U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

88–995 2003

TO REVIEW STATE USE OF FEDERAL

UNEMPLOYMENT FUNDS

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

MARCH 20, 2003

Serial No. 108–9

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

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 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

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 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MAX SANDLIN, Texas 

STEPHANIE TUBBS JONES, Ohio 

Allison H. Giles, Chief of Staff 

Janice Mays, Minority Chief Counsel 

SUBCOMMITTEE ON HUMAN RESOURCES

WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut 

SCOTT MCINNIS, Colorado 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

PHIL ENGLISH, Pennsylvania 

RON LEWIS, Kentucky 

ERIC CANTOR, Virginia 

BENJAMIN L. CARDIN, Maryland 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

CHARLES B. RANGEL, New York

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

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

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

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

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

is further refined.

iii

C O N T E N T S 

Page

Advisories announcing the hearing ........................................................................ 2, 4

WITNESSES 

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

U.S. General Accounting Office, Sigurd R. Nilsen ................................................ 21

Louisiana Department of Labor, Dawn Romero Watson ...................................... 48

National Association of State Workforce Agencies, and Oklahoma Employment Security Commission, Jon Brock ............................................................... 35

National Employment Law Project, Maurice Emsellem ....................................... 42

Ohio Department of Job and Family Services, Melissa DeLisio .......................... 39

SUBMISSIONS FOR THE RECORD 

Texas Workforce Commission, Austin, TX, Diane Rath, T.P. O’Mahoney, and 

Ron Lehman, letter .............................................................................................. 62

UWC—Strategic Services on Unemployment & Workers’ Compensation, Eric 

Oxfeld, and Society for Human Resources Management, Deron Zeppelin, 

joint statement ..................................................................................................... 63

Virginia Employment Commission, Richmond, VA, Dolores Esser, statement .. 66

(1)

TO REVIEW STATE USE OF FEDERAL 

UNEMPLOYMENT FUNDS 

THURSDAY, MARCH 20, 2003

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HUMAN RESOURCES, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 1:00 p.m., in room 

B–318, Rayburn House Office Building, Hon. Wally Herger (Chairman of the Subcommittee) presiding. 

[The advisory and revised advisory announcing the hearing follow:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HUMAN RESOURCES

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1025

March 13, 2003

HR–1

Herger Announces Hearing to Review

State Use of Federal Unemployment Funds

Congressman Wally Herger (R–CA), Chairman of the Subcommittee on Human 

Resources of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing to review State use of $8 billion in surplus Federal 

unemployment funds distributed in March 2002. The hearing will take place on 

Thursday, March 20, 2003, in room B–318 Rayburn House Office Building, 

beginning at 1:00 p.m. 

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

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

The Unemployment Compensation (UC) program is a State-Federal partnership 

under which benefits are paid to laid-off workers who have a history of attachment 

to the workforce. Federal payroll taxes paid by employers support Federal responsibilities under the system, including certain administrative expenses, loans to 

States, and the Federal half of extended benefit costs. These Federal taxes are held 

in accounts that are part of the unified Federal budget. 

When balances in the Federal accounts exceed certain ceilings, excess funds are 

generally transferred to State accounts, under a process known as ‘‘Reed Act transfers’’ in reference to legislation first passed in the 1950s. However, in recent years 

a provision in the 1997 Balanced Budget Act (P.L. 105–33) retained most excess 

funds in the Federal accounts in an effort to reduce Federal deficits. By early 2002, 

this change had resulted in the accumulation of significant surpluses in the Federal 

accounts. 

The Job Creation and Worker Assistance Act of 2002 (P.L. 107–147) transferred 

a total of $8 billion in Federal unemployment funds to the States. The legislation 

provided that these funds could be used for unemployment program administration, 

payment of unemployment benefits, and re-employment efforts. In addition, States 

could use these funds to provide unemployment benefits to individuals not otherwise 

eligible for regular UC, such as those seeking only part-time work or those eligible 

only under an alternative base period. 

In announcing the hearing, Chairman Herger stated, ‘‘In March 2002, Congress 

transferred an unprecedented $8 billion to help States provide unemployed workers 

with benefits and support in finding new jobs, including by keeping payroll taxes 

low. This hearing will review how those funds have been used by States to assist 

workers and prevent tax increases, among other important uses.’’

3

FOCUS OF THE HEARING: 

The hearing will focus on how States have used the $8 billion in Federal unemployment funds distributed in March 2002. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Due to the change in House mail policy, any person or organization 

wishing to submit a written statement for the printed record of the hearing should 

send it electronically to hearingclerks.waysandmeans@mail.house.gov, along with a 

fax copy to (202) 225–2610, by the close of business, Thursday, April 3, 2003. Those 

filing written statements who wish to have their statements distributed to the press 

and interested public at the hearing should deliver their 200 copies to the Subcommittee on Human Resources in room B–317 Rayburn House Office Building, in 

an open and searchable package 48 hours before the hearing. The U.S. Capitol Police will refuse sealed-packaged deliveries to all House Office Buildings. 

FORMATTING REQUIREMENTS: 

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

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

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

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

files for review and use by the Committee. 

1. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along 

with a fax copy to (202) 225–2610, in Word Perfect or MS Word format and MUST NOT exceed 

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely 

on electronic submissions for printing the official hearing record. 

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

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

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

by the Committee. 

3. Any statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness. 

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

Wide Web at http://waysandmeans.house.gov. 

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

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested). 

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

f

4

* * * POSSIBLE TIME CHANGE * * *

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HUMAN RESOURCES

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1025

March 20, 2003

HR 1–REV

Possible Change in Time for Hearing to

Review State Use of Federal Unemployment 

Funds

Congressman Wally Herger (R–CA), Chairman, Subcommittee on Human Resources of the Committee on Ways and Means, today announced the Subcommittee 

hearing to review State use of Federal unemployment funds previously scheduled 

for Thursday, March 20, 2003, at 1:00 p.m., in room B–318 Rayburn House Office 

Building, will begin 30 minutes after the conclusion of the Health Subcommittee markup. The Health Subcommittee markup will begin at 11:30

a.m., or at the conclusion of the Republican conference meeting. If the

Health Subcommittee markup ends at 12:30 p.m., then the hearing will still

begin at 1:00 p.m.

All other details for the hearing remain the same. (See Subcommittee Advisory 

No. HR–1, dated March 13, 2003.)

Chairman HERGER. Welcome to today’s hearing. 

I do want to acknowledge that circumstances in the world today 

f are much different than they were, when we planned this hearing; 

and I appreciate all of you coming to take part in this important 

part of our Nation’s democratic process. We are fortunate to live in 

a free Nation where all opinions are valued. We owe a great deal 

of debt to the brave men and women serving our country today who 

are laying their lives on the line to protect this right for all of us. 

Now to our hearing. 

This Committee has a long history of assisting unemployed workers. Today’s hearing focuses on one specific effort, the $8 billion in 

Federal funds we provided States last March. I expect additional 

hearings in the coming months will review other features of the 

Nation’s unemployment benefits program, so we will have ample 

opportunity to consider ways to improve this program and make 

the benefits more responsive to worker needs. 

This Committee also will continue to work to stimulate economic 

growth and job creation. That is the only way workers can receive 

what they really want, a paycheck, not an unemployment check. 

I want to begin by thanking our Ranking Member, Ben Cardin, 

for requesting a U.S. General Accounting Office (GAO) report on 

how States used this $8 billion we provided last year. Here is what 

we know. 

5

First, when States asked for help with budget demands, this Committee delivered. The $8 billion Federal unemployment fund 

transfer made in March 2002, was unprecedented in size. According to data from GAO and the Congressional Research Service, the 

March, 2002 transfer was six times larger than all prior transfers 

combined, using inflation-adjusted dollars. 

I have prepared the chart on my right, a copy of which is also 

in the Members’ folders, that shows how this transfer compared 

with prior transfers. 

[The chart follows:]

Chairman HERGER. Second, we have detailed information about 

how States used the broad flexibility in spending or reserving this 

money for their unemployment benefit needs. The GAO reports 30 

States were able to pay promised unemployment benefits without 

having to raise State payroll taxes. Absent this infusion of Federal 

funds, those States would have had to raise taxes in a recession. 

These funds also kept more States from having to borrow to pay 

benefits. A number of States have updated their computer and 

other systems to better handle claims and prevent fraud and abuse. 

It is noteworthy that only a handful of States used this money 

to increase unemployment benefits, but about $6 billion remains 

available to extend or expand benefits if States choose that path. 

This hearing also will let us consider the conditions under which 

these huge Federal surpluses accumulated. If we had not torn 

down the walls around this Federal money, the Federal accounts 

would have remained in surplus, while most States had to raise 

taxes to pay benefits. 

We also should consider whether broader funding reforms like 

those proposed by the Administration are needed. These reforms 


88995a.001
6

would allow States to set and collect a more appropriate amount 

of taxes to pay for getting unemployment benefits to workers in 

need. 

Without objection, each Member will have the opportunity to 

submit a written statement and have it included in the record at 

this point. 

Mr. Cardin, would you like to make an opening statement? 

[The opening statement of Chairman Herger follows:]

Opening Statement of The Honorable Wally Herger, Chairman, and a 

Representative in Congress from the State of California 

This Committee has a long history of assisting unemployed workers. Today’s hear- ing focuses on one specific effort—the $8 billion in Federal funds we provided States 

last March. I expect additional hearings in the coming months will review other features of the Nation’s unemployment benefits program. So we will have ample opportunity to consider ways to improve this program and make benefits more responsive 

to worker needs. 

This Committee also will continue to work to stimulate economic growth and job 

creation. That’s the only way workers can get what they really want—a paycheck, 

not an unemployment check. 

I want to begin by thanking our ranking Member, Ben Cardin, for requesting a GAO report on how States used the $8 billion we provided last year. 

Here’s what we know. First, when States asked for help with budget demands, this Committee delivered. The $8 billion Federal unemployment fund transfer made 

in March 2002 was unprecedented in size. According to data from GAO and the Congressional Research Service, the March 2002 transfer was six times larger than all 

prior transfers combined, using inflation-adjusted dollars. I have prepared the chart 

on my right, a copy of which is also in the Members’ folders, that shows how this 

transfer compares with prior transfers. 

Second, we have detailed information about how States used the broad flexibility 

in spending or reserving this money for their unemployment benefit needs. GAO reports 30 States were able to pay promised unemployment benefits without having 

to raise State payroll taxes. Absent this infusion of Federal funds, those States 

would have had to raise taxes in a recession. These funds also kept more States 

from having to borrow to pay benefits. 

A number of States have updated their computer and other systems to better handle claims and prevent fraud and abuse. It is noteworthy that only a handful of 

States used this money to increase unemployment benefits. But about $6 billion remains available to extend or expand benefits if States choose that path. 

This hearing also will let us consider the conditions under which these huge Federal surpluses accumulated. If we had not torn down the walls around this Federal 

money, the Federal accounts would have remained in surplus while most States had 

to raise taxes to pay benefits. We also should consider whether broader funding reforms like those proposed by the Administration are needed. The reforms would 

allow States to set and collect a more appropriate amount of taxes to pay for getting 

unemployment benefits to workers in need.

expressing our thoughts for the men and women in armed services 

Mr. CARDIN. Thank you, Mr. Chairman; and let me join you in 

f who are in harm’s way today. Obviously, it is difficult for us to continue our business, but we must continue our business. Our prayers are certainly with our troops, and the subject of today’s hearing 

is an important hearing dealing with those people who have lost 

their jobs who need unemployment insurance (UI). 

Over the last 2 years, our economy has lost 2 million jobs. A 

strong unemployment system moderates the negative impact that 

these job losses have on individual workers and on our entire economy. Our UI system is designed to take in more revenue than it 

needs during good times so it can pay out more than it takes in 

during hard times. It is exactly what has happened. 

7

The Federal Unemployment Insurance Trust Fund played such a 

role during this current economic downturn. If you look at what 

has happened in recent history, the Federal account paid down almost $3 for every $1 collected during the last year. These payments 

went out in three different forms. We had the Reed Act distributions that Chairman Herger has referred to, the extended benefits 

to dislocated workers, and administrative payments for State unemployment programs. 

We should be extremely careful, though, about undermining the 

ability of the unemployment system to provide a similar response 

during future economic downturns. In this context, Mr. Chairman, 

I challenge the wisdom of the Administration’s proposal to eliminate three-quarters of the revenue now dedicated to the Federal 

unemployment trust funds. 

Along with Senator Kennedy, I requested the GAO to evaluate 

how States utilized the $8 billion in refund distributions 1 year 

ago. Let me just observe that we supported the legislation and the 

transfer of these funds to the States. We thought that was an appropriate thing to do. However, we did not believe it would, in fact, 

add greatly to the States’ ability to increase their UI benefits to 

their workers, their unemployed workers. There was some who 

thought that that would be sufficient, just give the agreed money 

to our States and that they would be able to take care of the increased needs. That was not the case, and we thought it would not 

be the case. 

The Chairman has already referred to the preliminary results of 

that survey showing that, yes, it did help States from having to increase their UI taxes, but very few States used that money to expand the benefits itself. This means Congress still has work to do 

to eliminate barriers preventing low-wage workers and part-time 

workers from receiving unemployment benefits when they are laid 

off. 

In a GAO report from 2 years ago, you informed us that lowwage workers are only one-half as likely to receive unemployment 

benefits compared to higher wage workers, even when employed for 

similar lengths of time. Mr. Chairman, we should be working on 

solving that problem, because my observation is that it is probably 

even worse today than it was 2 years ago. 

I look forward to hearing from our witnesses, some of whom have 

traveled to Washington during this very difficult time. We appreciate you being here, and we look forward to your testimony. 

Chairman HERGER. Thank you, Mr. Cardin. 

Before we move on to our testimony, I want to remind to our witnesses to limit their oral statements to 5 minutes. However, without objection, all of the written testimony will be made a part of 

the permanent record. 

For our first witness today, we are honored to have the Honorable Emily Stover DeRocco, the Assistant Secretary of the Employment and Training Administration at the U.S. Department of 

Labor. Secretary DeRocco. 

8

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

Ms. DEROCCO. Good afternoon, Chairman Herger and distinguished Members of the Subcommittee. Thank you for inviting me 

to testify. I am extremely pleased to have the opportunity to talk 

with you about how States used last year’s Reed Act distribution. 

I want to start by thanking you, Mr. Chairman, and the Subcommittee for your leadership in crafting the legislation that established the Temporary Extended Unemployment Compensation 

(TEUC) program and transferred $8 billion in Federal unemployment funds to the States via a Reed Act distribution. This unprecedented action is helping to meet the present needs of unemployed 

workers as well as providing critical economic stimulus. 

Before discussing the Reed Act distribution, I would like to just 

mention briefly the Administration’s proposal to reform the UI system and to thank and recognize Mr. McCrery and Mr. Herger for 

their leadership on that issue. 

As you know, our proposal would promote job growth by cutting 

Federal unemployment taxes and simplifying the filing; strengthening the extended benefits program by lowering the ‘‘trigger;’’ and 

giving States new opportunities and flexibility to administer the UI 

program. The UI reform is indeed one of the Administration’s highest priorities, and I want to express my eagerness to work with this 

Subcommittee on that issue. 

Turning to the Reed Act, since the GAO and the National Association of State Workforce Agencies (NASWA) are in a better position to detail their reports to you, I want to give you a broad overview of State actions; and I do want to thank both of those organizations for the fine work they have done in surveying the States. 

Further, a complete assessment of the distribution cannot be 

made at this time because many States plan to propose further use 

of Reed Act funds in 2003. 

As to the requirements concerning the use of the 2002 Reed Act 

distribution, generally, Federal law requires that these funds only 

be used for the payment of unemployment benefits and for the administration of the UI laws and the State’s system of public employment offices. State legislative action is required if Reed Act 

moneys are used for administrative purposes and to change benefit 

eligibility provisions. 

With respect to benefits, the law specifically referenced some optional expansions of eligibility to groups of workers who are not 

currently eligible in some States and optional extensions of State 

benefits for TEUC exhaustees. 

The immediate effect of the Reed Act distribution was an improvement in the account balances of State unemployment funds. 

On average, those fund balances were raised by about 20 percent 

at the time of the distribution. This, in turn, did postpone or avoid 

the need to raise employer taxes in many States, which is important at a time when business investment is needed to spark economic growth. 

The Reed Act distributions also delayed borrowing for some 

States. Although we do have some States in borrowing status now 

9

and others may need to borrow in the future, indeed, the Reed Act 

distribution helps States that otherwise would have had to borrow. 

The GAO report indicates that, for 2003, the Reed Act distribution mitigated or avoided tax increases in 26 States. 

It is important to note that using Reed Act funds to avoid or 

mitigate tax increases now does not preclude States from using 

these funds in the future to increase benefits or for expanded services after their trust fund balances have recovered. There is no 

time limit on the use of the Reed Act distributed funds. 

With respect to benefits, the GAO report found that nine States 

increased or expanded benefits either temporarily or permanently. 

These States either increased their weekly benefit amounts, they 

enacted alternative base periods, or they enacted a State benefits 

extension for certain exhaustees. 

Given the relatively short period of time many State’s legislatures were in session following the distribution last year and the 

fact that heavy demands were already being placed on their State 

unemployment trust funds, I think this shows that the States took 

very seriously your suggestion to consider expanding eligibility. 

The Department of Labor also clarified and encouraged use of 

some of these funds for certain administrative purposes: 

One, to fund reemployment activities through the One-Stop Career Center systems; two, in line with your Subcommittee’s concerns and the President’s management agenda, to improve systems 

for preventing, detecting, and recovering overpayments of unemployment benefits; three, to improve performance; and, last, to improve customer service to both claimants and employers. 

As to State actions related to these administrative issues, according to the GAO, again, 21 States appropriated some funds for UI 

administrative improvements such as general technology, claims 

systems development and, we are pleased to note, benefit payment 

integrity. 

So, in sum, the information received so far indicates that States 

are using Reed Act funds to meet the unique needs of their workforce and their labor markets and that these funds are contributing 

to local economies as this Subcommittee intended. 

This concludes my remarks, and I will be glad to respond to any 

questions. 

[The prepared statement of Ms. DeRocco follows:]

Statement of The Honorable Emily S. DeRocco, Assistant Secretary, 

Employment and Training Administration, U.S. Department of Labor 

Good morning, Chairman Herger and distinguished members of the Subcommittee. Thank you for inviting me to testify. I am extremely pleased to have the 

opportunity to discuss how states have used last year’s Reed Act distribution. I 

would like to start by thanking you, Mr. Chairman and the Subcommittee, for your 

leadership in crafting legislation that established the Temporary Extended Unemployment Compensation (TEUC) program and transferred $8 billion in federal unemployment funds to the states via a Reed Act distribution. This unprecedented action is helping to meet the present needs of unemployed workers as well as providing critical economic stimulus. 

Before discussing the Reed Act distribution, I would like to mention briefly the 

Administration’s proposal to reform the unemployment insurance (UI) program. In 

the 2004 Budget, the Administration again proposes long-term reforms that will 

promote flexibility and strengthen the critical UI assistance that states provide to 

America’s workers. Our proposal will promote job growth, help unemployed workers 

10

and businesses alike, and give states new administrative opportunities. Specifically, 

the proposal:

• Promotes job growth by cuts in federal unemployment taxes and simplified 

filing; • Gives states over $5 billion in ‘‘special’’ Reed Act distributions to phase in the 

new system over five years; • Helps unemployed workers by making it easier to access Extended Benefits 

by reforming the automatic ‘‘trigger mechanism’’; • Allows states to determine administrative funding levels and provides new 

flexibility in program administration; and • Continues federal oversight and preserves workers’ UI safety net by continuing state access to federal loans to pay benefits, should states run short 

of funding.

As you know, the UI program is a key element of our Nation’s economic infrastructure. While the program acts as a critical automatic stabilizer during economic 

downturns, the system’s administrative structure is an unwieldy relic that badly 

needs an overhaul. For this reason, UI reform is one of the Administration’s highest 

priorities. I want to express the Administration’s eagerness to work with the Subcommittee to enact reform legislation to make the UI system more responsive to the 

needs of workers and employers by giving states flexibility and control. 

Now, turning to the Reed Act, I would like to thank my colleagues at the General 

Accounting Office (GAO) and the National Association of State Workforce Agencies 

(NASWA) for the fine work they have done to date in detailing state use of the recent distribution. Since GAO and NASWA are in a better position to provide detailed information from their reports, I will give you a broad overview of state actions in the context of overall economic policy. Further, I will reference the GAO 

report since its survey is the most recent. A complete assessment of the distribution 

cannot be made at this time because many states plan to propose further use of 

Reed Act funds in 2003. 

I’d like to briefly recap the requirements concerning the use of the 2002 Reed Act 

distribution. In general, federal law requires that these funds only be used for the 

payment of unemployment benefits and for the administration of the state’s unemployment laws and its system of public employment offices. State legislative action 

is required if Reed Act moneys are used for administrative purposes and, obviously, 

state legislative action is necessary to change benefit eligibility provisions. With respect to benefits, the law specifically referenced optional expansions of eligibility to 

groups of workers who are not currently eligible in some states, such as those seeking only part-time work and those workers who would qualify if more recently 

earned wages were available for determining benefit eligibility. It also referenced 

optional extensions of state benefits for TEUC exhaustees. The immediate effect of the $8 billion Reed Act distribution was a marked improvement in the account balances of state unemployment funds. On average, fund 

balances were raised by about 20% at the time of the distribution. This, in turn, 

postponed or avoided the need to raise employer taxes in many states, which is important at a time when business investment is needed to spark the economy. For 

example, New York’s fund level went from a negative balance to positive when it 

used its Reed Act distribution to pay back a loan from the federal Unemployment 

Trust Fund. 

Broadly speaking, the balance in a state’s fund directly affects employer taxes because the employer tax rates are tied to the unemployment fund’s balance; when 

the fund’s balance goes up, employer tax rates go down and vice versa. The GAO 

report indicates that, for 2003, the Reed Act distribution mitigated or avoided tax 

increases in 26 states. 

It is important to note that using Reed Act funds to avoid or mitigate tax increases now does not preclude states from using these funds in the future to increase benefits or for expanded services. Since the law does not establish a time 

limit with respect to using Reed Act funds, states may choose to use these funds 

for new benefits or services after trust fund balances have recovered from their current levels. 

And even in this time of economic difficulty, some states did use their Reed Act 

funds to enhance benefits. The GAO report found that nine states increased/expanded benefits either temporarily or permanently. Alabama, Maryland, Oregon, 

and Vermont increased their weekly benefit amounts. Connecticut, the District of 

Columbia, Georgia, and Oklahoma enacted alternative base periods, which will 

make more recent wages available for determining benefit eligibility. Minnesota enacted a state benefits extension for certain exhaustees. Given the relatively short 

period of time many states’ legislatures were in session following the distribution 

11

last year, and the fact that heavy demands were already being placed on state unemployment funds, I think this shows that states took seriously your suggestion to 

consider expanding eligibility in ways that made sense for their own particular situations. 

