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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

                    UNEMPLOYMENT COMPENSATION REFORM

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 29, 2000

                               __________

                             Serial 106-97

                               __________

         Printed for the use of the Committee on Ways and Means

                   U.S. GOVERNMENT PRINTING OFFICE
70-276                     WASHINGTON : 2001

_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
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
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    Subcommittee on Human Resources

                NANCY L. JOHNSON, Connecticut, Chairman

PHILIP S. ENGLISH, Pennsylvania      BENJAMIN L. CARDIN, Maryland
WES WATKINS, Oklahoma                FORTNEY PETE STARK, California
RON LEWIS, Kentucky                  ROBERT T. MATSUI, California
MARK FOLEY, Florida                  WILLIAM J. COYNE, Pennsylvania
SCOTT McINNIS, Colorado              WILLIAM J. JEFFERSON, Louisiana
JIM McCRERY, Louisiana
DAVE CAMP, Michigan

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

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 22, 2000, announcing the hearing............     2

                               WITNESSES

U.S. Department of Labor, Hon. Raymond J. Uhalde, Deputy 
  Assistant Secretary, Employment and Training Administration....    24

                                 ______

American Federation of Labor and Congress of Industrial 
  Organizations, David A. Smith..................................    59
Arizona, State of, Hon. Jane Dee Hull, Governor..................    16
Committee for Economic Development, Van Doorn Ooms...............    70
English, Hon. Philip S., a Representative in Congress from the 
  State of Pennsylvania..........................................     8
Interstate Conference of Employment Security Agencies, and Utah 
  Department of Workforce Services, Robert C. Gross..............    44
Levin, Hon. Sander M., a Representative in Congress from the 
  State of Michigan..............................................     4
Louisiana Department of Labor, Hon. Garey Forster, Secretary.....    67
UWC-Strategic Services on Unemployment and Workers' Compensation 
  and Tyson Foods, Inc., Chuck Yarbrough.........................    50
Wilson, Mark, Heritage Foundation................................    64

                       SUBMISSIONS FOR THE RECORD

American Federation of State, County and Municipal Employees, 
  AFL-CIO, statement.............................................    85
Ohio, State of, Hon. Bob Taft, Governor, statement and 
  attachments....................................................    88
Society for Human Resource Management, Alexandria, VA, statement.    92
Washington, State of, Hon. Gary Locke, Governor, statement.......    94
Western Governors' Association, Denver, CO, statement and 
  attachment.....................................................    98

 
                    UNEMPLOYMENT COMPENSATION REFORM

                              ----------                              

                       TUESDAY, FEBRUARY 29, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:34 p.m., in 
room B-318, Rayburn Building, Hon. Nancy L. Johnson (Chairman 
of Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
February 22, 2000
No. HR-16

                      Johnson Announces Hearing on

                    Unemployment Compensation Reform

    Congressman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Human Resources of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a hearing on unemployment compensation 
reform. The hearing will take place on Tuesday, February 29, 2000, in 
room B-318 Rayburn House Office Building, beginning at 1:30 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Governor Jane Dee Hull of Arizona and Governor 
Bob Taft of Ohio, Members of Congress, and a representative of the U.S. 
Department of Labor. Additional witnesses will include representatives 
of employers, labor, State administrators, and scholars. 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 system is a Federal-State program 
that provides benefits to unemployed workers with a history of labor 
force attachment. Every State designs its own benefit program, within a 
broad framework provided by Federal law, and levies taxes on employers 
to pay for regular unemployment benefits. The Federal Government also 
imposes a tax on employers, based on their number of employees, that 
pays for the Federal parts of the system. These parts include payments 
for State and Federal administration, funds for the U.S. Employment 
Services which helps unemployed workers reenter the labor market, funds 
for loans to States with bankrupt programs, and funds for half of 
extended unemployment benefits for workers in States with exceptionally 
high levels of unemployment. All funds, both those for regular State 
benefits and for the Federal parts of the system, are kept in Federal 
accounts that, like Social Security funds, are part of the unified 
Federal budget.
      
    In the last three years, several proposals for reforming the 
Unemployment Compensation program have been discussed. Several of these 
proposals have appeared in proposed legislation. Some of the major 
legislative proposals would:
      
    --eliminate the 0.2 percent surtax placed on employers in 1976 and 
was extended most recently through 2007 by the Balanced Budget Act of 
1997;
      
    --change the base period employment requirements to qualify for 
unemployment benefits and thereby allow more workers to qualify;
      
    --shift some Federal responsibilities, including control over the 
taxes that support them, to the States;
      
    --provide incentives for States to improve the solvency of their 
benefit accounts;
      
    --make the extended benefits program more accessible; and
      
    --increase access to unemployment benefits for laid-off workers 
seeking part-time work.
      
