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[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

 
           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

                       U. S. GOVERNMENT PRINTING OFFICE
88-995                         WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                    Subcommittee on Human Resources

                   WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut        BENJAMIN L. CARDIN, Maryland
SCOTT MCINNIS, Colorado              FORTNEY PETE STARK, California
JIM MCCRERY, Louisiana               SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
PHIL ENGLISH, Pennsylvania           CHARLES B. RANGEL, New York
RON LEWIS, Kentucky
ERIC CANTOR, Virginia

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page

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

           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:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
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.''

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 
[email protected], 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 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

                    * * * POSSIBLE TIME CHANGE * * *

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
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 Sub-
committee 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 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.
    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:]

    [GRAPHIC NOT AVAILABE IN TIFF FORMAT]
    
                              ----------                              

    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 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 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 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.

                                 

    Mr. CARDIN. Thank you, Mr. Chairman; and let me join you in 
expressing our thoughts for the men and women in armed services 
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.
    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 low-
wage 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.

    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 
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 and businesses alike, and give states new 
administrative opportunities. Specifically, the proposal:

       LPromotes job growth by cuts in federal unemployment 
taxes and simplified filing;
       LGives states over $5 billion in ``special'' Reed Act 
distributions to phase in the new system over five years;
       LHelps unemployed workers by making it easier to access 
Extended Benefits by reforming the automatic ``trigger mechanism'';
       LAllows states to determine administrative funding 
levels and provides new flexibility in program administration; and
       LContinues 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 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:

       LFunding 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;
       LImproving 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;
       LImproving 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
       LEnhancing 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.

                                 

    Chairman HERGER. Thank you for your testimony. I would like 
to remind Members that they each have 5 minutes for witness 
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 employer-paid 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.
    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 workload-
driven 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?
    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 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.
    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 
stimulant 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 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.
    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.
    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 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 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 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

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:]
  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\
---------------------------------------------------------------------------
    \1\ The 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.
    \2\ The 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\ See U.S. General Accounting Office, Unemployment Insurance: 
States' Use of the 2002 Reed Act Distribution, GAO-03-496 (Washington, 
D.C.: Mar. 6, 2003).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \4\ For UI purposes, federal law designates the District of 
Columbia, Puerto Rico, and the Virgin Islands as ``states.''
---------------------------------------------------------------------------
    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 programs,\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.
---------------------------------------------------------------------------
    \5\ Labor provided about $2.2 billion to states in fiscal year 2003 
to administer these programs.
    \6\ The 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.
---------------------------------------------------------------------------
    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 November 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)

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    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 reported 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:

       LAlabama, Maryland, and Oregon increased weekly UI 
benefit payments,
       LMinnesota extended benefits to individuals who have 
exhausted coverage, and
       LOklahoma implemented an alternative base period.\7\
---------------------------------------------------------------------------
    \7\ Most 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.

    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)

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

  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.
---------------------------------------------------------------------------
    \8\ Two states, Montana and Michigan, have appropriated all or 
almost all of their Reed Act funds to administer UI, ES, or one-stop 
systems.
    \9\ Together, 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.

    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
------------------------------------------------------------------------
                                                              Number of
                          System                               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
------------------------------------------------------------------------
                                                              Number of
               UI administrative activities                    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 employers, 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
------------------------------------------------------------------------
                                                              Number of
         ES and one-stop administrative activities             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               9
 informational materials
------------------------------------------------------------------------
Covering the shared costs of operating one-stop centers               7
------------------------------------------------------------------------
Improving access for clients with disabilities or limited             5
 English proficiency
------------------------------------------------------------------------
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 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.
---------------------------------------------------------------------------
    \10\ Welfare 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.
---------------------------------------------------------------------------
    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
----------------------------------------------------------------------------------------------------------------
                                                                                       Unexpended
                                                                       -----------------------------------------
                                                                            Percent
                                                                         appropriated     Percent      Percent
                  State                      Total Reed Act    Percent        for       officially     neither
                                               allotment      expended  administration   obligated  appropriated
                                                                         of UI, ES, or     to UI         nor
                                                                           one-stop     trust fund    obligated
                                                                            systems
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
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/    Reed Act funds prevented
surcharge are triggered if trust fund falls  triggering an increase in a
            below certain level               tax or surcharge in 2002a
------------------------------------------------------------------------
Alabama                                               
------------------------------------------------------------------------
Alaska
------------------------------------------------------------------------
Arkansas                                              
------------------------------------------------------------------------
California                                            
------------------------------------------------------------------------
Colorado                                              
------------------------------------------------------------------------
Connecticut                                           
------------------------------------------------------------------------
Delaware                                              
------------------------------------------------------------------------
District of Columbia
------------------------------------------------------------------------
Florida                                               
------------------------------------------------------------------------
Georgia
------------------------------------------------------------------------
Hawaii
------------------------------------------------------------------------
Idaho
------------------------------------------------------------------------
Illinois
------------------------------------------------------------------------
Indiana                                               
------------------------------------------------------------------------
Iowa                                                  
------------------------------------------------------------------------
Kansas
------------------------------------------------------------------------
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
------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
                                                                                           Reed Act dollars
                    State                       Reed Act dollars appropriated for UI  appropriated for ES or one-
                                                               system                         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                                                    
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
                                                                                                         Direct
                                          General                Claims      Tax filing      Appeals    deposit/
                 State                  technology    Staff      system      and paying      system       debit
                                                              developments  enhancements  improvements    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                           
----------------------------------------------------------------------------------------------------------------
Total: 21                                     14         10          13             9             5           4
----------------------------------------------------------------------------------------------------------------
Source: GAO survey of states.
a State 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
----------------------------------------------------------------------------------------------------------------
                                                                                                       Improve
                            Labor                 Shared                             Resource room   access for
                          exchange    Maintain   cost of   Reemployment                resources,    those with
         State               and         or     operating   services to    Enhance    outreach or   disabilities
                         employment   increase   one-stop  UI claimants  technology  informational   or limited
                          services     staff     centers                                material       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                 
----------------------------------------------------------------------------------------------------------------
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.

