U.S. GOVERNMENT PRINTING OFFICE

60–840 WASHINGTON : 1999

H.R. 3684, THE ‘‘EMPLOYMENT SECURITY

FINANCING ACT OF 1998’’

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

JUNE 23, 1998

Serial No. 105–85

Printed for the use of the Committee on Ways and Means

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(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HUMAN RESOURCES

E. CLAY SHAW, JR., Florida, Chairman

DAVE CAMP, Michigan

JIM MCCRERY, Louisiana

MAC COLLINS, Georgia

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

J.D. HAYWORTH, Arizona

WES WATKINS, Oklahoma

SANDER M. LEVIN, Michigan

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

WILLIAM J. JEFFERSON, Louisiana

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

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

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

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

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

is further refined.

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C O N T E N T S

Page

Advisory of June 16, 1998, announcing the hearing ............................................. 2

WITNESSES

U.S. Department of Labor, Grace A. Kilbane, Director, Unemployment Insurance Service, Employment and Training Administration ................................. 12

American Federation of Labor and Congress of Industrial Organizations,

Marc Baldwin ....................................................................................................... 87

Chrysler Corporation, and UWC, Inc., John P. Davidson .................................... 81

Cupp, Hon. Robert R., President Pro Tempore, Ohio State Senate .................... 45

Florida Department of Labor & Employment Security, Douglas L. Jamerson .. 56

New Hampshire Department of Employment Security, Joseph Weisenburger .. 51

Norwood, Hon. Janet L., Urban Institute .............................................................. 64

USX Corporation, William Petz, Jr ........................................................................ 73

SUBMISSIONS FOR THE RECORD

American Federation of State, County and Municipal Employees, statement ... 102

Coalition for Employment Security Financing Reform, statement and attachments ..................................................................................................................... 107

Ohio Grocers Association, statement ..................................................................... 116

Service Bureau Consortium, Roseland, NJ, statement ........................................ 118

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H.R. 3684, THE ‘‘EMPLOYMENT SECURITY

FINANCING ACT OF 1998’’

TUESDAY, JUNE 23, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HUMAN RESOURCES,

Washington, DC.

The Subcommittee met, pursuant to notice, at 3:10 p.m., in room

B–318, Rayburn House Office Building, Hon. E. Clay Shaw, Jr.

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

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Chairman SHAW. The Subcommittee on Human Resources will

come to order.

Keeping the Nation’s unemployment insurance system operating

effectively is important to more than 100 million employees, to millions of employers, and to the strength and vitality of the United

States’ economy. Yet, despite this critical mission, today less than

60 cents out of every dollar in Federal taxes collected to run the

unemployment insurance system is used for its intended purpose,

and that is to administer benefits and get the jobless back to work.

Florida’s Labor Secretary, Doug Jamerson will testify that in

1996 about 35 cents per dollar in Federal taxes was returned to the

State of Florida. In fact, the difference between Federal unemployment taxes paid by Florida businesses from 1991 to 1996 and what

my State received back from Washington totals more than $1 billion.

Florida is not alone. Nationally, over the next 5 years, more than $10 billion in Federal unemployment taxes will probably get lost in

Washington instead of helping jobless workers. When jobless workers don’t benefit from billions of dollars in unemployment taxes collected specifically for them, something is terribly wrong.

That’s one reason why working with a bipartisan coalition of employers and 27 States, I introduced H.R. 3684, the Employment Security Financing Act of 1998. This legislation’s goal is simple—to

get jobless Americans back to work sooner.

H.R. 3684 is endorsed by the United States Chamber of Commerce, the National Association of Manufacturers, the National

Restaurant Association, and even the National Broiler Council.

Now, if the Nation’s fried chicken lobby is on our side, who can possibly be against us at this point? [Laughter.]

For recipients, little would change; benefits would remain set by

States as part of a national system; small States would retain extra

Federal payments; and extended benefits and special assistance for

veterans and the disabled would continue. But States would collect

all taxes that support the system, cutting business paperwork and

tax filings in half. More employment services would help the jobless find work sooner. And Federal unemployment taxes would fall

with the end of the .02 percent surtax, which its defenders label

‘‘temporary’’ even though it has been around for the last 22 years.

This Subcommittee should consider ways to improve the unemployment system to benefit workers, employers, and especially jobless Americans. But we have to acknowledge the heart of the current problem—a Washington-designed system that taxes too much

and helps jobless Americans too little. The funds are there. But as

with welfare reform, we need to repair an outdated system so it

works better for jobless Americans and for their families.

[The opening statement follows:]

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Chairman SHAW. Now, I will recognize Mr. Levin for his opening

statement.

Mr. LEVIN. Thank you, Mr. Chairman. Let me start by saying

that I agree that we need to reform a system, the Nation’s unemployment compensation system that was enacted over 60 years ago

to help provide assistance to laid off workers. The strength of today’s economy provides us with a good opportunity to begin making

some of these changes or to put it another way, to fix the roof while

the sun is shining.

However, I have deep concerns that the legislation that’s being

proposed, H.R. 3684, would do much more harm than good. Rather

than fixing the roof, it might put a huge hole in it. First, the legislation ignores many of the current problems faced by our unemployment comp system, such as the decline in the number of unemployed Americans receiving UI, a figure that I think is shocking,

and the threatened solvency of the State unemployment trust

funds. To remain silent when the percentage of workers qualifying

for unemployment compensation has declined from nearly 50 percent in the 1950’s to about 35 percent today is a mistake; and to

ignore the fact that 22 States have insufficient reserves in their unemployment trust funds to weather a sustained recession is equally

unwise.

Second, the bill would create new problems for our unemployment comp system. For example, H.R. 3684 would eliminate the

current benefit for extended unemployment benefits, EB, without

proposing a reliable replacement. It’s true the legislation calls on

States to establish their own EB programs, but there is no enforcement mechanism on the Federal level to ensure they do so. This

could place dislocated workers in jeopardy during severe economic

downturns. And I might add that I think this is national, not only

a State problem because in times of downturn, people move from

one State to another.

Furthermore, H.R. 3684 could undermine the insurance principle

of shared risk, under which the current UI system pays States

based on their administrative workloads, not on the amount of

taxes paid in that State. Under this bill, it would not matter if one

State has an unemployment rate of 3 percent and another has an

unemployment rate of 10 percent.

I believe that we can build upon the current State/Federal partnership rather than ripping it apart. After all, unemployment is a

national problem requiring shared responsibility and oversight between the States and the Federal Government.

Therefore, along with Mr. English and Mr. Rangel, I have introduced legislation proposed by the administration to make improvements to the current unemployment comp system while still maintaining the State/Federal partnership. This legislation, H.R. 3697,

would help States voluntarily improve UI coverage among lowwage workers, encourage States to improve the solvency of their

unemployment trust funds, establish a more accurate and more equitable trigger for extended unemployment benefits, and provide

new supplemental funding to help States with their administrative

costs.

On this last issue, let me explain that our legislation would provide an additional $106 million in mandatory funding for State adVerDate 20-MAR-2000 12:18 Apr 14, 2000 Jkt 063431 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HEARINGS\60840 pfrm07 PsN: 60840
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ministrative expenses in Fiscal Year 1999, as well as additional

mandatory funding in subsequent years.

Let me also add in terms of Federal/State partnership, it seems

to me that we need to step back and to take an even broader look

at unemployment compensation in 1998. There’s been a lot of

change in recent years, perhaps in recent decades, as to the nature

of unemployment. Fewer and fewer people are temporarily laid off

and more and more are permanently laid off. And it may well be

that we need to look at ways to integrate unemployment compensation—or unemployment with training and re-training programs. If

we’re going to do that, I would think on a Federal/State partnership basis, that the notion of devolution could work against the

need to adjust unemployment—the response to unemployment as

it’s occurring in 1998 and 1999 as compared to 1978 or 1968.

Mr. Chairman, I look forward to hearing from today’s witnesses,

and to an open discussion about our unemployment compensation

system.

Thank you.

[The opening statement follows:]

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Chairman SHAW. Thank you, Sander.

Our first witness today is Grace Kilbane, who is the Director of

the Unemployment Insurance Service, United States Department

of Labor.

Welcome. We have your full statement which will be placed in

the record in full, and you may proceed and summarize as you see

fit.

STATEMENT OF GRACE KILBANE, DIRECTOR, UNEMPLOYMENT INSURANCE SERVICE, U.S. DEPARTMENT OF LABOR

Ms. KILBANE. Thank you, Mr. Chairman and Members of the

subcommittee, for this opportunity to testify before you today on

the Employment Security Financing Act of 1998. First of all, I

would really like to applaud the coalition and this bill’s objective

to both reform the funding for employment security, as well as to

increase the funding and the return on FUTA for the employment

security system.

However, we do have some concerns that we also would like to

share with you about this bill today from the administration’s perspective.

I also would like to commend you, the members of this subcommittee, for taking your time to look at these programs during

this good economy. This is the best time to look at the unemployment insurance program so that we’re ready if and when the economy takes a downturn.

In the interest of time, I would like to do two things today, one

is to summarize what our concerns are with this bill, and, secondly,

to present what the administration’s proposals are regarding these

issues.

First of all, the stated primary purpose of this bill, H.R. 3684,

is to remedy the insufficient administrative funds that are in the

system. The concern that we have is that the solution that is proposed to this major problem, which is to transfer the funds from

Congress to the States, does not guarantee the problem will be

fixed. Most State legislatures meet for only a portion of the year,

and six State legislatures meet biennially. There’s no guarantee in

this legislation that the States will be able to respond quickly to

economic downturns at the State level: either to unforeseen economic downturns or even those that are caused by large natural

disasters, which we have seen particularly in small States.

Transferring funding from Congress to States, too, has also

brought some concerns to some of our other agencies. Our Veterans

Employment and Training Service is concerned that States could

make decisions to not fund veterans’ programs with no guarantees

or requirements that they be funded. And our Bureau of Labor Statistics is concerned that there is no guarantee that the States

would be sufficiently funding these programs if they’re funded at

the State level—there’s some question about whether that remains

a Federal or State responsibility.

In addition to having the States appropriate funds instead of

Congress, the bill also transfers the responsibility for collecting the

Federal unemployment tax, or FUTA, from the IRS to the States.

We think that we need to take a close look at this because having

the States collect Federal revenue, and having their legislatures

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then appropriate Federal dollars, with no Federal requirements, no

guidelines, no standards, nor any kind of Federal requirements, actually flies in the face of the Government Performance and Results

Act, which Congress passed a few years ago in order to make sure

that we were spending Federal dollars wisely and achieving outcomes.

We would like to see other options considered in terms of how

to restructure the funding of this. For example, maybe the funding

should be totally switched to the mandatory side of the budget,

that’s where we pay benefits. We pay $22 billion a year of benefits

right now. Perhaps, the administrative dollars should be switched

there. Another idea that has been considered in the past is to create a permanent cap adjustment on the discretionary side so that

you could fund these programs based on workload, and when workload went up, you’d have sufficient funding to pay for it. A third

idea is that if there is a public policy—a good public policy reason

to transfer the administration to the States, that is, the States

being responsible for administration of these programs, then perhaps we should consider a State-based administrative tax, just like

a State-based benefits tax that the States would collect together

and keep a reduced FUTA tax for Federal activities that Congress

would still appropriate.

This bill basically restructures our current trust fund, and eliminates the three current Federal accounts and creates 53 specific

State accounts. In doing that, it creates a Federal administrative

account for Federal activities. It limits to Congress for appropriation to the Federal Government 2 percent of the Federal funds, or

the FUTA funds, collected. So the States keep 98 percent (including

2 percent small State set-aside) of the money and they give 2 percent to the Federal Government. This would produce right now

about $125 million a year. For the Department of Labor administration alone this year, it cost $195 million. Current Federal activities would be cut by 36 percent by this proposal.

Basically, the Secretary of Labor’s responsibilities stay pretty

much the same under this bill. Congress would be limited to only

the 2 percent appropriation. And, in addition, the 2 percent in this

bill would cover the IRS activities which would be an additional

amount of money, we’re not sure how much. Currently, it costs a

little over $100 million for the IRS but they wouldn’t be collecting

the taxes but would still be maintaining accounts. So this would

even further underfund Federal activities.

