark used to define a small business, our membership is very much 
a reflection of American small business when compared to data compiled 
by the United States Census Bureau.
    We believe it is important to distinguish the type and size of 
businesses NFIB represents. Too often, federal policy makers view the 
business community as one monolithic enterprise that is capable of 
passing taxes and regulatory costs onto consumers, without suffering 
negative consequences. For small business this is not the case. NFIB 
members are not publicly traded corporations; they are independently 
owned and operated. They do not have payroll departments, tax 
departments and attorneys on staff. Being a small business owner means, 
more times than not, you are responsible for everything--taking out the 
garbage, ordering inventory, hiring employees, and dealing with the 
mandates imposed upon your business by the federal, state and local 
governments. That is why simple government programs, particularly when 
it comes to the tax code, are so important. The less time our members 
spend with ``government overhead,'' the more they can spend growing 
their business and employing more people.
    Growing businesses lead to job creation, which is one of the major 
roles small business plays in our national economy. Small business is 
the leader in job creation because it is the embodiment of the 
entrepreneurial spirit. Small firms with fewer than 500 employees 
employ 52 percent of the non-farm private sector workforce as of 1998, 
and are responsible for 51 percent of the private sector business share 
of the nation's gross domestic product. From 1994 to 1998, about 11.1 
million new jobs were added to the economy. Small businesses with 1-4 
employees generated 60.2 percent of the net new jobs over this period 
and firms with 5-19 employees created another 18.3 percent. It is 
because small businesses have such deep impact on employment and the 
national economy that we feel it is critical that the policies you 
shape account for the impact the law will have on small business.
    Year after year, NFIB researchers have found that the two biggest 
challenges facing small businesses are health care and taxes. Our 
members are overwhelmed by the complexity of the tax code and their 
responsibilities, not just for income taxes, but also for the variety 
of federal and state payroll tax filings--including federal and state 
UI. They very much want to comply with the law, but its sheer size 
makes understanding the law nearly impossible for the average business 
owner. NFIB strongly supports efforts to simplify and cut taxes for our 
small business owners, and that is why we are pleased to testify on the 
Administration's proposals in this area. In our opinion, the federal 
unemployment system is ripe for reform.

                           The Current System

    The Unemployment Insurance (UI) system is a joint state-federal 
program, created with the passage of the Social Security Act of 1935. 
The Federal Unemployment Tax Act (FUTA), contained within the U.S. 
Internal Revenue Code, effectively mandates that the states maintain an 
unemployment insurance program in conformity with certain federal 
requirements. The UI system is financed by two taxes levied on 
employers--one state and one federal. The state UI tax is used to fund 
unemployment compensation benefits. The State tax is experience rated, 
meaning that an employer's tax rate is based upon past incidence of 
successful unemployment claims by his or her employees. The federal tax 
is a flat-rated tax, levied on a $7,000 taxable wage base. The federal 
tax is used to fund: (1) state and federal administration of the 
system; (2) the 50% federal share of extended benefit costs; and (3) 
loans made available to states when their trust funds are depleted.
    Both state and federal UI taxes are housed in the federal 
Unemployment Trust Fund, which is part of the unified federal budget. 
Each state has its own account in the federal trust fund into which 
state taxes are deposited and out of which state benefits are paid.
    State unemployment compensation benefits are an entitlement and are 
not subject to the appropriations process, but administrative funds are 
appropriated by Congress and distributed to states through grants from 
the Department of Labor. For many years state UI agencies have 
complained that the Congress is under funding administration of the 
program in order to mask the size of the federal deficit or to spend 
the dollars through the appropriations process. States have responded 
to this funding shortfall by reducing services to claimants, and in 
many cases enacting separate new taxes on employers to fund 
administration of the program.
    For small business, FUTA presents several problems. First, the rate 
is too high. Often we hear from critics that cutting this tax will do 
little for small business owners since the cost per employee is ``only 
$56 per year.'' I would ask the Committee to consider that the average 
NFIB member has five employees and that we have 600,000 members 
nationally. In our association alone, reducing the FUTA tax, as the 
Administration proposes, would result in over $126 million that would 
remain in the hands of entrepreneurs. While the difference between a 
.8% tax and .2% tax sounds small, our average member (with an annual 
income of $40,000-$50,000, five employees) would save $210 annually 
under this proposal. I would further point out that there are 
approximately 17 million full-time, self employed people in the country 
today. If they were all average NFIB members with five employees, this 
tax savings would represent roughly $3.57 billion annually.
    Second, under the current system, employers are required to pay two 
unemployment taxes--the federal tax and the state tax. That means twice 
the collection points, twice the payments, and twice the complexity. 
Payroll taxes were listed as the most costly tax in an NFIB tax survey, 
just ahead of personal income taxes. And 53 percent of those surveyed 
said payroll taxes are less fair or much less fair than business income 
taxes.
    Third, the taxes raised for UI programs are raided for deficit 
reduction or spent on other Federal Government endeavors other than UI 
programming. This fact, perhaps more than any other, infuriates small 
business owners. Like the American consumers' desire to see gas tax 
revenues spent on transportation, NFIB members desire all UI taxes to 
be spent on UI programs or be sent back to them to use in their 
business.
    Finally, when considering the cost and impact of the FUTA tax, it 
is important to remember that the federal FUTA tax is not the only tax 
on payroll for which small business owners are responsible. In addition 
to federal FUTA taxes, the business owner is paying State FUTA taxes 
and federal Social Security and Medicare taxes. In addition the 
business owner is responsible for the cost of filing quarterly state 
and federal payroll tax forms, making scheduled federal and state 
payroll tax deposits, making regular federal and state unemployment tax 
deposits in addition to filing the appropriate forms. These are real 
costs of hiring employees, that an individual who has never had to make 
a payroll takes for granted, but that involve real costs to small 
business owners and that add up to real dollars for a small business 
owner.