Before discussing state actions concerning administrative use of Reed Act funds, 

I’d like to mention that the Department of Labor has been very active in encouraging their use for certain administrative purposes, including:

• Funding activities that support One-Stop Career Center systems, such as 

staff for delivery of core and intensive reemployment services, thereby returning workers to jobs as soon as possible; 

• Improving systems for preventing, detecting, and recovering fraudulent and 

other types of overpayments of unemployment benefits, an issue of particular 

interest to your Subcommittee and others in Congress, the Department’s Inspector General, the GAO, the President, as reflected in the Management 

Agenda, and the Department of Labor, which has been actively providing 

technical assistance to the states; 

• Improving performance, with an emphasis on areas where performance problems have persisted through several years, such as evaluating current delivery systems and funding the costs of improvement; and 

• Enhancing customer service by creating systems that allow Internet reporting 

of wage and tax information by employers and Internet claims filing by workers. We also recommended creating systems for the electronic payment of employer taxes and direct deposit of unemployment checks for claimants.

As to state actions, according to the GAO report, 21 states appropriated some of 

these funds for UI administrative improvements. Activities for which funds were appropriated include general technology, claims system development, and, we are very 

pleased to note, benefit payment integrity. 

In summation, information received so far indicates that states are using Reed 

Act funds to meet the unique needs of their workforce and local economies, and 

these funds are contributing to economic stimulus as this Subcommittee intended. 

This concludes my remarks. I will be glad to respond to any questions you may 

have. Thank you.

to remind Members that they each have 5 minutes for witness 

Chairman HERGER. Thank you for your testimony. I would like 

f questioning. With that, the gentleman from Louisiana, Mr. 

McCrery, to inquire. 

Mr. MCCRERY. Thank you, Mr. Chairman. Ms. DeRocco, could 

you review for us how we got this money in the first place, this $8 

billion that we sent back to the States? How did that accumulate? 

Ms. DEROCCO. Certainly. These are employer payroll taxes, as 

you know, that every employer pays into the unemployment trust 

fund. The Federal unemployment accounts, there are three in the 

overall unified Federal budget. Those accounts are dedicated to employment security Administration for the payment of loans and for 

the Federal share of extended benefits. 

Over time, the payment of dollars into the trust fund with the 

interest accrued continues to grow, and when they reach a certain 

cap there is an automatic Reed Act distribution. Because the account levels were so high, this Committee made the determination 

to do a Reed Act distribution of $8 billion to return those employerpaid tax dollars to the States from whence they came in order for 

the States to use them more effectively. 

Mr. MCCRERY. So, in those Federal accounts, do we still have 

a surplus? 

Ms. DEROCCO. Absolutely. Right now, the account’s balance is 

at $23 billion; and, by all estimations, we have sufficient dollars for 

all of our needs long into the future. 

12

Mr. MCCRERY. Now, some of those taxes that are sent to Washington from the States are supposed to be used for administrative 

expenses of the unemployment system, isn’t that correct? 

Ms. DEROCCO. That is correct, and the States have long held 

that Congress does not appropriate sufficient funds for their administrative purposes. 

Mr. MCCRERY. Well, is there some formula that determines 

what amount of the taxes sent to Washington should be set aside 

for administrative purposes? 

Ms. DEROCCO. We determine administrative needs for the 

States based on workloads. So, there is a very strong workloaddriven formula for the identification of administrative needs for the 

States and the requests for administrative dollars in the subsequent appropriation. 

Mr. MCCRERY. Until last year when we sent back the $8 billion, 

were we returning to the States the full amount of the payroll 

taxes that they were sending to us for administrative purposes? 

Ms. DEROCCO. Yes, sir. I believe, on average, about 55 cents of 

every dollar was being returned for administrative purposes. 

Mr. MCCRERY. So every dollar of taxes that were collected by 

the States for the purpose of administering their unemployment 

systems, they were only getting back 55 cents? 

Ms. DEROCCO. That is correct. 

Mr. MCCRERY. They were only getting that back because that 

amount is subject to an annual appropriation by Congress? 

Ms. DEROCCO. That is correct. The level in the unemployment 

trust fund allows other spending against the amounts accumulated 

in the unemployment trust fund. 

Mr. MCCRERY. Was your department hearing complaints from 

the States over the last few years about an inability to administer 

properly their programs because of insufficient funds appropriated 

by the Congress? 

Ms. DEROCCO. Absolutely. I would say there is not a State that 

has not expressed their concern about not receiving all of their employer-paid tax dollars back in order to properly administer this 

program. 

Mr. MCCRERY. Well, is that an important part of the UI system, this administrative burden that the States have? 

Ms. DEROCCO. Well, it is an important Federal-State partnership at this juncture for——

Mr. MCCRERY. Well, no. The Federal doesn’t administer any of 

this, does it? 

Ms. DEROCCO. No. We have some minimum administrative requirements as they relate to interstate claims and as they relate 

to assurance of conformity with Federal law. 

Mr. MCCRERY. Right. 

Ms. DEROCCO. The actual operation and Administration of this 

program is wholly a State function, and it is in the State’s realm 

of responsibility to set benefit eligibility requirements to establish 

a system that operates effectively and efficiently on behalf of both 

claimants and employers. 

Mr. MCCRERY. So, does the administrative function have anything to do with getting the cash to the beneficiaries? 

13

Ms. DEROCCO. It has everything to do with getting the cash to 

the beneficiaries. If the administration of the program is broken, 

the claimants will not receive timely and accurate benefits. 

Mr. MCCRERY. So, it is kind of important, isn’t it? 

Ms. DEROCCO. Absolutely. 

Mr. MCCRERY. Thank you. 

Chairman HERGER. I thank the gentleman. Now the Ranking 

Member, Mr. Cardin, from Maryland. 

Mr. CARDIN. Thank you, Mr. Chairman. 

Just to follow up a little bit with Mr. McCrery’s comments. When 

the stakeholders came in with recommendations several years ago 

that deal with the issues that Mr. McCrery was raising in addition 

to other problems concerning low-wage workers and part-time 

workers—and we have been looking for a little leadership for someone to bring these proposals before the Congress. Can we count on 

the Administration coming forward with perhaps that recommendation so at least we have a starting point for reform of the 

system? 

Ms. DEROCCO. Well, we would like the Administration’s proposal for reform to be the starting point for discussion. I do have 

great respect for the stakeholders who came together to discuss 

these issues. Many of them I am sure, if not all of them, will continue to be involved in the public policy discussions; and it is important for them to continue to be. 

Mr. CARDIN. Well, I appreciate that answer, although I don’t 

think it was an answer. 

As you know, the Administration could come in and request for 

money in their budgets for the administration of the UI system by 

the States. Have you put more money in the budget for this purpose? Are you requesting more money? 

Ms. DEROCCO. We have attempted to request administrative 

dollars that are adequate for State Administration that are——

Mr. CARDIN. Does your budget this year——

Ms. DEROCCO.—that are close to the cost that we now assess 

based on a new resource justification model as possible and still 

stay within the constraints of the overall President’s budget. 

Mr. CARDIN. Yes, and I understand that, and I think the answer is, no. I don’t think you have requested the extra money, nor 

do I think the budget document that is on the floor today provides 

for that extra funds. I could be wrong on that. 

Mr. MCCRERY. Will the gentleman yield? 

Mr. CARDIN. Yes, I would be glad to. 

Mr. MCCRERY. Does the President’s budget make room for the 

administrative reforms that the Administration has proposed? 

Ms. DEROCCO. The President’s budget does speak to the reforms of the Administration’s proposal. The President’s budget——

Mr. CARDIN. I guess my point, Mr. McCrery——

Mr. MCCRERY. That is a reform proposal that would give the 

States total control over their——

Mr. CARDIN. I understand what you are suggesting. I guess my 

point is that the statement has been made that there is more 

money paid in than being paid out. I don’t think that was true for 

last year, we paid out a lot more, because the administrative cost 

is only one area that the revenues are used for. The redistribution 

14

money came out of there as well as the payment for extended benefits. 

I guess my point, Secretary Chao was before our Committee last 

week, and I raised the issue that the extended benefit program will 

terminate in May absent additional action by Congress. She promised that the Administration will be monitoring that situation as 

to whether to recommend a further extension, and I reminded her 

that our calendar moves pretty quickly around here, and Congress 

doesn’t act quickly. So, the earlier the Administration makes a decision, the more orderly the process can be. 

I just was curious as to what standards the Administration 

would be using. I believe the unemployment rate is higher today 

than it was when we last extended the benefits by a tenth of a percentage point. The exhaustee rate is higher. Last month, we had 

308,000 people who lost their jobs. We have three people unemployed for every person who is trying to seek a job today. So, can 

you enlighten this Committee as to what standards the Administration will be monitoring in order to decide whether to recommend 

an extended—further extension of the benefit program? 

Ms. DEROCCO. Yes, sir. We have committed to continuously assess the state of the economy. The unemployment rate in February 

was 5.8 percent, which is below the 6.0 percent high recorded in 

December 2002. We are watching the unemployment, the total unemployment. 

Mr. CARDIN. The 5.8 percent is higher than when the benefit 

program was first started, isn’t that correct? Wasn’t it 5.7 percent 

at that point? 

Ms. DEROCCO. I believe the first extension was at a point when 

the total unemployment rate was 5.7 percent. We also monitor the 

initial claims that are reported every week. We monitor the index 

of leading indicators, which for the third consecutive month had 

risen as of December. Real personal income is higher than pre-recession peak and increasing, and other economic indicators are important to an analysis of the need for another extension of the temporary extended unemployment program. 

Mr. CARDIN. By what you are suggesting, does that mean the 

Administration has made a decision already that it will not seek 

further extension? 

Ms. DEROCCO. Absolutely not. 

Mr. CARDIN. I am glad to hear that. 

Ms. DEROCCO. We have not made that decision. We are going 

to continually assess the economic situation. 

Mr. CARDIN. Let me just make an observation, that I strongly 

recommend that you monitor this closely and make a decision in 

an orderly way. 

I just tell you, on the streets in our community and around the 

Nation, people are hurting and can’t find employment who are 

looking for employment and that, obviously, we need to do everything we can to strengthen our economy and provide jobs which the 

Administration has talked about frequently and which we in the 

Congress support. Those who can’t find jobs need the protection of 

our system, and I would just urge the Administration to make a 

decision as early as possible. 

Thank you, Mr. Chairman. 

15

Chairman HERGER. Thank you. The gentleman from Kentucky, 

Mr. Lewis, to inquire. 

Mr. LEWIS OF KENTUCKY. Yes. Thank you, Mr. Chairman. 

I just might make a note of the fact that, in 1994, the unemployment benefits ceased when the unemployment rate was 6.4, so I 

think we are a little better off with 5.8 today. 

Secretary DeRocco, I would like to—you referred to some stimu- lant effects to the economy when we transferred this $8 billion to 

the States, and GAO’s report states that 30 States were able to 

keep unemployment taxes from rising last year. Nonetheless, a 

later witness, Maurice Emsellem, says in his testimony that it is 

clear that the $8 billion in funding did not help stimulate State 

economies, apparently because States chose not to use the money 

to expand benefits. 

Can you review for us why you feel the economy has been helped 

by this? 

Ms. DEROCCO. Absolutely. Employer taxes under the UI system 

in virtually all States are tied to the condition of the unemployment trust fund; and when trust fund levels are low, employer 

taxes trigger higher. We believe that higher employer taxes lead to 

more difficulty for employers to have a positive bottom line, and 

often that results in additional job loss. Our ability through the 

good work of this Committee to ensure that the $8 billion transferred to the States allowed States to increase their solvency to assure the balance in their unemployment trust fund and to keep 

those employer taxes from increasing dramatically in turn kept the 

employers operating, in many cases still creating jobs and keeping 

people working. That is an important offspring from this distribution of Reed Act funds. 

Mr. LEWIS OF KENTUCKY. Absolutely. Thank you. Thank you, 

Chair. 

Chairman HERGER. Thank you. The gentleman from Michigan, 

Mr. Levin, to inquire. 

Mr. LEVIN. I just would like to pursue these questions from the 

point of view of a person who is out of a job. You said there are 

$23 billion in the trust fund now, right? 

Ms. DEROCCO. Um-hmm. 

Mr. LEVIN. Eight billion dollars was distributed to the States. 

Most of that money remains in State treasuries, right? 

Ms. DEROCCO. That is correct. About $6 billion of it. 

Mr. LEVIN. Three-quarters. 

Ms. DEROCCO. Right. 

Mr. LEVIN. Mr. Lewis talks about the unemployment rate being 

lower. What is the exhaustion rate today? Isn’t it higher? 

Ms. DEROCCO. Well, right now, we have about 2.7 million people that have exhausted their extended benefits. 

Mr. LEVIN. Okay, and how many are predicted to exhaust their 

benefits between now and June? 

Ms. DEROCCO. I don’t know that. I don’t have that. 

Mr. LEVIN. I think it is about 200 a month. That sounds more 

or less correct? 

Ms. DEROCCO. That is a reasonable estimate. 

Mr. LEVIN. So, what is your answer to the person who has exhausted their benefits, who is looking for work and are required to 

16

look for work under State law? That is monitored, and the exhaustion rate is high. So, tell me, what is your answer to that unemployed worker? 

Ms. DEROCCO. Well, Mr. Levin, I have tremendous compassion 

for every worker that is unemployed. 

Mr. LEVIN. Tell me what your answer is. 

Ms. DEROCCO. My answer is two-fold. 

Number one, this economy is in a very dynamic economy. For example, in the month of November, we had 3.85 million people who 

were separated from their jobs. At the same time, 3.96 million were 

newly hired and 2.8 million job vacancies remained unfilled. That 

is just 1 month’s data from the Bureau of Labor Statistics to illustrate that there are job opportunities. 

We invest taxpayer dollars in a system called the Workforce Investment System in the range of $10 to $12 billion a year; and the 

intention of that system is to provide employment and reemployment services for unemployed workers, for those who don’t have 

the skills that are marketable in their local labor market, to provide for skills development for the jobs that are available so they 

have a chance at reemployment. 

Mr. LEVIN. Okay. I am fully aware of that. Those are the data. 

So, your conclusion from those data—your conclusion is that the 

huge numbers of people who have exhausted their benefits aren’t 

finding jobs that are there or that they are not seeking retraining? 

Just put together your data and look at it from the individual point 

of view. There are hundreds and hundreds of thousands of people 

who have exhausted their benefits who are looking for work. 

Ms. DEROCCO. There are billions of dollars in services available 

to help them find work. 

Mr. LEVIN. I know, but they are not finding work. 

Ms. DEROCCO. Well, perhaps they are not accessing those services, either. That is an important component of a plan to get people 

back to work. I don’t believe unemployed workers want another unemployment check. I believe they want a paycheck. 

Mr. LEVIN. Okay. Then if they want another paycheck, but they 

are not getting one, there is something wrong. 

Ms. DEROCCO. Their skills may not match the requirements for 

the jobs that are available in their local labor market or in one 

close by. 

Mr. LEVIN. Okay. So, while they are looking for jobs, why have 

an unemployment system that provides less of a base for living for 

those people than was true 10 years ago? 

Ms. DEROCCO. Well, right now, we have an unemployment system with extended benefits opportunities that is providing up to 65 

weeks of unemployment. 

Mr. LEVIN. Well, that is for a small number of people in a few 

States. Yes, you know that. 

Ms. DEROCCO. Well, the minimum——

Mr. LEVIN. The 65 weeks is for a very few people. What do you 

tell the people in the vast majority of States who have exhausted 

their 39 weeks, can’t find a job? Give me a simple answer that I 

can tell those people. 

17

Ms. DEROCCO. I would tell them that we want to help you find 

a job, and we have the services, we have the resources, and we 

have the capability to help you find a job. 

Mr. LEVIN. So, why aren’t they finding it? What is the problem? 

Ms. DEROCCO. I think there is a disconnect among many of the 

current services that are available and knowledge of those services, 

our ability to reach unemployed workers, which is why——

Mr. LEVIN. Whose fault is that? 

Chairman HERGER. The gentleman’s time has expired. 

Mr. LEVIN. Whose fault is that? 

Ms. DEROCCO. These are State and locally run systems with 

Federal oversight, and all of us need to do a better job in outreach. 

Chairman HERGER. The gentleman’s time has expired. 

Madam Secretary, I note that the GAO report provides results 

through November 30, 2002. For those who are concerned that 

States have not spent enough of this money, is it quite possible 

that some of these States have spent more since then or plan to 

spend more this year? 

Ms. DEROCCO. Absolutely. We know for a fact that there are 

two additional States that have taken action to extend or expand 

eligibility. The State of Virginia has an alternative base period 

plan pending finalization. The State of Utah has an extension of 

extended benefits pending action as well. 

Again, because the distribution was made at a time when State 

legislatures were partway through their sessions, many States 

didn’t have an opportunity to consider or to recommend use of the 

Reed Act dollars. We expect significantly more actions in 2003. 

Chairman HERGER. Thank you very much. Now I recognize the 

gentleman from Washington, Mr. McDermott, to inquire. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

Having been in a State legislature for a number of years like 

many on this panel, I sometimes look at it from what it looks like 

down their end. Can you give me the names of the governors who 

support your plan? It has been out there for a year for them to look 

at. Which governors have put their name in support of it? 

Ms. DEROCCO. We do have governors who have support it, but 

we——

Mr. MCDERMOTT. Give me the names. 

Ms. DEROCCO. We had a significant change in governors as of 

the November election. 

Mr. MCDERMOTT. I am asking you, what governors do you 

have? Give their names. 

Ms. DEROCCO. I have not had personal discussions with the 

governors yet, because the revised plan was just made available in 

the President’s budget in February. I have not personally had 

meetings with any governors. 

Mr. MCDERMOTT. Did he talk to all the governors and say, 

here is my plan; what do you think of it? 

Ms. DEROCCO. He may have talked to governors. I am not sure. 

Mr. MCDERMOTT. So, this is another one of those plans from 

Washington, DC, that is going to help the States, and you haven’t 

got a single governor’s name to give me who is in support of this. 

Ms. DEROCCO. I will be glad to get back——

Mr. MCDERMOTT. Not one single one. 

18

Ms. DEROCCO. With the governors that will be supportive of it. 

Mr. MCDERMOTT. Will be. I see. Well, why wouldn’t they have 

already come forward and said, this is great thing. Hurry up and 

do it. 

Ms. DEROCCO. In large measure, because we haven’t had the 

opportunity to go talk with them, brief them on it, and ask them 

for their input. 

Mr. MCDERMOTT. What has Administration been doing? 

Ms. DEROCCO. Since February? 

Mr. MCDERMOTT. Yes. 

Ms. DEROCCO. Been working very hard on helping unemployed 

workers, on workforce investment system changes to ensure better 

reemployment and skills development services, and other priorities. 

Mr. MCDERMOTT. It isn’t working in my State, whatever you 

are doing. It isn’t working. We have still got the highest unemployment or second or third highest unemployment in the United 

States. So, whatever you have been doing since February has been 

wasted. 

Let me ask another question. The legislatures—I know they are 

all imbedded right now in enormous financial problems. The legislatures have certainly come forward and asked for this plan, 

haven’t they? 

Ms. DEROCCO. For the UI plan? 

Mr. MCDERMOTT. Yes. 

Ms. DEROCCO. I would suspect most State legislatures are not 

familiar with the manner in which their employer-paid taxes are 

sent to Washington and kept in Washington and not used for the 

benefit of their citizens and their employees. 

Mr. MCDERMOTT. So, you are going to pull the money out, but 

you haven’t talked to them about how they are going to replace it? 

Ms. DEROCCO. No, sir. We pulled the money out a long time 

ago. We are going to talk to them about how we are going to give 

it back to them. 

Mr. MCDERMOTT. Give it back to them how? 

Ms. DEROCCO. Transferring administrative financing responsibility to the States. 

Mr. MCDERMOTT. So, you are not giving them money; you are 

giving them the responsibility. 

Ms. DEROCCO. They will be able to keep their employer taxes 

in their States in their budgets. 

Mr. MCDERMOTT. So, what you are saying to them is, we are 

going to take off a Federal tax, and you people have to raise the 

tax to replace it. Right? 

Ms. DEROCCO. The States would need a replacement tax but at 

a significantly lower level than the——

Mr. MCDERMOTT. Why? Why would it be a significantly lower 

level? 

Ms. DEROCCO. Right now the taxes that we are assessing 

against employers we bring to Washington, we put in the unemployment trust fund, and it accumulates high balances and additional interest, leaving us with a situation where you return to the 

States in 1 year $8 billion in a Reed Act distribution. 

Mr. MCDERMOTT. Isn’t that the point of unemployment? You 

save it up during the fat period? This is the Bible story. The old 

19

fat years and the lean years. So, in the fat years, you put the 

money in, and then when you come to the lean years, you have got 

it to give out. Isn’t that exactly the deal? 

Ms. DEROCCO. That is exactly what is done in the State unemployment trust funds, which is—because the State unemployment 

trust funds are the source from which the benefits are paid. So that 

in those lean years when there is an additional need for benefits 

to unemployed workers, the State unemployment trust fund balances are the important level. The Federal unemployment trust 

fund balances in large measure for administrative purposes have 

grown to such an extent that there is more than sufficient dollars. 

Mr. MCDERMOTT. Is that fund used for anything besides administrative purposes? 

Ms. DEROCCO. Certainly. 

Mr. MCDERMOTT. What? 

Ms. DEROCCO. It is used for, 50 percent, the Federal responsibility, for extended benefits and for——

Mr. MCDERMOTT. So, in the lean times, when you want to put 

the extended benefits out there, you have to have that money. 

Ms. DEROCCO. We have more than sufficient funds. We now 

have a balance of $29 billion. 

Mr. MCDERMOTT. Why haven’t you extended the benefits if you 

have got plenty of money? I am glad to hear you say that. I hope 

the press will remember that you said we have plenty of money. 

Why is the Administration sitting still on extending benefits when 

you have all these people blowing out of their benefits? 

Ms. DEROCCO. It is our intention to return that money to the 

States so that if they choose to extend benefits or enhance benefits 

they have the opportunity to do it. 

Mr. MCDERMOTT. What is it that you think it is better shipping it back down there? Why is it you just don’t extend the program that is already there? 

Ms. DEROCCO. I have more confidence in the State executive 

and legislative branches to deal effectively and efficiently for their 

employers and their constituents than I do with the Federal Government. 

Mr. MCDERMOTT. You are talking about yourself. 

Ms. DEROCCO. I am talking about all of us in Washington. 

Mr. MCDERMOTT. You are talking about yourself. 

Ms. DEROCCO. Yes. 

Mr. MCDERMOTT. You have more. 

Ms. DEROCCO. I do. 

Chairman HERGER. The gentleman’s time has expired. 