Under H.R. 3684, the Extended Benefit Program would be given

over to the States to be administered solely by the States. So the

whole Federal partnership—State partnership for extending benefits when the economy starts going down in certain areas or regions

would be eliminated. We would have no special funding mechanism

but for EB. Congress would be faced with enacting special compensation programs, extended unemployment compensation programs.

And if we look at our experience in the last recession, when Congress did this in the 1990’s, it cost $28.5 billion in Federal funds

in order to enact these programs, $12 billion of which was funded

by FUTA, which we will be eliminating in this proposal, and $16.5

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billion of which was funded by general revenue which had to be offset.

We also believe that this proposal weakens State accountability

for performance. The bill does require States to determine what

they want to achieve and then report annually to the Governor.

There’s no requirement that these be comparable State by State, so

we could look at the country and see what the performance is.

Finally, looking at this bill in an era of more and more multinational corporations and global economies, we just have to wonder

if it makes sense to reduce our ability to respond as a nation by

reducing our Federal and national roles.

In terms of the administration, we think that in order to enact

reform and strengthen the unemployment insurance program, we

need to address three key issues:

The first one is recipiency, which Mr. Levin referred to earlier in

his remarks;

Secondly, recession readiness; and

Finally, administrative funding, which is where we agree with

the overall objective of H.R. 3684.

If we could look at recipiency for a moment, and we do have

some charts over here, which I’ve also made available to you, copies

for the record, you can see that those able to receive unemployment

compensation have been steadily trending downward, or eroding

since the 1950’s. It used to be about half unemployed workers who

could get unemployment insurance. Now, nationally, about 36 percent can in 1990, and that’s what that chart shows you. In some

States, it’s under 25 percent, or only one in four unemployed workers receive benefits.

If we could look at the next chart, we know, and studies have

shown, that this downward trend in recipiency has negatively impacted the program’s ability both to help individuals with their economic stabilization during periods of joblessness, as well as the

economy. And what this chart shows you is that post-World War

II, which is about 1945 there on the chart, you’ll see that the squiggles, the up and down squiggles in terms of change in our Gross

National Product, were stabilized or smoothed so to speak. Before

that, the swings in our economy were much broader. And what

economists have agreed to is that the unemployment insurance program, as well as other fiscal activities that have been taken, have

in part contributed to smoothing out the economic cycles in our

economy.

The second goal is recession readiness and what we’re concerned

about there is during the last recession in this country, in the early

1990’s, only nine States triggered on to extended benefits, which

caused Congress to act with a national program for all States.

Also, we’re concerned about State trust fund levels, or solvency

levels. These levels are below where they should be in this recovery

of the economy, in our opinion, and we’re concerned that a large

economic downturn would cause major State borrowing.

And, finally, we believe that we need to pay attention to administrative funding which, again, is also the purpose of H.R. 3684.

Since Fiscal Year 1995, appropriations for the unemployment insurance program have remained static, and have not accounted for

increases in workload or inflation. The Employment Service fundVerDate 20-MAR-2000 12:18 Apr 14, 2000 Jkt 063431 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HEARINGS\60840 pfrm07 PsN: 60840
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ing has been steadily cut since 1984, hindering its ability to re-employ workers quickly. In 1997, States had to pitch in $200 million

of their own money and so we see evidence of this.

Our approach to reform is, therefore, in our budget request,

which the President set in motion. For 1999, we set in motion a

plan to reform the employment securities system. This is a two

phase strategy that we have put in place. The first phase is a bill,

H.R. 3697, which was introduced by Representatives Levin,

English, and Rangel to provide incentives to strengthen the unemployment insurance program in these areas: recipiency, recession

readiness, and administrative funding; and to really provide a

down payment for further and larger discussions of how to permanently reform this program. H.R. 3697 would provide $20 million in each of the next three fiscal years for States to install an alternative base period. If every

State did this, this would help an additional 450,000 people to become eligible for benefits today. Mostly, these are low-wage workers and this would increase recipiency by 6 to 8 percent and start

reversing that trend that we saw on the first chart.

In terms of recession readiness, H.R. 3697 would prepare the Unemployment Insurance Program for a recession. It would strengthen the Extended Benefit Program by revising the program triggers

so that the program could respond during a recession.

And if we could look at the next chart real quickly, this will show

you that if the Adminstration proposed law was in place in the

1990’s recession, it would have cost the country a total of $7.2 billion and it would have triggered on in 29 States. Instead, the triggers only happened in nine States, shown by that really skinny

color on the ‘‘current law’’ bar, and Congress enacted five extensions of extended unemployment compensation for a total cost of

$28.5 billion. We believe that if the program was more responsive,

it would go on quicker, it would be more effective in the right

places, and it would cost less money.

We also provide incentives in this bill for helping to improve the

solvency of the trust fund. And, again, if we look at the next chart,

you will see a——

Chairman SHAW. Ms. Kilbane, could you go ahead and wrap up?

Ms. KILBANE. Yes.

Chairman SHAW. You’re about three times your five minutes

right now.

Ms. KILBANE. Okay. Essentially, if I could just move on to the

end, basically we would also fix administrative funding by adding

some additional funds. And the bill also proposes to extend the

Self-Employment Assistance Program, which is due to expire December 8th—10 States currently have that program.

One of the issues that we have in both extended benefits and administrative financing is return on FUTA. And if I could just show

our final two charts here, return on FUTA is more than administrative dollars. It also includes extended benefits and loans; it does

not include general revenue for emergency programs. If you would

look at, here’s an example, 1989, which was a pretty good economic

time for our country—almost every State got back less than 70 percent of their FUTA dollars that they put in. But if you look a few

years later, just three years later, to 1992, when we were, in fact,

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in a recession, you will see that almost every State in the country

got back more than the dollars that it put into FUTA funding. We

need more administrative funding and we need more FUTA funding for extended benefits when our workload goes high, when the

economy goes down.

I would like to thank you for your time and this concludes my

formal remarks, Mr. Chairman.

[The proposed statement and attachments follow:]

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Chairman SHAW. Ms. Kilbane, we’ve seen all the charts and

we’ve seen the maps and we know the amounts of money and what

happens in a recession and what doesn’t, and I think through both

of those years, I’ve been serving in the Congress, but the question

remains that some $6 billion has been paid in and about $3.5 billion have paid out. Where’s the money? Where does it go?

Ms. KILBANE. Well, first of all, we agree that we do need to get

more administrative funding back to the States. Currently, as you

mentioned——

Chairman SHAW. Don’t tell me, don’t answer the question as to

where we’re going. If you could tell us what happened? I’m just

asking for the history? What happened to the money? The only way

we’re going to keep history from repeating itself is to find out what

happened.

Ms. KILBANE. The money is retained in the Federal accounts.

The Federal accounts are three. They’re for three purposes: administration of the program, Federal loans, and for extended benefits.

Now, we don’t need the Federal loans and extended benefits when

times are good, but we do need to build up those accounts. Currently, there’s $18 billion balance in the Federal loan accounts,

which is where these balances are going and so they’ve been building up over the last few years.

Chairman SHAW. Well, do you think that it’s necessary to build

them up to that extent?

Ms. KILBANE. Well, as I mentioned——

Chairman SHAW. I mean, at some point, don’t you think we

ought to maybe get rid of that temporary tax, .02 percent?

Ms. KILBANE. I think to the extent that we don’t need the taxes

that we shouldn’t collect them. But I also think that we want to

run an insurance program——

Chairman SHAW. Can I take that as the administration’s position?

Ms. KILBANE. I’m sorry?

Chairman SHAW. Can I take that as the administration’s position, that as long as you don’t need it, you shouldn’t collect it?

Ms. KILBANE. Right. And the administration’s position is that we

should have an actuarially sound trust fund, including the Federal

accounts. In the last recession——

Chairman SHAW. The $18 billion——

Ms. KILBANE [continuing]. We went through $28.5 billion.

Chairman SHAW [continuing]. Is that going in to make up part

of the surplus that the administration and the Congress are bragging about so much? What’s in that account, does that go in the

unified budget?

Ms. KILBANE. It goes into the unified budget, that’s right.

Chairman SHAW. So there’s about $18 billion, another $18 billion, we’re finding out that’s in the trust fund that we really

shouldn’t be calling part of the surplus. So, as I take it, the way

you’ve answered my question, in that, unless there’s some actuarial

reason to keep that .02 tax on there, that we ought to get rid of

it?

Ms. KILBANE. I think that’s correct, but I think the administration’s position is that at this point, actuarially, we need to make

sure that those accounts are built up to cover a downturn.

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Chairman SHAW. What amount is necessary?

Ms. KILBANE. Well, the administration has put forward an extension of the two-tenths through the year 2007, but we are also expecting that the Reed Act would——

Chairman SHAW. Wait a minute, the administration thinks that

that two-tenths should stay in until the year 2007?

Ms. KILBANE. That’s the current law.

Chairman SHAW. I mean, do you think that’s what it ought to be?

Ms. KILBANE. We are anticipating in the year 2003 that the Reed

Act distributions would reduce those Federal accounts by spilling

over excess administrative funds to the States, and we think that

that’s the proper way of taking care of that.

Chairman SHAW. Does that $18 billion that’s in the surplus fund

account for most of the imbalance of what’s paid in compared to

what comes out? I mean this is, I don’t know of any program that

crazier than this as far as the imbalance of the monies. This isn’t

just a question of socking the employer, this is part of the employees’ compensation, so I think we need to put this on the right

plane. This is part of the compensation paid to labor today. So this

is not a big business issue any more than it is a big labor issue,

and it’s one that I think jointly we should address and do something about. And if the monies are not necessary and if we’ve got

these huge surplus funds, let’s give the guy a break.

Ms. KILBANE. Right, and, Mr. Chairman, I guess I would say that

the administration does not agree that the funds are not necessary.

We think that we need to, just like a private insurance

company——

Chairman SHAW. I’m just talking about now just the .02 percent.

Ms. KILBANE. Well, the .02 percent is part of the overall FUTA

funds that goes to build the Federal accounts, and as those two

charts (charts 5 and 6) show that when——

Chairman SHAW. Well, let’s cut it short——

Ms. KILBANE [continuing]. You hit an economic downturn, you

need more money.

Chairman SHAW [continuing]. Where should the surplus fund be?

When are we going to stop, at $25 billion, $30 billion, what do you

think is reasonable?

Ms. KILBANE. Well, the analysis——

Chairman SHAW. It’s $18 billion now.

Ms. KILBANE. The analysis that we did last year when the twotenths was continued showed that if we hit an economic downturn

like the 1980’s, we would end up—States would end up borrowing

somewhere in the neighborhood of $25 billion, and we would also

be paying extended benefits. And so we didn’t think that $18 billion, at that time, looked like too much money, nor do we now. I

don’t have a magic figure off the top of my head. We look at the

percentages of the caps as in relation to our past experience with

recessions.

Chairman SHAW. Well, do you think you could supply this committee with what would be a reasonable figure, according to the administration, to be put in this trust fund?

Ms. KILBANE. We’ll give you whatever we can give you——

[The following was subsequently received:]

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A simulation shows that approximately $25 billion is needed in the Federal accounts right now in order to remain solvent in the event of a 1980s-type recession

in the near future. The necessary balance will grow in future years as growth in

the labor force and in wage levels causes potential recessionary outlays to increase.

This estimate assumes that the changes to the Extended Benefit program proposed

in H.R. 3697 will be implemented. It should be noted that the extended benefit account was also used to fund the Emergency Unemployment Compensation program

in the last recession.

Chairman SHAW. Now, this trust fund is this—this trust fund

really is a fiction though isn’t it? I mean, is there actually money

in it? It’s just an account isn’t it?

Ms. KILBANE. Well, my understanding is that all trust funds are

part of the unified Federal budget.

Chairman SHAW. Yes, they’re all fraudulent. There’s no money

out there is there? [Laughter.]

Ms. KILBANE. I didn’t create the trust fund. [Laughter.]