                     The Administration's Proposal

    As an overall package, we are pleased with the Administration's 
proposal and have included specific comments on some of its the key 
components:

                              FUTA Tax Cut

    NFIB strongly supports the proposal to cut the federal unemployment 
tax by 75% through January 2007. Today the federal tax is .8% and under 
the proposal the tax will be reduced to .2% by 2007. This tax reduction 
would be particularly gratifying to small business owners because .2% 
of this .8% was imposed in 1976 as a temporary surtax. Congress 
promised to remove this temporary tax once the loan from the federal 
trust fund to the States was repaid. In 1987, the loan was paid off, 
but the tax remained. Since then, the Congress has extended this tax 
five times. Last year, this extension resulted in a $1.75 billion tax 
burden on the nations' employers.
    We also applaud the reduction to the total FUTA tax beyond the 
surtax because the FUTA collects far more than it needs. FUTA raised 
$6.1 billion in 1998, but only $3.5 billion was spent on FUTA-related 
expenses. The balance was used to pay for non-related government 
programs.

                  Streamlined Filing of FUTA Tax Forms

    We are very pleased to see an effort to reduce the complexity of 
Form 940 in the Administration proposal by eliminating a many of the 
information requests and calculations in Part II that is already 
reported on the state UI forms. Federal paperwork complaints ranked 
eighth in NFIB's ``Problems and Priorities'' survey. The majority of 
paperwork coming from the Federal Government is tax-related, so any 
effort to streamline or eliminate forms or steps on forms would be 
welcomed with open arms.
    However, we think the Administration proposal could go one step 
further. Small business owners know that a great deal of time is wasted 
by having to provide the same information in different form to federal 
and state agencies. We would urge the Administration and the Congress 
to consider eliminating all of the overlap between the federal and 
state forms and simply and coordinate the filings into a combined 
federal state form that must only be filed once.

                           Reed Act Transfer

    The Administration's budget has proposed 13 weeks of additional 
temporary federal extensions of unemployment insurance be provided to 
workers. The Federal Government would fund this benefit. They have also 
proposed returning $9.2 billion in ``Reed Act'' funds to the states for 
expansion of benefits, or enhancements in reemployment services, 
shoring up trust funds or cutting employer payroll taxes.
    NFIB believes returning these dollars to the State employment 
offices is a positive decision. As mentioned above, the Congress has 
failed to spend this money on its stated purposes in the past and we do 
not believe this is likely to occur in the future. This 
misappropriation of funds has lead to a degradation of employment 
programs and inefficiencies that have resulted in tax increases in some 
states. We believe the taxes raised for unemployment programs should be 
used solely to fund unemployment programs. In the event that the taxes 
raise more dollars than is needed to run the unemployment programs, the 
taxpayers should be refunded their dollars. Neither the Congress nor a 
State Legislature should spend the surplus dollars on other programs.

                      Temporary 13-Week Extension

    NFIB does not have a position on the 13 weeks of additional 
unemployment insurance. We do believe that the temporary nature of this 
benefit is appropriate and that it would only become a concern if the 
proposal became a permanent benefit that NFIB members would be required 
to finance.

                     Triggers and State Eligibility

    We also understand the Administration's proposal reduces the 
``trigger'' for extended benefits eligibility and would allow States to 
determine when extended benefits would apply. This change will increase 
the number of individuals that will qualify for benefits, resulting in 
a higher demand on the programs in an economic downturn. While we are 
not completely comfortable with these provisions, they are acceptable 
when viewed together with the reduction of taxes and the increased 
responsibilities of the State governments. We feel that the respective 
State governments know their workforces best, and that they will be 
able to react quickly and efficiently to the demands of their workers. 
Empowering the States will move the unemployed back to work quicker, 
result in less demand on the system and ultimately eliminate future 
need to impose higher UI taxes on employers.

                               Conclusion

    In conclusion, NFIB believes that the proposal advanced by the FY 
2003 Administration budget is positive. The current system is too 
expensive, too complex and too unfair. It is time we pink slip the 
current unemployment tax system and pass this sweeping reform plan, 
which will ease the tax burden on Main Street and restore some 
integrity to the system. Thank you, Chairman Herger and Ranking Member 
Cardin, for soliciting the views of NFIB on this matter. We look 
forward to working with the Congress and the Administration on these 
important reforms in the coming months.

                                