Mr. MCDERMOTT. What I get from you is that you think you 

are incompetent and they are competent. So, if you just ship the 

money back to them, they will figure out how to put it to use. 

Chairman HERGER. The gentleman’s time has expired. 

Ms. DEROCCO. I think they are far more competent than Washington. 

Mr. MCDERMOTT. Boy, that is an amazing admission. 

Chairman HERGER. Thank you. 

Madam Secretary, could you contrast our March 2002, action 

with past legislation, including the 1997 Balanced Budget Act? Is 

it correct that if we had behaved in 2002 like Congress had in the 

20

past, all or most of this money probably would have stayed in Federal accounts? Hasn’t there been a number of times that the Federal account ceilings have been raised, leading to bigger Federal 

balances and less being returned to the States as the Reed Act was 

intended? 

Ms. DEROCCO. Absolutely. The normal course of operation historically seems to have been to raise the caps in the Federal accounts, to retain the money in Washington, again primarily for the 

purpose of offsetting other spending, because it all resides in the 

unified Federal budget and it provides an opportunity to be used 

as an offset. 

Prior distributions of Reed Act funds since 1956, we have had 

only eight occasions for distribution, most of them at fairly minimal 

levels, the lowest at $16 million; and, of course, the highest has 

been the distribution that this Congress made last year of $8 billion to the States. 

Chairman HERGER. I thank you, Madam Secretary. 

As our chart showed, we can see very little was returned in the 

years after the Reed Act was enacted, and it really wasn’t until just 

this last year that we finally did return funding to the States so 

that they could use it as they needed it and are doing so with the 

balance now. 

Madam Secretary, I thank you for your testimony. With that, I 

would like to ask the next panel to come up and be seated. 

Today we are hearing from Sigurd Nilsen, Director of the Education, Workforce, and Income Security Division at the U.S. GAO; 

Jon Brock, former President of the NASWA and Executive Director 

of the Oklahoma Employment Security Commission; Melissa 

DeLisio, Assistant Director of the Ohio Department of Job and 

Family Services; Maurice Emsellem, Director of Public Policy at 

the National Employment Law Project. 

To introduce the next witness, I turn to my colleague from Louisiana, Mr. McCrery. 

Mr. MCCRERY. Thank you, Mr. Chairman. 

We have with us today on our second panel from my State of 

Louisiana the Secretary of Labor, Dawn Watson. Ms. Watson, prior 

to becoming Secretary since 1997, served as the Deputy Secretary 

of the Department of Labor in Louisiana; and prior to that she 

worked as a staff attorney for the Louisiana State House of Representatives from 1991 to 1997. She is a graduate—an honor graduate of the University of Southwestern Louisiana, now the University of Louisiana at Lafayette, and my law school alma mater, Louisiana State University (LSU). She has her juris doctorate from 

LSU. 

She brought with her today Mrs. Raj Jindal. Mrs. Jindal’s name 

may be familiar to the Members of the panel. She is the mother 

of Bobby Jindal who has just departed Washington, having served 

up here as the Assistant Secretary of Planning and Evaluation at 

the U.S. Department of Health and Human Services, and is now 

back home in Louisiana about to run for Governor. 

So, Mrs. Jindal, welcome; and, Ms. Watson, welcome to you. 

Ms. WATSON. Thank you. 

Mr. CARDIN. Mr. Chairman, if I might, I would like to welcome 

Mr. Emsellem on behalf of Mr. Stark. He apologizes for not being 

21

here, but he wanted to welcome his constituent to our Committee. 

It is a pleasure to have you. 

Chairman HERGER. I would like to recognize someone who is a 

Member of the full Committee to introduce one of our witnesses, 

Stephanie Tubbs Jones. 

Ms. TUBBS JONES. Thank you, Mr. Chairman. 

I would like to introduce to each and every one of you a Buckeye, 

Melissa DeLisio, who is the Assistant Director of the Ohio Department of Job and Family Services in Columbus, Ohio. We actually 

just met this afternoon, but I have learned in that short period of 

time that she has been with the Department for 23 years; and, say 

it, gentlemen, she only looks like she is about 26. Come on, join in. 

No. 

We are pleased to have her here to make some presentations this 

afternoon about what is going on in Ohio. We are struggling in 

Ohio, and we need help, so we have got to figure out what to do. 

Thank you, Mr. Chairman. 

Chairman HERGER. You are welcome. With that, we will hear 

from our witnesses. Mr. Nilsen. 

STATEMENT OF SIGURD R. NILSEN, DIRECTOR, EDUCATION, 

WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL 

ACCOUNTING OFFICE 

Mr. NILSEN. Thank you, Mr. Chairman, Members of the Subcommittee. I am pleased to be here today to discuss how States are 

using the $8 billion that was allocated to them in March 2002, 

under the Reed Act. 

These funds, as we have heard earlier, may be used to pay UI 

benefits or be appropriated by States for the administrative costs 

of UI, Employment Service (ES), or one-stop centers. Today, I will 

be providing information from our report that was issued earlier 

this month that has been alluded to already. 

First, as you can see from the pie chart I have over there, 17 percent of the funds, a relatively small proportion, has been spent so 

far; and, again, this is through November 30th, 2002. Almost all of 

the $1.34 billion that was spent was used to pay regular UI benefits in three States with very low trust fund reserves. New York 

spent about $300 million on regular UI benefits; and the remainder 

of its distribution, nearly $190 million, was used to repay a Federal 

UI loan. North Carolina spent all of its Reed Act funds, $241 million, on regular UI benefits. Texas used 90 percent of its Reed Act 

funds, $535 million, to pay regular UI benefits. 

According to the Department of Labor, Texas has since spent its 

remaining Reed Act funds and, along with New York, has received 

a Federal loan to continue paying UI benefits. 

Although nine States reported that they have made or plan to 

make enhancements to UI benefits with the help of Reed Act dollars, Vermont is the only State that told us it was spending Reed 

Act funds to do so during 2002, spending $1.67 million to increase 

weekly UI benefit payments. 

You have already heard Ms. DeRocco relate some of the findings 

from our study that found that five States reported

22

that Reed Act dollars enabled them to enhance UI benefits in 2002, 

and three others told us that they are planning to do so in 2003. 

Next, as the pie chart also shows, 83 percent of the Reed Act 

funds is remaining in State unemployment insurance trust funds. 

This $6.66 billion boosted UI reserves in a number of States and 

enabled 30 States to avoid automatic employer tax increases or surcharges in 2002. While five States told us that they had lowered 

employer taxes in 2003, only two of them, the District of Columbia 

and Maine, said it was because of their Reed Act distribution. 

In addition, nine States made binding policy decisions that obligated 16 percent or $1.27 billion to their trust funds. Nearly half 

of it was accounted for by California, that obligated about $600 million or two-thirds of its allocation to its trust fund. Four States—

Missouri, Kansas, Nevada, and Delaware—obligated their entire 

Reed Act distribution to their trust funds, most frequently citing 

their desire to avoid raising employer taxes as a reason for obligating Reed Act dollars to UI trust funds. 

Finally, over half of the States appropriated some Reed Act funds 

for the administrative expenses associated with UI or employment 

services, including their one-stops. Twenty-seven States appropriated a total of $662 million, about 8 percent of the Reed Act distribution, for these purposes. So far, 15 States have spent about 

$74 million. Interestingly, two States, Michigan and Montana, have 

appropriated almost all of their Reed Act funds for administrative 

purposes. 

Of the $662 million that was appropriated, a total of $313 million 

was appropriated in 21 States for UI purposes. These funds were 

targeted for a range of purposes, including enhancing technology, 

improving systems for handling UI claims, maintaining or increasing the number of UI staff, and improving tax filing and payment 

systems for employers. 

For example, New Jersey is completely overhauling its 1970-era 

benefit payment system. Michigan is also updating its computer 

systems, and California is looking at improving its tax system. 

Eighteen of the 21 States that have appropriated money for UI 

have reported that these investments would enhance program integrity by improving wage reporting for employers, strengthening 

its eligibility procedures and enhancing benefit payment control 

systems. For example, Virginia is increasing its staff in its benefit 

payment control center. 

Twenty-two States appropriated roughly $350 million for their 

ES or one-stop systems. As with funds appropriated for the UI system, most States were planning to use these funds to enhance technology, 12 States plan to use funds to maintain or increase staff, 

and 10 States plan to enhance reemployment services for UI claimants. Some States also plan to use funds to improve resource rooms 

in one-stop centers and to increase their outreach activities. 

Mr. Chairman, that concludes my statement, and I would be 

happy to answer any questions you or other Members of the Subcommittee might have. 

[The prepared statement of Mr. Nilsen follows:]

23

1The term ‘‘Reed Act’’ refers to a part of the Employment Security Financing Act of 1954. 

The Reed Act provides that when federal accounts in the UI trust fund reach their statutory 

limits at the end of a federal fiscal year, any excess funds are transferred to state UI trust 

funds. Unlike ‘‘traditional’’ Reed Act distributions, the calendar year 2002 distribution was required regardless of the ceilings and did not take place at the beginning of a fiscal year. 2The employment services system, established by the Wagner-Peyser Act of 1933, provides job 

seeker and employer labor exchange service and information. The Workforce Investment Act 

(WIA) of 1998 amended the Wagner-Peyser Act to require that the employment service activities 

be provided as part of the WIA one-stop system, which is a centralized service delivery structure 

consolidating delivery of most federally funded state and local employment and training assistance. 3See U.S. General Accounting Office, Unemployment Insurance: States’ Use of the 2002 Reed 

Act Distribution, GAO–03–496 (Washington, D.C.: Mar. 6, 2003). 4For UI purposes, federal law designates the District of Columbia, Puerto Rico, and the Virgin 

Islands as ‘‘states.’’

Statement of Sigurd R. Nilsen, Director, Education, Workforce, and Income 

Security Issues, U.S. General Accounting Office 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss how states are using the March 2002 

Reed Act distribution, which was part of the Job Creation and Worker Assistance 

Act of 2002. This broad stimulus package included an additional 13 additional 

weeks of federally-funded extended unemployment insurance (UI) benefits for all 

states and a distribution to states of $8 billion of the unemployment tax revenue 

it holds in reserve, referred to as a Reed Act distribution.1 Under the act, these 

funds may be used to pay UI benefits, and/or to enhance UI benefits, such as increasing weekly benefit payments, extending the period of time benefits are paid, 

or otherwise expanding eligibility to groups that currently do not qualify for benefits. States may also appropriate these funds for the administrative costs of UI, including activities related to program integrity, and employment services (ES) programs, including one-stop service centers.2

Today, I will be providing information from our recent report on how states have 

used the Reed Act distribution so far.3 I will discuss: (1) the proportion of Reed Act 

dollars that states have spent; (2) the proportion of total Reed Act dollars that remains in state UI trust funds and the effect this has had on employer UI taxes; 

and (3) the proportion of Reed Act dollars that have been appropriated by states 

for administering the UI, ES, or one-stop systems. 

To determine how Reed Act dollars are being used, we surveyed state workforce 

agency administrators in 50 states, the District of Columbia, Puerto Rico, and the 

Virgin Islands.4 We also reviewed legislation, federal guidance, and other documents 

and data relevant to UI and Reed Act distributions and interviewed U.S. Department of Labor officials responsible for overseeing state activities related to the 2002 

Reed Act distribution. We also interviewed various interest groups and met with 

state UI and workforce agency officials and state legislative representatives in Virginia and New Jersey. 

In summary, we found that about 17 percent ($1.34 billion) of the $8 billion 2002 

Reed Act distribution had been spent as of November 30, 2002, primarily on regular 

UI benefits, and only a small portion had been spent on benefit enhancements, or 

administrative costs of UI, ES, and one-stop systems. A total of $6.66 billion (83 percent) remains in state trust funds, which, according to state workforce officials, has 

prevented automatic increases in employer taxes in 30 states. Twenty-seven states 

appropriated about $662 million for administrative costs of UI, ES, or one-stop systems, of which $74 million has been spent. 

Background 

The UI program was established by Title III of the Social Security Act in 1935 

and is a key component in ensuring the financial security of America’s workforce. 

This complex program, which is jointly administered by the U.S. Department of Labor’s Employment and Training Administration and the states, provides temporary 

cash benefits to workers who lose their jobs through no fault of their own. By providing unemployed workers money for basic needs, UI helps boost demand for goods 

and services, thereby stabilizing the economy during recessions. Although Labor 

provides oversight and guidance, primary responsibility for administering the program lies with the states. 

The UI program is funded through federal and state taxes levied on employers. 

The federal tax generally covers the administrative costs of the UI and ES proVerDate jul 14 2003 05:04 Sep 06, 2003 Jkt 088995 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 E:\HR\OC\88995A.XXX 88995A
24

5Labor provided about $2.2 billion to states in fiscal year 2003 to administer these programs. 

6The federal tax accumulates in three separate accounts. These three accounts are the (1) 

Employment Security Administration Account (ESAA), which covers both federal and state administrative costs of UI and ES; (2) Extended Unemployment Compensation Account (EUCA), 

which covers the federal share of extended UI benefits and has been used to fund temporary 

extended unemployment compensation benefits; and (3) Federal Unemployment Account (FUA), 

which funds loans to insolvent state accounts. 

grams,5 loans to states, and the federal share of extended UI benefits.6 State taxes 

are used to pay UI benefits. States deposit their taxes with the U.S. Treasury, 

which maintains one trust fund with a separate account for each state. States are 

responsible for ensuring the solvency of their individual trust funds. To ensure trust 

fund solvency, states can build up trust fund reserves during good economic times, 

so that they have sufficient reserves to pay UI benefits if unemployment rises, without raising taxes or borrowing money from the Federal Government. Forty-nine 

states set triggers that automatically increase employer taxes when UI trust funds 

fall below specific levels. 

The current Reed Act distribution was authorized by the Job Creation and Worker Assistance Act of 2002 on March 9, 2002, and provided $8 billion, the largest Reed 

Act distribution to date, to the UI trust funds of all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. Appendix I presents the Reed Act allotment by state, the percent expended, and the percent unexpended. The allotted 

amounts ranged from $1.95 million to the Virgin Islands to $936.9 million to California. Each state’s share was based on its proportionate share of the Federal Unemployment Tax Act (FUTA) taxable wages for calendar year 2000. 

To use the funds for administrative costs of state UI, ES or one-stop systems, 

states are required to have a specific appropriation from their legislatures. In addition, there is no time limit on using the 2002 Reed Act dollars for administrative 

purposes. Finally, Labor issued guidance encouraging states to use 2002 Reed Act 

dollars to support one-stop systems. 

Only A Small Portion Of The 2002 Reed Act Distribution Had Been Spent 

As Of November 30, 2002

Only 17 percent of the $8 billion Reed Act distribution had been spent as of No- vember 30, 2002. (See fig. 1.) Of the $1.34 billion spent as of November 30, 2002, 

almost all was used to pay regular UI benefits in three states with very low trust 

fund reserves. New York spent most of its Reed Act distribution ($302.5 million) on 

regular UI benefits, and the remainder ($188.8 million) to repay a federal UI loan. 

North Carolina spent all of its Reed Act funds ($240.9 million) on regular UI benefits. Texas used 90 percent of its Reed Act funds ($534.7 million) to pay regular UI 

benefits. According to Labor, Texas has since spent its remaining Reed Act dollars 

on UI benefits, and along with New York, has received a federal loan to continue 

paying UI benefits. 

Figure 1: Status of the $8 Billion Reed Act Distribution (as of November 30, 

2002)

Although nine states reported that they made or plan to make enhancements to 

UI benefits with the help of Reed Act dollars, Vermont is the only state that reVerDate jul 14 2003 05:04 Sep 06, 2003 Jkt 088995 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 E:\HR\OC\88995A.XXX 88995A

88995b.001
25

7Most states use previous earnings—recorded on a quarterly basis in state wage records—

to measure whether a claimant has had a sufficient employment history. For the most part, 

states require that a claimant have earned a certain minimum amount over a specified four calendar quarters (the ‘‘base period’’). Typically, the base period consists of the first four of the 

last five completed calendar quarters immediately preceding the filing of a claim, which is referred to as a ‘‘regular base period.’’ An ‘‘alternative base period’’ uses wages earned in more 

recent quarters as a basis for determining eligibility.

ported spending any Reed Act funds to do so during calendar year 2002. Vermont 

spent $1.67 million to increase weekly UI benefit payments. Five states reported 

that Reed Act dollars enabled their states to use non-Reed Act dollars in their trust 

funds to make UI benefit enhancements in 2002:

• Alabama, Maryland, and Oregon increased weekly UI benefit payments, 

• Minnesota extended benefits to individuals who have exhausted coverage, and 

• Oklahoma implemented an alternative base period.7

Connecticut, the District of Columbia, and Georgia reported that they are planning to use Reed Act dollars to implement an alternative base period in calendar 

year 2003. 

A relatively small amount of Reed Act funds was spent for administrative costs 

of the UI, ES, or one-stop systems. Seventeen states spent a total of about $74 million (1 percent of the total Reed Act distribution) to cover the administrative costs 

of the UI, ES, or one-stop systems. 

Most Reed Act Dollars Remained In State Trust Funds And Helped Many 

States Avoid UI Tax Increases 

Eighty-three percent of the Reed Act distribution had not been spent as of November 30, 2002. This $6.66 billion boost in state UI trust fund reserves enabled 30 

states to avoid automatic employer tax increases or surcharges in 2002, according 

to the workforce agency officials from those states. (See app. II.) Five states—Alaska, the District of Columbia, Maine, the Virgin Islands, and Wyoming—reported 

lowering employer tax rates for 2003. The District of Columbia and Maine were able 

to lower them because of the Reed Act distribution. 

Nine states made binding policy decisions that obligated 16 percent, or $1.27 billion, of the Reed Act dollars to their trust funds. (See fig. 2.) States are not required 

to pass legislation or take other official action to retain Reed Act dollars in their 

UI trust funds, yet these nine states explicitly specified in legislation, the governor’s 

budget, or other official documentation, that some or all Reed Act dollars should be 

kept in their trust funds. State officials most frequently cited their desire to avoid 

raising employer taxes as the reason for obligating Reed Act dollars to UI trust 

funds. Other reasons they gave for obligating these funds to the trust fund included: 

to avoid borrowing from the Federal Government, to avoid cutting benefits, and to 

enhance benefits. 

Figure 2: Reed Act Dollars Obligated to UI Trust Funds (as of November 

30, 2002)


88995c.001
26

8Two states, Montana and Michigan, have appropriated all or almost all of their Reed Act 

funds to administer UI, ES, or one-stop systems. 9Together, Michigan and New Jersey reported spending about $41 million of the total $74 million spent on UI and ES/one-stop systems. Neither state was able to report the amount spent 

on each system, however.

OVER HALF OF THE STATES APPROPRIATED SOME FUNDS FOR ADMINISTRATIVE COSTS

OF THE UI, ES, OR ONE-STOP SYSTEMS

Twenty-seven states had appropriated a total of $662 million (8 percent) for administrative costs of UI, ES, and one-stop systems—$74 million had been spent and 

about $590 million had not been spent—as of November 30, 2002.8 (See app. III.) 

Close to half the states appropriated Reed Act dollars for ES and one-stop systems. 

(See table 1.)9 About the same number of states appropriated these funds to enhance UI system technology, operations, and program integrity. Some states plan 

to use Reed Act dollars to replace funding that previously came from other state 

and/or federal sources. 

Table 1: Number of States That Appropriated Reed Act Dollars for Administrative Costs of 

UI, ES, and One-Stop Systems, as of November 30, 2002

System Number of 

states 

UI systems, only 5

ES/one-stop systems, only 6

Both UI and ES/one-stop systems 16

Total 27

Source: GAO survey of states. 

States Appropriated Reed Act Dollars to Enhance UI System Technology, 

Operations, and Program Integrity 

Twenty-one states appropriated $313 million for UI administrative costs, of which 

$22 million had been spent by nine states, as of November 30, 2002. (See app. IV.) 

Many states appropriated funds for more than one UI administrative activity. Close 

to half of the 21 states that appropriated Reed Act dollars for UI activities did so 

for at least one of four major purposes. These included establishing, maintaining, 

or enhancing technology; improving systems for handling UI claims; maintaining or 

increasing the number of UI staff; and improving tax filing and payment systems 

for employers. (See table 2.)

Table 2: Number of States That Appropriated Reed Act Dollars for Various UI Administrative 

Activities, as of November 30, 2002

UI administrative activities 

Number of states 

(n=21) 

Establishing, maintaining, or enhancing technology 14

Improving systems for handling UI claims 13

Maintaining/increasing Staff 10

Improving tax filing and payment systems for employers 9

Source: GAO survey of states. 

States targeted Reed Act dollars toward a variety of UI administrative activities. 

Idaho and New Jersey, reported that the Reed Act distribution provided the ‘‘shot 

in the arm’’ they needed to upgrade outdated computer systems. New Jersey is funding a complete overhaul of its 1970’s benefit payment system, which will allow it 

to provide more self-service information to claimants so that they will be able to 

track their own claims. Michigan earmarked funds to enhance an Internet-based UI 

claims system, updating computer software systems to improve customer service. A 

number of states targeted funds to improve tax filing and payment systems for emVerDate jul 14 2003 05:04 Sep 06, 2003 Jkt 088995 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 E:\HR\OC\88995A.XXX 88995A
27

ployers, including California, which is funding a review of its employment tax system. 

Eighteen of the 21 states that targeted Reed Act dollars for UI systems reported 

that these investments would enhance program integrity by improving wage reporting for employers, strengthening eligibility procedures, and enhancing benefit payment control systems. For example, Virginia is increasing staff in the benefit payment control center, including fraud investigators. New Jersey is enhancing its Benefits Audit Report and Tracking system, which cross matches data on newly hired 

employees with current UI recipients. 

States Appropriated Reed Act Dollars to Improve ES and One-Stop Systems 

in a Variety of Ways 

Twenty-two states appropriated $349 million for ES and one-stop administrative 

costs, of which just under $12 million had been spent by 6 states, as of November 

30, 2002. (See app. V.) As with funds states appropriated for administration of UI 

systems, most of the 22 states appropriated Reed Act dollars for enhancing technology in ES or one-stop systems. (See table 3.) For example, Massachusetts, is 

building a database for its one-stops that integrates the performance management 

systems of a number of programs

Table 3: Number of States That Appropriated Reed Act Dollars for Various ES and One-Stop 

Administrative Activities, as of November 30, 2002

ES and one-stop administrative activities 

Number of states 

(n=22) 

Enhancing technology 17

Providing labor exchange and employment services 14

Maintaining/increasing staff 12

Providing reemployment services to UI claimants 10

Enhancing resource room resources, outreach efforts, or informational materials 9

Covering the shared costs of operating one-stop centers 7

Improving access for clients with disabilities or limited English proficiency 5

Source: GAO survey of states. 