Chairman SHAW. We couldn’t go write a check on the trust fund

so what we’re really looking at, even though we can put that into

the trust fund and say, ‘‘Hey, it’s out there for a rainy day,’’ there’s

really no money. And what will be today will come out of the deficit

of tomorrow, if it’s needed to be drawn down, isn’t that correct, because it’s all in the unified budget?

Ms. KILBANE. My understanding is that that’s correct but it is

still part of the trust fund and the balance is like other trust funds,

my understanding is, are tracked separately.

Chairman SHAW. Well, I can tell you that if lawyers would all

treat their trust funds like the United States Government did, we

wouldn’t have any more lawyers because they’d all be in jail. And

I think that’s something that we ought to really be thinking about.

We’re setting up these fictions and that’s—we need to take care—

and I’m all for pay-as-you-go, but this is no pay-as-you-go, this is

a fiction.

Ms. KILBANE. Well, I think that——

Chairman SHAW. It’s stealth. It’s not out there. It’s just something we talk about. It’s a feel good type thing but what it is is

we’re just taxing the hell out of the employer and the employee in

order to build up something that will make our surplus look good,

and it has nothing to do with the trust fund because it’s not a trust

fund.

Ms. KILBANE. Well, and I think that the administration, from our

perspective, in launching a broad dialogue on reforming the unemployment insurance program, which I have also brought copies of

our complete paper that was released today, would hope that we

could get into all areas of how do we fix this program? And, certainly, to the extent that we would get into a broader discussion

about trust funds, or how to fund it, or where to fund it, where to

shift the funding to, we would see that as being a better way of

approaching this issue.

Chairman SHAW. Okay. Mr. Levin.

Mr. LEVIN. Well, I think that last exchange has been useful and

we need to trace what’s happening with the Federal monies.

They’re part of the unified budget, all the trust funds are. I don’t

think that makes them fraudulent. We have a highway trust fund,

an aviation trust fund, and there is some sense of obligation as to

the use of those monies. And, in a sense, it’s a fiction, it isn’t a

38

trust fund in a strictly legal sense. It is, I think, however, something that has some meaning to it. And I’ve been one who has suggested we don’t spend the surplus because it essentially exists because of the inflow from Social Security compared to the outflow.

I don’t think that means that it’s a fraudulent system.

But, most importantly, I don’t see why that means we should

simply throw all of this into the States and have a—if that’s true,

let’s have a 50 State unemployment comp system. The trouble with

that is what do you do when there’s a recession? And there’s a recession in some States, not in others? We talk about the flow-in

being greater than the outflow and we have this surplus, and this

is a complicated—I once sat through a long explication of the three

trust funds, it’s very complicated. And, perhaps, we can simplify it.

But it turned out in the 1980’s, we did not have enough money to

pay for extended benefits and we, as a result, had to dip into the

general fund, isn’t that true?

Ms. KILBANE. Yes, Mr. Levin, that was in the 1970’s recession

and that’s the reason that the two tenths, temporary tax was put

on.

Mr. LEVIN. Oh, so in the 1980’s, when we had the recession, and

I remember the fights we had relative to Pennsylvania and other

States that were in difficult positions and had trouble using the

laws, we amended it, and the triggers did not really help, we had

tens of thousands of unemployed workers who had exhausted their

benefits and simply, through no fault of their own, could not find

a job. And I think it would be interesting for us to get a break-out

of which States are in trouble in terms of administrative funds and

which States are in trouble in terms of solvency. I think it also

would be interesting to compare the benefits that are paid State by

State, and to look at the recipiency rates State by State. They vary

substantially, don’t they?

Ms. KILBANE. Yes, there’s a wide-range, like between 20 percent

and 50 percent on recipiency, for example.

[The following was subsequently received:]

39

40

Mr. LEVIN. My guess is that some of the States that are pressing

for devolution are States that have very low recipiency rates and

what it means when you have low recipiency rates is that some of

those workers go to other States. So I hope we can take an objective look at what’s going on. This is a very mixed system. It’s a

partnership but a very mixed system.

But what would happen if we just said to every State, ‘‘Do your

own unemployment comp?’’ Give them all the administrative, just

tax your own employers.

Ms. KILBANE. I think that our position is that we should take a

look at this as a Federal/State system, that there are national

issues, that we do have a global economy, that recessions happen

in regional pockets, not just State by State, and that we should

agree on what we want to achieve as a Federal/State system and

make sure that we’ve got at least some standards or goals laid out

and then proceed with making sure that we’re funding it adequately.

Mr. LEVIN. Why have any standards? I mean, right now it’s a

very mixed, I think you could argue, even a mixed-up system.

There are standards but there are very different levels of eligibility, of benefits, why not just let every State do what it wants?

Ms. KILBANE. Well, I think that our concern would be that we

have had a very successful, in the past, economic safety net for this

country, which has involved a Federal/State partnership. And if

you look at, for example, the Macroeconomics Stabilization Chart

(chart 2) and the contributions that we’ve made to smooth some of

the recessions that we’ve had, that it’s important to keep that Federal/State partnership in place.

Mr. LEVIN. I think the answer is that if every State did what

they wanted, it would mean that some of them would simply shuffle the responsibilities to other States and people would move during recessions, or they would try to move, and then we would end

up with national economic emergencies where the Federal Government would have to bail out States that did not meet their responsibilities, and we would have an unemployment system somewhat

like we have a hurricane system. And the Federal Government

would end up as the payer of last resort, with States coming here

and pleading for help. And the unemployed would be left, talking

about a hurricane, high and dry.

Thank you.

Chairman SHAW. Mr. McCrery.

Mr. MCCRERY. Thank you, Mr. Chairman. Before I ask a couple

of questions, I want to join Mr. Jefferson in welcoming the State

of Louisiana’s Secretary of Labor, Gary Forrester, who’s not testifying but he’s here observing today. Welcome, Secretary Forrester.

Let me just try to clear up this trust fund concept. I think ‘‘actuarially sound’’ is maybe a good phrase but let’s examine what that

means. You say there’s about $18 billion in the trust fund. Where

is that $18 billion? Where is it kept?

Ms. KILBANE. Well, it’s part of the unified budget, the $18 billion

in the Federal accounts is kept as part of that account, as part of

the unified budget.

Mr. MCCRERY. Is there any cash in the bank so to speak for that

trust fund?

41

Ms. KILBANE. Again, my understanding of how Congress has set

up a Federal unified budget is that all trust funds are part of it,

and that for trust funds, you account for the funding separately so

that you know what’s there for those purposes.

Mr. MCCRERY. Sure, it’s accounted for separately but the fact is

there’s no cash in the bank in the trust fund. It’s all I–O–U’s. It’s

Federal securities. And there—it’s the safest I–O–U in the world

but it’s an I–O–U, it’s paper. So if we were to have a recession and

there would be a call on this supposed trust fund, there wouldn’t

be any money there would there? You’d have to get the money from

current revenues, and you’d use those current revenues maybe to

redeem the I–O–U’s. Big deal. You still have got to find the cash.

You’ve got to find it from current revenues. So what’s the difference

if we’ve got a paper trust fund or not? It doesn’t make any difference as a practical matter.

So, I think this is all a fiction we’ve been talking about this trust

fund. And the chairman is right. If we’re collecting more money

than we need to finance the system, let’s don’t collect it knowing

that someday we’re going to have a recession, we’re going to have

to make accommodations for that expenditure, as we have in the

past, probably with deficit-spending, and be done with it. But let’s

not have this fiction and create this need, this supposed need for

more taxes. And that’s all we’re doing.

And so I think the chairman’s legislation is perfectly correct in

saying let’s give the .02 percent surtax back and then the next time

we have a recession and we have to spend a bunch of money,

maybe we can create another surtax to repay ourselves but let’s

don’t do it when we don’t have to.

Have Federal unemployment taxes ever gone down to your

knowledge?

Ms. KILBANE. No, not to my knowledge.

Mr. MCCRERY. Have they gone up?

Ms. KILBANE. Well, by two-tenths of a percent, that’s correct.

Mr. MCCRERY. That’s all since the first——

Ms. KILBANE. Yes.

Mr. MCCRERY. Just two-tenths of a percent? Under the chairman’s bill, employers under——

Ms. KILBANE. Can I clarify that?

Mr. MCCRERY. Yes, please?

Ms. KILBANE. The tax base has gone up, has increased, the Federal tax base over the years.

Mr. MCCRERY. Yes, and taxes have never been cut nor has the

base been reduced.

Ms. KILBANE. The base is currently $7,000.

Mr. MCCRERY. Right. And it’s gone up from the initial base, it’s

gone up.

Ms. KILBANE. From the initial base, that’s correct.

Mr. MCCRERY. Right. Under the chairman’s bill, employers would

file four unemployment tax payments per year, one consolidated

Federal/State payment each quarter. Now the current system requires eight filings. The administration’s Fiscal Year 1999 budget

proposal would require 24 tax filings. Is that still the administration’s position?

42

Ms. KILBANE. That is in the administration’s request, that’s correct.

Mr. MCCRERY. If you were an employer, which would you prefer?

Ms. KILBANE. If I were an employer, I would probably prefer the

former.

Mr. MCCRERY. Then I suggest we try to find a way to make it

easier, not harder, on the employer and just use common sense. If

we can collect the same amount of money through an easier system, with a consolidated filing, let’s work together to try to find a

way to do that.

Thank you, Mr. Chairman.

Chairman SHAW. Mr. Jefferson.

Mr. JEFFERSON. Thank you, Mr. Chairman. I would also like to

recognize our Secretary of Labor, who I had a chance to meet with

this evening—this afternoon, as I’m sure Mr. McCrery did, we used

to serve together in the State legislature. Good to see you here, sir.

This is a rather complicated problem we have on our hands and

it’s not necessarily made more simple by the solutions that are offered today.

I’m concerned about the issues you raised about the lack of guarantees, particularly with respect to the lack of guarantees with respect to what States will do with the money if they were to receive

it. Would they establish trust funds of their own, or would they use

the money for some other related purpose, for State administration,

for something else, I don’t know. And isn’t there reason to require

trust funds? After all, we all could hear that there isn’t one, but

are we then going to put ourselves in the same position on the

State level to say that there may or may not be one.

That’s a concern which you raise. Do you see how that concern

can be addressed in the context of the bill Mr. Shaw offers, or is

it something that we can’t remedy in the context of his legislation?

Ms. KILBANE. Well, I would think that what the administration

was hoping to do by putting forward the dialogue paper was to discuss all of these—the proposals included in H.R. 3684, as well as

other ways to look at it, including maybe putting performance

standards in place a la GPRA or other ways of guaranteeing that

we maintain a Federal/State system, even if we restructure it and

reform it, and completely change the way we’ve done business. I

mean, maybe we should take our trust funds out of the Federal

Unified Budget to resolve some of the other issues that have been

raised.

Mr. JEFFERSON. You speak of a lack of a guarantee with respect

to the States responding quickly, either in the case of an economic

downturn or in the case of, I think you described it as, an emergency. Is this because based on our experience in doing this sort

of thing or they might have different setups State by State?

I guess my question is, is this something that can be fixed, and

if it is, if it can be, how can it be fixed in the context of this legislation? Or is it something that you have to worry that each State is

going to have to develop some capacity to do?

Ms. KILBANE. We believe that the legislation that we have proposed through Representatives Levin, English, and Rangel would

put forward a target for solvency, for example; that States would

have to work toward having at least one year of benefit payments

43

at the average of a high three bad years, and that that would help

in terms of having a goal, where we could have States work toward

that.

The other is, of course, without any goals the results could be

underfunding the program, which then costs more money during a

recession. What we know is that, if we have to borrow money, we

raise the taxes on employers during a recession.

Mr. JEFFERSON. Our Labor Secretary talked about the need for—

at least with me he did—for more administrative money on the

States’ part out of these funds. Does Mr. Levin’s legislation address

this issue? And does it address it right now?

One matter that he was concerned about was, whatever you do,

he wanted it to be done fairly quickly. The idea of having it done

in 2003, or whatever, seemed an idea which is too distant for him

to get his arms around, because he thought basically, who knows

what by 2003—that’s too far out to make much of a plan for. Even

for his own career plans it’s too far out.