    Chairman Herger. I thank you, Mr. Blankenburg, and each of 
you, and now we will turn to our panel for questions. First to 
inquire is the gentleman from Louisiana, Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman. Mr. Cardin spoke 
about the stakeholders that got together a couple of years ago 
and worked out a deal, and why didn't--why can't the 
Administration support that? Well, I was involved very much in 
the discussions at the time trying to put together something 
that we could pass, and unfortunately, at least it was my 
impression, at the end of the whole thing we did not have an 
agreement among all of the stakeholders. I thought, by the way, 
that organized labor, AFL-CIO, and the business community both 
acted in good faith and worked hard to come up with an 
agreement in which everybody got something and nobody got 
everything, and I thought that was a good description, Ms. 
Owens.
    But the fact is at the end of the deliberations, we did not 
have an agreement among all of the stakeholders. Mr. Yarbrough, 
I know you were around during that. Isn't that your impression 
that we did not have agreement among all the stakeholders?
    Mr. Yarbrough. I served as the business representative with 
UWC on that, and although we had maybe a total overall program, 
we didn't really support all the things, just like other people 
that were in there didn't support everything that we had in it. 
I think what came to this Committee to be considered had some 
different formula things and that, and we did not, I guess, 
line up to support that. We had something that we had done 
earlier that we gave to them, and then there were some other 
minor changes in the funding----
    Mr. McCrery. Mr. Blankenburg, NFIB didn't support the final 
draft?
    Mr. Blankenburg. Yes, I am glad you brought this up----
    Mr. McCrery. I have got limited time.
    Mr. Blankenburg. We did not.
    Mr. McCrery. And there were other groups that didn't 
support it. So as much as I would have liked to have gotten an 
agreement among all the stakeholders, we just didn't do it. So 
the Administration is trying to come up with something, I 
think, that bridges the gap among the various disparate 
interests and at least addresses some of the fundamental 
questions, or shortcomings I should say, of the current system.
    Ms. Owens, you talk about if the Administration's proposal 
were to go into effect, there would be this competition between 
tax revenue for benefits and tax revenue for administrative 
funding. Isn't that the case right now?
    Ms. Owens. Well, there is a firewall now, because the 
benefits are set by the States. The administrative funding 
comes from the Federal Government and grants, and let me just 
back up and say we don't disagree that the State UI and ES 
services are badly underfunded and that Congress should 
appropriate more resources for those programs. I don't think 
there is any disagreement in this, and we certainly don't 
disagree with that, but we do think that the firewall that 
exists between administrative funding that comes from the 
Federal Government in the form of grants as opposed to benefits 
that are at the State level provides a degree of insulation and 
protection that would be eliminated were administrative 
financing turned over to the States, especially if ultimately 
it is turned over to the States down the road without 
resources.
    Mr. McCrery. But the firewall does little good if the 
States are getting insufficient funding for the administrative 
purposes and they have to look to their employer community as 
my State has done for increased taxes to fund administrative 
expenses rather than doing some of the things you would like to 
do for benefits, perhaps part-time workers, most recent quarter 
earnings, all of those things. The State can't do that because 
they are having to raise taxes to pay for the administrative 
funding. So you have already got that competition. That is all 
I am trying to say. And, yes, it would still exist, but it 
exists now.
    And just for fun, I would like to examine one other part of 
your testimony. In your testimony----
    Ms. Owens. I hope I enjoy it as much as you.
    Mr. McCrery. Oh, I am sure you will. In your testimony, you 
talk about how--and I think you are referring to part-time 
workers particularly--how some workers are now paying for a UI 
system that they get no benefit from. What do you mean by 
paying workers that are paying for the system? How are they 
paying--they don't pay taxes for UI, do they?
    Ms. Owens. Well, I mean, I think actually Members of this 
Committee and certainly the Labor Department in some of its 
publications that I have read have taken--have argued that the 
premiums that are paid for unemployment----for the unemployment 
insurance programs in the States actually reflect lost wages to 
workers.
    Mr. McCrery. But it is the employer that is--the tax is 
exacted against the employer. Is that right?
    Ms. Owens. Sends them a check. That is right.
    Mr. McCrery. So it is not an explicit tax on the employee?
    Ms. Owens. It is not taken out of the employee's check.
    Mr. McCrery. But because the employer has to pay it, I 
mean, the theory is it comes out of the pockets of the 
employees?
    Ms. Owens. Right.
    Mr. McCrery. Well, wouldn't the theory hold true for, say, 
corporate income taxes?
    Ms. Owens. Is that the topic of today's hearing?
    Chairman Herger. The time is expired.
    Mr. McCrery. I just told you I was just having some fun.
    Ms. Owens. It was fun.
    Mr. McCrery. Thank you, Mr. Chairman.
    Chairman Herger. You are welcome. The Ranking Member from 
Maryland, Mr. Cardin, to inquire.
    Mr. Cardin. That is an interesting thought. I think, 
though, the point is that we don't differentiate in law between 
the premiums paid by part-time workers. Why do we differentiate 
on the benefits that they are entitled to receive? I think that 
is the point that many of us have been trying to make.
    First of all, I appreciate all of your testimony. I think 
all four of you have added to the record here, and I thank you 
for that. I regret that I think we have really lost ground over 
the last year. I thought a year ago we had more consensus than 
we do today, and Mr. McCrery is absolutely correct. We have a 
problem that we have to deal with, in that we impose--we were 
collecting too much revenue at the Federal level for what we 
are returning to the States, certainly on the administrative 
side. There is no question about that. We tried to do something 
about it.
    What concerns me is I think we are using the wrong numbers 
here. There is no disagreement that we should deal with the .2 
percent. There is no disagreement about that. It is the .4 
percent we seem to have a little different view as to what 
impact that will have. If we follow what Mr. Brock is saying, 
and I am trying to follow his testimony because you are the one 
who is going to have the bottom line responsibility. If the 