Most of the states that appropriated Reed Act dollars for ES or one-stop administration, targeted these funds for labor exchange and employment services; half appropriated them to maintain or increase the number of ES or one-stop staff; and 

some earmarked Reed Act dollars to reemployment services for UI claimants. For 

example, Louisiana reported expanding its reemployment services by updating the 

state’s UI client profiling model, and designing job search workshops for at-risk 

youth, older workers, single heads of households, ex-offenders, and other high-risk 

groups. Some states committed these funds to enhancing one-stop resource rooms, 

outreach efforts, or information materials. 

A number of states reported that they appropriated Reed Act dollars to improve 

one-stops in other ways. Virginia, for example, targeted Reed Act dollars for economic recovery crisis centers, enhanced one-stops that grew out of a center that was 

established to help workers in northern Virginia in the aftermath of the September 

11, 2001, terrorist attacks. New Jersey is using Reed Act dollars to pilot test and 

expand a scan card technology statewide for all of its one-stop centers, and to support business service centers that provide services to employers within the one-stop 

centers. According to a state official in New Jersey, these and other Reed Act-funded 

investments to improve one-stops and core services have helped transform New Jersey’s ES system into a significant partner in that state’s one-stop system. 

Some States Plan to Use Reed Act Dollars to Replace Funding from Other Sources.

As allowed by law, nine states reported they plan to use Reed Act dollars to replace funding for UI, ES, or one-stop systems that previously came from other state 

and/or federal sources. Five states reported planning to replace funds that previously came from state funding sources such as general revenue funds or penalty 

28

10Welfare reform legislation in 1996 created the Temporary Assistance for Needy Families 

(TANF) block grants to help move welfare recipients into jobs and provide greater flexibility to 

states in designing training services for TANF clients. 

and interest funds. Three states reported planning to replace funds that previously 

came from a combination of state funding sources and federal sources such as the 

Workforce Investment Act or the Temporary Assistance for Needy Families 

(TANF) 10 programs. One state reported planning to replace funds that previously 

came from the TANF program. 

Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or other members of the subcommittee may have. 

GAO Contacts and Acknowledgments 

If you or other members of the Subcommittee have questions regarding this testimony, please contact Sigurd Nilsen at (202) 512–7215 or Clarita Mrena at (202) 

512–3022. Individuals making key contributions to this testimony include Laura 

Heald, Carolyn Blocker, Cheri Harrington, and Patrick DiBattista.

Appendix I: Status of CY 2002 Reed Act Dollars by State, as of 11/30/2002

State Total Reed Act allotment 

Percent 

expended 

Unexpended 

Percent 

appropriated 

for administration 

of UI, 

ES, or 

one-stop 

systems 

Percent 

officially 

obligated to 

UI trust 

fund 

Percent 

neither 

appropriated 

nor obligated 

Alabama $110,623,477 0 15.0 0 85.0

Alaska 14,820,932 0.5 19.7 0 79.8

Arizona 144,079,575 0 0 0 100

Arkansas 63,958,998 0 0 0 100

California 936,873,766 0.6 3.7 64.0 31.6

Colorado 142,666,574 0 0 0 100

Connecticut 100,418,304 0 9.0 0 91.0

Delaware 26,024,719 0 0 100 0

District of Columbia 25,765,401 0 31.3 0 68.7

Florida 449,667,718 0.4 3.2 0 96.4

Georgia 249,673,858 0 a 0 100

Hawaii 30,761,048 0 0 0 100

Idahob 32,244,586 21.7 0 0 78.3

Illinois 376,244,918 0 0 0 100

Indiana 174,573,012 0 0 42.4 57.6

Iowa 82,395,262 1.2 35.2 0 63.6

Kansas 78,166,750 0 0 100 0

Kentucky 103,829,381 0 0 0 100

Louisiana 105,499,296 0 24.9 0 75.1

29

Appendix I: Status of CY 2002 Reed Act Dollars by State, as of 11/30/2002—Continued

State Total Reed Act allotment 

Percent ex- pended 

Unexpended 

Percent 

appropriated 

for administration 

of UI, 

ES, or 

one-stop 

systems 

Percent 

officially 

obligated to 

UI trust 

fund 

Percent 

neither 

appropriated 

nor obligated 

Maine 32,486,816 0 0 0 100

Maryland 142,929,005 0 0 0 100

Massachusetts 193,639,110 0 1.3 0 98.7

Michigan 291,485,481 13.9 85.0 0 1.2

Minnesotab 163,061,573 7.4 0 0 92.6

Mississippi 64,670,097 1.4 23.3 0 75.3

Missouri 161,426,814 0 0 100 0

Montana 18,551,627 3.0 97.0 0 0

Nebraska 48,380,203 0 0 28.9 71.1

Nevada 68,082,942 0 0 100 0

New Hampshire 38,475,620 0 0 0 100

New Jersey 242,816,310 0.2 15.1 0 84.8

New Mexico 38,599,338 0 0 0 100

New York 491,343,135 100 0 0 0

North Carolina 240,892,032 100 0 0 0

North Dakota 15,267,835 0.4 1.1 0 98.5

Ohio 343,709,635 0.4 14.4 63.0 22.1

Oklahoma 81,441,628 0 2.5 0 97.5

Oregon 98,029,105 0 0 0 100

Pennsylvania 337,595,975 0.1 4.3 0 95.6

Puerto Rico 48,875,605 0 33.8 66.2 0

Rhode Island 27,123,409 0 9.6 0 90.4

South Carolina 108,203,982 1.5 0 0 98.5

South Dakota 19,140,671 0 0 0 100

Tennessee 162,633,730 0 4.6 0 95.4

Texas 596,446,497 89.7 0 0 10.3

Utah 61,627,678 0 3.5 0 96.5

Vermont 16,395,967 10.2 0 0 89.8

30

Appendix I: Status of CY 2002 Reed Act Dollars by State, as of 11/30/2002—Continued

State Total Reed Act allotment 

Percent 

expended 

Unexpended 

Percent 

appropriated 

for administration 

of UI, 

ES, or 

one-stop 

systems 

Percent 

officially 

obligated to 

UI trust 

fund 

Percent 

neither 

appropriated 

nor obligated 

Virgin Islands 1,950,917 5.1 2.9 0 92.0

Virginia 214,949,942 1.2 13.2 0 85.6

Washington 167,011,815 0 0 0 100

West Virginia 36,210,068 0 10.3 0 89.7

Wisconsin 166,214,419 0 0 0 100

Wyoming 12,043,444 0 0 0 100

United States $8,000,000,000 16.8 7.4 15.9 60.0

Source: GAO data and U.S. Department of Labor data. 

a Appropriated Reed Act funds for administration of UI, but could not specify the dollar amount allocated for 

this purpose. b Appropriated Reed Act funds for administration of UI, ES, or one-stop systems and expended all the dollars 

appropriated. 

Appendix II: Effect of Reed Act Distribution on Employer Taxes as Reported by States 

States where automatic increases in UI tax/surcharge are triggered if trust fund falls below 

certain level 

Reed Act funds prevented triggering an increase in a tax or surcharge in 2002a

Alabama •

Alaska 

Arkansas •

California •

Colorado •

Connecticut •

Delaware •

District of Columbia 

Florida •

Georgia 

Hawaii 

Idaho 

Illinois 

Indiana •

Iowa •

Kansas 

31

Appendix II: Effect of Reed Act Distribution on Employer Taxes as Reported by States—

Continued

States where automatic increases in UI tax/surcharge are triggered if trust fund falls below 

certain level 

Reed Act funds prevented triggering an increase in a tax or surcharge in 2002a

Kentucky •

Louisiana 

Maine 

Maryland •

Massachusetts •

Michigan 

Minnesota •

Mississippi •

Missouri •

Montana •

New Hampshire •

New Jersey 

New Mexico 

New York •

North Carolina •

Ohio •

Oklahoma •

Oregon •

Pennsylvania •

Puerto Rico 

Rhode Island 

South Carolina •

South Dakota 

Tennessee •

Texas •

Utah •

Vermont •

Virgin Islands 

Virginia •

Washington •

West Virginia 

32

Appendix II: Effect of Reed Act Distribution on Employer Taxes as Reported by States—

Continued

States where automatic increases in UI tax/surcharge are triggered if trust fund falls below 

certain level 

Reed Act funds prevented triggering an increase in a tax or surcharge in 2002a

Wisconsin 

Wyoming 

Total: 49 30

Source: GAO Survey of States. 

a According to the Department of Labor, for most states, any increases triggered in CY 2002 would not have 

gone into effect until CY 2003. 

Appendix III: States with Reed Act Dollars Appropriated by Law for UI, and ES, or One-Stop 

Systems, as of 11/30/2002

State Reed Act dollars appropriated 

for UI system 

Reed Act dollars appropriated 

for ES or one-stop system 

Alabama • •

Alaska • •

California • •

Connecticut • •

District of Columbia •

Florida •

Georgia •

Idaho • •

Iowa •

Louisiana • •

Massachusetts •

Michigan • •

Minnesota •

Mississippi •

Montana • •

New Jersey • •

North Dakota •

Ohio • •

Oklahoma •

Pennsylvania • •

Puerto Rico • •

Rhode Island •

Tennessee • •

33

Appendix III: States with Reed Act Dollars Appropriated by Law for UI, and ES, or One-Stop 

Systems, as of 11/30/2002—Continued

State Reed Act dollars appropriated 

for UI system 

Reed Act dollars appropriated 

for ES or one-stop system 

Utah •

Virgin Islands • •

Virginia • •

West Virginia • •

Total: 27 21 22

Source: GAO survey of states. 

Appendix IV: UI Administrative Activities for which CY2002 Reed Act Dollars had been 

Appropriated, as of 11–30–2002

State 

General 

technology Staff 

Claims 

system 

developments 

Tax filing 

and paying enhancements 

Appeals 

system 

improvements 

Direct 

deposit/ 

debit 

cards 

Alabama ••••

Alaska •

California •

Connecticut • ••

District of Columbia • •

Georgiaa

Idaho •••

Iowa • ••• •

Louisiana • ••

Michigan •

Minnesota • ••• •

Montana •••

New Jersey •••

North Dakota •

Ohio •••••

Pennsylvania 

Puerto Rico ••••• •

Tennessee ••••

Virgin Islands • •

Virginia •

West Virginia • •

34

Appendix IV: UI Administrative Activities for which CY2002 Reed Act Dollars had been 

Appropriated, as of 11–30–2002—Continued

State 

General 

technology Staff 

Claims 

system 

developments 

Tax filing 

and paying enhancements 

Appeals 

system 

improvements 

Direct 

deposit/ 

debit 

cards 

Total: 21 14 10 13 9 5 4

Source: GAO survey of states. 

aState was unable to report how dollars were allocated. 

Appendix V: ES and One-Stop Administrative Activities for which CY2002 Reed Act Dollars had 

been Appropriated, as of 11–30–2002

State 

Labor 

exchange 

and employment 

services 

Maintain or 

increase 

staff 

Shared 

cost of 

operating 

one-stop 

centers 

Reemployment 

services 

to UI 

claimants 

Enhance 

technology 

Resource 

room resources, 

outreach or 

informational 

material 

Improve 

access 

for 

those 

with disabilities 

or limited 

English 

proficiency 

Alabama •

Alaska •

California • •

Connecticut •• •• •

Florida • • ••

Idaho •• ••••

Louisiana • ••••

Massachusetts •• ••

Michigan •

Mississippi 

Montana ••• •

New Jersey • •••••

Ohio •• •••

Oklahoma ••• ••

Pennsylvania •••••

Puerto Rico • ••

Rhode Island •••• •

Tennessee •

Utah • •

Virgin Islands 

Virginia •••••••

35

Appendix V: ES and One-Stop Administrative Activities for which CY2002 Reed Act Dollars had 

been Appropriated, as of 11–30–2002—Continued

State 

Labor 

exchange 

and employment 

services 

Maintain or 

increase 

staff 

Shared 

cost of 

operating 

one-stop 

centers 

Reemployment 

services 

to UI 

claimants 

Enhance 

technology 

Resource 

room resources, 

outreach or 

informational 

material 

Improve 

access 

for 

those 

with disabilities 

or limited 

English 

proficiency 

West Virginia • •

Total: 22 14 12 7 10 17 9 5

Source: GAO survey of states. 

Related GAO Products 

Unemployment Insurance: States’ Use of the 2002 Reed Act Distribution. GAO–03–

496. Washington, D.C.: Mar. 6, 2003. 

Unemployment Insurance: Increased Focus on Program Integrity Could Reduce 

Billions in Overpayments. GAO–02–697. Washington, D.C.: July 12, 2002. 

Strategies to Manage Improper Payments: Learning From Public and Private Sector Organizations. GAO–02–69G. Washington, D.C.: Oct. 1, 2001. 

Unemployment Insurance: Role as Safety Net for Low-Wage Workers Is Limited. 

GAO–01–181. Washington, D.C.: Dec. 29, 2000. 

Benefit and Loan Programs: Improved Data Sharing Could Enhance Program Integrity. GAO/HEHS–00–119. Washington, D.C.: Sept. 13, 2000. 

Unemployment Insurance: Program’s Ability to Meet Objectives Jeopardized. GAO/

HRD–93–107. Washington, D.C.: Sept. 28, 1993.

tify. 

Chairman HERGER. Thank you, Mr. Nilsen. Mr. Brock to tesf STATEMENT OF JON BROCK, PAST PRESIDENT, NATIONAL ASSOCIATION OF STATE WORKFORCE AGENCIES, AND EXECUTIVE DIRECTOR, OKLAHOMA EMPLOYMENT SECURITY COMMISSION, OKLAHOMA CITY, OKLAHOMA, ON BEHALF OF THE 

NATIONAL ASSOCIATION OF STATE WORKFORCE AGENCIES 

Mr. BROCK. Thank you, sir. 

Chairman HERGER. Thank you. 

Mr. BROCK. I am coming to you today as past President of the 

NASWA and as the Executive Director for the Oklahoma Employment Security Commission. 

On behalf of NASWA today and its 53 State and territorial workforce agencies, I would like to tell you some of the things that we 

have been doing. 

Although the $8 billion Reed Act distribution was made available 

to States relatively late in the State legislative cycles, it still had 

positive effects in 2002 and beyond. Overall, the $8 billion Reed Act 

distribution increased the aggregate balance in the State accounts 

of the unemployment trust fund by about 21 percent. 

In 2002, the Reed Act distribution helped New York repay a Federal loan it had obtained to cover the cost of regular State benefits 

of about $189 million. New York used its remaining $302 million 

to cover UI benefits in 2002 and to avoid further borrowing. Texas 

and Minnesota also avoided borrowing in 2002 as a result of receiving Reed Act distributions. However, each of these three States 

36

needed to borrow in 2003; and three more States have applied for 

Federal loans. That is Illinois, Missouri, and North Carolina. 

The GAO report noted that States had spent only about $2 bil- lion of the $8 billion Reed Act distribution in 2002. This should not 

imply, however, that employers and workers did not benefit from 

the additional $6 billion in State unemployment trust fund accounts. In fact, nearly three out of five States either avoided automatic employer tax increases or lowered employer taxes because 

their State unemployment account balances were higher as a result 

of the Reed Act distribution. This helped maintain employment and 

wage levels that might have been dampened by pending payroll tax 

increases. 

In addition, one out of five States were able to improve benefits 

in 2002. About two out of five States were able to appropriate 

funds for improvements in UI Administration or ES. Mr. Chairman, Oklahoma received $81 million under the Reed 

Act distribution. It could not have come at a better time. Because 

of cuts in its ES grant, the Oklahoma Employment Security Commission was facing a $1.7 million shortfall. The commission also 

needed $300,000 to cover its share of the overhead expenses of the 

one-stop employment centers. The State legislature appropriated 

$2 million of the Reed Act funds to cover these deficiencies. This 

action averted a reduction in force and the loss of much-needed ES. 

It has been projected that the Commission will experience a 

budget shortfall by the end of this year in its UI division, in addition to a continuing deficit in ES budget. This year, the Commission is requesting appropriation from the Reed Act funds in the 

amount of $6.2 million to meet these shortfalls. Without this 

money, the unemployment service and UI Administration benefit 

program in Oklahoma would be severely compromised. 

Our employers’ tax rates in Oklahoma are set based upon the 

health of the UI trust fund. Had we not received the Reed Act distribution, Oklahoma’s employers would have paid another $40 million in taxes in 2003. 

Now, on the benefits side. The receipt of the Reed Act funds gave 

impetus to the passage of an alternate base period which will extend UI benefits to some low wage and relatively inexperienced 

workers. About three out of five States reported that they plan to 

spend more Reed Act funds this year. Utah, for example, just 

passed an extension of benefits for 5 weeks after exhaustion of currently available benefits. 

Finally, sir, I would like to ask the Subcommittee to study a 

technical change to the law. Under past Reed Act distribution, 

States have been able to restore funds spent on benefits to Reed 

Act status so that they can use them for UI Administration or ES 

later. This restoration authority was not included with the $8 billion Reed Act distribution in 2002. Such restoration would be particularly important for less solvent States. Once these States recover from the recession and become more solvent, they could restore Reed Act funds and use them to improve administrative performance of their programs. 

On behalf of the State workforce agencies, we thank you for the 

opportunity to testify before the Subcommittee today. The $8 billion Reed Act distribution has helped States weather the storm 

37

while we await UI and employment reform. We hope you will begin 

work on this reform this year. 

Thank you, sir. 

[The prepared statement of Mr. Brock follows:]

Statement of Jon Brock, Past President, National Association of State 

Workforce Agencies, and Executive Director, Oklahoma Employment Security Commission, Oklahoma City, Oklahoma, on behalf of the National 

Association of State Workforce Agencies 

Mr. Chairman and Members of the Subcommittee on Human Resources, I am Jon 

Brock, Past-President of the National Association of State Workforce Agencies 

(NASWA) and Executive Director of the Oklahoma Employment Security Commission. Thank you for inviting me to testify today on behalf of NASWA and its members. NASWA represents 53 state and territorial workforce agencies in general and 

Unemployment Insurance and Employment Service programs in particular. Most of 

our state members also administer programs authorized under the Workforce Investment Act, and some administer public assistance programs, such as Temporary 

Assistance for Needy Families or ‘‘TANF.’’

I want to thank the Chairman for scheduling a hearing to review states’ use of 

the $8 billion in so-called ‘‘Reed Act’’ funds that the Federal Government distributed 

from the federal accounts to the state accounts of the unemployment trust fund in 

March of 2002 under the Job Creation and Worker Assistance Act of 2002. Although 

these funds were made available to states relatively late in state legislative cycles, 

they still had positive effects in 2002 and beyond for employers, workers, state unemployment insurance programs, and the economy. 

Mr. Chairman, today I would like to summarize the results of a NASWA survey 

of the states’ use of Reed Act funds that was conducted last September. The results 

of this survey are similar to the results of a study conducted by the U.S. General 

Accounting Office that was summarized in an ‘‘Advisory’’ from the Committee on 

Ways and Means last week. In addition, I would like to briefly mention what happened in my own state, Oklahoma, and what appears to be happening in states 

early this year. 

Overall, the $8 billion Reed Act distribution increased the balance in the state accounts of the unemployment trust fund by about 21 percent in March 2002. State 

shares were based on state shares of covered taxable wages paid by employers 

under the Federal Unemployment Tax Act. The percentage increase was higher in 

less solvent state programs because their distribution was relatively large compared 

to their unemployment account balances. The distribution increased the unemployment insurance account balance in nine states by more than 50 percent. These 

states were Arkansas, Illinois, Minnesota, Missouri, New York, North Carolina, 

North Dakota, South Dakota, and Texas. 

In 2002, the Reed Act distribution helped New York repay a federal loan it had 

obtained to cover the cost of regular state benefits of about $189 million. New York 

used its remaining $302 million to cover UI benefits in 2002 and to avoid further 

borrowing. Texas and Minnesota also avoided borrowing in 2002 as a result of receiving Reed Act distributions. 

However, each of these three states needed to borrow in 2003, and three more 

states have applied for federal loans in 2003—Illinois, Missouri, and North Carolina. 

Mr. Chairman, the Committee Advisory noted that states had spent only about 

$2 billion of the $8 billion Reed Act distribution in 2002. This should not imply, 

however, that employers and workers did not benefit from the additional $6 billion 

in state unemployment trust fund accounts. In fact, nearly three out of five states 

either avoided automatic employer tax increases or lowered employer taxes because 

their state unemployment account balances were higher as a result of the Reed Act 

distribution. This helped maintain employment and wage levels that might have 

been dampened by payroll tax increases that might have occurred otherwise. As you 

said, ‘‘Helping workers, keeping payroll taxes low, and strengthening the economy 

is exactly why we provided States this record support.’’

In addition to providing lower taxes, about one out of five states were able to improve benefits in 2002. These changes included extended benefits in Minnesota, an 

increase in weekly benefits in Alabama and Vermont, and new alternate base periods in Connecticut, the District of Columbia, and Georgia. Alternate base periods 

allow some workers to qualify for benefits even though they did not have enough 

earnings in the normal base period, which usually is the first four of the last five 

completed calendar quarters. By taking into account the last three to six months, 

38

alternate base periods allow some workers to qualify for benefits by counting more 

recent earnings. 

About 2 out of five states were able to appropriate funds for improvements in Unemployment Insurance administration or employment services. These funds were allocated toward such spending as implementing telephone claims call centers, modernizing computer benefit and tax systems, improving timeliness of claims determinations, reducing fraud, compensating for federal under funding for administration of unemployment insurance and employment services, building an internet 

labor exchange, and purchasing computers, imaging equipment, and network enhancements. 

Mr. Chairman, my state of Oklahoma received $81 million under the Reed Act 

distribution. It could not have come at a better time. Because of cuts in its Employment Service grant, the Oklahoma Employment Security Commission was facing a 

$1.7 million budget shortfall. The Commission also needed $300,000 to cover its 

share of overhead expenses in the state One Stop Employment Centers. The state 

legislature appropriated $2 million of the Reed Act Funds to cover these deficiencies. 

This action averted a reduction in force and the loss of much needed employment 

services. 

It has been projected that the Oklahoma Employment Security Commission will 

experience a budget shortfall by the end of this year in its Unemployment Insurance 

Division, in addition to a continuing deficit in its Employment Service budget. This 

year, the Commission has requested an appropriation from the Reed Act Funds in 

the amount of $6.2 million to make up for these shortfalls. Without this money, the 

Employment Service and the Unemployment Benefit Program in Oklahoma would 

be severely compromised. 

The Reed Act Distribution also helped to keep Unemployment Insurance taxes in 

Oklahoma at the lowest possible level. Oklahoma has five levels of UI tax scales. 

As the balance in its UI Trust fund sinks to certain levels, the tax scale is stepped 

up to increase taxes for employers. In 2002, Oklahoma was operating under the lowest tax scale available. Due to the economic recession which caused a drop in the 

Trust Fund balance, Oklahoma could have gone up two steps in the tax scales for 

2003. After the Reed Act Distribution was deposited into the Oklahoma UI Trust 

Fund, the balance was raised sufficiently to hold the increase to only one step up. 