                                 

    Chairman HERGER. Thank you, Mr. Nilsen. Mr. Brock to 
testify.

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 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 
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 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 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, 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.

                                 

    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.
    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:]
 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 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. LUp to $26 million each year in SFY '03, '04, and '05 to 
        offset GRF & Penalty & Interest.
        2. LUp to $30 million to replace the current Unemployment 
        Compensation Tax system.
        3. LUp to $10 million for operation of local One Stops.
        4. LUp to $3 million for one time improvements to ODJFS's Labor 
        Market Information system.
        5. LUp to $6 million for one time equipment and training 
        expenses for program delivery and policy staff.
        6. LUp 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.

                                 

    Chairman HERGER. Thank you, Ms. DeLisio. Now Mr. Emsellem 
to testify.

    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 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.
    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.

       LEven 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.
       LBecause 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.
       LThe 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.
                              *    *    *
       LEven 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%).
---------------------------------------------------------------------------
    \1\ National Employment Law Project, ``Crisis of Long-Term 
Unemployment is Far From Over Now Reaching Most Segments of the Labor 
Market'' (February 2003).
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \2\ U.S. General Accounting Office, Unemployment Insurance: Role as 
Safety Net for Low-Wage Workers is Limited (December 2000).
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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 benefits. 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.
---------------------------------------------------------------------------
    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.

       LBecause 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
---------------------------------------------------------------------------
    \4\ Marc Baldwin, Beyond Boom and Bust: Financing Unemployment 
Insurance in a Changing Economy (National Employment Law Project, April 
2001)
---------------------------------------------------------------------------
    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 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.

       LThe 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.
    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.

                                 

    Chairman HERGER. Thank you, Mr. Emsellem. Now Ms. Watson to 
testify.

     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.
    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, at-risk 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:]
  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 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            $20,000,000  Comprehensive redesign of our
Redesign                                    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.
------------------------------------------------------------------------
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                $395,000  Upgrade to allow current IVR
Response                                    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 Media-                 $523,000  Intranet/Internet website
Content Distribution                        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                 $1,956,780  Added ADA workstations and
Technology                                  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          $1,508,100  Building and parking lot
 Improvements                               improvements including
                                            handicap access, fire alarm
                                            system, lighting,
                                            furnishings, restrooms, etc.
------------------------------------------------------------------------
Technical Training for           $755,000  Training for staff on
 Wagner Peyser Staff                        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.
------------------------------------------------------------------------
Specialized Assistance           $650,000  Increase capacity for
 for Older Workers                          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           $693,000  Develop an automated match of
 for Single Heads of                        individual's education major
 Households                                 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         $1,100,000  Conduct focus groups with
 for At-Risk Youth                          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           $652,000  Develop special workshops for
 for Ex-Offender                            unique needs that can be
 Population                                 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      $1,200,000  Expand REI program to more
 Initiative                                 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        $565,000  Amnesty legislation inundated
 Program                                    office and tremendous
                                            backlog of cases exists.
                                            Professional services
                                            contract to review processes
                                            and make recommendations and
                                            automate where ever
                                            possible.
------------------------------------------------------------------------
Employer Services                 $11,200  CD providing basic
CD-ROM                                      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 of the
                                            product.
------------------------------------------------------------------------

                                 

    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 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?
    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 Wagner-Peyser 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 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.
    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----
    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----
    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 
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 part-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 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
                                Commissioner 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 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 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.

       LThirty 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.
       LNew 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.
       LMany 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.
       LStates improved the integrity of their programs and 
reduce fraud and benefit overpayments, which again inevitably lowers 
costs and taxes for employers and workers.
       LStates 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.
    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:

       LRepeal of the 0.2% FUTA surtax.
       LAllowing the state UI agencies access to the National 
Directory of New Hires (NDNH) in order to verify that claimants are not 
currently employed.
       LProhibiting 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, 
                                Virginia
    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.
    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.
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.

                                   - 
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