States impose that .4 percent--and I understand they may not be 
able to because of constitutional restrictions or political 
considerations, but if they impose the .4 percent then what Ms. 
Owens is saying, some States are going to be worse off than 
they are today under the current system as far as recouping 
their administrative costs. It is going to be different per 
State, and Mr. Blankenburg's concern about reducing the overall 
tax by .6 percent is not going to happen. It is going to only 
be a .2-percent reduction, which is nothing to be embarrassed 
about. The $14 we save per employee is still important to be 
done, and we should do it, but I think we should use the right 
numbers, and I think it is $14, not the other numbers we are 
using per employee, because we assume that the administrative 
burdens are going to be met and the taxes are going to be 
imposed locally in order to deal with it.
    My concern is it might not be enough, and that is why I 
come back to the stakeholders, and Mr. Yarbrough, I appreciate 
your response to Mr. McCrery. You did a great job, and, of 
course, the UWC was at the table and was part of the process, 
as was the local government people, as was the AFL-CIO. I think 
the NFIB came later in the stages in the process and never did 
agree on the agreement. I accept that.
    But there was an agreement reached by the stakeholders, and 
it was not easy, because we had a history, a long history on UI 
of not being able to even sit at a table let alone reach an 
agreement on what we should do as far as Federal policy is 
concerned, and I think, Ms. Owens, you expressed it correctly, 
and so did Mr. Yarbrough. Nobody was totally happy with that 
agreement. There was--you had a give and a take. That is what 
usually happens on an agreement. You are not totally happy, but 
we were able to get the permanent reduction of the tax, which 
was important.
    We were able to get the administrative costs funded so, Mr. 
Brock, you knew how to--you are right. You need a reliable 
funding source, and that is what the stakeholders' agreement 
gave you, a reliable funding source. It is not reliable if you 
have to wait every year for the appropriations of this 
Congress, in all due respect. That is why there is risk in what 
we do here. If you have it on the mandatory side, because we 
are collecting the revenue, we have the money, it should be 
mandatory spending. I disagree with the Administration. If we 
collect the money for that purpose, we should return it to you 
for that purpose and you should have the reliable funding, and 
that was part of the stakeholders' agreement, which I thought, 
by the way--Mr. McCrery thought was a pretty good idea at least 
a year ago, that part of the overall agreement.
    And of course we get to the issue that Mr. McCrery has 
difficulty with, and that is trying to deal with people who are 
trying to pay according to the rules. They are working. Many of 
these people come off the welfare system, and many of these 
people are low-wage workers. Many of these people don't have 
the long wage history that more seasoned workers have had, and 
now they are coming off the employment rolls because of a 
recession, and they are not qualifying for unemployment 
benefits. So we wanted to do something--and a large percentage 
are women, and we wanted to do something about it. And the 
stakeholders amazingly 18 months ago recognized that as an 
issue, before we got into the recession as an issue, and we 
were able to work out the politics between State flexibility 
and national policy, and I applaud you for that.
    I happen to believe in State flexibility, but I think this 
is one area that we should act at the national level. So you 
were able to reach an agreement. So I don't think it is fair to 
say that we didn't have an agreement 18 months ago. We had an 
agreement 18 months ago, and that agreement was brought to 
Congress, and there were people who were unhappy with parts of 
it, but collectively you said don't pull it apart. Keep it as a 
unit, keep it together, and we will keep our coalition 
together. And true, there were some elements that were opposed 
to it, such as the NFIB, and you were. There is no question 
about that. But the many groups within the business community 
supported it, and my regret is that we have lost a year, and 
now it looks like we may not get anything accomplished.
    Chairman Herger. I thank the gentleman. Now would the 
gentlelady from Connecticut, Mrs. Johnson, wish to inquire?
    Mrs. Johnson. I think it is imperative that we get 
something done, and I don't think we can let the perfect be the 
enemy of the good. We need to do what we can get agreement on.
    Mr. Blankenburg, one of the reasons that consensus of the 
other group failed was because small business was not at the 
table, and so there wasn't any ability by that group to talk 
through some of the problems that have a unique and heavy 
impact on small businesses. I mean, certainly the urgency of 
the administrative reforms you point to were something we all 
understand and can all agree to. I think the concerns about 
whether the funding is going to be there through ups and downs 
is something that we can address when we get additional 
information back.
    And I absolutely agree that States are going to continue to 
set benefits and benefit levels, whether you like it or not. We 
are not going to change that in this environment this year and 
maybe not for a long time. We didn't change that under the 
Democrats, and the likelihood of changing it now--so let us not 
let that impede progress, but this issue of part-time 
employment is something that is very important to small 
business. You need smart, educated women who need to take time 
off to raise their kids to be willing to work half-time and as 
things get worse in the future in terms of the balance between 
the number of workers and number of retirees, you are going to 
need that even more. So we need to look at what is the criteria 
for permanent part time. How long could it last? It doesn't 
have to be mysterious, but if we could just do a demo, if we 
could do something to encourage States so that we would get 
better information. The States that have done this have not 
seen an increase in cost.
    So I think there are a couple of issues here that are 
particularly relevant to contemporary society, to our goals as 
a society of family strengthening, as well as to appropriate 
compensation to people who are unemployed and unemployed under 
certain circumstances for a good reason that we do need to 
tackle.
    And then I think the other thing--and I don't know--I was 
just talking to the staff about this--there are terrible 
jurisdictional problems here, because really the system was 
constructed for a whole different era, and I think some of the 
questions of my colleagues that pointed out what percentage of 
those who are unemployed this system actually serves is a case 
in point. But we are not going to change the fundamental 