    A working group of the Administration, labor, business, and various 
entities with an interest in Unemployment Compensation has been meeting 
for nearly two years in the attempt to reach a compromise proposal that 
could draw support from across the political spectrum.
      
    In announcing the hearing, Chairman Johnson stated: ``The nation's 
unemployment program provides critical services to out-of-work 
Americans. As we move into the 21st Century, it is important that we 
improve and strengthen the system so we can meet the increasingly 
complex needs of the changing workforce. This hearing will give us an 
opportunity to review a variety of proposals developed to meet this 
goal.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the various reforms now under discussion.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
March 14, 2000 , to A.L. Singleton, Chief of Staff, Committee on Ways 
and Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Human Resources office, room B-317 
Rayburn House Office Building, by close of business the day before the 
hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette WordPerfect or MS 
Word format, typed in single space and may 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. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

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

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

                                

    Chairman Johnson. We are going to delay our opening 
statements and move right to Congressman Levin and hopefully 
Congressman English so that they have full opportunity to give 
their testimony and answer questions before the Governor 
arrives at 2. We will adjust our activities according to the 
needs of those who are testifying. And so with that, Sandy, I 
would really like to welcome you.
    Mr. Levin. Thank you.
    Chairman Johnson. You have been a long and active Member of 
this Subcommittee of many years and I appreciate your 
testifying. And if then Ben would like to open.
    Mr. Cardin. My opening statement was devoted to the great 
career that Congressman Levin has had as Ranking Member of this 
Committee, but I will defer all those comments and just welcome 
our colleague to the Committee.

STATEMENT OF HON. SANDER M. LEVIN, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF MICHIGAN