By being able to set tax rates on the lower tax scale, Oklahoma employers will save 

approximately $40 million in 2003. 

On the benefits side, the receipt of the Reed Act funds gave impetus to the passage of an alternate base period in Oklahoma. The alternate base period will extend 

UI benefits to low wage workers and those who have not been attached to the workforce for long enough to qualify for benefits under the regular base period. 

Nationwide, we believe more positive effects probably will unfold this year. About 

three out of five states reported they plan to spend more Reed Act funds this year. 

Already, states have been reporting action early in 2003. Utah just passed an extension of benefits for 5 weeks after exhaustion of currently available benefits; Colorado 

just enacted a bill to spend $7 million on additional employment services; and the 

Indiana House of Representatives just passed the Governor’s Reed Act proposals, 

which included spending most of Indiana’s Reed Act funds on a modernizing Unemployment Insurance administration and helping workers find jobs. 

Finally, Mr. Chairman, I would like to ask the Subcommittee to study a technical 

change in the Title II of the Job Creation and Worker Assistance Act of 2002 that 

authorized the $8 billion Reed Act distribution. Under past Reed Act distributions, 

states have been able to restore funds spent on benefits to Reed Act status so that 

they can use them for Unemployment Insurance administration or employment 

services later. This restoration authority was not included with the $8 billion Reed 

Act distribution in 2002. Such restoration would be particularly important for less 

solvent states or states that have borrowed to cover benefit costs already. Once 

these states recover from the recession and become more solvent, they could restore 

Reed Act funds and use them to improve administrative performance of their programs in the future. 

On behalf of the state workforce agencies, we thank you for the opportunity to 

testify before the subcommittee today. The $8 billion Reed Act distribution was a 

valuable component of the economic stimulus package last year that still yields benefits this year. It has helped states weather the storm while we await Unemployment Insurance and Employment Service reform. We hope you will begin work on 

that difficult task this year. 

Thank you.

f

39

Chairman HERGER. Thank you very much, Mr. Brock. Now Ms. 

DeLisio to testify. 

STATEMENT OF MELISSA DELISIO, ASSISTANT DIRECTOR, 

OHIO DEPARTMENT OF JOB AND FAMILY SERVICES, COLUMBUS, OHIO 

Ms. DELISIO. Thank you, Mr. Chairman; and thank you for inviting me here today to testify regarding the 2002 Reed Act distribution. I would also like to thank you and your colleagues on behalf of Governor Bob Taft, Business and Labor in Ohio for allowing 

the Reed Act distribution a year ago. 

Ohio received $343 million in Reed Act funds. We treated this as 

one-time money and focused Ohio’s allocation plan on one-time expenditures. Our goal was to allocate a portion of the money to support the administration of both Unemployment Compensation (UC) 

and ES programs, as well as ensure the integrity of Ohio’s UI trust 

fund. 

For every dollar of Ohio Federal Unemployment Tax Act (FUTA) 

tax paid by employers that was sent to the Federal Government for 

2000, only 36 cents was returned to Ohio to operate the UC and 

ES programs. This return has remained low for a number of years 

and remains well below 50 percent. As a result of this lack of return, it has been necessary for Ohio to use general revenue funds 

and State penalty and interest fund dollars to make up that shortfall. 

The 2002 Reed Act distribution enabled Ohio to address the 

shortfall in administrative needs as follows: 

Ohio appropriated up to $18 million per year to reimburse the 

General Revenue Fund (GRF) in State fiscal years 2003, 2004, and 

2005 for the amount of GRF that would have otherwise been used 

to operate the State’s UI and ES programs. This will be advantageous to Ohio as the money to support these expenditures will be 

drawn on a reimbursement basis, which will leave the Reed Act 

funding in Ohio’s unemployment benefit account for a longer period 

of time, allowing it to accumulate interest. 

Ohio’s current UC tax system is over 26-years-old and has been 

targeted as high risk for potential failure. The current tax system 

does not lend itself well to modifications to assist Ohio’s employers, 

to implement law changes, or take advantage of technological improvements. Reed Act funds will be used to replace this system, 

and costs will be spread out over a 3-year period. 

With the implementation of the Federal Workforce Investment 

Act (WIA), the local service delivery system for workforce development services is evolving into local one-stops. Over the next year, 

Ohio will transition its traditional ES functions from former field 

service delivery offices to local one-stops. 

Resource rooms are a critical component of successful one-stops; 

and Reed Act funds will be provided so that each certified one-stop 

will have a resource room that will offer services that can be utilized by job seekers and employers providing them with access to 

computers, the Internet, fax machines, telephones, and other services and resources. Ohio will also provide funds for the development of matching systems for employers and job seekers. 

40

Ohio will use some of its Reed Act funding in promotion and 

marketing of certified one-stops. While getting claims checks to our 

claims customers is critical, our ultimate goal is getting unemployed workers back to work as soon as possible and providing adequate resources to accomplish that. These one-time expenses will 

be spread over 2 to 3 years. 

We currently provide specific labor market information to the 

Federal Government, but we also provide valuable labor market information to local one-stops to support decisionmaking by both employers and job seekers. Our primary goal is to expand locally focused labor market information products and ensure that information is complete, timely, accessible, and user friendly. Reed Act 

funds will be used for this as well. 

As the services Ohio provides under the UC and ES programs 

are delivered by call and processing centers and one-stops, it is apparent that our staff will need additional training and equipment 

to meet the demands of the new ways of doing business. Due to 

continued underfunding at the Federal level, we have not committed the resources necessary to continuously improve the skills 

of our staff and upgrade equipment. We will use Reed Act funds 

for this as well. 

Ohio employers will benefit from Reed Act distribution funds of 

approximately $216 million remaining in the UC Trust Fund after 

these administrative expenditures. One solvency tax associated 

with the mutualized portion of the State’s unemployment tax structure will be avoided in 2003 and 2004, and the magnitude of the 

other solvency tax will be lessened for 2003. We completely avoided 

a tax rate schedule increase for calendar year 2003, and the severity of an increase for 2004 will be lessened as a result of this distribution. 

Our allocation plan was unanimously approved by our Unemployment Compensation Advisory Council (UCAC), cochaired by the 

president of the Ohio American Federation of Labor-Congress of Industrial Organizations (AFL–CIO) and the president of the Ohio 

Chamber of Commerce. As a result of this allocation plan, the advisory council also assigned a Subcommittee to review Ohio’s law 

with respect to requirements of eligibility for benefits. 

In the past 24 months, benefit payouts have increased dramatically; and the maximum weekly benefit amounts increased automatically under Ohio law at the same rate as average weekly 

wages. Without this Reed Act distribution, these automatic increases would have been frozen as they were from 1982 through 

1987 in Ohio. 

Ms. DELISIO. We are in the process of proposing additional allocation of $25 million to complete the planned closing of 56 local offices, and transitioning of services to call centers, process centers 

and one-stops. That will leave an unobligated balance of $11 million of Reed Act funds in Ohio’s trust fund account. Additional information regarding the cost of each of these items I mentioned is 

attached to my written testimony. Thank you again for the opportunity to testify and for the Reed Act distribution, and I would be 

happy to answer questions. 

[The prepared statement of Ms. DeLisio follows:]

41

Statement of Melissa DeLisio, Assistant Director, Ohio Department of Job 

and Family Services, Columbus, Ohio 

Mr. Chairman and Members of the Subcommittee: 

My name is Melissa DeLisio and I am Assistant Director of the Ohio Department 

of Job and Family Services. Thank you for inviting me to testify today regarding 

the 2002 Reed Act distribution. I would also like to thank you and your colleagues 

on behalf of Governor Bob Taft, business and labor in Ohio for allowing the Reed 

Act distribution a year ago. Ohio received $343 million in Reed Act funds. We treated this distribution as ‘‘one 

time’’ money and focused Ohio’s allocation plan on ‘‘one time’’ expenditures. Our goal 

was to allocate a portion of the money to support the administration of both Unemployment Compensation and Employment Service programs as well as ensure the 

integrity of Ohio’s Unemployment Insurance trust fund. 

For every dollar of Ohio FUTA tax paid by employers that was sent to the Federal 

Government for 2000, only 36 cents was returned to Ohio to operate the Unemployment Compensation and Employment Service programs. This return has remained 

low for a number of years, and remains well below 50 percent. As a result of this 

lack of return, it has been necessary for Ohio to use General Revenue Fund (GRF) 

& State Penalty & Interest Fund dollars to make up the shortfall. The 2002 Reed 

Act distribution enabled Ohio to address the shortfall in administrative needs as follows: 

Ohio appropriated up to $18 million per year to reimburse the General Revenue 

Fund in SFY 2003, 2004 and 2005 for the amount of GRF that would have otherwise been used to operate the state’s Unemployment Insurance and Employment 

Services programs. This will be advantageous to Ohio as the money to support these 

expenditures will be drawn on a reimbursement basis, which will leave the Reed 

Act funding in Ohio’s unemployment benefit account for a longer period of time, allowing it to accumulate interest. 

Ohio’s current UC Tax system is 26 years old and has been targeted as ‘‘high risk’’ 

for potential system failure. The current tax system does not lend itself to modifications to assist Ohio employers, implement law changes or take advantage of technological improvements. Reed Act funds will be used to replace this system and costs 

will be spread out over a three year period. 

With the implementation of the federal Workforce Investment Act the local delivery system for workforce development services is evolving into the local One Stops. 

Over the next year, Ohio will transition its traditional employment service functions 

from former field service delivery offices to local One Stops. 

Resource rooms are a critical component of successful One Stops. Reed Act funds 

will be provided so that each certified One Stop will have a resource room that will 

offer services that can be utilized by local job seekers and employers providing them 

access to computers, the Internet, fax machines, telephones and other services and 

resources. Ohio will also provide funds for the development of user friendly computer links that allow on-line interactive access within various local workforce systems that link employers and jobs seekers. 

Ohio will also use some Reed Act funding in the promotion and marketing of certified One Stops and services provided in local communities. While paying benefits 

in a timely fashion is critical to claims customers, our ultimate goal is getting unemployed workers back to work as soon as possible and providing adequate resources 

to accomplish that. Again, these are one-time expenses that will be spread over 2–

3 years. 

We are currently required to provide specific Labor Market Information to the 

Federal Government, but we also provide valuable information to local One Stops 

to support decision-making by employers and job seekers. A primary goal is to expand locally focused Labor Market Information products and ensure the information 

is complete, timely, accessible and user friendly for local employers and job seekers. 

As the services Ohio provides under the Unemployment Compensation and Employment Service programs are delivered by call and processing centers and One 

Stops it has become apparent that our staff will need training and equipment to 

meet the demands of the new ways of doing business. Due to continued under funding at the federal level we have not committed the resources necessary to continuously improve the skills of our staff or upgrade equipment. Reed Act funds will be 

used for staff training and equipment upgrades. 

Ohio employers will benefit from Reed Act distribution funds of approximately 

$216 million remaining in the Unemployment Compensation Trust Fund after these 

administrative expenditures. One solvency tax associated with the mutualized portion of the state’s unemployment tax structure will be avoided for 2003 and 2004. 

The magnitude of the other solvency tax will be lessened for 2003. We completely 

42

avoided a tax rate schedule increase for calendar year 2003. The severity of the increase for 2004 will be lessened as a result of the Reed Act distribution. 

Our allocation plan was unanimously approved by our Unemployment Compensation Advisory Council (UCAC), which is co-chaired by the President of the Ohio 

AFL–CIO and the President of the Ohio Chamber of Commerce. As a result of this 

allocation plan, the advisory council also assigned a subcommittee the task of reviewing Ohio’s law with respect to requirements of eligibility for benefits. 

In the past 24 months, benefit payouts have increased dramatically and the maximum weekly benefit amounts increased automatically under Ohio law at the same 

rate as average weekly wages. Without this Reed Act distribution, these automatic 

increases may have been frozen as they were in Ohio from 1982 through 1987. We are in the process of proposing an additional allocation of $25 million to complete the planned closing of 56 local offices and transitioning services to call centers, 

processing centers and One Stops. That will leave an unobligated balance of $191 

million in Reed Act funds within Ohio’s Trust Fund Account. 

Additional information regarding the cost of each allocation item I mentioned is 

attached to my written testimony. 

Again, thank you for the opportunity to testify and I would be happy to answer 

any questions. 

ATTACHMENT 

The Ohio Reed Act Appropriation Plan is as follows:

1. Up to $26 million each year in SFY ’03, ’04, and ’05 to offset GRF & Penalty 

& Interest. 

2. Up to $30 million to replace the current Unemployment Compensation Tax 

system. 

3. Up to $10 million for operation of local One Stops. 

4. Up to $3 million for one time improvements to ODJFS’s Labor Market Information system. 

5. Up to $6 million for one time equipment and training expenses for program 

delivery and policy staff. 

6. Up to $216 million to remain in the Unemployment Compensation Employers’ Trust Fund.

* Under consideration as of March 18, 2003, an additional $25 million to complete 

the local office transition plan.

Emsellem to testify. 

Chairman HERGER. Thank you, Ms. DeLisio. Now Mr. 

f STATEMENT OF MAURICE EMSELLEM, DIRECTOR, PUBLIC 

POLICY, NATIONAL EMPLOYMENT LAW PROJECT, OAKLAND, 

CALIFORNIA 

Mr. EMSELLEM. Thank you, Chairman. Thank you, Members of 

the Committee. I would like to discuss a few key concerns related 

to the Reed Act distribution. As a result of these concerns, we believe that the Reed Act survey, findings of the GAO support the 

conclusion that Congress should enact more targeted reforms to expand benefits and that proposals to further devolve Federal UI 

funding to the States should be reconsidered. 

First, has the Reed Act distribution helped to close the major 

gaps in the unemployment system? In our view, it has not, as documented by the GAO. Even during the recession, most unemployed 

workers are not collecting unemployment benefits in the United 

States, because the State laws have failed to keep pace with 

changes in the labor market, the growth of low wage, part time and 

women worker. Low wage workers are especially hard hit. They are 

half as likely to collect unemployment benefits compared to hire 

wage workers. That is at a rate of 18 percent. When Congress 

43

passed the Reed Act measure along with the temporary extension 

of unemployment benefits, the opportunity existed for States to 

bring many more workers into the unemployment system. Certainly the funding is there to help do it. For example, compared to 

the $8 billion in funding, the Department of Labor estimated that 

the annual cost, if every State adopted the key eligibility reforms 

benefiting low-wage and part-time workers, would not exceed $1.16 

billion. 

However, while Congress nearly tripled the amount of Reed Act 

funding that was scheduled to be released in October, it did not 

target any specific portion of the Reed Act funds to fill the gaps in 

the unemployment program. According to the GAO, only 9 States 

indicated that they expanded benefits or even planned to do so as 

a result of the Reed Act funds, and of the 14 States with the most 

solvent trust funds that also pay benefits below the average 

recipiency rate, only 3 indicated that they were expanding benefits. 

Thus, as of today, there are only 35 States that have not adopted 

the alternative base period and 31 States that failed to provide protections to part-time workers. 

The GAO findings thus support the conclusion that block granting has not substantially helped to bring more workers into the unemployment system and that more target of Federal reforms are 

necessary to close the gaps in the program. 

Second, if the Reed Act funds were not used to help close the 

gaps in the program, has the funding helped to produce other significant benefits in line or commensurate with the unprecedented 

size of the 2002 distribution? In our view, the answer is no, primarily because the funding was block-granted to the States and 

held in reserve to reduce unemployment taxes. First, it is clear that the $8 billion funding did not help stimulate 

State economies. According to the GAO, 88 percent of the funding 

was held, and most of the Reed Act funding that was spent for regular benefits in those States—was for those States experiencing 

funding problems, not for new programs. 

Second, and most significant, the States were lobbied aggressively to ensure that the Reed Act funding was held in the State 

trust funds to benefit employers in the form of reduced unemployment taxes. However, two-thirds of the States that benefited most 

as a result were already paying relatively low unemployment taxes, 

that is, below the national average. The national average has fallen 

in recent years to literally record-low levels. 

Thus, even from the standpoint of reducing employer taxes, it is 

fair to say that the Reed Act funding could have been better targeted. 

Third, the Reed Act funding provided some support to the underfunded UI Administration ES, amounting to 7 percent of the total. 

However, a significant percentage of this represents Reed Act funding appropriated in just a few States. 

Finally, Reed Act funds have had the effect of reducing trust 

fund levels in the States at a time when more benefits are being 

paid as a result of the recession. However, while the extra funding 

is welcome, it is important to emphasize that the solvency situation 

cannot be characterized as severe, except in the limited number of 

States. 

44

So, we believe that the Reed Act block grant did not produce substantial benefits commensurate with the unprecedented size of the 

program. As the UI stakeholder consensus proposal concluded, specific targeting of Reed Act funds to provide greater administrative 

resources, expand eligibility and tax relief to employers will 

produce more results at far less cost to the Federal trust fund. 

Finally, what lessons can be learned from the Reed Act experience as applied to the Administration’s new balance proposal? We 

believe that the experience documented by the GAO underscores 

the serious limitations of the Administration’s initiatives, especially 

when the demands on the UI system are the greatest in times of 

recession. 

This year’s Reed Act experience demonstrates that the Administration’s initiative will probably fail to achieve the goal of increasing administrative funding for the States, because most States 

were unable or unwilling to use the funds for anything other than 

UI payroll tax deductions despite the substantial demand for services. 

I guess my time is up. Can I take a couple more seconds to conclude? 

Chairman HERGER. Your time is up, but certainly your testimony will be submitted for the record. 

Mr. EMSELLEM. Thank you. 

[The prepared statement of Mr. Emsellem follows:]

Statement of Maurice Emsellem, Director, Public Policy, National 

Employment Law Project, Oakland, California 

Good afternoon, Chairman Herger and members of the Committee. My name is 

Maurice Emsellem, and I am Director of Public Policy with the National Employment Law Project. Thank you for this opportunity to testify with regard to the $8 

billion in federal unemployment funds (‘‘Reed Act’’) distributed to the states as part 

of the Job Creation and Worker Assistance Act of 2002 (P.L. 107–147, Section 209). 

For the reasons described below, we believe that the Reed Act survey findings of 

the U.S. General Accounting Office (GAO) (Unemployment Insurance: States’ Use of 

the 2002 Reed Act Distribution, March 2003) support the conclusion that Congress 

should enact more targeted reforms to expand unemployment benefits and that proposals to further devolve federal unemployment insurance (UI) funding to the states 

should be rejected. 

The National Employment Law Project (NELP) is a non-profit organization that 

specializes in the unemployment insurance system. We provide technical assistance 

to state lawmakers and advocates in support of reforms of the unemployment system to fill the gaps in coverage that deny benefits to many low-wage and women 

workers. We have published extensively on the unemployment system, including a 

recent analysis of the 2002 Reed Act distribution (Strengthening the UI Safety Net 

with $8 Billion in New Federal Reed Act Funding: State Findings and Recommendations).

In today’s testimony, I will expand on the following key concerns related to the 

2002 Reed Act distribution.

• Even in those states with especially solvent trust funds and where 

most unemployed workers still do not collect unemployment benefits, 

the 2002 Reed Act funding has failed to help close the major gaps in 

the unemployment system. 

• Because the Reed Act block grant was most often held in the state 

trust funds to reduce unemployment taxes, it has thus far failed to 

produce other significant benefits commensurate with the unprecedented size of the 2002 distribution. • The Reed Act experience documented by the GAO underscores the serious limitations of the Administration’s ‘‘New Balance’’ proposal especially when the demands on the UI system are the greatest in times 

of recession.

45

1 National Employment Law Project, ‘‘Crisis of Long-Term Unemployment is Far From Over 

Now Reaching Most Segments of the Labor Market’’ (February 2003). 2 U.S. General Accounting Office, Unemployment Insurance: Role as Safety Net for Low-Wage 

Workers is Limited (December 2000). 3 Even more alarming is the lack of meaningful progress in those states that have especially 

abundant UI reserves and a below-average proportion of workers collecting unemployment beneContinued

***

• Even in those states with especially solvent trust funds and where 

most unemployed workers still do not collect unemployment benefits, 

the 2002 Reed Act funding has failed to help close the major gaps in 

the unemployment system.

The critical question is whether the Federal Government received a fair return on its investment of $8 billion in Reed Act funds distributed to the states in March 

2002. In our view, it has not thus far, especially given the failure of the states to 

expand unemployment benefits to meet the needs of today’s working families. 

The unemployment insurance safety net is being sorely tested, as monthly layoffs 

show few signs of subsiding and long-term unemployment reached a 10-year high 

last month. According to our recent analysis,1 the long-term jobless now represent 

nearly all sectors of the workforce. For example, the most significant increases in 

long-term unemployment since 2000 have been among manufacturing workers 

(177% increase from 2000–2002), professional workers (up 234%) and the college 

educated (up 207%). 

Yet even during the recession, most unemployed workers are not collecting unemployment benefits in the United States. That is because state unemployment laws 

have failed to keep pace with the changes in the labor market, including the growth 

in the number of low-wage workers, part-time and women workers. As of the 3rd

Quarter of 2002, the average state provided unemployment benefits to 41% of the 

unemployed (a figure which has increased since the recession began in March 2001 

because a larger percentage of laid off workers qualify for benefits). In 14 states, 

less than one-third of all unemployed workers collect benefits, while only twelve 

states provide benefits to more than 50% of the unemployed. As documented by another GAO report, low-wage workers are especially hard hit—they are half as likely 

to collect unemployment benefits compared to higher-wage workers.2

When Congress passed the Reed Act measure along with the temporary extension 

of unemployment benefits, the expectation of many was that the states would take 

advantage of the $8 billion in funding to bring more workers into the unemployment 

system. The costs of most eligibility measures, compared with the significant 

amount of funding available, raised the hopes for significant state reform. The Reed 

Act funds represented the equivalent of 38% of the revenue collected in an entire 

year by the states. It represents even more of the UI revenue collected in those 

states where unemployed workers have the hardest time collecting benefits (of the 

14 states providing unemployment benefits to less than one-third of the unemployed, Reed Act funds represented an average of 81% of the state’s revenue generated in one year). In contrast, the Labor Department estimated that the annual 

cost if every state adopted two of the key eligibility reforms benefiting low-wage and part-time workers (630,000 workers total) would not exceed $1.16 billion. 

However, while Congress nearly tripled the amount of Reed Act funding that was 

scheduled to be released in October 2002, it did not target any specific portion of 

the Reed Act funds to fill the gaps in the unemployment program. Instead, the law 

listed several categories of UI reforms that the states could adopt at their option, 

including state-funded extended unemployment benefits (limited to those workers 

who were able to first access the temporary extension program), coverage for workers who do not qualify for state UI benefits because the state does not count their 

recent earnings (the ‘‘alternative base period’’), and benefits for workers who are 

only available for part-time employment. 