structure right now, but we could--we may be able to think of 
some way that under this rubric we can remind States that in 
administering we are looking not just for you to administer the 
delivery of the check. For too long that was catastrophic in 
the area of welfare. We need for you to deliver a check 
accompanied by services, and those services have to be services 
small employers can depend on, so you can depend on, if you are 
getting something from the employment services, that it is 
going to be valid.
    One of the queer things that has happened, whether you like 
it or whether you don't--and I think with all due respect, Ms. 
Owens, your testimony doesn't necessarily take into account 
what we have learned through the job placement programs we 
developed under welfare. We have under that program developed a 
much more responsive relationship between the job placers and 
the employers, and the old unemployment system employers don't 
even participate in. They don't trust them so they don't look 
at their rosters, they use temporaries instead of. The growth 
of temporary employment services is a terrible condemnation of 
our old system.
    So there are very big issues in how America helps people 
who are unemployed and helps people who need to get reemployed 
and small business has to be at the table, but I can't believe 
that through this bill there isn't some way we couldn't 
encourage States to integrate their unemployment services for 
the unemployed and for people coming off of unemployment 
lifestyles, like welfare or out of prison.
    I mean, there is just so much to be done that we cannot 
lose this opportunity to fix what we know is a problem, we know 
is causing big trouble. And maybe to at least put in place some 
demos or whatever we can do to move toward a system that 
legitimately recognizes people who need to work part-time 
because of their other responsibilities they carry or 
disabilities they carry--we tried to do this in the Ticket to 
Work bill. We tried to do that. It didn't work. We haven't got 
that far. We need to look at the big issues and try not to get 
ourselves snarled down and prevent a step forward.
    Now, solvency is a big issue, and I agree with that, but I 
do ask you to all work with us to be sure we accomplish 
something this year, because every year matters, and I don't 
care who is the President or who is the majority. They are 
going to be closely balanced for a number of years to come and 
we are going to have take one step at a time to make real 
progress in America for working people. So I just hope we will 
all work together to get something done together this year on 
this.
    Thanks.
    Chairman Herger. I thank the gentlelady. Now the gentleman 
from Michigan, Mr. Levin, to inquire.
    Mr. Levin. You know, in a sense I will pick up from where 
Mrs. Johnson left off. I guess you noticed some impatience in 
my questions, and I do have that. I was going to, Mr. Herger, 
pull out $4, since you pulled out $1. I think is what Michigan 
got back in 1999 for--let me do this first. This is what we got 
back in 1992 for every dollar we put in, and I am very 
skeptical that under this proposal we would have the funds to 
do that. I just don't believe it, especially if we have an 
extended benefit change and these other changes.
    But let me just say something else, indicating my 
impatience. I don't see a ghost of a chance that this proposal 
can be adopted, the Administration proposal. If the decision is 
to try to put it through the House, maybe you can do that. We 
will have a huge debate, but there is no chance I would think 
it can pass the Senate. And essentially what we are going to 
say to you, especially those of you who support this or anybody 
else, it is the status quo all over again. It is where we are 
going to be, and it is sad. We have these trust fund monies. 
There is agreement there has to be more put forth for 
administrative expenses. Everybody agrees on that, and we are 
going to be stuck right where we are. Nothing is going to 
happen. And some of those who support this proposal, whatever 
you want to call it, have been--that is not true of everybody 
on this Committee--the major opponents of more appropriations. 
It is not true of everybody on this Committee.
    So the institution that would be considering this is the 
institution that has helped to create this problem and that 
could solve it by moving nonadministrative expenses. And I kind 
of smile, Mr. Brock, when you say about the small State 
supplement, could Congress and the Administration accept it as 
mandatory spending? I mean, we haven't been willing to 
appropriate moneys, and to talk about mandatory expending for a 
piece of this I think is a dead end. So if we want another dead 
end, we will follow this path. I think it is a terrible 
mistake, and to Mr. Blankenburg, I don't know how much you have 
lobbied this Congress to get moving on administrative expenses. 
My guess is not much. I won't put you on the spot. I don't want 
to put anybody on the spot.
    Mr. Blankenburg. I will be happy to tell you. Two years. I 
worked on the Hill for 6 years.
    Mr. Levin. You worked on the Hill for 6 years? So--but I 
don't want to put any organization on the spot. I don't know 
how much NFIB has used its efforts to try to get this Congress 
to use moneys that were set aside for a certain purpose. We 
know that these trust fund moneys, like other trust fund 
monies, were used for many years to hide a larger deficit, and 
we need to face up to it.
    And let me just say in terms of trusting the States, we are 
going to get into a huge argument, because I think the record 
of many States in terms of preserving moneys for unemployment 
comp these last few years in many States has been miserable. 
And now with a recession, they are coming here and saying 
extend unemployment benefits when they have diminished the 
funds available in some cases way below what is recommended by 
the Labor Department, way, way below.
    So we are going to end up having this deep argument about 
this proposal, and administrative funding is going to stay just 
where it is, and so I thought last year, Mr. McCrery, you and 
others--I was less a participant--tried to move this ball 
along. And now we are essentially changing the goal post 
dramatically, and if anybody thinks this will lead to 
legislation, I think they are wrong. So we need to decide, is 
there another course, and I hope there is.
    Chairman Herger. I thank the gentleman from Michigan. Now 
the gentleman from Kentucky, Mr. Lewis, to inquire.
    Mr. Lewis. Thanks, Mr. Chairman. Excuse me. Mr. Brock.
    Mr. Brock. Yes, sir.
    Mr. Lewis. What do job seekers lose today by there not 
being adequate funding for the administration of UI benefits 
and employment service programs, and how will this proposal 
improve services for those laid off employees who are looking 
for work?
    Mr. Brock. Yes, sir. Job seekers--obviously I don't mean to 