So the idea is, if we’re going to do something, why does it take

us that long to do it, and does Mr. Levin’s bill address this issue

in a more timely way?

Ms. KILBANE. Yes. H.R. 3697 would make sufficient funds available for unemployment insurance this year, 1999, as well as for the

next four years. This is a temporary funding fix, until we can work

on a more permanent one, which is what we would like to see

through the dialogue and through the coalition proposal.

Mr. JEFFERSON. Could we move toward a solution not so much

that would take away the Federal/State partnership, like perhaps

Mr. Shaw’s appears to do now, but that would address some of the

concerns that he has in great detail and at the same time keep this

partnership going, and use Mr. Levin’s approach as a temporary

one, a kind of a bridge one, until we can make more changes that

will be in place over a longer period of time?

Ms. KILBANE. Yes, exactly. We believe that these bills could—

that they’re not competing bills; that one takes place in the next

five years and one is a more permanent reform that becomes effective subsequent to the five-year window.

Mr. JEFFERSON. Thank you, Mr. Chairman.

Chairman SHAW. Thank you. I would just like to comment with

regard to the year 2003 the problems are budgetary because we’re

using this stealth surplus which goes into the stealth trust fund as

a budget problem. It creates a budget problem because of the Unified Budget. And that’s the problem, and that’s the reason why it’s

got to—we’ve got to work with those type of years.

Mr. JEFFERSON. This $20 million, Sandy, there’s a figure in

your—I missed it here—that you appropriated this year for distribution to the States. How much money? It can’t be $20 million.

What’s the number, Sandy, we’re dealing with?

Mr. LEVIN. There’s $106 million for administrative funds and

about $20 million for low-income workers.

Mr. JEFFERSON. Oh, that’s what I’m thinking about.

Mr. LEVIN. If I might use your time, Mr. English is next, and

then I just want to ask a quick question, Mr. Shaw.

Chairman SHAW. Mr. English?

44

Mr. ENGLISH. I’m happy to yield to the gentleman from Michigan.

Mr. LEVIN. No, go ahead. I just wanted on the FUTA tax to just

be clear, so I’ll ask it, if I might. What bill extended the two-tenths

of 1 percent to the year 2007, do you know?

Ms. KILBANE. It was the Balanced——

Mr. LEVIN. It was the Balanced Budget Act?

Ms. KILBANE [continuing]. The Balanced Budget Act last year.

Mr. LEVIN. It was the Balanced Budget Act——

Ms. KILBANE. That’s right.

Mr. LEVIN [continuing]. That I think most people on this panel

voted for.

And the bill of Mr. Shaw would extend it until when?

Ms. KILBANE. Until the year 2004.

Chairman SHAW. Sandy, I would like to point out that the President made that as a condition for his signing the bill. That was the

reason it’s in there.

Mr. ENGLISH. I’ll reclaim my time, if that’s——

Mr. LEVIN. I think you’d better. [Laughter.]

That’s why I hesitated to raise it during your time. I hope the

Chair will give you a full 5 minutes. [Laughter.]

Mr. ENGLISH. No, no, I’ll be fine. Mr. Chairman, I’ll keep my

questions relatively brief, but I want to ask a couple of specific

questions, Ms. Kilbane.

One, could you elaborate on your concerns of the effect that devolution or the chairman’s approach to devolution might have on the

vets’ program?

Ms. KILBANE. Well—our vets’ organization believes that the way

the bill is written would put the responsibility for funding this program at the State level, and they have concerns that States could

independently make decisions to reduce services to veterans by reducing funding for veterans.

Mr. ENGLISH. I think that’s a legitimate concern, and it’s one

that I don’t think is necessarily fatal to a significant overhaul of

unemployment compensation, but certainly it’s an issue that I

think would have to be addressed as part of an overhaul of unemployment compensation.

I wonder, under the bill that the chairman has proposed, what

options would the Federal Government have to impose sanctions

for noncompliance on States?

Ms. KILBANE. The Federal Government currently has two ways

of imposing sanctions for noncompliance. The first one is that employers in States that are noncompliant lose their offset credit reduction. So their taxes would go from .8 percent to 6.2 percent.

The other method we currently have is we can withhold administrative grants from States under Title III Social Security Act. We

would lose that under this bill because we would no longer be in

the grant-making business, but we would still be in the business

of being able to basically enforce it on employers through loss of

their offset credit.

Mr. ENGLISH. In your view, from your recent experience, is this

a significant lose of leverage or not?

Ms. KILBANE. We believe that both are important, because one

goes after certainly the employers, which is known as the atomic

45

bomb around our office, because it’s so huge. But the second is the

threat of loss of administrative grants, which is sort of the usual

way that Federal agencies are able to manage and oversee Federal

grants.

Mr. ENGLISH. Well, I guess I’d like to close with a couple of observations. One, I think there is some agreement on the panel that

the level of administrative funding for the States has not been adequate, and I do believe that needs to be addressed.

Second of all—and I hope the administration will appreciate this

perspective—I used to work as a legislative aide specifically dealing

with some of these issues for the Pennsylvania State Senate, and

I think the way the law is written right now does provide for a

level of micromanagement at the Federal level which is not entirely

appropriate. But it seems to me that the micromanagement could

be significantly reduced without necessarily moving toward a radical restructuring, as envisioned in the chairman’s bill.

My concern is I think there clearly is a Federal role in unemployment compensation, and I would feel probably a greater one than

the chairman’s bill actually allows. But I wonder if this micromanagement couldn’t be addressed and still retain essentially a

Federal system. Do you want to comment on that?

Ms. KILBANE. Well, I think, clearly, the dialogue that we have

launched on how to reform unemployment insurance and the employment service programs is open to not only things like

recipiency rate and economic stabilization, but what is the Federal/

State role, and how can that be done better, looking into the 21st

century? So we would certainly be open to all kinds of comments

about how to improve that.

Mr. ENGLISH. Thank you, and I’ll yield back the balance of my

time, Mr. Chairman.

Chairman SHAW. Thank you.

Ms. KILBANE. Thank you, Mr. Chairman.

Chairman SHAW. Our next witness is Robert R. Cupp, president

pro tempore and cochairman of the Senate Finance Committee, and

past chairman of the Unemployment Insurance Authorizing Committee, the Ohio State Senate. Joseph Weisenburger is the Deputy

Commissioner of the New Hampshire Department of Employment

Security; Douglas Jamerson, Secretary of the Florida Department

of Labor and Employment Security, and Dr. Janet Norwood, who

is a senior fellow, the Urban Institute.

I welcome all of you. This last witness took more time than I had

anticipated. I am going to try to enforce the five-minute rule. We

do have all of your statements, and it will be made a part of the

complete record. I would request that you might try to summarize.

Mr. Cupp.

STATEMENT OF ROBERT R. CUPP, PRESIDENT PRO TEMPORE,

COCHAIRMAN, SENATE FINANCE COMMITTEE, OHIO STATE

SENATE

Mr. CUPP. Thank you, Mr. Chairman and members of the committee. My name is Bob Cupp, and I am the president pro tem of

the Ohio Senate. And, Mr. Chairman, for eight years before being

selected for that position, I chaired the Ohio’ Senate’s Commerce

and Labor Committee, which had jurisdiction over unemployment

46

and employment compensation issues. I’m also a member of the

Senate Finance Committee, which handles budget issues and appropriations.

Mr. Chairman, in our senate——

Chairman SHAW. I was just told that you’re the Bill Archer of

Ohio. [Laughter.]

Mr. CUPP. Thank you, Mr. Chairman. Thank you, I think.

[Laughter.]

I have sat on your side of the bench in the Ohio Senate, so I appreciate your request for brevity, and I appreciate the opportunity

to testify in support of H.R. 3684, but I just want to make two

issues.

One, I want to explain why as a State legislator who has dealt

with unemployment compensation issues I think this bill is important for States and for providing a better system of employment security, and to assure you that States like Ohio are fully capable of

the new responsibilities the bill would put on them and exercising

the flexibility that is granted by the bill.

The funds that Ohio gets from the FUTA trust fund are seriously

inadequate to meet the costs of properly administering the employment services program. It has resulted in the closing of 22 local

employment offices just in the last four years alone. Ohio once had

120 offices; we’re now down to 57. In my senate district, which includes seven counties, there are only three employment offices left,

and I represent a geographical area that is big as the States of

Rhode Island and Delaware combined.

The Bureau of Employment Services has also cut staff and are

operating at historically low levels. If we were to have a recession,

we would not have the capacity to respond.

More offices would have been closed except the State has put in general tax revenue—$50 million in the last four years alone, and

that pays for services that the FUTA funds are paid by employers

to support. So Ohioans are double-taxed in this regard. Employers

pay enough in FUTA taxes to fund the employment security operations, but still money that’s paid in by all Ohio taxpayers must

be used to support the very thing that employers are paying the

FUTA taxes for.

For our new State budget year, which begins July 1st of this

year, funding from Ohio’s general revenue fund to support district

offices and other support services for our system will go up 85 percent. The money could be used for schools; it could be used for children’s health needs; it could be used for economic development purposes, but it’s basically supplementing something that employers

are already paying for. Without this additional State money, we

would have to close an additional 15 employment offices.

Employers pay the FUTA tax, which is a dedicated tax to pay for

administering the system, for the Public Employment Service, for

veterans’ reemployment assistance, and for labor market information. In fact, Ohio employers in 1995 paid $259 million but got back

only $102 million, less than 39 cents on the dollar. And I understand the newly released 1996 figures have made the situation

even worse. And it’s not unique to Ohio alone.

The general assembly has passed Senate Concurrent Resolution

10 without dissent, which asks Congress to return adequate dollars

47

to the State, to give employers a fair return on the taxes they pay,

and I’m pleased to say that five members of Ohio’s congressional

delegations are cosponsoring your bill, Mr. Chairman.

H.R. 3684 would correct the flawed system. It would give States

adequate money to operate the system that they do. It would give

employers a fair return. It assures unemployed workers adequate

levels of service in the payment of benefits and in assistance in

finding new jobs. And it will allow States the flexibility they need

to meet current needs, to be able to shift some money here or there

as is necessary to have the best-run system, and also the predictability to meet the long-term needs.

Mr. Chairman, members of the committee, I want to assure you

that State legislatures are fully capable of handling this new responsibility. We already collect the State portion of the unemployment compensation tax. That amount that we already collect is two

to three times greater than the FUTA tax we would be collecting

under your bill, Mr. Chairman. For 60 years, States have set unemployment benefit and tax rates, and States already appropriate

the special administrative funds from employer penalty and interest charges.

The legislature in Ohio and in other States is experienced in deciding how much to allocate for employment services around the

State. We are experienced in meeting FUTA conformity requirements in our unemployment laws. We’re experienced in utilizing

dedicated funds only for dedicated purposes—improper budgeting

and balancing budgets year after year, and setting aside funds for

future needs.

The legislatures and the governors of this country are already

doing the things similar to what they would be doing if your bill

passes, Mr. Chairman. We’re doing it capably, and thank you for

sponsoring the bill, because if it is passed, it will allow us to do

an even better job of administering the system and serving the unemployed. Thank you.

[The prepared statement of Mr. Cupp follows:]

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49

50

51

Chairman SHAW. Thank you, sir.

Mr. Weisenburger.

STATEMENT OF JOSEPH WEISENBURGER, DEPUTY COMMISSIONER, NEW HAMPSHIRE DEPARTMENT OF EMPLOYMENT

SECURITY

Mr. WEISENBURGER. Thank you, Mr. Chairman, Subcommittee

members. My name is Joe Weisenburger. I’m the deputy commissioner of the New Hampshire Department of Employment Security.

H.R. 3684, a measure to reform the employment securities system, is not about power and control; it’s about restoring the integrity of the unemployment insurance system and the Public Employment Service. It’s about helping unemployed workers get back to

work as quickly as possible. These programs have been devastated

by budget cuts and mismanagement. The current system is inefficient; it’s rule-bound, and it shortchanges employers and workers

alike.