    Mr. Levin. Well, thank you. And to the two of you and to 
Jim McCrery, I very much appreciate the chance to testify 
today. You have my written statement and I will refer to it.
    Chairman Johnson. And it will be entered in----
    Mr. Levin. Good.
    Chairman Johnson.--its entirety in the record.
    Mr. Levin. As you know, this is a vital issue. I was 
thinking about it yesterday and the only way it would not be 
absolutely important would be if anybody thinks there will 
never be another recession. And none of us like to think that 
there ever will be. But I think the likelihood is there will be 
some kind of a downturn at some point in the future.
    And that is why I think it is so wise to Congresswoman 
Johnson and to you, Mr. Cardin, and, Mr. McCrery, that you are 
taking the time to look at this issue. And as I look at the 
various proposals, I would like all of you to consider the 
clear need for a continuing Federal role in this matter.
    History has taught us that states cannot always address 
unemployment singlehandedly, and that as a nation we should 
save resources during good times to prepare for less fortunate 
circumstances.
    And as I was reading that over, it struck me, I think more 
and more there is some agreement across party lines that, as 
they say now in a trite way, we should fix a roof when the sun 
is shining. And I think that very much applies to Unemployment 
Compensation. And I fear that advocates of eliminating the 
current Federal-State partnership on unemployment have failed 
to accept these two lessons.
    And let me give you, if I might, one example. It is from my 
own home state. And this is a reference to 1982, the last 
recession of the early `nineties. I did not look up the figures 
for the even more severe recession in the `eighties, but my 
guess is the figures would be even more dramatic.
    In 1992, 188 million in Federal unemployment taxes were 
paid in my home state of Michigan. But the Federal Government 
spent $719 million that same year in Michigan for 
administrative costs and emergency unemployment benefits. I 
understand the Governor of Ohio was not--is not able to be here 
today.
    Chairman Johnson. Unfortunately.
    Mr. Levin. I do remember at a hearing of the Subcommittee a 
few years ago when he was here, I raised this issue relative to 
Ohio and presented figures showing, in a particular year, how 
much was paid in and how much was paid out. And while the 
figures were not quite as striking as those from Michigan, I 
thought they were rather dramatic. And I think that so-called 
devolution proposals, including H.R. 3174, would eliminate or 
seriously erode this Federal backstop protection during 
economic downturns.
    The major impetus behind proposals to eliminate the Federal 
collection of unemployment taxes is the concern that states 
have expressed regarding inadequate administrative funding 
being provided by the Federal Government. And let me say 
unequivocally that this is a legitimate concern which should be 
addressed. And 3174 shines a spotlight on that issue, though it 
goes much beyond it.
    However, we do not need to eliminate the Federal role in 
helping unemployed workers to achieve that goal. In the 
legislation that I have introduced with Representative English, 
who is next to me, administrative funding--additional funding 
would be provided to those states that make an even modest 
improvement in the solvency of their state UI trust funds.
    And I would like to point out, according to the Labor 
Department, 20 states currently have insufficient reserves in 
their unemployment trust funds to weather a severe recession. 
Encouraging them to save for the future is certainly consistent 
with common sense.
    I also understand that a working group on unemployment 
issues, which represents employers, workers, the states, and 
the administration, have discussed the advantages of making UI 
administrative funding mandatory, rather than discretionary. 
This proposal warrants some attention, particularly concerning 
the recent trend in the Appropriations Committee.
    In fact, the shortfall between funding provided by the 
Appropriations Committee and the level of financial need in the 
states to administer the UI systems has grown considerably 
since 1994. And I point that out to--in part because that is 
the fact and, in part, because I do think that everybody who 
wants to flirt with the idea of devolution should look at what 
the record is.
    Because from 1995 to 198, a shortfall between 
administrative funding and financial need increased from three 
percent to more than 13 percent. Continually cutting 
appropriations for UI and employment services and the claiming 
that reduction makes the case for devolution, seems a bit 
disingenuous.
    There are two other issues the Subcommittee should 
consider, I think, when reviewing proposed reforms for the UC 
system. First, during the last recession, the Extended Benefits 
Program did not trigger on appropriately, meaning Congress was 
forced to pass an Emergency Unemployment Compensation program 
at $28.5 billion dollars as I remember it. And I think that all 
of you were on the Subcommittee during at least some of those 
years. And I was. And the difficult task we had in terms of 
providing for emergency funding.
    And the legislation introduced by Mr. English and myself 
proposes an alternative trigger for the EB program to ensure 
that it works as intended. This approach, which assesses the 
total number rather than the insured number of unemployed 
workers, is consistent with the recommendations of the Advisory 
Committee on Unemployment Compensation.
    And, second, some low-income workers are being denied UI 
benefits because their most recent earnings are not considered 
by many states when eligibility decisions are made. To address 
this situation, H.R. 1830 would provide funds to help states 
voluntarily implement--and I emphasize voluntarily implement--
so-called Alternative Base Periods, which calculate the last 
four quarters of earnings, rather than the first four out of 
five. This change represents one way to begin to reverse the 
long-term trend of fewer unemployed Americans receiving UI 
benefits.
    And I do say to all of you, as colleagues, if we asked our 
constituents what percentage--just give us a rough 
approximation--of unemployed people are eligible for 
Unemployment Compensation, I doubt if anybody would come any 
close to as low a figure as one-third. There is something 
wrong.
    And it seems to me--for example, people who have moved from 
Welfare to work who would be vulnerable in a recession, I just 
think for those and others, there has to be some answer. And 
the notion that only a third of the unemployed workers, people 
who are working are eligible these days for unemployment--a 
historic low--I think is contradictory to what we believe in 
the value of work.
    In closing, let me say that I hope this Subcommittee is 
guided by one overriding concern when considering reforms to 
our Nation's Unemployment Comp system--the well-being of 
workers without employment. We need a system capable of 
providing them with temporary wage replacement, and I would 
add, with permanent re-employment--a system that is dependable 
on both good times and bad. Thanks very much.
    [The prepared statement follows:]

Statement of Hon. Sander M. Levin, a Representative in Congress from 
the State of Michigan