be trite or flippant--they are looking for a job. They are 
wanting someplace where they can come, where employers have 
listed their jobs, where there are individuals in fact working 
with the employers in overall job development to be sure that 
they get the qualified workers that they need.
    Job seekers, right now I--this is very closely akin to it, 
and I will refer to my own State here in this regard, but in 
years past we talked about the long unemployment lines. Many of 
our States, Oklahoma being one of them, have gone to telephone 
call centers today so you don't see those lines, but what you 
would see if you were looking closely, you would see people--
telephone lines that are clogged in many cases. Now, this isn't 
true in every State, but by and large it is true in a lot of 
them. You would see people that are out of work through no 
fault of their own simply wanting to get benefits to get them 
by as a bridge until they can get their next job, holding for 
40, 50 minutes, whatever. And I realize--when we put ourselves 
in their position, that is a very difficult position to be.
    But overall with adequate funding of the administration of 
this whole program, we would see the program working as it was 
originally intended to work, that people would be off work for 
far less time than they are today, we would be able to help 
them get back quicker, we would be able to help employers get 
the workers that they need much quicker. It would just be a 
system that is operating the way that it was originally 
intended.
    Mr. Lewis. If the program was fully funded, would you be 
satisfied with the system, how it works?
    Mr. Brock. Well, generally speaking, I--and here again in 
this case, I am speaking for the membership of the national 
organization that I am the President of. I believe, yes, 
basically we would be. I mean, obviously nothing is perfect, 
but in general that is our greatest concern right now, is just 
being able to keep up with the demand.
    Again referring to Oklahoma, if you don't mind--I mean, I 
am more familiar with these statistics--our initial claims for 
unemployment were up 50 percent prior to September the 11th. 
September the 11th has just dumped that additional load on us, 
and we are trying to keep up. We are getting calls from our 
local legislators and others asking ``how come I can't get 
through to file my unemployment claim,'' and we try to get the 
word out and let people know to be patient. No one has missed a 
check yet, but it is just the inability to be able to keep up 
with the demand, and I only see it getting worse.
    Mr. Lewis. Thank you.
    Chairman Herger. I thank the gentleman from Kentucky. Now 
the gentleman from Michigan, Mr. Camp, to inquire.
    Mr. Camp. Thank you, Mr. Chairman. Mr. Yarbrough, you 
mentioned in your testimony that employers are overtaxed 
because of some of the shortcomings in the unemployment 
compensation system, and you mentioned the concept of quadruple 
taxation. Can you tell me what you mean by that and what might 
be an example of that?
    Mr. Yarbrough. Well, I guess the first tax is obviously the 
two-tenths. That is $14 that we are having to pay, which is not 
being returned to the State for UI administrative funding. The 
second tax is the fact that our State unemployment taxes are 
increased because we do not receive enough UI administrative 
funding from the government. The third tax is that we are now 
paying temporary agencies to refer workers to us, because we 
are not receiving enough referrals from our UI offices. The 
fourth tax is that we have had to open up our own continued 
employment centers to try and find enough workers.
    So what has happened is we are having to go out and search 
four different times, where in the late eighties, early 
nineties, when the system was up and viable and fully funded, I 
had liaison officers walking to me from the employment service 
saying, these are the people that we have available, these are 
the tax credits that you could take advantage of, and these are 
the folks that we have ready to come to work for you.
    And so since now the funding has been flat-lined out of 
here, all those things and all those services have gone away. 
The State UI offices are also no longer even certifying that 
our workers are eligible to work. But, I just want to say that 
there are four different levels of taxation.
    Mr. Camp. Ms. Owens, you mentioned the lack of benefits for 
workers who were formerly employed. And the States have the 
option of providing people part-time workers' UI benefits at 
this point, don't they?
    Ms. Owens. Yes.
    Mr. Camp. And I think several States do, as many as 15; is 
that your understanding?
    Ms. Owens. That is about right. If I might interrupt just a 
second. One of the things that I think was surprising to worker 
advocates was that during the boom time of the nineties, 
especially the last few years of the nineties when, as I said, 
we had almost full employment and many of the State trust funds 
were flush, States did very little to expand coverage or 
increase benefits and, in fact, they cut taxes. And one of our 
concerns is that once States have the obligation of covering 
administrative financing costs as well as benefits, there will 
be even less incentive to expand coverage. So this proposal 
makes it that much less likely that States will on their own 
initiatives make these changes.
    Mr. Camp. About 15 States have elected to offer part-time 
benefits; is that correct?
    Ms. Owens. That is correct.
    Mr. Camp. And no State withdrew that offer in the nineties.
    Ms. Owens. No. Not that I am aware of.
    Mr. Camp. That has been in the States' prerogatives since 
the inception of the program, has it not, since the thirties?
    Ms. Owens. I would assume that is the case.
    Mr. Camp. And I am just asking, you are not suggesting in 
your testimony that the Federal Government take over and tell 
the States whom to cover, are you?
    Ms. Owens. Not entirely. We probably disagree as to what 
might be appropriate Federal standards versus State standards, 
and we do think that while there are matters that certainly are 
appropriately left to the States, that this is a national 
economy and there are some more decisions the Federal 
Government should make. Unlike most European nations that run 
national unemployment systems, many decisions most important to 
workers here are left solely to the States.
    Mr. Camp. And I would like to hear from some of the other 
representatives on that point. Mr. Yarbrough.
    Mr. Yarbrough. I did want to add that several States have 
enacted additional UI taxes to help compensate for the lack of 
administrative funding they are receiving from the Federal 
Government.
    Mr. Camp. For the Federal Government to do that in some 
sense, there would be a mandating of tax hikes on States to 
provide benefits that aren't provided.
    Mr. Yarbrough. Working on the Governor's advisory board at 