Budget shortfalls have led to errors in our system, errors that

have caused overpayments and longer periods of unemployment duration. Both of those issues have raised employer taxes at the State

level, and have caused unnecessary expenditures from the Federal

Unified Budget.

Employers today are burdened unnecessarily with two tax systems for the same system, costing them hundreds of millions of dollars a year. Employment services to workers and to employers have

deteriorated. The work test, a function necessary to determine an

individual’s continued eligibility for unemployment benefits, is a

thing of the past in most States.

H.R. 3684 will reverse the negative direction our program is experiencing. It is a mechanism that would allow for adequate appropriations while at the same time having a minimum impact on the

Federal budget. It consolidates employer tax filings into a simple

tax, a single tax collected by the States, and, most importantly, it

ties the Public Employment Service to the unemployment insurance system, ensuring that workers will be provided with re-employment services after experiencing unemployment.

Last year you reformed the welfare system. This year it is likely

that the Congress will reform the job training program. Governors

need the flexibility to manage both of these programs along with

the unemployment insurance program, and to leverage the resources of these programs to provide the needed services at the

State and local levels. Transferring the authority to collect the

taxes and administer this program to the governors at the State

level, and to the State legislatures, will allow us to make all three

programs successful.

Finally, Mr. Chairman, I’d like to discuss how the employment

securities system is funded by the U.S. Department of Labor. Section 302 of title 3 of the Social Security Act requires the Secretary

of Labor to provide adequate funds for the proper and efficient administration of the State’s unemployment compensation laws. As

you know, employers this year will pay about $6 billion in FUTA

taxes. Only 80 percent of that, $4.8 billion, will go into the administrative account. The administration’s budget for this year is $3.7

billion; $200 million of that is for a one-time expenditure for the

52

year 2000 problem, leaving $3.5 billion available to the States for

the proper and efficient administration of not only the unemployment insurance system, but the Public Employment Service, labor

market information programs, veterans’ programs, work opportunity tax credits, alien labor certification—a whole number of programs that support the workforce. This year the President’s budget is the same $3.5 billion. By the

Department’s own admission, the Fiscal Year 1998 appropriation

for the unemployment insurance program is $305 million short of

what is necessary for the proper and efficient administration of the

State’s unemployment compensation laws. The President’s budget

for Fiscal Year 1999 raises that to $365 million short.

If the Secretary has a lawful responsibility to request funds for

the proper and efficient administration of the program from the

Congress, why isn’t the Department of Labor doing that? This

shortfall is the result of the Department funding other initiatives

for which there is no revenue in the Department of Labor’s budget—programs such as School to Work, programs such as One-Stop

Career Centers.

Mr. Chairman, bad things happen to people when they’re unemployed. Families break apart; child abuse and spousal abuse increase; crime increases; drug and alcohol abuse increases; debt

rises; families stop investing in their children’s education; they stop

volunteering. These are problems, social ills, that follow unemployment.

The employment security system works to relieve the workers of

this terrible burden of unemployment. Why wouldn’t this country

invest fully in the employment securities system? This year 18 million unemployed workers, 1 out of every 7 workers in this country,

went to the Public Employment Service looking for work. We were

able to place 3 million of those 18 million. That means 15 million

unemployed workers did not get help from the Public Employment

Service because we did not have the resources to help them.

Thank you, Mr. Chairman.

[The prepared statement follows:]

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Chairman SHAW. Mr. Jamerson.

STATEMENT OF DOUGLAS JAMERSON, SECRETARY, FLORIDA

DEPARTMENT OF LABOR AND EMPLOYMENT SECURITY

Mr. JAMERSON. Good afternoon, Mr. Chairman and members of

the subcommittee. I am very pleased to be here today and to have

this opportunity to testify before you on H.R. 3684——

Chairman SHAW. Douglas pull that mic to you, if you would, sir.

Thank you.

Mr. JAMERSON [continuing]. The Employment Security Financing

Act of 1998.

Let me begin my remarks by commending you, Mr. Chairman,

for your prescience in sponsoring such a comprehensive reform

package. H.R. 3684 will provide welcome relief to States such as

Florida that receive a disproportionately low return of FUTA tax

revenue.

H.R. 3684 represents a bold departure that holds the promise of

a future in which the unemployment compensation system will be

able to fulfill its mission in a rapidly-changing workplace.

We in Florida are blessed by a continuing strong national economy that supports the lowest level of unemployment in modern history. However, we would be naive to think that the cycle of growth

will continue unabated. The very nature of work and one’s relationship to the workplace is in the process of being redesigned. The dynamics of the employer-employee relationship is undergoing profound evolution. In this setting, the goals envisioned by H.R. 3684

could not come at a more opportune time.

I would like to discuss the provisions of H.R. 3684 with you in

the context of the impact that I believe that they will have on the

State of Florida and the system that I am charged with overseeing.

I don’t know if I’m stopping, but you might have to stop for me

[referring to the bells ringing]. [Laughter.]

As I understand it, major tenets of the bill would assign responsibility for collection of FUTA taxes to the State agency beginning

in the year 2000. It would also authorize expenditures from State

administrative funds of an amount not to exceed $245 million annually for Fiscal Years 2000 through 2003, subject to appropriation

by the State legislature.

These administrative dollars could then be used to provide for

collection of the FUTA tax; to more effectively, I believe, determine

whether or not those claiming benefits have made themselves

available or able for suitable employment; to provide job search and

placement services, including job counseling, testing, occupational

and labor forecasting; to enhance employees’ skill assessment and

referral to employers, and to appropriate recruitment services and

technical assistance to employers.

Mr. Chairman and members of the subcommittee, this bill further provides for annual appropriation of 100 percent of the

amount collected in both FUTA taxes and Reed Act monies to the

States, beginning in Fiscal Year 2004, eliminating some of the caps

that have been placed in the way.

It authorizes expenditures of up to 140 percent of the amount appropriated to the States from employment security funds for the

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previous Fiscal Year, and it repeals the two-tenths of a percent

FUTA tax, surtax, effective 2004.

You’ve heard it said here before, and I will reiterate, the repeal

of this temporary tax fulfills the promise made to employers when

it was originally enacted—that it is, indeed, a temporary tax, and

that its goal was to, in fact, reduce the burden on employers by economic factors in place at the time. By shifting the tax collection

process to the States, H.R. 3684 holds the promise of decreasing

the administrative cost to employers by establishing the State

agency as the sole point of payment; reducing or even eliminating

paperwork, due to the filing of one State tax return versus both a

State and a Federal return; providing more localized services, thus,

assuring quicker response patterns to the specific needs of the taxpayer.

It is my opinion that allowing the States greater flexibility to appropriate administrative funds for unemployment compensation

and employment services will lead to more efficient operation of the

program, more exact tailoring of services rendered to the unemployed and job seekers, as designed by State legislators and the Executive Branch; a sharper focus by agencies on the business of employment, rather than dealing with budget shortfalls and administrative uncertainties that are inherent in the current system; a

greater accountability by those charged with the mission of putting

people back to work, and a direct link between the State appropriations process and the services rendered by the responsible State

agencies.

I would like to mention that there are a few areas of H.R. 3684

that we believe need to be addressed. We believe that government

plays a very important role in ensuring that unemployment compensation funds are dispersed properly. Clearly, this bill gives

greater flexibility to integrate these programs into the workforce

development system that we applaud, because in Florida we’re

moving very quickly in our workforce development effort. Our caution is that we do believe that eligibility and payment of unemployment compensation claims is inherently a function of government.

We encourage you to remember to maintain the integrity of the

unemployment compensation and services program, the current

safeguards that are needed to be maintained and strengthened to

ensure that States cannot use unemployment benefits for administrative funding or other purposes.

Mr. Chairman, in closing, let me say that this committee I believe will have the ultimate responsibility for ensuring that the

United States employment security program continues to fulfill its

mission and remain focused on the needs of the people. The passage of H.R. 3684 will enhance the employment security program

and allow States to individualize their own unemployment compensation programs to meet the needs of their own residents.

With that, Mr. Chairman, I want to again thank you for your

offer to address the committee, and I’m available to answer questions that you may have.

[The prepared statement and attachments follow:]

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Chairman SHAW. Thank you, Mr. Jamerson, for a very fine statement.

Dr. Norwood.

STATEMENT OF JANET NORWOOD, SENIOR FELLOW, THE

URBAN INSTITUTE

Ms. NORWOOD. Thank you, Mr. Chairman. As you all know, I

spent three years chairing the Advisory Council on Unemployment

Compensation, having been appointed by both the Republican and

Democratic President, and I’ve also served more than 13 years as

Commissioner of Labor Statistics with responsibility for the country’s Federal/State labor market information system.

The UI program is now more than 60 years old, is one of the

most important examples of effective cooperation between two levels of government with shared responsibility. Although the overall

unemployment rate for the country as a whole is relatively low and

job growth remains quite strong, more than 20 States still have

rates higher than the national average. We know also that the proportion of total unemployed who received unemployment benefits

has fallen over the last several decades.

The solvency of the State UI trust funds must remain a matter

of real concern. If the unemployment insurance program is to meet

its twin objectives—to promote economic stability and to provide

temporary assistance to workers with job detachment who lose

their jobs through no fault of their own—it is important that States

accumulate reserves during periods of economic health that are sufficient to pay benefits during economic recessions.

But, by the end of last year, State trust fund reserves were only

about 80 percent of the levels they were at just before the last recession. Instead of building up trust fund reserves during these

current good times, last year alone 16 States reduced unemployment insurance taxes.

It is clear that the States have the important responsibilities and

powers in the administration of the UI program, and I believe they

should continue to have them. However, our research demonstrated

that increasing competitive pressures on the States has at times

caused a tightening of eligibility standards, resulting in a reduction

in coverage. These conditions have caused a race to the bottom

among some States, affecting especially trust fund solvency and the

treatment of low-wage workers.

Of course, some States have maintained a sensible degree of forward-funding, but some States have not. In those States which do

not, one extremely important purpose of the UI program, the provision of purchasing power during economic downturn, just does not

work. State trust funds must be adequately funded in good times,

so that funds are available for payment to workers in recession

times. I am concerned that H.R. 3684 provides little Federal role

for working toward trust fund solvency.

Our research also found that competitive pressures among the

States to attract business could lead to a continued decline in the

proportion of workers who receive benefits, disproportionately affecting low-wage workers. Those working part-time are especially

hard-hit. I believe that it is important to ensure that a low-wage

worker not be required to work more hours to qualify for benefits

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than a higher-wage worker. H.R. 3697 deals with this issue, but

H.R. 3684 does not.

Finally, as I’m sure you are aware, Mr. Chairman, I have a very

real interest in any action that could affect the Federal/State statistical system. I’m pleased to see that H.R. 3697 takes note of the

importance of labor market information, but I am concerned about

the effect of the proposed change and the manner in which the statistical programs are funded. I believe that this change could damage most of the most important national and State economic intelligence that the country produces.

I could review all the programs, but I won’t do that now. It’s sufficient to say that these data are extremely important. I am concerned that H.R. 3684 makes the appropriation of much of the

funding, apart from whatever comes out of the 2 percent setaside,

to administer the important State activities, to produce State and

national data, dependent on the legislatures in each of the States

and other jurisdictions.

We should not put programs such as this in jeopardy by making

them dependent on the likelihood that 53 different jurisdictions

would each year appropriate the funds required to maintain the

quality and consistency of the national data. If they do not, and the

history of this Nation’s statistical system suggests that this is a

very real possibility, the country’s entire system of labor market

statistics would suffer. Some State data would be inconsistent with

those in other States producing national data of poor quality. Indeed, the Federal Government might be forced to mount new national surveys which would inevitably increase respondent burden

as well as cost. I urge you to reconsider the bill’s treatment of the

method of funding for these programs.

Mr. Chairman, I appreciate this opportunity to be here, and I’d

be glad to try to answer any questions.

[The prepared statement follows:]

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Chairman SHAW. Thank you, Dr. Norwood.