As the GAO survey found, only a small percentage of the states took advantage 

of their Reed Act funds to expand their UI programs. According to the GAO, only 

nine states indicated that they expanded unemployment benefits, or even planned 

to do so, as a result of their Reed Act funds. That is true as well of the states with 

the most solvent UI trust funds. Of the 21 states that had sufficient trust fund reserves (as of October 2002) to pay benefits for more than one year at peak recession 

levels (the recommended solvency level recognized by the U.S. Department of 

Labor), just six states (Alabama, District of Columbia, Georgia, Oklahoma, Oregon, 

and Vermont) indicated that they planned to expand benefits as a result of Reed 

Act funding.3

46

fits. 14 states (Alabama, Arizona, Florida, Georgia, Indiana, Louisiana, Maine, Mississippi, Montana, New Hampshire, New Mexico, Oklahoma, Utah, Wyoming) fall in this category, while and 

only three of them (Alabama, Georgia, Oklahoma) reported that they planned on expanding benefits as a result of Reed Act funding. 4Marc Baldwin, Beyond Boom and Bust: Financing Unemployment Insurance in a Changing 

Economy (National Employment Law Project, April 2001) 

While it is still possible that some of these states will eventually adopt eligibility 

reforms, most of them will not according to judgment of the state officials that responded to the survey. Thus, as of today, there are still 35 states that have not 

adopted the alternative base period and 31 states that fail to provide unemployment 

benefits to workers who cannot look for full-time work. 

The GAO findings thus support the conclusion that block granting did not work 

to help bring more workers into the UI system and thus that more targeted federal 

reforms are necessary to close the gaps in the program. Federal legislation should 

include structural reform of the unemployment system to cover more low-wage and 

part-time workers and provide additional weeks of benefits for those who have exhausted their federal extension or will do so come May when the federal program 

expires.

• Because the Reed Act block grant was most often held in the state 

trust funds to reduce unemployment taxes, it has thus far failed to 

produce other significant benefits commensurate with the unprecedented size of the 2002 distribution.

If the Reed Act funds were not used to help close the gaps in the unemployment 

program, then the question is whether the funding produced other measurable benefits in proportion to the size of the Reed Act distribution. In our view, the answer 

is thus far no, primarily because the funding was block granted to the states and 

held in reserve to reduce unemployment taxes. First, it’s clear that the $8 billion in funding did not help stimulate state economies. Local economies would have benefited if the funding were directed to pay for 

expanded unemployment benefits, thus building purchasing power in those areas hit 

hardest by unemployment and paying for goods and services. However, according to 

the GAO, 88% of the funding had not been spent ($6.66 billion) as of November 

2002. And most of the Reed Act funding that was spent paid for regular benefits 

in those states experiencing funding problems (especially New York and Texas), not 

for new programs. 

Second, and probably most significant, the states were lobbied aggressively to ensure that the Reed Act funding was held in the state trust funds to benefit employers in the form of reduced unemployment taxes. However, those states that benefited most as a result were already paying relatively low unemployment taxes. Thus, 

even from the standpoint of reducing employer taxes, it’s fair to say that the Reed 

Act funding was poorly targeted. 

According to the GAO, 30 states held onto their Reed Act funds, which had the 

effect of avoiding scheduled increases in taxes or new solvency taxes. However, in 

two-thirds of these states (19), unemployment taxes were already at or below the 

national average of just half of one percent of total wages (.5%). In eight of these 

states (Colorado, Florida, Indiana, Missouri, New Hampshire, Oklahoma, Utah and 

Virginia), unemployment taxes were already below three-tenths of one percent (.3%) 

of total wages. 

It’s important to point out that unemployment taxes have fallen to historic low 

levels in recent years. In 2001, the average tax was lower than at any time since 

1950 when the data were first collected, and from 1994 to 2002 (2002 rates estimated by the Labor Department) the average UI tax rate fell nearly in half (from 

.92% to.5%). The story of the last decade is that the states have moved to ‘‘pay as 

you go’’ financing, thus maintaining the lowest possible unemployment taxes even 

during those periods when the unemployment trust funds should be building reserves to pay benefits during a recession.4

Third, the 2002 Reed Act funding provided some support to the under-funded UI 

administration and employment services, amounting to 7% of the total distribution 

(or $590 million). However, a significant percentage of this total represents Reed Act 

funding appropriated in just a small number of states, most notably Michigan and 

Ohio. Thus, even assuming that double or triple the current amount is appropriated 

by the states in future years, the Reed Act funding would still represent a relatively 

modest portion of the need and a limited amount of the total funds available. 

Finally, Reed Act funds have had the effect of raising trust fund levels in the 

states at a time when more benefits are being paid as a result of the recession. 

While the extra funding is welcome, it’s important to emphasize that the solvency 

47

situation cannot be characterized as a crisis except in a handful of states. Without 

the Reed Act funding, about half the states (23) had sufficient reserves as of September 2002 to pay benefits at peak recession levels for a least nine months. That 

is not significantly short of the one-year standard that applies before a recession begins, not 19 months after a recession started. Moreover, the solvency measure assumes that the states are not taking in any additional revenue. Yet the states are 

still accumulating significant reserves which are projected to total $28 billion in 

2003. With the Reed Act funding, the number of states with at least nine months 

of recession-level reserves increased from 23 to 32. 

In sum, the Reed Act block grant did not produce substantial benefits commensurate with the unprecedented size of the distribution. As the UI stakeholder ‘‘consensus’’ proposal concluded in 2001, specific targeting of Reed Act funds to provide 

greater administrative resources, expanded eligiblity and tax relief to employers 

would still likely produce more results at far less cost to the federal UI trust fund.

• The Reed Act experience documented by the GAO underscores the 

serious limitations of the Administration’s ‘‘New Balance’’ proposal 

especially when the demands on the UI system are the greatest in 

times of recession.

Lastly, it is important to evaluate the Administration’s ‘‘New Balance’’ proposal 

in light of the state experience with the latest Reed Act distribution. In our view, 

the experience documented by the GAO underscores the serious limitations of the 

Administration’s initiative especially when the demands on the UI system are the 

greatest in times of recession. 

The ‘‘New Balance’’ initiative calls for a 75% cut in federal unemployment taxes, 

coinciding with a major shift in responsibility for UI administrative funding from 

the Federal Government to the states. The states would be expected to raise the 

necessary funding to administer the UI system by creating a new state tax. During 

the transition, they would receive an additional $5.4 billion in Reed Act funding. 

The primary rationale for the proposal is that the states do not receive sufficient 

funding to pay for administration of their UI programs. 

This year’s Reed Act experience demonstrates that the Administration’s initiative 

will probably fail to achieve its stated goal because most states were unable or unwilling to use the funds for anything other than UI payroll tax reductions despite 

the substantial demand for services for unemployed workers and the extreme pressures on state government budgets. Thus, in most states, there is every reason to 

believe that the $5.4 billion in proposed Reed Act funding will end up remaining 

in the state trust funds to reduce unemployment taxes, not to pay for administration of a state’s UI program. Even more significant, the proposal introduces a new 

political dynamic into state UI funding by requiring the states to create a tax to 

fund administration that will for the first time compete with other more salient 

state priorities (e.g., state police, homeland security, Medicaid) and even with the 

funding necessary to pay UI benefits. After the dust settles, we strongly believe that 

the Administration’s initiative will lead to reduced services and even more pressure 

to restrict benefits for unemployed workers. 

Moreover, by eliminating most of the federal unemployment tax, the Administration’s proposal also eliminates most of the federal role that exists to support the 

states especially during recessions. For example, the prospects of building sufficient 

federal reserves to fund an adequate extension of unemployment benefits when a 

severe recession hits or to distribute large sums of Reed Act funding are far more 

limited if the unemployment tax is substantially reduced. And certainly, the states 

will not be in a position to raise enough revenue on their own to fill the void, as 

demonstrated by the state budget crisis they are currently experiencing as a result 

of the recession. 

A recent analysis prepared by the Congressional Research Service documents the 

critical role that segregated federal funding plays, especially during recessions. It 

examines how much the states received in 2002 compared with how much they contributed to the federal trust funds in UI taxes. The analysis found that the states 

contributed about $7 billion to the federal trust funds in 2002, while they received 

about $19.5 billion in the form of administrative grants, Reed Act funding and federal extended benefits. 

These figures call into question the claims that the states do not receive a proportion share of the funding that they contribute to the federal unemployment trust 

funds. Indeed, when recessions hit, they receive much more. The funding is thus 

targeted to respond to recessions in order to serve the key federal role of the program—to help stimulate the economy and ensure that all unemployed workers (regardless of where they live) receive the income support they need to survive hard 

economic times. 

48

Accordingly, we urge the Committee to reexamine the ‘‘New Balance’’ proposal 

and reject the initiative in light of the significant limitations described above. We 

strongly agree that UI administrative funding should be increased, and thus we also 

urge the Committee to consider the measures adopted by the 2001 ‘‘consensus’’ proposal to address this key concern. 

Chairman Herger and members of the Committee, thank you again for this opportunity to testify.

son to testify. 

Chairman HERGER. Thank you, Mr. Emsellem. Now Ms. Watf STATEMENT OF DAWN ROMERO WATSON, SECRETARY, LOUISIANA DEPARTMENT OF LABOR, BATON ROUGE, LOUISIANA 

Ms. WATSON. Mr. Chairman and Members of the Subcommittee, my name is Dawn Romero Watson, and I am the secretary for the Louisiana Department of Labor. I am honored to be 

invited to testify before you today and would like to thank you personally and your colleagues on behalf of our Governor and the 

workers and employers in Louisiana for allowing the Reed Act distribution to take place a year ago. Louisiana’s trust fund received 

over $105 million as a result of the distribution. 

As has been said earlier, dollars in the trust fund are dedicated 

exclusively for the payment of benefits. The use of Reed Act dollars 

can be used for administrative purposes only by State-legislated 

appropriation. The distribution occurred in mid March of last year, 

and our Legislature was scheduled to go into a 60-day session beginning at the end of April. The timeframe for developing the proposal, building consensus and passing it was very tight. As soon as 

our allocations per State were set and the guidance from the Department of Labor were released, we began developing our proposal. 

As in most States, our law provides triggers based on the UI 

trust fund for increases and decreases in benefits. It actually provides what will be the taxable wage base, which tax rate table will 

be used, how the benefits will be calculated and what is the maximum weekly benefit amount. They are always in equal percentages. If benefits are going up by 5 percent, then taxes are going 

down by 5 percent. These are carefully negotiated in the State law 

by our State leaders on the business side and the labor side. 

For a variety of reasons, we decided that about half of our $105 

million needed to remain in the trust fund to guarantee we would 

not trigger an increase in taxes or decrease in benefits in the foreseeable future. With the balance of the distribution, we put our 

best thinking into developing projects using one-time money to invest in our department to provide better services to both our business and worker customer. We presented our legislature with a 

$36.5 million proposal, leaving about $69 million for benefits and 

future appropriation for administrative needs. 

Our proposal can be divided into three different categories, a 

comprehensive UI tax and benefit system redesign; second, integration of new technology and upgrading of existing technology infrastructure to improve the services and accountability. Third, professional development of and additional resources for our staff to address special needs of targeted populations. 

49

The single most critical project to the future of the Department 

in terms of its ability to provide services and to respond to its business and worker customers is the comprehensive redesign of the UI 

tax and benefit system. The current system has been in place since 

1970, and it was state of the art in 1970, but there has been substantial changes through the years to laws and also the way the 

employment relationship has evolved. 

The last major upgrade to the system was in 1985. Our proposal 

is to move to an object-oriented programming environment and an 

enterprise-wide relational database with access through a browser 

or portal. Specific areas in work flow processes that will be included are delinquency and legal accounting, remittance processing—which is how we process taxes received—experience rating, 

benefit charges and maintenance of employer information, claimant 

information, wage record information, benefit payments and benefit 

overpayments. 

Modernization of the system will significantly impact the integrity of our programs and our ability to provide quality services 

timely. We anticipate this being a 3-year to 5-year project and costing upwards of $20 million. We are currently in the planning 

stages, and should be releasing either a Request for Information or 

a Request for Proposal (RFP) later this year or early next year. 

The second major category is an investment of about $10 million 

in the integration of new technologies and upgrading of existing 

technology infrastructure to improve our service, delivery and accountability. Projects included the replacement of about 700 computer workstations in our local offices and one-stops, expansion of 

an imaging system to local offices, upgrading the interactive voice 

response system to be Web-enabled and substantial network enhancements to accommodate the additional traffic. We are also 

adding a card scan system in our local offices and one-stop centers 

so we can better track the services that are being delivered and 

evaluate them and adjust our offerings. 

Another major category is about $5.8 million for professional development of and additional resources for our staff to assist targeted populations. These projects are largely in response to feedback gained from legislative hearings and from our customers directly. They include the development of workshops and materials 

customized to the typical needs of older workers, ex-offenders, atrisk use and single heads of household. 

Prior to the Committee hearing, our proposal was endorsed by 

both Louisiana Association of Business and Industry, which is our 

counterpart to the State Chambers of Commerce, and the State 

AFL–CIO. It passed all Committee hearings in the House and Senate floors unanimously and became Act No. 76 of the 2002 regular 

session of the Louisiana Legislature. 

This concludes my formal remarks. Again, I am honored to be before you today, and on behalf of Louisiana, I sincerely appreciate 

the Reed Act distribution last March. I will be happy to answer any 

questions. Thank you. 

[The prepared statement of Ms. Watson follows:]

50

Statement of Dawn Romero Watson, Secretary, Louisiana Department of 

Labor, Baton Rouge, Louisiana 

Mr. Chairman and Members of the Subcommittee: 

My name is Dawn Romero Watson and I am the Louisiana Secretary of Labor. 

I am honored to be invited to testify before you today and would like to personally 

thank you and your colleagues on behalf of our Governor M.J. ‘‘Mike’’ Foster and 

the employers and workers in Louisiana for allowing for the Reed Act distribution 

a year ago. Louisiana’s trust fund received over $105 Million as a result of the distribution. 

I’m going to begin by telling you a little about our state so you will have a point 

of reference in relation to other states, then talk about how our proposal was developed and outline the major projects approved. A complete list of projects, with a 

short description and amount appropriated, is attached to my submitted remarks. 

At the time of the distribution, Louisiana’s Trust Fund Balance was just over $1.4 

Billion, making us one of the most solvent states in the country. We have an employer base of approximately 97,000, and in 2001, we collected approximately $130 

Million in state unemployment taxes. We have a workforce of about 1.9 Million people, and in 2001, we paid out about $220 Million in unemployment insurance (UI) 

benefits. Prior to the distribution, growth in our trust fund occurred because taxes 

and interest exceeded benefits paid. 

By law, dollars in the trust fund are dedicated exclusively for the payment of benefits. The use of Reed Act dollars for administrative expenses can only be accomplished by state legislative appropriation. The distribution occurred mid-March of 

last year and our Legislature was scheduled to go into a sixty (60) day session beginning at the end of April. The time frame for developing a proposal, building consensus and passing it was very tight. As soon as allocations per state were set and 

the guidance from the United States Department of Labor was released, we began 

developing our proposal. 

As in most states, our law provides triggers, based on our UI Trust Fund balance, 

for increases and decreases in taxes and benefits. For a variety of reasons, we decided that about half of the $105 Million needed to remain in the trust fund to guarantee we would not trigger an increase in taxes and a decrease in benefits in the 

foreseeable future. With the balance of the distribution, we put our best thinking 

into developing projects using ‘‘one-time’’ money to invest in our department to provide better services to our business and worker customers. 

We presented our Legislature with a $36.5 Million proposal, leaving $69 Million 

for benefits or future appropriation for administrative needs. Our proposal can be 

divided into three major categories: (1) Comprehensive UI tax and benefit system 

redesign for $20.5 Million; (2) Integration of new technologies and upgrades to existing technology infrastructure to improve services and accountability for $10 Million; 

and, (3) Professional development of and additional resources for our staff to address special needs of targeted populations for $5.8 Million. 

The single most critical project to the future of the department in terms of its 

ability to provide services and to respond to its business and worker customers is 

the comprehensive redesign of the UI tax and benefit system. The current system 

has been in place since 1970. It has been modified many times over the years as 

laws were changed and the nature of employers and employment evolved. The last 

major upgrade to the system was in 1985. Our proposal is to move to an ‘‘object oriented’’ programming environment and enterprise wide relational database with access through a browser or portal. Specific areas and workflow processes that will 

be included are Delinquency and Legal Accounting, Remittance Processing, Experience Rating, Benefit Charges, and Maintenance of Employer Information, Claimant 

Information, Wage Record Information, Benefit Payments and Benefit Overpayments. Modernization of system will significantly impact integrity of programs and 

our ability to provide quality services timely. We anticipate this being a three to 

five year project and costing upwards of $20 Million. We are currently in the planning stage and should be releasing a Request for Information and Request for Proposal later this year or early next year. 

The second major category is an investment of about $10 Million in the integration of new technologies and upgrades to existing technology infrastructure to improve our service delivery and accountability. Projects included replacement of about 

700 computer workstations in our local offices, expansion of imaging system to local 

offices, upgrading of interactive voice response system to be web enabled, and substantial network enhancements to accommodate the additional traffic. We are also 

adding a card scan system in our local offices and One Stop Centers so we can better track services delivered and evaluate and adjust offerings. We are also investing 

51

in technologies to provide better services to our customers with disabilities in our 

local offices and through the Internet. 

The final major category is about $5.8 Million for professional development of and 

additional resources for our staff to assist targeted populations. These projects are 

largely in response to feedback gained from legislative hearings and from our customers directly. They include the development of workshops and materials customized to the typical needs of older workers, ex-offenders, ‘‘at-risk’’ youth, and single heads of households. For example, older workers seeking employment desire information on how wages will impact their social security benefits and tend to be less 

concerned about health insurance. On the other hand, health insurance and career 

advancement opportunity as part of an employment package tend to be critical concerns for single heads of households. 

To improve our services to employers, we plan to hire an outside facilitator to 

moderate employer forums to gather information from the employer’s perspective on 

awareness and quality of the services that the Department is currently providing. 

The forum will also solicit suggestions in the mode of continuous improvement to 

meet the needs of our business customer. We are also piloting a CD–ROM package 

that provides basic information on each of the department’s major program areas 

related to employers with hyperlinks directly to the online version of those services. 

Prior to the first committee hearing, our proposal was endorsed by both the Louisiana Association of Business and Industry (similar to other state’s State Chamber 

of Commerce) and the Louisiana AFL–CIO. It passed all committee hearings and 

the House and Senate floors unanimously and became Act No. 76 of the 2002 Regular Session of the Louisiana Legislature. 

This concludes my formal remarks. Again, I am honored to be before you today, 

and on behalf of Louisiana, I sincerely appreciate the Reed Act distribution last 

March. I’ll be happy to answer any questions. 

Thank you.

Project Appropriation Description 

UI Tax and Benefit 

Redesign 

$20,000,000 Comprehensive redesign of our automated UI tax 

and benefit system. Move to an ‘‘object oriented’’ programming environment and relational database with browser/portal access. 

Modernization of system will significantly improve integrity of programs and ability to provide services.

Remittance Processing $580,571 Upgrading of current system with additional software to capture check amount by Intelligence 

Character recognition, additional scanners and 

mail openers, customized index programming 

and creation of a test site.

LaVOS VOScan System $292,254 A card scan system to be implemented in local offices and OneStop Centers to more easily and 

accurately record services provided to customers. Data accumulated will then be used to 

evaluate success of services and adjust offerings. The data captured will be integrated into 

our network operating system called Louisiana’s Virtual OneStop System.

Network Enhancements $791,000 Router Upgrades for our field offices to support 

additional voice ports for additional traffic on 

our interactive voice response system. Additional gigabit support for growing bandwidth 

for additional file services, imaging, database, 

and web activity. Additional network management and monitoring support.

52

Project Appropriation Description 

Imaging $1,802,500 Expand use of imaging system to local offices. 

This will allow documents relative to a customer’s contact with the department to be readily available throughout the state thereby enabling our staff to provide better and faster service to the employer and the claimant concerning UI matters.

Interactive Voice 

Response 

$395,000 Upgrade to allow current IVR applications (claim 

renewal, check status, employer inquiries, etc.) 

to also be deployed on the web.

Mainframe $430,200 Upgrade will reduce the processing capacity in 

order to ‘‘right size’’ the equipment to current 

load. This will lower the software license cost 

and operating cost.

Streaming MediaContent Distribution $523,000 Intranet/Internet website enhancements, as well 

as on-demand training for all local offices. Adds 

capability to distribute rich media content close 

to our target users, overcoming issues such as 

network bandwidth availability/congestion and 

latency. Allows consistent information or instruction to be disseminated simultaneously 

without the added cost of travel to a central location and time out of the office.

Computer Equipment $1,456,690 Replaced workstations in local offices with updated computers and laptops.

ADA Compliance 

Technology 

$1,956,780 Added ADA workstations and software in each 

local office. Workstations will integrate speech 

recognition, print and screen to speech technologies, screen and print magnification, work 

prediction, tools for learning differences, Braille 

embossing and refreshable Braille. Also, staff 

training.

Storage Area Network $750,000 Provides a high-speed network direct central storage for all department client servers in one centrally managed storage array. Simplifies off site 

backup procedure to assure data is protected.

Color Copier $130,000 Expands color copy or printing capabilities of the 

Department.

Administrative Office 

Improvements 

$1,508,100 Building and parking lot improvements including 

handicap access, fire alarm system, lighting, 

furnishings, restrooms, etc.

Technical Training for 

Wagner Peyser Staff 

$755,000 Training for staff on promoting labor exchange 

services of the department and providing such 

services. Hire a consultant through an RFP to 

evaluate staff skills and abilities; develop performance measures and establish measurement 

methodology; develop a training needs matrix 

and identify training to meet the identified 

needs; and, develop follow-up evaluation tool to 

measure training effectiveness and ensure continuous improvement.

53

Project Appropriation Description 

Specialized Assistance 

for Older Workers 

$650,000 Increase capacity for outreach to older workers 

though partnerships & local affiliates of the 

AARP and correlating outreach, promotion and 

support to employers. Develop more specialized 

job preparatory and job search workshops customized to unique needs of older workers.

Specialized Assistance 

for Single Heads of 

Households 

$693,000 Develop an automated match of individual’s education major to careers and availability of those 

careers in Louisiana. Identify standards to enable an automated match of skill sets and employment needs to jobs and job seekers. Develop an online mock interviewing service to 

better prepare job seekers for job interviews. 

Automate resource mapping to identify services 

in close proximity to where an individual lives 

or works.

Specialized Assistance 

for At-Risk Youth 

$1,100,000 Conduct focus groups with youth and high school 

counselors to gain feedback on needs and services currently provided. Use information to improve job development efforts, identification of 

internships, part-time after school jobs, youth 

job fairs and summer job fairs, etc.