home, labor and management sit down with the public and work 
out these issues before we go to the legislatures with what we 
need to be seeking and what we need to be doing. That way we 
get good local support on what takes place. That is the 
problem, we continue to come to this group and we have seen no 
reform, no dollars come back. We brought several proposals. 
Everybody says we have got to do something but everybody wants 
to wring their hands, and we need the dollars back. People are 
needing the service.
    Mr. Camp. Thank you. Mr. Blankenburg, do you have any 
comments?
    Mr. Blankenburg. Following up on what Chuck said, these are 
situations that are worked on at the State levels whether to 
cover part-timers or not. And just to emphasize your point, by 
having the Congress mandate it, you are throwing the whole 
balance of the system out of whack.
    Mr. Camp. Thank you. Thank you, Mr. Chairman. I see my time 
has expired.
    Chairman Herger. Thank you, Mr. Camp. Now the gentleman 
from Oklahoma, Mr. Watkins, to inquire.
    Mr. Watkins. Just kind of an editorial comment. I notice my 
colleague, Mr. Levin, has left. But I would agree with him 
about legislation going to a dead end because that other body 
has become kind of a graveyard over there. We passed very 
progressive steps to try to stimulate the economy three times, 
and we moved out front on several other issues. All have fallen 
by the wayside when it got over to the Senate. I want to 
acknowledge that being an obstructionist, though, does not 
provide much leadership. It is easy to do. You can always board 
up the barn and head to the house and say--but that doesn't 
solve the problem. And we have got to solve problems. And it 
becomes a very discouraging situation sometimes when we try to 
work through things and they are not resolved.
    Let me just ask, in Oklahoma, I know--we all are kind of 
short-changing the refunds to the States, so to speak, on 
administrative costs, and I noticed that we have only been 
getting about 41 percent back, and there are problems that can 
come about, but some people say there are going to be certain 
program purposes dropped. But let me ask you in the way of a 
question, what is in jeopardy in Oklahoma if we don't--and what 
can you do or what would you do if you got 100 percent? That is 
a hypothetical question there.
    Mr. Brock. Congressman, I am not aware of programs 
particularly being dropped per se, at least nothing comes to my 
mind at the moment. But the problem is that it just continues 
to choke more and more the delivery of these services. For us, 
for example, in Oklahoma, it would mean that we would have more 
local offices that we are having to close and consolidate 
offices just simply because it is a matter of the funding that 
we receive.
    One thing that Chuck mentioned earlier just brought to my 
mind, our legislature, and rightfully so, for several years has 
given pay increases to our State employees. These are State 
employees but they are coming from a federally funded source. 
We just have to eat that. Every time they give a 3, 4, 5 
percent salary increase, that is just that many fewer people 
out there.
    Mr. Watkins. Is 100 percent of that increase picked up by 
Federal?
    Mr. Brock. We are 100 percent Federally funded except we 
are one of those States, and the report that I gave to you a 
few moments ago, that about $1.2 million or so from our penalty 
and interest, we use that to pay about 20 salaries also. That 
money is over and above what employers are already paying for.
    Mr. Watkins. That is kind of a reverse mandate.
    Mr. Brock. In essence, it is.
    Mr. Watkins. The State says we are going to require the 
feds to pay more money.
    Mr. Brock. That is correct. And I suspect that the same 
thing is true in all of the States that I represent and that 
they have to make it up somewhere.
    Mr. Watkins. We have 77 counties in Oklahoma. How many 
offices do we have?
    Mr. Brock. We have 40.
    Mr. Watkins. Some people have to drive 50 miles or more if 
they know----
    Mr. Brock. And this is where we are trying to economize 
through technology, for example. Taking unemployment insurance 
claims by telephone as opposed to maybe 40 or 50 minutes 
waiting on the telephone. That is better than having to drive 
50 miles to file an unemployment claim. So there are some 
economies as a result of technology and so forth. This is the 
people business and we need to be able to lend people the 
personal care and assistance that they need, not only in times 
of crisis and job loss and what-have-you, but for those who 
have a job but want a better job. We need to be able to help 
them, too. And as a result, we just end up bottom fishing, if 
you please. We just end up doing the bare minimum just to get 
by from day to day.
    Mr. Watkins. In Oklahoma, our per capita income is 20 
percent of the national average, and unemployment benefits, I 
guess, are likewise.
    Mr. Brock. Well, I am not looking at it exactly that way. 
We pay our unemployment benefits based on a percentage of our 
average income in Oklahoma. So it is comparable. It fits our 
specific situation. Now how that relates to the national 
average as far as benefits are concerned, I would have to do a 
little research on that.
    Mr. Watkins. Well, I share a concern and look forward to 
trying to find some solutions and look forward to working with 
you and other States in trying to find some solutions. And I 
thank you very much. I know it is a long trip up; I don't know 
when you got to town but----
    Mr. Brock. I got a better night's sleep than you did.
    Mr. Watkins. Thank you so much for coming.
    Chairman Herger. Thank you very much, Mr. Watkins. I want 
to thank each of our panelists for very interesting and helpful 
testimony. We seem to be unanimous in recognizing that we have 
a very serious problem and I believe our constituents 
throughout the Nation expect us to correct this. Certainly part 
of the problem, and it was just brought out, I believe, by you, 
Mr. Brock, is that the employer--going back to something we had 
stated before, but with a visual of that--is paying a dollar. 
The Federal Government is taking that dollar and putting on 
average 54 cents into a trust fund that is not being used. On 
average 46 cents--in your case, Mr. Brock, only 41 cents--is 
actually getting back to the States. Some 14 States here 
actually have had to inflict an additional tax to help meet 
State costs. We can and should and must do better than this, 
and hopefully we are going to do that.
    Mr. Watkins. Jon, I am leaving after this year, and I am 
going to become unemployed.
    Mr. Brock. That is not through no fault of your own.
    Chairman Herger. I want to thank everyone involved, and 
thank you, Mr. Cardin, for a very informative hearing. Thank 
you very much. This hearing stands adjourned.
    [Whereupon, at 2:10 p.m., the hearing was adjourned.]
    [A submission for the record follows:]