As some of our regular attendees here know, those buzzers mean

that we’ve got to go down and vote, and there’s two votes on the

floor. I hope all of our witnesses on this panel and the next panel

can stay. The Members, we will be gone for approximately 15 minutes, and so we will stay in recess until that time.

[Recess.]

Chairman SHAW. If you could be seated, we will commence the

hearing.

Mr. Levin, to inquire.

Mr. LEVIN. Well, it’s an interesting panel. I think there’s basic

agreement we want to try to reduce paperwork where we can and

we don’t want employers paying unnecessary taxes. Hopefully, we

can have an open dialogue where we go from here without too

many pre-set positions. One thing that would be helpful is if we get

the facts—if we get a common understanding of the facts.

It was mentioned that the administration’s request would

underfund the needs. I think the facts are that the appropriations

for several years did not meet the administration’s requests. Therefore, the administration reduced its request. Also, the reference, I

think, Mr. Cupp, about the employment services, the underfunding,

there’s been a big argument here about the funding of the employment service and I think you need to study the history of that. Indeed, at one point, there was a proposal, the previous administration’s, to abolish the employment service.

But let me just ask, and I want it to be as constructively as possible, but you mentioned, Mr. Jamerson, about the need to individualize to meet the needs of our citizens and, with the welfare reform bill as we finally worked it out, there was flexibility within

the States, but within some parameters, a requirement to meet

health needs, daycare needs, a maintenance-of-effort provision. We

worked it out.

Now I think each of these programs has its own characteristics.

But individuality is one thing, but meeting responsibilities is something else. Unemployment in one State affects another and, indeed,

unemployment in one State calls upon the Federal Government—

other States—to help out. And the three of you come from States

that, in terms of certain markers, are way below the norm. And the

question is: How much individuality do we want?

For example, recipiency rates—that’s the percentage of the unemployed who receive benefits—New Hampshire, you compare it

with my State of Michigan, your—New Hampshire is far less than

even half of the recipiency rate of Michigan and you’re near the

bottom. And Florida isn’t much better. You’re half of—you’re better

than half, but you’re 20 points—percentage points—below Michigan. And Ohio’s a bit better on recipiency rates, but when it comes

to solvency, you’re, I think, Mr. Cupp, in pretty bad shape, aren’t

you? This chart shows you—you’re at .63. You have six-tenths of

a year—I think that’s what it means—to—you’d have sixty threeone hundredths of a year. I think these are accurate figures, and

in terms of replacement rates, the percentage of wages that’s replaced, Ohio and New Hampshire are very low.

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Now, I mean, I want us to take a fresh look at this, but I think

we want some flexibility for the States, but isn’t there also a level

of responsibility incumbent on the States. Yes, all three of you.

Mr. CUPP. Mr. Chairman, Mr. Levin, in terms of the solvency

issue, it seems to me that the benefit issue is really a little different issue in regards to this bill in terms of my testimony, because States have historically set their benefit levels and this bill

wouldn’t change that. In terms of solvency—and I don’t know what

chart you’re looking at——

Mr. LEVIN. Well, this is from the unemployment insurance service and it’s the calendar year 1997 and it has Ohio at .63. You’re

tenth from the bottom.

Mr. CUPP. We have a $2 billion surplus and we have, in terms

of our rate structure, we have automatic triggers that go into effect

when there isn’t a sufficient safe level in our fund. And this was

agreed to by the legislature and by business and labor interests

years ago. And so when there is a need to replace the fund or to

add additional money to it, the rates—increased rates automatically trigger and the money will go into the system. So we believe

we do have a sufficient safe level.

Mr. LEVIN. Well, I mean, there can be agreement in the State.

That’s part of the dilemma of one proposal. It would let every State

set its solvency rate and it’s interesting, here New Hampshire has

a much higher solvency strength. In fact, it’s more than three times

Ohio and what that means is that essentially every State sets its

own solvency rate and when it gets into trouble, you come looking

here. I think that’s what it means.

And we’ve been through the pain of regional recessions. Each of

you should understand that. Surely you should, from Ohio, and I

think Florida, which came later. And we had immense difficulty responding to that because only a number of States were impacted

and we had to convince the majority of States to cough up their

taxpayers to pick up, through Appropriations, the funding so there

would be loans available and so that there would be extended benefit.

So—and I’ll finish, Mr. Chairman—I think we need very much

to take a fresh look, that we’ve got to look at the blend, and I’ll

finish. If you look, Mr.—you talked about what you’re getting now

in FUTA return, 38 percent. In 1992, Ohio got 188 percent. New

Hampshire got 154 percent. Florida got 205 percent. You got double what you paid in because of the recession and I think we ought

to dig out what the figures were for 1983 and 1984 in Michigan

and Ohio and States that were impacted, what we got back compared to what we paid in. Because the recession of 1983, 1984,

1985 was much, much more severe.

And our fund, our proposal, will increase the returns to States

for FUTA. That should happen. But there is an insurance principle

that has to be built in here.

Chairman SHAW. In looking at the chart that you’ve been referring to, it’s not a snapshot, it’s a chart that goes back during the

last recession. Mr. Weisenburger, are you familiar with this? And

would you like to comment on that?

Mr. WEISENBURGER. Yes, I am. The chart that covers the 1991,

1993 recession includes about $12 billion under the Extended

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Emergency Unemployment Compensation Act, which was a Federal—100 percent federally funded extension of unemployment benefits because the extended benefit program that the States run did

not work. So this was not a return of FUTA dollars to the States,

as the Department said. An additional $16 billion came from Federal General Revenue. The $12 billion balance in the EUCCA Account was literally stolen from the EUCCA Account to fund EUC,

the emergency unemployment compensation program, simply because the Extended Benefit program, as it’s currently written,

didn’t work—only worked in nine States. And the Congress, being

very concerned that the program didn’t work, passed an Emergency

Unemployment Compensation Act and the $12 billion from the

EUCA account is being included in the Department’s documentation and called a return on FUTA revenue to the States when, in

fact, it was not. New Hampshire received no money from the Federal Extended Benefits program.

Chairman SHAW. I think, you know, that just throws these figures out. They’re just totally—they have no application. But what

I would like to do is to have our staff come up with a year-by-year

chart to chart these amounts for these States so we can really take

a close look at it and take out the special appropriation that was

made at that time. So we do have honest figures to look for and

then we can go back and look at it because it’s something that we

should be concerned about.

Dr. Norwood.

Ms. NORWOOD. Yes.

Chairman SHAW. I share your views on the importance of maintaining good data about the unemployment benefit receipts and

other labor market information. How can we best make sure that

the data is still available if we do press ahead with H.R. 3684?

Ms. NORWOOD. Well, I’m not sure, because what your bill does,

really, is to return to the States for purposes of unemployment insurance, the money, the 2 percent setaside is relatively small considering that it goes to the Secretary of Labor to do the—whatever—oversight, and I think that everybody agrees there should be

at least some reporting to the Federal Government and the IRS

and a variety of other programs.

The Bureau of Labor Statistics gets about $53 million in the latest budget for the Federal/State programs. All of that goes to the

States. I mean, BLS is a pass-through. The Congress approves this.

It goes into the BLS budget. BLS turns all of that money over to

the States. It retains none of it. I don’t see how, out of the 2 percent set-aside, the Secretary of Labor could possibly take $53 million out of about—what—$120, I hear, and put it into statistics.

Therefore, what would happen is that you’d have to go to every—

every State would have to go to its own legislature and I can just

tell you that what would happen is some States would approve it

and some wouldn’t.

Chairman SHAW. Well, how much would it take?

Ms. NORWOOD. Well, for this year, it’s about $53 million, as I understand it, that the States get. I’m not—I don’t know what it

would be next year or what it was last year. But this is something

that’s agreed to between the Bureau and the States. But I think

it’s indicative of the kinds of problems that exist when you have

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a set-aside. The other point is that that whole fund could go down

if the taxes are reduced, of course. And, as I pointed out, 16 States

have reduced the tax.

So I’m very concerned about that. There is some confusion, I

think, because it comes in and—the labor market programs come

in in several places in the law. But the problem is the amount that

is there. And it’s indicative of what is happening, really, when you

take a set-aside of a fixed pot of money for some very good programs that exist. I mean, I recognize that statistical programs have

to take their lumps with everybody else. We’ve done that. But I’m

very worried about this, because I’m afraid that what it will do is

increase the burden on respondents.

Chairman SHAW. Mr. Jamerson, how do you explain the slow return that the State of Florida gets on the unemployment taxes

paid?

Mr. JAMERSON. Mr. Chairman and Mr. Levin, I think the slow

return on the investment is, again, a factor—and I’m learning this.

My UI director is here with me—based upon what I think this

bill—one of the things this bill attempts to address is the formula,

the formula that currently exists is arcane and perhaps needs to

be revisited in some fashion. And that’s what I would expect part

of your legislation to do; look at this formula. The recipiency rate,

as I understand the recipiency rate, that’s only one factor that’s

brought into the equation to determine the amounts. And, as far

as Joe said, the EB, as I understand the situation, Florida won’t

be triggered by it.

So we would hope that, as the discussion evolves around your

legislation, your good legislation, there would be a way to look at

this formula which has, I believe, outlived its usefulness, Mr.

Chairman, and that’s part of Florida’s problem in getting our—

what we call a fair share.

Chairman SHAW. Thank you.

Mr. LEVIN. Let me just take a few minutes if I might to finish

this off. Do you favor the improvement in the triggers in the bill

that Mr. English and Mr. Rangel and I have proposed?

Mr. CUPP. I’m not familiar with them.

Mr. WEISENBURGER. We believe that changes need to be made in

the extended benefit program that allow the program to work in

States that have a need to extend benefits. In New Hampshire, we

just recently passed a total unemployment rate trigger on top of a

trigger that doesn’t work. We have not triggered on an extended

benefit since February of 1981. This year our legislature enacted

what it is in H.R. 3697.

Mr. LEVIN. Okay.

Mr. JAMERSON. I’m not that familiar with them either, Mr.

Levin.

Mr. LEVIN. All right. Let me just say that—I take it that’s more

or less yes. You know, the problem is that your proposal has no improvement in the Extended Benefit program. There isn’t one, except as the States would provide it, as I understand it. And let me

just say something—and Mr. Shaw, I think it would be good to look

at these, at the figures, because, you know, we tried for years to

improve the Extended Benefit program and it was those improvements were opposed by the people who are sponsoring Mr. Shaw’s

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bill. We fought like the dickens to do that and we could not get the

votes. And I think it reflects, Mr. Jamerson’s, your statement, ‘‘too

much power in the hands of the States and the program loses its

national character and could lead to a race to the bottom.’’ But, you

know, if we had improved the trigger, Mr. Shaw, these figures——

Chairman SHAW. By the way, my bill does have the Extended

Benefit provision in it. So your character——

Mr. LEVIN. With any improvement in the trigger?

Chairman SHAW. It continues the way it is. Our bill attacks the

administrative problem, which I think you would admit is a nightmare and it’s a damn waste of money.

Mr. LEVIN. I think there are real problems. I don’t think you

want to destroy the partnership in doing so. And all I can say is,

if there had been an ample trigger mechanism, these figures of 205

for Florida in 1992, 154, and 188 would have been probably more

or less the same, except instead of the money coming from the General Treasury, Mr. Weisenburger, they would have come from the

unemployment funds.

And so we’ll take a look of these figures, but if there had been

an appropriate trigger that some of us had fought for for years, I’m

not sure you wouldn’t have received much more in 1992 than you

paid in, because you would have triggered. So you ought to be in

here fighting to change and improve the trigger mechanism. That’s

what you should be doing, in addition to straightening out the administrative programs.

Chairman SHAW. You through? [Laughter.]

Okay, I would like to—perhaps someday you will share with me

these figures that are fed to you by the administration that we

don’t get. Well, I didn’t get them. I don’t know where you got them.

Mr. LEVIN. Oh, no, no. They’re not Fed—I mean—what? They’re

published figures. I mean, they’re not fed to me by anybody. I just

read them.

Chairman SHAW. Just pull them out of the air, I guess.

Okay, lady and gentlemen, I appreciate your testimony.

Mr. LEVIN. Thank you.