Specialized Assistance 

for Ex-Offender Population 

$652,000 Develop special workshops for unique needs that 

can be delivered in different formats such as 

paper-based materials, computer-based software, video technology and lectures. Design 

workshop materials and job fairs using current 

labor market information to determine industries most likely to hire and appropriate skills 

set requirements. Outreach to target industries 

tax credits associated with the hiring from this 

population.

Expansion of Reemployment Initiative $1,200,000 Expand REI program to more job seekers. Also, 

update videos and instructional materials and 

add workshops.

Employer Forums $200,000 Facilitate employer forums to gain information on 

how to continue changing and improving to 

meet the needs of the employer and ultimately 

our citizens. Gauge awareness and quality of 

services to adjust program delivery.

Assistance to Alien 

Labor Program 

$565,000 Amnesty legislation inundated office and tremendous backlog of cases exists. Professional services contract to review processes and make recommendations and automate where ever possible.

Employer Services 

CD–ROM 

$11,200 CD providing basic information on each of the department’s major programs areas related to employers. CD has hyperlinks to take the user directly to the online version of services. This 

funding is to test market and pilot before a 

mass distribution. CD’s provide a mechanism 

for feedback on the content and the usefulness 

fof the product. 

54

Chairman HERGER. Thank you very much, Ms. Watson. The 

gentleman from Louisiana, Mr. McCrery, to inquire. 

Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Brock, you are 

here from Oklahoma, but you also represent a nationwide organization. 

Mr. BROCK. Yes, I do. 

Mr. MCCRERY. Which organization is that? 

Mr. BROCK. It is the NASWA. 

Mr. MCCRERY. So, that is the employment agencies? 

Mr. BROCK. That is correct. Ms. Watson is a Member of that organization. 

Mr. MCCRERY. Has your organization looked at the Administration’s proposal for overall reform of the UI system? 

Mr. BROCK. Yes, we have. 

Mr. MCCRERY. What is your impression of it? 

Mr. BROCK. We are still—we are as diverse as the States and 

territories, and we are in the process of developing a consensus on 

that, but at this time, we do not have one. 

Mr. MCCRERY. Okay. You worked, though, on a former proposal, which I introduced into—in the Congress, and the purpose 

of—or one of the purposes of my legislation was to give States more 

control over the tax dollars that they were collecting for administrative purposes. Wouldn’t the Administration’s newest proposal—

or new proposal accomplish that goal? 

Mr. BROCK. Yes, it would, sir. 

Mr. MCCRERY. Mr. Brock, Ms. DeLisio, Ms. Watson, I would 

like for you to briefly explain how the—your use of the Reed Act 

money so far has helped workers in your State. Just briefly, if you 

can explain how the expenditures—I think Mr. Brock already mentioned that Oklahoma, for example, created an alternative base——

Mr. BROCK. That is correct, sir. 

Mr. MCCRERY. For eligibility. That clearly would help some 

workers. Anything else, Mr. Brock? 

Mr. BROCK. That is primarily—from the benefits side that is all 

that was accomplished last year. That is right. 

Mr. MCDERMOTT. Would the gentleman yield? 

Mr. MCCRERY. Yes. 

Mr. MCDERMOTT. Do you know what he means by an alternative base? 

Mr. MCCRERY. Yes, sir. 

Mr. MCDERMOTT. Can you explain that for the rest of us? 

Mr. MCCRERY. On your time you can ask him that. 

Mr. MCDERMOTT. Thank you very much. 

Mr. MCCRERY. Ms. DeLisio. 

Ms. DELISIO. Yes. In Ohio, we have a had an alternate base period from about 1988. So, that was already in existence. The ways 

that we have worked to benefit the claimant customer first is the 

Subcommittee that I mentioned. There have been two issues that 

have been significant in Ohio for a number of years and debatable 

between business and labor around our eligibility requirements, 

and the Reed Act distribution was the impetus to bring both parties to the table to talk about it. One is dependency. In Ohio, we 

are one of the few States that still has dependency, which means 

you make more or less dependent on the number of dependencies 

55

you have. The second issue is around weeks and wages. We still 

require both in order to be eligible while most States go just with 

the wages. This is the first time that we have been able to have 

a thoughtful discussion with both parties at the table about that 

issue, which would help our claimants as we resolve that issue. 

The investment in the one-stops and the resource rooms. Our 

one-stops are very anxious to begin moving on that, because in the 

one-stop setting, claimants really need to get access to the Internet. 

They need to get access to job-matching services. They need to have 

access to information about what wages are reasonable, what training is available, if I need retrained. This really helps support getting them back to work. 

Our employer community certainly has commented that keeping 

their tax rates lower has kept them in a position to be less likely 

to lay off again or even considering reducing staff or going out of 

the business considering with other tax issues they are dealing 

with. 

Mr. MCCRERY. Ms. Watson. 

Ms. WATSON. The projects that stand out the most to me were 

our investments, like Ohio did, in our resource rooms that are in 

the one-stops and upgrading of the computer stations there. We 

also have a several RFPs that we have been awarded, and they are 

developing the products for the specialized workshops to help the 

unique needs of the targeted populations. Those are the ones that 

I mentioned at the end for the single heads of household, the older 

workers and the at-risk youth and the former customers of our correctional institutions. The special needs that they have in attaching to the labor force. 

Mr. MCCRERY. All of these expenditures that you have done 

from the Reed Act distribution would be classified generally as administrative expenditures? 

Ms. WATSON. That is correct. 

Mr. MCCRERY. Ms. DeLisio, same thing? 

Ms. DELISIO. That is correct. 

Mr. MCCRERY. Briefly, Mr. Emsellem talked about the need for 

the Federal Government in any future Reed Act distributions to be 

more specific in how those funds could be used and specifically 

maybe having to use part or all of it for benefits or increasing benefits. Do you representatives from the States think that is a good 

idea? 

Mr. BROCK. That is an issue for the States to decide myself, and 

I think I pretty well represent that opinion within my State. 

Ms. DELISIO. I would agree that it is an issue for the States to 

decide, and it is exactly why we have an UCAC that is so active 

between business and labor to decide those kinds of issues. 

Mr. MCCRERY. Thank you. 

Chairman HERGER. The time of the gentleman has expired. The 

gentleman Mr. Levin from Michigan to inquire. 

Mr. LEVIN. Well, thank you for being here. Let me ask you a 

question of the three people from the State agencies you all hold 

responsible, I guess key positions, and at least two of you have 

been in those agencies for some time. I am not sure, Ms. Watson, 

how long you have been there. How long? 

56

Ms. WATSON. I went in 1997 to the Louisiana Department of 

Labor. 

Mr. LEVIN. This recession has seen a lot of exhaustion of benefits. Right? 

Ms. WATSON. Yes, sir. 

Mr. BROCK. Yes, sir. 

Mr. LEVIN. In fact, in terms of exhaustions, it has exceeded the 

recession of the early nineties. We spent out of the trust fund, as 

I understand it, in the nineties, early nineties, about $28 billion. 

We have spent less than half of that, as I understand it, this recession. There are $20-some billion in the trust fund. So, let me ask 

you, are the States suggesting, urging the Federal Government to 

be more vigilant and diligent about the extension of benefits, and 

if not, why not? 

Mr. BROCK. I can speak for Oklahoma. Just looking at exhaustions compared to 2001, our exhaustions are up 150 percent. Our 

initial claims are up 50 percent over that period of time, the last 

2 years. Obviously, the need for this system continues to increase, 

and not only does there need to be the money there for the benefits, 

which is obvious, but there has to be the money there, too, to administer the programs. 

Mr. LEVIN. Ms. DeLisio, you go back into the early nineties and 

a bit before, like at the figures for Ohio, you have got, as of February, over 40,000 people who had exhausted their benefits and 

were out of work. So, what is your response? Is the State urging 

this Congress and White House to pass a broader extended benefit 

program when there are 20-some billion dollars in the fund? 

Ms. DELISIO. Ohio would be looking at it from a couple of different angles. We would—there are several pieces of legislation, the 

President’s proposal on WIA reform, that could impact whether or 

not we get full funding and that could change decisions about how 

we administer our benefits in the State. 

We are also paying close attention to what is happening with the 

WIA reauthorization around that and the potential block granting 

of the re-employment dollars, the training dollars, the WagnerPeyser dollars, what impact that could have. 

Also paying close attention to the economic picture. We are seeing a very similar situation that was mentioned earlier that the 

skills aren’t necessarily matching the jobs that we have today. 

Mr. LEVIN. Let me just interrupt. Look, you have run these programs. You run these programs. You have got 40,000 plus people. 

Now it is probably 50—who has exhausted their benefits. In the 

earlier recession, we exhausted benefits beyond the 39 weeks. 

Now, what do you tell an unemployed worker, you are responsible for the training programs, you monitor whether to look for 

work? How do you tell the person that in this recession with the 

higher rate of exhaustion, they don’t get any help? What do you say 

to that individual that you are looking at reforms or that—what do 

you tell that person? 

Ms. DELISIO. We do our absolute best to invest in getting them 

either retrained or matched up with jobs that are in the labor market. 

Mr. LEVIN. I know, but you have got 40,000 plus people, for 

whom that hasn’t worked, and with $20 some billion in this trust 

57

fund, you logged the $8 billion that was given back. Why aren’t you 

asking for the Federal Government in this recession to allocate 

more money in extended benefits? 

Ms. DELISIO. It is not that we have not done that yet. We also 

are paying attention to what is happening with the economic climate, and we are also paying attention to the other legislation that 

could affect how much more money we have available——

Mr. LEVIN. Look—my time is up. You come to Michigan. You 

are not very far. Or I will come to Ohio and meet unemployed 

workers, and you tell them that, face to face. Essentially, you are 

saying I am not doing a good enough job. You are in charge of 

matchmaking, and I don’t know why you are not here with all this 

money available for unemployed workers asking that this institution—-

Chairman HERGER. The gentleman’s time has expired. 

Mr. LEVIN. Meet its responsibilities. 

Chairman HERGER. The gentleman’s time has expired. The gentleman from Kentucky, Mr. Lewis, to inquire. 

Mr. LEWIS OF KENTUCKY. Yes. Thanks, Mr. Chairman. There 

is always, I think—the testimony of Mr. Emsellem and some of 

those that have directed question at the witnesses, there seems to 

be this paternalistic view of Washington, DC and only good things 

can be done here. It reminds me of the Wizard of Oz movie, that 

you have got this wizard behind this screen behind these curtains 

cranking out lightning and these thunderous sounds, and the only 

good thing that can happen has to come from the wizard. It seems 

to be that there is this thought that States and the people who run 

the States have no brains, they have no heart, they have no courage, that only can happen here in Washington, DC. 

That is kind of amusing, because it is the same human beings 

that are elected to offices here that are elected to offices in our 

States, and it is a lot closer for the people that are out of work to 

go down the street and talk to their State legislator or to call or 

to visit the governor or to come to your offices when they have 

needs than to come to Washington, DC. 

I don’t know about some folks here, but I pretty well trust the 

people in our States to make good judgments, to know what is 

going on in their communities and have just as much compassion 

for people out of work as those that would have compassion here. 

I think the ability to have—and by the way, where does the money 

come from? What money are we talking about? Where does it come 

from? Does it come out of the pockets of bureaucrats in Washington, DC? Where does it come from? Whose money is it? Maybe 

you would like to answer that, Mr. Brock. 

Mr. BROCK. Well, that money comes from employers within the 

States. It is the State’s money. I have been involved with this system coming out of the private sector about 7-years-ago, and the 

more I learned about this system, frankly, the more—the angrier 

I became, in the sense that it seemed to me like it was a pretty 

good deal at the beginning, between the States and the Federal 

Government. As time went by, for whatever reason, the money that 

was paid, particularly from employers to administer this program, 

I know in my State, I think on the average, we have gotten back 

about 60 percent. 

58

The last year that we have a measurement of a couple of years 

ago, it was about 43 percent, and this money stays up here for 

some reason. It seems to me and particularly, too, when I am trying to administer a program, that is exponentially increasing, as I 

have pointed out, from our exhaustions and from our increased 

claims and so on, and we don’t have the resources to keep up with 

the need. The system is broke. 

Mr. LEWIS OF KENTUCKY. Yes. I think, Ms. Watson, you said 

you get back 36 cents on the dollar? 

Ms. WATSON. Thirty eight cents. 

Mr. LEWIS OF KENTUCKY. Thirty eight cents on the dollar. 

That is a bad deal. You are paying in 100 percent and getting back 

38 percent. That is a bad deal. So, it just amazes me that there 

is this elitist attitude here in Washington, DC that all good things 

can only happen here, and that the States and their elected officials and the administrators of their laws can’t do as good a job as 

what can be done here in DC it amazes me. Thank you. 

Chairman HERGER. I thank the gentleman. Next the gentleman 

from Washington, Mr. McDermott, to inquire. 

Mr. MCDERMOTT. That last discussion was kind of interesting. 

You get 36 cents back on every dollar. 

Mr. BROCK. That was Louisiana. We get——

Mr. MCDERMOTT. How much do you get? 

Mr. BROCK. On the average—well, you may have more recent 

numbers than I do, but the most recent number I have seen was 

about 2-years-old, and I think it was about 43 percent. On the average, I said over the last 10 years or so, I think we have gotten 

back about 60 percent. 

Mr. MCDERMOTT. So, where does that money evaporate to? 

Mr. BROCK. You tell me. 

Mr. MCDERMOTT. You think it goes into that reserve fund, that $28 billion that is sitting there that they don’t give you back for 

extended benefits? Maybe that is where some of it is? 

Mr. BROCK. These pots continue to swell here in Washington, 

and that money does not flow back to the States, as was the original deal with the States. 

Mr. MCDERMOTT. Mr. Emsellem, can you tell me why it is that 

these States have not picked up their part-time workers? What is 

it? We gave them $8 billion. They are sitting on a bunch of it, $6 

billion or whatever. Why haven’t they picked up—why haven’t they 

changed their base—their base cost so they can get them? 

Mr. EMSELLEM. Well, that is the problem, and it is partially in 

response to Congressman Lewis’s point as well. We have a problem. Eighteen percent of low-wage workers are collecting unemployment benefits. Everybody agrees you need to expand the program to bring more workers into the system. 

So, the question is, as you have asked, why is it that there are 

still 35 States that don’t have the alternate base and 31 States that 

don’t cover part-time workers? Of the measures that have been 

passed, very few States have done very much to bring more people 

into the system. It has mostly been in response to raising benefits. 

So, the reality of the situation is that it is a dog fight in the 

States. To be blunt, it is a dog fight in the States. The politics 

there make it very difficult——

59

Mr. MCDERMOTT. So, it is between these guys and the Social 

Health Services Department and the welfare. If these women that 

they have kicked off welfare go out and get a low-wage job as a 

maid in a motel, and they work 30 hours a week or 25 hours a 

week and they don’t qualify for unemployment benefits, when they 

get laid off, where do they go? Back to welfare. Right? These people 

don’t care. That is basically—as long as it isn’t on their watch, they 

are glad to get it—get rid of them? 

Mr. EMSELLEM. If I can elaborate briefly, I think it speaks very 

directly to the problems with the new balance proposal and devolution. These are the realities of the politics in the State. It is very 

hard for workers in most States to get what they need to expand 

benefits, and now with devolution, you are asking States to create 

a new tax on its own that now is going to compete with other State 

priorities, Medicaid, everything else under the sun related to budgets, against employers, their tax interests and against the States, 

literally the agencies seeking administrative funding. All that gets 

thrown into the pot now when workers are going to try to argue 

for expanded benefits. That is the reality of the politics of the situation. 

It would be great if every State did everything right, but the reality is that there is still 18 percent of the wage——

Mr. MCDERMOTT. Okay. Let me stop you, because I want to 

ask these three——

Mr. MCCRERY. Would the gentleman yield for just a clarification? 

Mr. MCDERMOTT. Yes. 

Mr. MCCRERY. States now set their tax rates for unemployment. So, it is already in competition with everything else. 

Mr. MCDERMOTT. Okay. We got that. The next thing is, the 

President has said we are going to take this tax away. So, not 

going to send you any money anymore. That is built into the budget that is going to go out of here in a few hours. How many of your 

governors are going to ask for a rate increase to pick up this 

money, or where are they going to get the administrative money for 

their program when it no longer comes from us, when we have devolved it down to you? What will your governors do? 

Ms. WATSON. Do you want to go first? 

Mr. MCDERMOTT. Any one of you. Start anyplace. I have got 

a couple Republicans and a Democrat, so we will see what they 

say. 

Ms. WATSON. Well, I am a Democrat, but I work for a Republican governor. So, I am not sure——

Mr. MCDERMOTT. I am talking about your governor. All that 

matters is your governor. 

Ms. WATSON. Our State—our employers already subsidize our 

UI grant to the tune of about $5 million. Now, what we plan to do 

in our State is try to—because I think that we can work—I respectfully disagree that we don’t care about our workers, because we 

really do, and I think our State leaders advocate strongly on their 

behalf, and so does the business community advocate strongly on 

the business’s side. We try to work it out. I really think that we 

can show that employers will save money if you devolve it to the 

State, because you are not going to—if——

60

Mr. MCDERMOTT. So, you don’t expect your governor is going 

to raise taxes? 

Ms. WATSON. He is going to have to raise taxes, but to the employer who pays the tax, he should get a net savings, because he 

is not going to pay as much——

Mr. MCDERMOTT. He is not going to raise it as much. Is that 

it? 

Ms. WATSON. That is right, as the reduction is from the FUTA. 

Mr. MCDERMOTT. For Ohio? 

Chairman HERGER. The gentleman’s time has expired. 

Mr. MCDERMOTT. Well, but let them answer. Tell me—okay. 

Ms. TUBBS JONES. I will ask them. 

Mr. MCDERMOTT. Okay. You don’t want to know the answer. 

That is your problem. 

Mr. MCCRERY. Well, the only answer we got was yes. 

Chairman HERGER. We will give the gentlelady a turn here, but 

I would just like follow up on this line of questioning myself. We 

hear there isn’t a free lunch. In the long run, States will use up 

the $8 billion we transfer to them, and then the lasting effects of 

increasing benefits or expanding eligibility will fall to them. That 

means they would have to raise State unemployment taxes above 

levels they would have otherwise been to pay for the higher benefits or expanded eligibility. Is that correct, Mr. Brock, Ms. DeLisio? 

Ms. DELISIO. That is correct. 

Chairman HERGER. Thank you. Now, I do turn to the 

gentlelady, who even though she does not serve on this Subcommittee, is on our full Committee, for questioning. Ms. Tubbs 

Jones. 

Ms. TUBBS JONES. Thank you, Mr. Chairman. I would like to 

yield to my colleague to complete his questioning on that one issue. 

Go ahead. 

Mr. MCDERMOTT. I’d like Ohio and Oklahoma to tell me what 

your governor is going to do. 

Ms. DELISIO. Our governor supports devolution as we know it 

today, and we would be in a similar situation as in Louisiana that 

we would have to raise taxes, but there would still be a net gain, 

because we are one of the States that gets 36 cents back on every 

dollar, and to keep the money in the State and allow us the administration of the fund and the money would be beneficial to us. 

As far as the——

Mr. MCDERMOTT. Is he going to do anything else with the benefit package or the base on which people are eligible or anything 

else? Is he going to keep everything the same and just raise the 

money for administration, or is he going to cut some corners? 

Ms. DELISIO. First, we haven’t seen—the complete legislative 

bill is not available, obviously, to get into specifics, but anything we 

would do to change our benefit package would go through our 

UCAC that is equally cochaired with business and labor, Senate 

and House, Democrat, Republican, and equal amounts of business 

and labor membership. We would work that out together with them 

about what their desires are to take that forward to our governor. 

That Committee has been active for over 60 years, and every piece 

of legislation that they have taken forward, 17 pieces have passed 

61

unanimously. So, we would work together to what is in the benefit 

and best interest of both of those parties and what they agree to. 

Mr. MCDERMOTT. Even though they have to cut? They are 

going to get less money from the Federal Government. They are 

going to be—he is going to put the taxes up in the business community in Ohio? 

Ms. DELISIO. The business community in Ohio would support us 

having more control over the money today and the likelihood of getting more than 36 cents back on the dollar than we have been, yes. 

Mr. BROCK. Well, basically, we would see a net decrease in 

taxes to the employers. By the way, I am a Republican in a Democratic Administration. 

Mr. MCDERMOTT. I said it doesn’t make any difference. 

Mr. BROCK. You are exactly right. It doesn’t matter what I am. 

I would tell you that, sir, that in Oklahoma, we do have—we do 

cover part-time workers, and we——

Ms. WATSON. We cover them, too. 

Mr. BROCK. We have just passed, as I said, the alternate base 

period. As for those inexperienced short-term workers, it gives 

a——

Ms. TUBBS JONES. If you don’t mind, very quickly, in Ohio we 

have got so many more problems with regard to taxing issues in 

Ohio right now, that our Governor is getting ready to—we are getting ready to tax manicures, tax hairdos, tax all kinds of things because of the economic situation Ohio finds itself in. Can you tell me 

how many more workers are unemployed currently in Ohio than 

there were 6-months-ago? 

Ms. DELISIO. I can tell you the difference in our claims from 

2001 to 2002. In 2001, we processed 811,000 new claims. In 2001. 

In 2002 we processed 794,000 new claims. 

Ms. TUBBS JONES. In 2002 as of December? 

Ms. DELISIO. As of December. That does not take into consideration——

Ms. TUBBS JONES. It was 800 or——

Ms. DELISIO. In 2001 there was 811,000, and 794,000 in 2002. 

Ms. TUBBS JONES. Can you tell me how many as of the beginning of this year? 

Ms. DELISIO. I do not have that number with me, but we had 

several weeks where it actually decreased as compared to last year, 

but we did have some weeks it increased. 

Ms. TUBBS JONES. That number is based on how many people 

actually apply for unemployment. It may not be accurately reflecting the number of people who are out here unemployed. 

Ms. DELISIO. That is correct. That is the number that filed for 

UC. 

Ms. TUBBS JONES. So, if, in certain instances, for example, in 

Ohio, you are not eligible—we had this discussion before the hearing about how you become eligible if you are a part-time worker, 

and it is too complicated to get through in this session, but there 

are a significant number of people who are working part-time in 

some capacity, who under Ohio law, are not eligible to claim, and 

so they are not counted in that number either, are they? 

Ms. DELISIO. That is possible. However, in a situation where if 

you are working full-time and laid off and you would accept a partVerDate jul 14 2003 05:04 Sep 06, 2003 Jkt 088995 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 E:\HR\OC\88995A.XXX 88995A
62

time job, we would pay partial benefits to those who are working 

part-time if there was a difference between what they were making 

in their wages and what their weekly benefit amount would be. So, 

it is possible for a part-time worker to get partial benefits. We do 

not currently have part-time benefits for part-time workers as a result of the discussion between the UCAC on dependency and weeks 

and wages. 

Ms. TUBBS JONES. Thank you, Mr. Chairman, for the opportunity to be heard. I look forward to talking to you more at a later 

time. 