  Statement of the American Federation of State, County and Municipal 
                           Employees, AFL-CIO

    The American Federation of State, County and Municipal Employees 
(AFSCME) submits the following statement on President Bush's 
Unemployment Administrative Financing Reform Initiative for the March 
5, 2002 hearing record of the Human Resources Subcommittee of the House 
Ways and Means Committee.
    As a participant in the multi-year unemployment insurance (UI) 
``stakeholder dialogue,'' AFSCME is deeply disappointed that the 
current Administration has abandoned the fundamental premise of that 
process: that unemployment insurance reform can best be achieved when 
consensus is sought among the key stakeholders in the system. The 
consensus reform plan reached in June 2000 represented a remarkable 
achievement at the federal level. Although stakeholder negotiations 
occur at the state level, never before had such a process occurred in 
Washington, much less produced a consensus.
    The stakeholder package was a fair and balanced compromise among 
competing interests. It contained something of importance for each 
party, but not every change sought by the participants. For workers, it 
required that states implement an alternative base period and cover 
part-time employees and provided federal funds to pay these benefits. 
For states, workers and employers, it provided increased and dependable 
funding for state unemployment insurance and employment service (ES) 
operations. For employers, it repealed the federal unemployment 
insurance (FUTA) surtax.
    Unfortunately, opposition by some business groups at the end of the 
106th Congress stopped consideration of this package. Now the 
Administration has sent to Congress a one-sided plan that abandons the 
progress made during the stakeholder process.
    The Administration plan would phase down the federal FUTA tax by 75 
percent in five years. It would shift the responsibility for UI and ES 
administrative financing to the states over the five-year period, 
leaving the federal government with responsibility only for the 
federal-state extended benefits program and the loan account and 
transferring to the states a new annual financial responsibility of 
over $3.5 billion.
    This devolution plan can in no way be regarded as a comprehensive 
employment security reform. It gives employers a $36.5 billion tax cut 
over 10 years, but it does nothing to address the need to expand the 
percent of unemployed workers receiving unemployment benefits. In 
calendar year 2000, this ``recipiency rate'' was only 38 percent 
nationally and ranged from a high of 73 percent in Connecticut to a low 
of 16 percent in New Hampshire.
    The absence of any reforms to address recipiency rates is not just 
disappointing. It also is alarming. The low percent of the unemployed 
who receive benefits compromises the program's countercyclical 
effectiveness and has rendered the federal extended benefits (EB) 
program increasingly less relevant. Because the EB program is triggered 
by the insured unemployment rate (IUR), which measures the number of 
individuals who receive basic benefits, increasingly it fails to 
reflect the nation's overall pattern of unemployment. Thus, reducing 
the IUR from five percent to four percent, as proposed by the 
Administration, is not a satisfactory solution to improving the 
extended benefits program. State benefit policies also must be 
modernized to reflect the changing composition of the workforce, 
including the growth of low-wage, temporary and part-time employment.
    Worse yet, we believe that the Administration's devolution plan 
will harm workers and further weaken this important safety net program 
in several ways.
    First, it will create new downward pressure on state benefit 
policies. This is because the proposal eliminates the current 
``firewall'' between administrative financing, which is a federal 
responsibility, and benefit financing, which is a state responsibility.
    Currently, state policymakers balance two competing pressures, 
those from employers to minimize taxes and those from worker advocates 
to improve state benefit policy. The devolution plan will add a third 
claim on state taxes and resources--the need for administrative 
funding. Inevitably, employer pressure to keep taxes down, combined 
with state needs to maintain an adequate administrative structure, will 
lead to cuts in benefits or rejection of much needed worker 
improvements.
    There is very good reason to believe that state benefit policy will 
be caught in this vise. Despite the 1990s economic expansion, states 
failed to strengthen their benefit policies while employers reaped 
substantial benefits. Between 1994 and 2000, for example, tax decreases 
took over $47 billion out of the UI system while recipiency rates 
hovered at an all-time low of about one-third of the unemployed.
    The Bush devolution plan also undercuts the primary enforcement 
mechanism for federal protections for workers. Currently, as a 
condition of receiving federal administrative grants, states must 
maintain proper and efficient administration, pay benefits accurately 
and promptly ``when due'', and provide a fair and impartial hearing 
process. Without any federal funding of state operations, the 
appropriateness of federal standards for the use of state funds will 
certainly be challenged. Furthermore, it is highly doubtful that the 
federal government would raise employer taxes by eliminating the tax-
offset credit in nonconforming states as the Administration has 
proposed.
     AFSCME strongly believes that there is an administrative 
underfunding crisis. Severe underfunding means workers do not get 
benefits paid in a timely fashion and do not get the reemployment 
services they want and need. Furthermore, underfunding has led states 
increasingly to rely heavily, if not exclusively, on telephone claims 
systems or other electronic methods, which do not adapt easily to 
sudden surges in volume or to the complexity of disputed claims. In 
addition, because states are not fully reimbursed for their workload, 
it is possible that federal underfunding may constitute another 
rationale for not improving state benefit policies to cover more 
unemployed workers.
    However, even as a solution to this problem, the devolution plan 
falls short in our view.
    In the first place, although the Administration intends to transfer 
$14 billion from the federal trust fund into state trust funds during 
the five-year transition period, there will be no federal 
administrative funding after that. This means that states will have to 
rise over $3.5 billion annually in new state revenue simply to make up 
for the loss in federal funding.
    The Administration maintains that, because federal FUTA taxes will 
be reduced by six-tenths of a percent, states should be able to finance 
their administrative costs without employers experiencing a tax 
increase. There are several fallacies to this analysis.
    Employers do not regard two-tenths of the six-tenths as a source of 
revenue for the system at all because they consider it an outdated and 
unnecessary surtax that should have expired long ago. As a result, 
states could only be able to reclaim four-tenths without raising 
employer taxes beyond what employers might be willing to accept.
    In the aggregate, the four-tenths tax would have raised $3.5 
billion in FY 2001. That is only about $300 million more than the FY 
2001 federal appropriation, a level which the states have said is 
inadequate. The amount is actually less than states have been receiving 
during the current recession.
    For individual states with high recipiency rates, the picture is 
worse. For example, Connecticut's federal administrative grant was $57 
million in FY 2001, while a four-tenths tax on its employers would have 
raised only $44 million. Other states, such as Pennsylvania, 
California, and Michigan, would be in the same situation.
    The current administrative financing system more accurately 
reflects state workload needs and is countercyclical in nature. It also 
pools risk nationally. First, administrative funds are allocated among 
the states according to their share of UI claimants and employer taxes 
collected. Second, there is a federal mechanism that automatically 
releases additional administrative funding if national unemployment 
rises above expected levels and the number of claimants rise. Both of 
these features would be eliminated if the federal administrative 
financing responsibility ends. Individual states could not easily 
replicate these features.
    The fact that a four-tenths unemployment tax would not have yielded 
as much as the current system has sent to the states during the current 
recession graphically demonstrates the bind states in which may find 
themselves. Unless the states build adequate reserves during economic 
expansions, they will not be able to increase their administrative 
resources easily when claims surge during recessions. That means they 
may have to borrow from the federal loan fund at six percent interest 
(or whatever the rate at the time might be), thus unnecessarily 
increasing the cost of their operations.
    The track record of the states does not inspire confidence that 
they will handle this new financial responsibility prudently in all 
cases. As noted earlier, states were much more eager to cut taxes than 
strengthen their benefit systems even when a robust economy would have 
made doing so much easier. Furthermore, some states have mismanaged 
their benefit trust funds by failing to build up adequate reserves and 
choosing instead to give their employers tax cuts. Most notable are New 
York and Texas, which will be borrowing $1.5 billion from the federal 
government because their benefit trust funds are running out of money.
    The essence of the Administration's plan is to cut employer taxes 
and to pass the responsibility for administrative funding off to the 
states. While it may be a ``new balance,'' it is no meaningful solution 
to the problem. A far better solution would be simply to request 
additional appropriations for FY 2003. Even better would be a return to 
the stakeholder framework, with its administrative funding mechanism 
that would release adequate funds based on workload as a mandatory 
expenditure. For FY 2003, it would guarantee states an additional $1 
billion in federal appropriations, instead of giving them the 
``opportunity'' to levy a four-tenths increase in state employer taxes 
that would raise only $300 million more.
    The release of $8 billion in Reed Act funds as part of the economic 
stimulus bill has given states a unique opportunity to address the 
administrative underfunding problem and weaknesses in state benefit 
policies. The Reed Act money should give the states ample resources for 
many years to come if they use it wisely. In our view, it obviates the 
need for the Administration's misguided devolution plan. AFSCME 
strongly urges the Committee to monitor closely how states use their 
Reed Act funds and to refrain from considering the Administration's 
proposed administrative financing proposal.

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