Chairman SHAW. Now we will bring our final panel. Mr. William

Petz, Jr., manager, Payroll and Unemployment Taxes, USX Corporation, Pittsburgh, Pennsylvania; Mr. John P. Davidson, staff attorney, Chrysler Corporation, Auburn Hills, Michigan; and Marc

Baldwin, who is the assistant director of the Public Policy Department of American Federation of Labor and Congress Industrial Organizations.

Excuse me for laughing, but it’s interesting to note that, two

chairs down, the man from labor sits. [Laughter.]

Well, we might have a standoff.

Mr. LEVIN. Actually, there are good relationships between them.

Chairman SHAW. Mr. Petz.

STATEMENT OF WILLIAM PETZ, JR., MANAGER, PAYROLL AND

UNEMPLOYMENT TAXES, USX CORPORATION, PITTSBURGH,

PA

Mr. PETZ. Thank you, Mr. Chairman.

Chairman SHAW. And again, I have all of your full statements

which will be made a part of the record.

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Mr. PETZ. Good afternoon to you, Mr. Chairman and Mr. Levin.

Again, my name is William Petz, Jr. I am manager of the payroll

and unemployment compensation taxes for USX Corporation, a

major worldwide producer of steel products, energy, and oil and

gas, headquartered in Pittsburgh, Pennsylvania.

I thank you for the invitation to speak today in support of H.R.

3684, the Employment Security Financing Act of 1998. USX would

like to take this opportunity to commend Chairman Archer and especially you, Mr. Chairman and cosponsors for this historic step in

advancing the reform of the Federal Unemployment Tax administrative finance process.

Over the years, USX has been at the forefront in support a sound

and efficiently run State UC program. Our company believes that

H.R. 3684 will bring those characteristics back to the program. As

you know, State UC administrative expenses are funded solely by

FUTA dollars and the funding level must be such that claim processing and job search services for the unemployed individual are

not jeopardized by the underfunding of Congress.

However, in recent years, Congress has funded less than 100 percent of the State UC administration costs and this has resulted in

a serious deterioration and service for employers, unemployed

workers eligible for benefits, and other job seekers. Annual FUTA

payments by employers total nearly $6 billion. The Congress has

been appropriating only about 60 percent or $3.5 billion.

This lack of sufficient funding has forced the State UC agencies

to cut critical services that affect the unemployed worker, such as

work search and counseling. It has also decreased the State’s ability to monitor and prevent fraudulent UC payments. In addition,

various States have taken it upon themselves to fill the deficiency

in funding by Congress to enact over $200 million in supplemental

State payroll taxes on business. In effect, USX and other employers

are paying for UC administration costs via three forms: FUTA tax,

through State supplemental payroll taxes, and through inflated UC

tax rates by longer benefit durations.

This is particularly frustrating for employers given that the

FUTA trust fund accounts contained over $19 billion at the end of

Fiscal Year 1997 that was primarily being used to offset general

spending by Congress. H.R. 3684 will end that kind of productive

over-collection of more than $2 billion a year in FUTA taxes. It will

assign the responsibility for the collection, reporting and appropriation of FUTA tax to the States.

USX believes that with additional administrative financing, the

State’s will be encouraged to run a more efficient UC benefit and

employment service program for the unemployed individual without taking anything away from current claimant rights and privileges or veterans or LMI statistics.

USX strongly supports H.R. 3684 for the following reasons: Sufficient funding for administration of State UC programs will be provided.

The FUTA surtax of two-tenths will be repealed after the year

2003. An example of how it affects an employer, USX currently

pays a surtax of over $.5 million each year. Just to pay for this

temporary surtax obligation, USX must sell about $7,100 tons of

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steel products and over $100,000 of equivalent barrels of refined oil

products. H.R. 3684 will eliminate the need for that $200 million of State

supplemental taxes. It will also promote lower UC spending and

taxes, because each State will become the tax collector, the appropriator, and the overseer of how the employers FUTA tax is used.

The bill will eliminate the duplication and collection of reporting of UC taxes. It is estimated to save employers most of the $100

million which is annually being paid to the U.S. Treasury by the

FUTA administrative fund for these services.

And finally, H.R. 3684 will codify the quarterly payment of

FUTA and State UC taxes. USX does not support the administration’s Fiscal Year 1999 proposal to pay and support FUTA and

State UC taxes monthly, which is nothing more than a gimmick

that does not actually raise any new revenue. More importantly, if

the administration’s proposal were enacted, it would triple the reporting for USX. Presently, it costs about $7,000 for us to make our

reports and deposits of FUTA tax and State UC taxes. It would triple that burden to around $21,000. It would also place another unfunded mandate on employers and States.

In summary, USX supports H.R. 3684 because it finally addresses the problem of underfunded administrative financing for State

UC programs. It will allow each State to control its own UC program with sufficient funds being provided to pay out UC benefits

to the jobless and deliver needed work search assistance to unemployed individuals while maintaining the program’s integrity. It is

definitely a win-win-win proposition for employers, the jobless, and

State UC agencies. Employers FUTA dollars will be used as it was

intended.

This, Mr. Chairman, ends my prepared remarks.

[The prepared statement follows:]

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Chairman SHAW. Thank you.

Mr. Davidson.

STATEMENT OF JOHN P. DAVIDSON, STAFF ATTORNEY,

CHRYSLER CORPORATION, AUBURN HILLS, MI

Mr. DAVIDSON. Thank you, Mr. Chairman, Mr. Levin. I appreciate the invitation to address you this afternoon on H.R. 3684.

As an opening comment, I want to say that Chrysler strongly

supports an efficiently run employment security system throughout

the country. While supporting this system, we also recognize the

need for individuality among the States, as they all have their special circumstances to be addressed.

The FUTA tax which is the subject of H.R. 3684 is the issue

being addressed here today. This tax is dedicated to financing the

administration of the employment security system and creates a reserve for the payment of Federal share of extended benefits. Employers pay approximately $6 billion a year in FUTA taxes.

Throughout the years I have seen many State employment security agencies struggle to deliver the services because they do not

have the funds avot have the funds available. Being one of the

large customers of the State agencies, we are concerned about

these reductions. The reduced funding has left the State’s with the

following alternatives: One, supplement the administrative funds

for their State general revenues; two, assess a special State tax

solely for the supplementation of the available funds; or three, cut

services by closing branch offices or diverting available resources to

other functions.

States should not be confronted with such choices. The funds are

there, but are being diverted to other purposes not intended by

FUTA.

Employers and workers rely on the services of the Employment

Security Agencies. We have instructed our plants to use the employment service exclusively to obtain workers. We also rely on the

unemployment insurance agencies to pay benefits in a timely and

accurate manner to eligible employees. It is troubling that our employees are unable to receive the services while employers continue

to provide adequate revenue through the FUTA taxes.

Perhaps the greatest concern is the loss of program integrity.

Based on USDOL quality reports, error rates of 10–15 percent are

not unusual. In 1997, nearly $20 billion were paid in unemployment benefits. That means, assuming a 10 percent error rate, nearly $200 million were paid incorrectly. That is money employers

have paid and entrusted to the States to properly administer. Unfortunately, most of the money paid in error is never recovered and

the trust funds and the employers suffer from that loss.

The biggest change which has taken place under the guise of efficiency is the use of automated systems for applying and certifying

for benefits. While this is good administratively, it adds to the decline in program integrity. Let me illustrate with a couple of scenarios that we have encountered.

When States started allowing claims by mail, we actually had a

former employee certifying for and receiving benefits while he was

in prison. Another situation that we have caught where improper

benefits were paid is when a person is hospitalized. With phone

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certification, the individual can call from his hospital bed. How can

these claims be caught?

Don’t misunderstand, I am not advocating returning to the old

days when people were lined up around the block waiting up to six

hours to be serviced. Instead, I’m advocating more funds for the

audit and the police functions at the State agencies. Improper benefits are a direct cost to employers since they are charged to the

State’s experience rated trust funds.

How does this address the need for H.R. 3684? Where States

have adequate funding to administer the program, they can staff

the agencies to improve the integrity and the services provided.

The squeeze caused by the reduction in funding has forced States

to seek approximately $200 million per year from other sources,

notwithstanding the fact that, there is $2 billion in surplus FUTA

being collected.

The main feature of H.R. 3684 is the establishment of the State

specific accounts for the deposit of FUTA revenues. It will be up

to the State legislatures to appropriate the funds needed for proper

administration of their system. The funds will still be held by the

U.S. Treasury, as are the benefit trust funds.

The second feature is the collection of the FUTA by the States.

This would eliminate the need for the employers to file two tax returns each quarter. It would also eliminate the collection expense

currently charged by IRS while increasing the integrity of the tax

collection.

And then, there is the notorious two-tenths temporary tax. This amounts to an unnecessary $1.5 billion per year of employer payroll taxes. The purpose of this tax was to repay a loan for emergency benefits in the mid-1970’s. This loan was repaid in 1987.

There is no need for that tax to be continued at this time, much

less, to the year 2007. H.R. 3684 will repeal this tax in 2004.

I’m not going to lengthen this testimony discussing the rest of

the bill—others will be doing that. I’m here to say that we support

this bill and hope the committee and other members of Congress

will support its passage.

Mr. Chairman, thank you for your attention.

[The prepared statement follows:]

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Chairman SHAW. Thank you, Mr. Davidson. I’d like to make one

correction in your testimony. I hate to do it, but the math was incorrect. Ten percent of 20 billion is 2 billion, not 200 million.

Mr. DAVIDSON. I’ll accept that correction. [Laughter.]

I’ll just add, I think that just highlights the problem further.

Chairman SHAW. Mr. Baldwin.

STATEMENT OF MARC BALDWIN, ASSISTANT DIRECTOR, AFL–

CIO PUBLIC POLICY DEPARTMENT

Mr. BALDWIN. Thank you, Mr. Chairman and Members of the

Subcommittee, for the opportunity to present our views this

evening. I’ve submitted a statement for the record, so I’ll briefly review the key issues in that.

Our UI system is a program of roughly thirds. About one-third

of the unemployed receive benefits, one-third of their last wages

are replaced, and one-third of those who enter the system exhaust

their benefits before finding a new job. The record of State programs fall short of the goals of the UI system in the new economy.

The road to a one-third system is not travelled because governors

or State agency’s want to restrict access or because State agency’s

are poor administrators. The one-third system emerges precisely

because of the decentralized structure of the benefit side of the program which devolution advocates mistakenly would expand. Because States face competitive pressures from their neighbors, they

have strong incentives to limit benefits in the name of business climate. Whatever we may think of the ultimate effectiveness of this

economic development model, the fact that benefit recipiency rates

have fallen from 75 to 35 percent over the last 20 years is directly

related to interstate competition in this downward pressure.

H.R. 3684 and the other devolution proposals would subject additional elements of the UI program to this pressure, limiting the national effectiveness of the program. Instead of following established

social insurance principles, like pooled risk and a broad revenue

base, devolution proposals force individual States to rely almost entirely on their own funding bases.

This isolation combined with interstate competition provides an

incentive to underinvest in the Nation’s re-employment system,

promoting privatization and shifting funds from administration to

benefits. Clearly, by maintaining FUTA funds in the unified budget, the current system also contains incentives that encourage

underinvestment, in this case, in pursuit of a balanced Federal

budget.

But devolution cures this structural problem by creating more severe structural problems. The concern about Federal trust funds

being unreal or not fiduciarily sound, as was mentioned this morning, to me, is only heightened by a proposal to create 50 such

State-based funds. H.R. 3684 dismantles the current system of

pooled risk and reduces funding by one-fourth, putting State programs in jeopardy during recessions.

In an attempt to rebuild the current broad-sharing of risk, the

proposal suggests two small funds—a revolving loan fund and a

small State fund. Our written testimony details the administrative

difficulties with these inadequate attempts to rebuild risk-pooling

which the proposal dismantles. More broadly, this dramatic strucVerDate 20-MAR-2000 12:18 Apr 14, 2000 Jkt 063431 PO 00000 Frm 00090 Fmt 6633 Sfmt 6602 E:\HEARINGS\60840 pfrm07 PsN: 60840
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tural change runs counter to all insurance principles—pooling of

risk, fair distribution, and a broadest possible funding base.