Ms. DELISIO. Thank you. 

Chairman HERGER. The gentlelady is welcome. Just so Mr. 

Nilsen doesn’t feel left out here, I would like to address a final 

question to you. What was the effect of artificially keeping this surplus money in the Federal accounts since 1997 in terms of the Federal deficit instead of returning it to the States, and has the law 

ever been changed in the past to raise the Federal ceiling, which 

would have the same effect of keeping more Federal money in the 

Federal accounts instead of returning it to the States? 

Mr. NILSEN. Well, the way the UI system and the budget works 

is if money raised by the States is put into Federal accounts and 

less money is transferred back to the States, in a sense, that has 

the net effect of reducing the deficit. Over some periods of time 

when actually less dollars have been sent back to the States, that 

has been the case. 

Overall, given the fact that there is still $23 billion in the trust 

funds, that has, over time, a cumulative effect of reducing the deficit by that much. 

Caps on the Federal trust funds have been raised a number of 

times. The Reed Act provides that when they hit the cap in those 

funds, then the excess funds are to be transferred back to the 

States. A number of times legislation has been passed that raised 

those caps, so that additional funds were built up in those accounts. 

Chairman HERGER. So, the essence of that would be that the 

Federal deficit would appear to be less than——

Mr. NILSEN. Exactly. 

Chairman HERGER. It would have been if these funds had been 

transferred to the States to be used as they had been intended to 

be used? 

Mr. NILSEN. Yes. 

Chairman HERGER. I thank you, and I want to thank each of 

our witnesses for appearing before us today. With that, this hearing stands adjourned. 

[Whereupon, at 2:40 p.m., the hearing was adjourned.] 

[Submissions for the record follow:]

Texas Workforce Commission 

Austin, Texas 78778

March 25, 2003

The Texas Workforce Commission appreciates the opportunity to comment on our 

use of the Reed Act distribution that was included in the Job Creation and Worker 

Assistance Act of 2002. 

Texas received $596.4 million through the Reed Act distribution at a critical moment for Texas; our fund was close to insolvency. We greatly appreciated having the 

flexibility to spend it in the way that most benefited Texas. In our case, due to the 

rapid depletion of our Unemployment Trust Fund, we decided to put 100% of the 

63

funds toward paying benefits for eligible laid-off workers. Not only did local economies and laid-off workers benefit, but because employers had paid the taxes that 

made the distribution possible, we felt that the distribution should go toward mitigating the inevitable employer tax rate increases that accompany any economic 

downturn. 

Per the U.S. Department of Labor, the Federal Trust Fund Accounts still hold $22 

billion. We urge the Congress to consider returning a portion of those funds in another flexible Reed Act distribution this year. With the national economy in an uncertain recovery, another distribution of employer tax money would allow states to 

provide additional tax relief to the business community at a time when business hiring is the key to an economic rebound. 

Thank you for hearing our comments.

Sincerely,

Diane D. Rath 

Chair and Commissioner Representing the Public

T.P. O’Mahoney 

Commissioner Representing Labor

Ron Lehman 

fCommissioner Representing Employers

Statement of Eric Oxfeld, UWC—Strategic Services on Unemployment & 

Workers’ Compensation, and Deron Zeppelin, Society for Human Resources Development 

We appreciate the Human Resource Subcommittee’s ongoing oversight of the unemployment insurance (UI) system and specifically the $8.1 billion ‘‘Reed Act’’ distribution to state unemployment insurance trust accounts pursuant to the Job Creation and Worker Assistance Act of 2002 (H.R. 3090). The Reed Act distribution was 

a very important and helpful response to the economic recession and the economic 

dislocation resulting from the terrorist attacks on September 11. It also provides 

funding available for use by the states to make over-due administrative improvements that otherwise are not possible because of the chronic under-funding of state 

UI and employment services (ES) agencies through the normal UI/ES administrative financing mechanism. 

These comments are submitted jointly by UWC—Strategic Services on Unemployment & Workers’ Compensation (UWC) and the Society for Human Resource Management (SHRM). UWC and SHRM support a strong UI/ES program through which 

employers provide fair and affordable insurance benefits for a temporary period of 

time to workers with a strong attachment to work who are temporarily and involuntarily jobless when suitable work is no longer available. We believe that a sound 

UI program is best embodied through the state UI/ES system, with a limited federal 

role where uniformity of state law is considered essential. 

UWC is the only association exclusively devoted to providing legislative/regulatory 

representation for the business community in connection with national UI and 

workers’ compensation public policy (WC) issues. UWC’s members include employers 

of all sizes, industries and geographic locations; national and state business associations; third party service companies; accounting and law firms and other organizations who advocate sound, cost effective UI and WC programs for workers and employers. UWC members and their clients and members represent a major share of 

the business community in the United States. The Society for Human Resource 

Management (SHRM) is the world’s largest association devoted to human resource 

management. Representing more than 170,000 individual members, the Society’s 

mission is to serve the needs of HR professionals by providing the most essential 

and comprehensive resources available. As an influential voice, the Society’s mission 

is also to advance the human resource profession to ensure that HR is recognized 

as an essential partner in developing and executing organizational strategy. Founded in 1948, SHRM currently has more than 500 affiliated chapters within the 

United States and members in more than 120 countries. 

UWC and SHRM support the UI program and its purposes. For more than 65 

years, the UI program has protected jobless workers, employers, and the public by 

assuring that workers who lose their jobs when employers do not have work can 

64

receive temporary partial income replacement during their transition to new employment. The UI system is funded by dual state and federal payroll taxes paid by 

employers. State UI (SUI) taxes are deposited into a trust account for each state, 

dedicated to the payment of UI benefits. The Federal Unemployment Tax (FUT) is 

deposited into 3 accounts: the Employment Security Administration Account 

(ESAA), which funds the administrative costs of the UI program (state and federal) 

and the public labor exchange under the Wagner-Peyser Act (state); the Extended 

Unemployment Compensation Account (EUCA), which funds 50% of the benefits 

payable under the permanent Federal-State Extended Benefits (EB) program; and 

the Federal Unemployment Account, which funds loans to states who deplete their 

UI benefits trust accounts. Congress has from time to time dipped into the EUCA 

account to finance special federal UI benefit extensions, such as the Temporary Extended Unemployment Compensation (TEUC) program now in effect. The state benefits accounts and the three federal accounts are held by the US Treasury in the 

Unemployment Trust Fund and are included in the unified federal budget. 

In recent years, the FUT has been excessive relative to the need for these funds. 

Less than half the FUT revenue was actually spent in many years, leading to an 

unhealthy accumulation in the FUT accounts in the Trust Fund. Despite the fact 

that Congress doubled the ceiling on these accounts in 1997, as recently as 2 years 

ago the Department of Labor projected that FUT revenue would exceed the legal 

ceiling by more than $40 billion over 10 years. Federal law (known as the Reed Act) 

requires distribution of FUT balances above the ceiling into the state UI trust accounts, where the funds will be available to pay for UI benefits or may be appropriated by the state legislature to pay for UI/ES administrative costs. 

The principal reason for the excessive FUT revenue is the continuation of a ‘‘temporary’’ FUT surtax, which originally was imposed in 1976 to finance a supplemental benefits extension in the 1970’s. The surtax was to expire when the deficit 

was retired, which would have occurred in 1987. However, driven by the federal 

budget process, Congress intervened 4 times to continue this unnecessary surtax. 

The surtax was most recently extended in 1997, and under current law it does not 

expire until the end of 2007. 

It is especially maddening for employers that despite the excessive FUT tax, 

states are not receiving enough money to provide the services for workers and employers that business has paid for through the FUT tax. The Federal Government 

has chronically declined to appropriate adequate funding for the state UI/ES agencies. To avoid this very situation, the FUT revenue is held in a dedicated Trust 

Fund and by law may be expended only for the specific purposes for which the FUT 

is levied. However, in practice, the inclusion of FUT revenue and expenditures in 

the federal budget means that the Federal Government can meet its tax and spending targets for other, general revenue funded programs by keeping the FUT rate at 

inflated levels and by appropriating less than the amount needed for efficient and 

effective UI/ES agencies. The now-chronic under-funding for UI/ES administration 

has caused many states to impose add-on state payroll taxes and/or dip into their 

own general funds to supplement inadequate FUT funding. 

Under-funding of state UI/ES agencies has many unintended consequences which 

adversely affect workers, employers, and states, as well as the federal budget. Inadequate administrative funding has directly contributed to an unacceptable level of 

fraud, abuse, and improper payments involving UI claims, running into payment of 

billions of dollars each year on improper claims that should never have been paid 

in the first place. It has resulted in inadequate re-employment services for UI claimants, which in turn causes an increase in the average length of time UI claimants 

receive benefits before finding new employment and an increased total payout for 

UI claims. In turn, the higher expenditures needlessly inflate state payroll tax levels needed to fund the benefits. At the same time, inadequate administrative funding reduces state UI tax collections because states lack the financial resources to 

detect, prevent and recover under payment of UI taxes by employers. The consequence of higher payouts and reduced revenue is the bleeding down of UI benefits 

trust fund balances. Depleted reserves means that states lack funds needed to ride 

out recessionary periods and avoid federal loans and the imposition of payroll tax 

increases during economic recovery—the worst possible time to raise payroll taxes. 

And because state UI benefits trust accounts are included in the federal budget, outside the appropriations process, higher spending on UI benefits, lower state revenue 

from state UI payroll taxes, and federal loans to the states negatively affect the federal budget, also. 

The UI system is designed to be countercyclical. During economic downturns the 

state trust accounts are caught in a financial squeeze that results from layoffs: a 

simultaneous reduction in revenue from the shrinkage of taxable payroll and increase in expenditures as UI claims increase in number and duration. Inadequate 

65

administrative funding makes the states especially vulnerable during recessions and 

their aftermath, when the sudden spike in claims workload simply overwhelms the 

administrative infrastructure. 

The recent recession is extremely mild by historical standards but follows a period 

of near-record low unemployment. Despite (or perhaps because of) the low unemployment rate preceding the recession, balances in state UI trust accounts were generally well below recommended reserve levels. Consequently, the recession quickly 

depleted many state accounts. Five states have received federal loans, and several 

more may need them soon. In many states, UI taxes are headed sharply upward, 

creating a new burden on employment that will weaken or delay full economic recovery. In this environment, the decision by Congress in 2002 to distribute the $8.1 billion in Reed Act funds to the state UI benefits trust funds was an exceptionally 

helpful response to the recession because it returned to the states FUT tax revenue 

that should never have been collected in the first place, thereby providing a boost 

to state trust fund balances and the flexibility for each state to decide how best to 

use its own UI needs.

• Thirty states were able to avoid automatic tax increases or additional surcharges because the $8 billion distribution sufficiently replenished their trust 

fund accounts. And as Assistant Secretary Emily De Rocco testified, increasing employer taxes inevitably means more layoffs and fewer jobs for workers, 

a result which simply must be avoided in an already sluggish economy. 

Sigurd Nilsen of the General Accounting Office also noted that the distribution actually allowed the District of Columbia and Maine to lower employer 

taxes. • New York and Texas were able to repay federal loans they had already received in order to continue paying benefits. Repaying these loans as soon as 

possible reduced interest rate charges for the states, monies which are inevitably recouped from employers and workers in the form of higher taxes. It 

also avoided or reduced the state tax increases or repayment of the loans 

through an increase in the FUT rate for employers in states with overdue 

UI loans. • Many states provided much needed employment services to unemployed 

workers. Twenty-seven states appropriated approximately $662 million for 

UI/ES administrative services, and to their ‘‘one stop’’ centers. Access to adequate UI/ES services is critical to ensuring that unemployed workers return 

to work as soon as possible, a fact which reduces benefit duration and therefore the UI tax rates paid by employers. • States improved the integrity of their programs and reduce fraud and benefit 

overpayments, which again inevitably lowers costs and taxes for employers 

and workers. 

• States had more funding available if they wanted to provide benefit extensions or other expansions of eligibility. Five states used Reed Act monies in 

this fashion, including the implementation of an alternative base period in 

Oklahoma.

An important issue for Congress is whether states should or must use their Reed 

Act funds to increase benefits or expand eligibility. We strongly oppose any federal 

pressure on states to implement expansions. Benefit eligibility and weekly benefit 

amounts are decisions most appropriately made at the state level. Decisions on 

these issues are better made at the state level, because states are more responsive 

to local needs and conditions, which vary widely. Furthermore, states have the general responsibility for benefit levels and eligibility and are thus better able to balance the competing interests of their workers and employers. Federal decisions even 

on limited questions of eligibility or benefits will inevitably upset the delicate balance on the entire range of such questions. For example, some states have chosen 

to help low wage workers by lowering the minimum qualifying earnings during the 

standard base period, rather than using an alternative base period that is more burdensome to administer. A federal mandate for an alternative base period would 

needlessly overturn this judgment. 

Furthermore, we are constrained to point out the inherent flaws in using the temporary infusion of Reed Act funds to finance permanent benefit expansions. Once the 

Reed Act funds are spent, states are faced with the choice of restricting eligibility 

or reducing benefits, or more likely, adding to the ‘‘sticker price’’ for the UI program, 

directly inflating future UI payroll taxes on employers. UI is after all an insurance 

program. We hope Congress won’t be misled into thinking that because the insurance premiums are collected through a tax mechanism, somehow the premiums will 

not increase when benefits are expanded. 

66

Although the flexibility the Reed Act distribution afforded the states is one of its 

strengths, there are a few states where the Reed Act funds have not been used as 

intended by being functionally diverted to purposes completely unrelated to UI benefits or UI/ES administration. Michigan and New Jersey used part of their Reed Act 

money to plug holes in the state general revenue budget. New Jersey did this by 

in effect reducing the state UI tax and then imposing a new tax that will generate 

an amount of state revenue equivalent to the Reed Act funds. Michigan did this by 

stretching the definition of ‘‘employment services’’ to include expenditures that are 

only tenuously connected to the UI/ES system, such as placing internet-enabled 

computers in public libraries general use. Although a computer housed in a library 

can be used to file UI claims or access employment services over the internet, such 

use is incidental to other purposes. If this use can be considered ‘‘employment services,’’ there may be very few uses that are not! We do not believe it is appropriate 

public policy to impose unemployment payroll taxes on employers to buy computers 

for libraries, and we believe that clearer boundaries of what are acceptable and unacceptable uses are needed. 

Notwithstanding the foregoing problems, we believe that in general the Reed Act 

distribution has been very successful in achieving its purpose. We want to stress 

that this purpose is one that is not only limited in the scope of allowable use, but 

also in time. The Reed Act money does not eliminate the need to repeal the FUT 

surtax, enact permanent administrative financing reform, and address other chronic 

problems such as fraud and abuse. Additional reforms to the UI system which will 

help employers and workers, and reduce fraud and abuse, include the following:

• Repeal of the 0.2% FUTA surtax. 

• Allowing the state UI agencies access to the National Directory of New Hires 

(NDNH) in order to verify that claimants are not currently employed. 

• Prohibiting the collection of FUTA and state UI taxes more often than quarterly.

We look forward to working with the Human Resources Subcommittee on these 

and other UI policy issues, as well as on a reduction in the Federal Unemployment 

Tax and reform of the UI administrative financing system.

Statement of Dolores Esser, Virginia Employment Commission, Richmond, 

fVirginia 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to submit testimony regarding the Virginia Employment Commission’s use of Reed Act funds distributed under the Job Creation 

and Worker Assistance Act of 2002. The Reed Act distribution provided timely financial support to the Commission and to the Commonwealth’s unemployed. 

The Commonwealth of Virginia received a Reed Act distribution of $214.9 million. 

This amount was deposited in Virginia’s unemployment insurance trust fund on 

March 13, 2002. The Reed Act distribution provided significant assistance in maintaining the solvency of the trust fund, compensating for administrative funding 

shortfalls for the past decade, offsetting the cost of enhanced unemployment compensation benefits instituted after September 11, 2001, and helping the Virginia 

Employment Commission (VEC) to enhance customer service to job seekers and employers. 

Reed Act Distribution Compensated for Administrative Under Funding

Before the Reed Act distribution, the VEC had experienced declining federal funding for Unemployment Insurance (UI) and Employment Services (ES) administration for a decade. As a result of significant under funding, the VEC has unfortunately experienced decreased levels of services, particularly among employer services and follow up services. Circumstances had become so critical that field staff 

have had to devote a greater proportion of resources to ‘‘front-end’’ services to respond to increases in the number of claimants. In the six years prior to the Reed 

Act distribution, staff in the ES program had decreased by more than 20% while 

the number of claimants seeking services increased. The number of registrations 

with job services in the first half of program year 2002 (368,446) is almost equal 

to registrations for the entire program year in 2000 (385,677). In addition, the ES 

program was expecting to have to absorb substantial increases in infrastructure 

costs when UI services transition from field offices to telephone and Internet services. 

67

Unlike several states, Virginia imposed no additional surtax on employers to 

maintain levels of UI and ES services. Instead, Virginia initiated program efficiency 

improvements, including cross-training staff, streamlining processes, and instituting 

information technology improvements. Although these measures helped, the VEC’s 

costs were increasing faster than its grant revenues. 

Frankly, we are of the view that if Reed Act funds had been distributed regularly, 

the UI and ES administrative funding would have kept pace with service demands, 

and our customers would not have faced a decade of service declines. Instead, as 

the Ways and Means Advisory notes, the Congress kept ‘‘excess’’ funds in the federal 

accounts in an effort to reduce federal deficits. So while we are appreciative that 

the Reed Act distribution allowed us to restore service levels, we would have preferred to maintain a consistent level of service with predictable adequate funding. 

In 2000, the most recent year for which we have figures, Virginia received only 

28% return on FUTA taxes paid by Virginia employers. We are not asking that the 

state receive 100% of the FUTA taxes paid by our employers for state administration, as we appreciate the need to maintain adequate balances in the federal accounts for purposes that are appropriate. What we are asking for, however, is adequate funding for proper and efficient administration of the Unemployment Insurance program. 

In order to effect this change, we suggest that the Congress continue with its annual discretionary appropriation for UI administration, but supplement insufficient 

amounts appropriated with annual mandatory special Reed Act distributions. These 

special Reed Act Distributions would make up for the difference between adequate 

funding and inadequate discretional appropriations. A workload formula based on 

Average Weekly Insured Unemployment (AWIU) and the cost of administration, as 

determined by the new UI administration resource justification model, would determine the mandatory special Reed Act spending. If implemented, this would give 

states an opportunity, for the first time in a decade, to administer their UI programs in a proper and efficient manner. 

Background Before Reed Act Distribution:

Virginia received the Reed Act distribution between the close of the state’s regular 

General Assembly session and it’s reconvened or ‘‘veto’’ session. In the months before the distribution, the Commonwealth had experienced a significant increase in 

unemployment due to major plant closings in Southwest and Southside Virginia and 

because of the terrorist attacks of September 11, 2001. Virginia’s rural regions had 

been experiencing significant declines in manufacturing jobs prior to September 11, 

2001, and plant closures accelerated after September 11. In addition, the terrorist 

attacks had an immediate and widespread impact on the economy of Northern Virginia. The closure of Reagan National Airport and loss of tourism in the wake of 

the attacks cost tens of thousands of jobs immediately and sent shock waves 

throughout the regional service and transportation economy. 

In the weeks following the terrorist attack, then-Governor Gilmore instituted a 

37.3% increase in unemployment benefits. The Virginia Employment Commission 

also incurred nearly $1 million in administrative costs to establish temporary unemployment offices at Reagan National Airport to process thousands of unemployment 

claims expeditiously. 

During the General Assembly Session immediately following these events, the legislature grappled with the issue of either extending or curtailing the enhanced benefits provided by emergency executive order. Members weighed the sudden drain on 

the unemployment trust fund and the need to enhance benefits, and compromised 

on an approach that allowed the 37.3% increase to continue until January 2003, at 

which time it was reduced by half. In January 2004, benefit levels were scheduled 

to revert to their pre September 11, 2001 with a maximum benefit of $268 per week. 

2002 General Assembly Appropriations

The Reed Act distribution in March 2002 immediately followed the achievement 

of this hard-fought compromise on unemployment insurance benefit levels. Although 

the Governor proposed using a portion of the Reed Act funding to maintain the 

37.3% benefit increase for an additional six months, the legislature rejected the proposal. However, during the veto session, the General Assembly did approve the VEC 

and Governor’s request to appropriate approximately $30.9 million of the state’s 

Reed Act Distribution to supplement the VEC’s ES and UI program administration. 

Of this amount, $6.16 million was appropriated for the biennium for administering 

the ES program, and $24.74 million was appropriated for the biennium for administering the UI program. The remainder of the distribution, $184 million, remained 

in the unemployment insurance trust fund to offset the increasing cost of benefits 

and ensure the fund’s continued solvency. 

68

Recent Statutory Changes to UI Benefits

During the past year, UI payouts to claimants have continued to be high. The deposit of $184 million in Reed Act funding has provided a cushion to our trust fund 

that has prevented our solvency level from declining and tax rates increasing as 

rapidly as projected. Without the Reed Act distribution, increases in benefit payments would have increased employer tax rates higher and more rapidly than is 

currently projected. Because of the improved solvency of the trust fund, employers 

are projected to save an average of $8.53 per employee per year through 2008. The 

per-employee tax savings for 2003 is projected to be $5.93. 

With the Reed Act funding, Virginia UI trust fund is 80% solvent for calendar 

year 2003. Without the Reed Act funding, the trust fund would have been 60% solvent this year. Without the Reed Act funding, solvency was projected to drop to 20% 

next year and the year after. Instead, trust fund solvency is projected to decline to 

40% in CY 2004 and 2005 before increasing again in 2006. 

To the extent that the Reed Act distribution improved trust fund solvency by 20% 

over projected levels, the increased solvency may have weighed into the General Assembly’s decision this year to maintain rather than decrease current benefit levels. 

Rather than allowing the maximum benefit to revert from it’s current $318 per 

week to the pre-September 11, 2001 maximum of $268, the General Assembly elected to reduce benefits by only $2 per week for the state fiscal year beginning July 

1, 2003. Additionally, the maximum will increase in July 2004 to $326. Had the 

trust fund been projected to decrease to 20% solvency for the next two years, it is 

unlikely that the General Assembly would have maintained benefits amounts at 

these levels. 

During the 2003 Session, the General Assembly also elected to institute an alternative base period and to eliminate 50% of the offset of Social Security benefits from 

UI benefits. Although the cost of these two benefit enhancements is comparatively 

minor, these measures may not have been approved without the positive impact of 

the Reed Act distribution. 

Conclusion

Thank you again for the opportunity to present testimony. The Reed Act distribution allowed us to partially compensate for 10 years of administrative under funding 

and to restore and maintain certain services to our customers. The funds also 

helped maintain state trust fund solvency in the face of significant increases in unemployment. We urge the subcommittee to support adequate funding for the UI and 

ES programs to prevent serious declines in services and benefits in the future.

Æ