H.R. 3697 introduced by Congressman Levin and English of this

subcommittee propose reform which is in keeping with these fundamental principles. It provides incentives funds for States which

choose to address administrative problems facing temporary and

contingent workers. It provides an increase in administrative funds

generally. It establishes a solvency measure linked, again, to incentive funds and it creates an extended benefit trigger which will

work, unlike the current measure which has resulted in Congressional emergency action when the EB system failed to trigger on

despite high unemployment.

These reforms are overdue. They have bipartisan support and

they should be passed as a first step toward longer term solutions.

Although we see the devolution proposals as a dangerous rejection of the principles which should govern insurance programs, we

are also aware of the perils caused by the current situation. Both

the administration of the program and the benefits side of the program are in need of reform. On administration, the devolution proposal seeks to address the level of funding to States by altering

both the level and the distribution of funding. A dialogue should

promote solutions which combine the best outcomes both for levels

and for distribution on the following lines:

Administrative funding to be expanded while maintaining national risk-pooling and Federal stakeholder commitments. The distribution of funding among the States should more accurately reflect the cost of an effective system in each State and actual State

expenditures. And finally, the countercyclical impact of the system

should be improved through extended benefit reform and solvency

measures.

H.R. 3697 and H.R. 3684 should provoke a broad debate about

stable financing for a system which meets the three goals of unemployment insurance as outlined in our testimony. Reforms based on

devolution only highlight inequities among the States and reject

sound principles for organizing social insurance. Instead, we look

forward to a dialogue around expanded funding and improved formula for distributing funds on the basis of need and countercyclical

reforms.

Thank you.

[The prepared statement follows:]

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Chairman SHAW. Mr. Levin.

Mr. LEVIN. Well, it’s late. I’ll be brief.

I agree with you completely about the monthly. I don’t think it’s

part of our proposal. It’s a budget proposal. I don’t think it will

happen. I also agree about the underfunding of the administrative

funding and we try to handle that. I would simply urge—you come

from a very responsible corporation—that we try to proceed not

kind of automatically choosing upsides here or getting caught in labels, but try to look at what the problem is.

I think one of the problems with the proposal with the majority,

at this point, is that if you don’t have a substantial sharing of the

risk, it can affect the administrative provisions, as well as the

other side of it. I think you have more employees in States with

high recipient rates than low. To some extent, the administrative

formula today reflects how many people the States are servicing,

and I would think you would want to keep some reflection of that.

Also, you have, I think, an unusual or beyond average proportion

of your employees in States that have had a very cyclical past. And,

if you don’t have some sharing of the risk, you’re going to have

some real problems. I don’t think the automation is the result of

the shortage of administrative fund. I think the history, for example, Michigan is something else. That went in into effect I think,

when there was a much larger receipt of administrative fund. The

present proposal on the employment service side in Michigan is to

abolish and to do things by machine—employment placement.

So, I would hope that we can take, Mr. Chairman, a look at those

administrative problems. Extended benefit program needs to be

looked at. The last thing we want to do is to maintain the status

quo, I would hope, which your proposal does. So, this isn’t going to

happen this year. We’ve got some time.

Chairman SHAW. Whose proposal maintains the status quo?

Mr. LEVIN. On extended benefits?

Chairman SHAW. Oh, on extended benefits.

Mr. LEVIN. I would hope that we could sit down and have a true

dialogue about looking at the unemployment system in an age

which is very different from when it was formed. But, I do think

that reflexive shifting to the States at a time when it isn’t only

globalization internationally, there is globalization nationally, is

something we really need to look at and I hope we can all do it together.

I don’t know, Mr. Davidson, and Mr. Petz and Mr. Baldwin, you

want to comment.

Mr. DAVIDSON. Mr. Chairman, if I may respond to it briefly?

Mr. Levin, I don’t want my comments with regard to automation

to sound like I disapprove of that. I do agree that it is a good thing

to have. The concern that I had that I tried to address is that because of the automatization, the integrity of the program is suffering. And because it is suffering, it needs a tighter policing or auditing or control within the State agencies. Unfortunately, the insufficient revenues prevents them from doing that.

This is the point that I was trying to get to.

Mr. LEVIN. I would just say that I worry about the quality of the

system. In fact, one of my objections to what’s proposed in Michigan in terms of the abolition of the employment service is that, I

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think, you’re never sure who’s looking for work. So, let’s not argue

that—discuss it.

But, I just hope all the focus isn’t on the .2 percent. We’ve debated that off and on and our proposal continues to 2003, and I understand the resistance to it. But, let’s also focus on the larger

needs of tailoring an unemployment system in this age where more

and more dislocation is not temporary, but permanent. And where

we need to be sure where people like we reformed the welfare system, if they’re going to be laid off, in more cases than was true 20

years ago, permanently, are trained and re-trained to go back to

take another job.

Mr. DAVIDSON. Thank you, Mr. Chairman.

Chairman SHAW. We’ve brought up reforming the welfare system, and I think somewhere during this debate, I have to remind

you, Mr. Levin, that all through this debate on welfare reform race

to the bottom, was used over, and over, and over. Lack of confidence in the State was expressed over, and over, and over, and

all of this came from your side of the aisle—a bunch of it from you.

Mr. LEVIN. No, no, no. You never heard me once say that about

race to the bottom.

Chairman SHAW. I never heard you say that——

Mr. LEVIN. I never used that term.

Chairman SHAW. Well, you’re the only one that didn’t.

Mr. LEVIN. I never.

Chairman SHAW. But anyway, we had confidence in the States.

I have confidence in the States. Frankly, the three gentlemen representing States here today, I have ultimate confidence in them

and I have a total lack of confidence in the present system and the

way it’s being administered.

There is no question in my mind, tax on employment is the most

regressive tax you can have and I’m sure all of us would agree to

that—business and labor. And this is part of the compensation of

the people you represent in labor unions. It’s a question of this

being a tax on their employment. Now the fact that the employer

pays it, makes no difference. It’s still a tax on employment and it’s

regressive.

I think it is really, really outrageous that these huge surpluses

that we have built up, that don’t even exist—and you talk about

actuarialy sound. Nobody is going to say a program where there

‘‘ain’t no money in it’’ is actuarialy sound. It’s an IOU from the taxpayers that they’re going to have to come up, cough up with the

money on the future budgets, future congress’s and future administrations. There’s no recession out there. I know that—you know

that—we all know that. There are going to be times when that socalled stealth surplus is depleted and comes down to zero, but

that’s just simply a book entry because it’s going to be taxed

against the taxpayers of the day of the recession. We know that.

There is no surplus. It is a fraud. It is a total fraud and I think

the quicker we face up to that, and I think the .2 percent is a very,

very valid issue. A temporary tax is a temporary tax. And it should

become a permanent tax. And to make things even worse, it’s kept

as a permanent tax in order to make it look like we’re balancing

the budget.

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I do have one question that I’d like to ask you, Mr. Baldwin. As

I read your testimony, on page 2, you discuss various ways that

States have narrowed eligibility for benefits which you oppose, and

I can understand that. Later on page 6, you argue that more extended benefits should be provided, half of which would come from

State taxes through the use of a more generous trigger mechanism.

Then, on page 7, you talk about how States should use alternative

base periods allowing more individuals to qualify for unemployment benefits.

Following through on your position on this proposal would result

in more unemployment benefits being paid out. I totally understand that. Yet, later on page seven, you talk about the importance

of establishing and reaching a solvency target that is, by building

up larger reserves in State benefits accounts to meet needs of a recession. Now how do you reconcile these competing goals? And

wouldn’t it require huge State benefit tax increases to both provide

more regular and extended benefits, and ensure that sufficient

funds are built-up for their future needs?

Mr. BALDWIN. Well, clearly, it might. The extended benefit piece

would be in the future. So, you would have funds built-up between

now and then to cover that. That’s paid for in the Levin-English

proposal.

The administrative side of the alternative base period change is

covered by the Levin-English. That covers about 6–8 percent of the

unemployed. But it has a smaller price tag because they are not

average employees. They’re virtually, by definition, low wage employees. So, their impact on the budget is actually smaller than

that.

In your own State, the State estimate was extremely low. I’m actually quoted in the Wall Street Journal questioning whether it’s

high enough. So, I’m acknowledging that these things will cost

some money. But I believe we have a national commitment to the

unemployment insurance system, not just the administrative side,

but the benefits side. It’s vital to the countercyclical capacity of the

economy. It’s vital to the income support for individuals who lose

their jobs and increasingly, it is the gateway to re-employment

services.

It’s no accident, in my mind, that the percentage of the unemployed receiving benefits and the durations are moving in opposition directions. Fewer people are getting benefits and durations are

climbing. Most people would say that benefit receipt would climb

and durations would climb together because they have this image

that people sit around. On the contrary, people get into the UI system and that is their gateway to re-employment services. So, I actually think that the cost will be lower than a lot of folks would

estimate.

Chairman SHAW. Mr. Baldwin, I recall vividly, the hearing that

we had on this when we were extending the benefits. At that time,

Mr. Downey was chairman of this committee. And I don’t recall

whether I was a ranking Republican member or just one of the

members of this committee, but from all the statistics we sought,

people went back to work about the time the benefits ran out. This

was clearly a trend. And to have more generous benefits would appear, or longer period-of-time benefits, particularly in good times—

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I’m not talking about really tough times, I’m talking about good

times—would simply make the periods of unemployment even

longer.

Surely, you’ll certainly—maybe without enthusiasm—but agree

with me that people tend to look harder for jobs and tend to go

back to work towards the end of the benefit period.

Mr. BALDWIN. That’s correct. The operative question though is,

will they find them. And in fact, because one-third of the unemployed actually exhaust benefits, that suggests that there must be

something else going on in the system that extends their durations

whether they have continued to received unemployed insurance or

not.

Chairman SHAW. But do you have statistical data as to what

happens to them when they fall off of the——

Mr. BALDWIN. There was a Department of Labor study on benefit

exhaustees in the 1980’s—yes. And, I’m not sure what the answer

is, but I know that there is a known answer, at least in that setting.

Chairman SHAW. Well, we’ll find out what they came up with

back in the 1980’s.

Mr. BALDWIN. There’s another explanation for the spike right before you exhaust and that is, that you are looking for a job which

replaces a higher percentage of your wages than what you’re able

to find. Closer to exhausting benefits, you give up and take the

first job you can get. There’s a lot of evidence of that in the displaced worker programs which show that most people have to

change jobs based on—there may be some data in my testimony—

lose up to 20 percent of their income. I think there’s some numbers

to that effect, in our testimony.

Chairman SHAW. Well, I think all of us should be outraged by

the fact, maybe for different reasons—Mr. Baldwin, you’d be outraged by the fact that these surpluses are building up and being

used to balance a budget because you feel there should be more

generous benefits.

Business, on the other hand, feels that their payroll tax is being

used for something for which it wasn’t intended. And this is being

used to balance a budget and they’re being taxed unfairly.

And I think back in the middle—I think what we have to remember here and don’t lose sight of the fact, that a payroll tax is part

of the compensation for America’s worker. The fact, at the bargaining table, if we can save those monies, save some administrative costs that you will be looking for a greater share from the corporations because it will be showing in their income statements.

And you have a great deal of interest in their income statement

during the time of contract negotiations.

So, I think this is one area where we can agree that we should

be pushing together, and exactly where it’s all going to shake out

is another thing. But I think the present system that we all agree

is an absolute outrage.

I want to thank all the witnesses of all the three panels that we

had here today. I think we’ve all learned a great deal. I think that

all of us are going to have to go back to the drawing boards and

make some adjustment, but we do agree, and it’s fine to come away

from here, and even if you don’t agree what road we’re going to

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take, that we’re going to get out of this mess and we’re going to

start, if not in this Congress, we’ll get the job finished up in the

next Congress.

Thank you all very much.

This hearing is adjourned.

[Whereupon, at 5:45 p.m., the hearing was adjourned subject to

the call of the Chair.]

[Submissions for the record follow:]

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