    Madame Chairwoman, I would like to thank you for allowing 
me to testify today on a very important issue--our Nation's 
response to unemployment. It is a pleasure to return to the 
Human Resources Subcommittee, if only for a day.
    As you consider various proposals to reform the 
unemployment compensation system, I urge you to consider the 
clear need for a Federal role in addressing a National issue.
    History has taught us that States cannot always address 
unemployment single-handedly, and that as a Nation, we should 
save resources during good times to prepare for less fortunate 
circumstances. I fear that advocates of eliminating the current 
Federal-State partnership on unemployment have failed to learn 
these two lessons.
    Let me give you one example of this issue. During the last 
recession in 1992, $188 million in Federal unemployment taxes 
were paid in my home state of Michigan. But the Federal 
government spent $719 million that same year in Michigan for UI 
administration costs and emergency unemployment benefits. So-
called devolution proposals, including HR 3174, would eliminate 
this Federal backstop protection during economic downturns.
    The major impetus behind proposals to eliminate the Federal 
collection of unemployment taxes is the concern States have 
expressed regarding inadequate administrative funding being 
provided by the Federal government. Let me say unequivocally 
this is a legitimate concern which should be addressed.
    However, we do not need to eliminate the Federal role in 
helping unemployed workers to achieve that goal. In the 
legislation I have introduced with Representative English (HR 
1830), additional administrative funding would be provided to 
those States that make even modest improvements in the solvency 
of their State UI Trust Funds.
    I should say that, according to the Department of Labor, 20 
States currently have insufficient reserves in their 
unemployment trust funds to weather a severe recession. 
Encouraging them to save for the future is certainly consistent 
with commonsense.
    I also understand that a working group on unemployment 
issues, which represents employers, workers, the States and the 
Administration, have discussed the advantages of making UI 
administrative funding mandatory, rather than discretionary. 
This proposal warrants some attention, particularly considering 
the recent trend in the Appropriations Committee.
    In fact, the shortfall between funding provided by the 
Appropriations Committee and the level of financial need in the 
States to administer their UI systems has grown considerably 
since my friends who advocate on behalf of devolution assumed 
majority status in Congress. From 1995 to 1998, this shortfall 
between administrative funding and financial need increased 
from 3% to more than 13%. Continually cutting appropriations 
for UI and employment services, and then claiming that 
reduction makes the case for devolution, may seem a little 
disingenuous to a neutral observer.
    There are two other issues the Subcommittee should consider 
when reviewing proposed reforms for the Unemployment 
Compensation system. First, during the last recession, the 
Extended Benefits Program did not trigger on appropriately, 
meaning Congress was forced to pass an Emergency Unemployment 
Compensation program. My legislation proposes an alternative 
trigger for the EB program to ensure that it works as intended. 
This approach, which assesses the total number rather than the 
insured number of unemployed workers, is consistent with the 
recommendations of the Advisory Committee on Unemployment 
Compensation.
    And second, some low-income workers are being denied UI 
benefits because their most recent earnings are not considered 
by many States when eligibility decisions are made. To address 
this situation, HR 1830 would provide funds to help States 
voluntarily implement so-called Alternative Base Periods, which 
calculate the last four quarters of earnings, rather than the 
first four out of five. This change represents one way to begin 
to reverse the long-term trend of fewer unemployed Americans 
receiving UI benefits.
    In closing, let me say that I hope this Subcommittee is 
guided by one overriding concern when considering reforms to 
our Nation's unemployment compensation system--the well-being 
of workers without employment. We need a system capable of 
providing them with temporary wage replacement and permanent 
re-employment--a system that is dependable in both good times 
and bad.
            Thank you.

                                

    Chairman Johnson. Thanks very much, Congressman Levin. And, 
Congressman English, a pleasure to welcome you before the 
Committee. It has been a great help to me to have you on my 
right hand and I am delighted to have you----
    Mr. English. Thank you, Madam Chair. That is----
    Chairman Johnson.--testify in support of your legislation.

   STATEMENT OF HON. PHILIP S. ENGLISH, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. English. That is high praise. And I want to, first of 
all, thank you for the opportunity to testify. Second of all, 
say that I would like to associate myself with remarks of the 
distinguished gentleman from Michigan and it is a privilege for 
me to be the prime cosponsor of his legislation, which, I 
believe, has the support of the administration.
    I would like to kind of condense the remarks I had intended 
to deliver here today, but simply make the point that there is 
a real problem in our system of unemployment insurance. The 
safety net is badly tattered and there are many holes that the 
public is largely unaware of. I think we need to move to 
address that.
    Second of all, the time to act is now. The fact that we are 
in a period of comparatively low unemployment and comparatively 
low utilization of the program, means that it is a perfect time 
to try to address this problem because of cost factors. We need 
to move now, not when we are next in a recession.
    And, third, I want to caution the Subcommittee against the 
dangers of vulcanizing [ph] unemployment insurance in America. 
I believe we need to have a strong national system of 
unemployment insurance that can guarantee that people can 
receive like treatment in states across the country and that 
states will have a comparable fiscal capacity to deal with 
problems.
    When I began to deal with this issue, I was a young staffer 
working for the State Senate Labor Committee in Pennsylvania 
and our experience was that Pennsylvania was going afresh into 
a recession. And, in fact, our state had been plagued with high 
employment for a long period of time. I fear that if we tamper 
with the Federal nature of the unemployment insurance system, 
we run the risk of putting states who had--go through longer 
spells of unemployment at a comparative disadvantage dealing 
with their problem because they are forced to raise taxes and 
ultimately make themselves a less attractive place for 
investment.
    Lake last year, in addition to the legislation that I have 
cosponsored with Mr. Levin, I introduced legislation designed 
to empower states to meet the needs of the long-term 
unemployed. The current unemployment insurance system was 
created to help states combat short-term unemployment. 
Unfortunately, workers who are laid off from their jobs now are 
less likely to return to their previous jobs as in the past, 
even in the situation where we are running and it--through a 
period of extended growth.
    Unemployment is hard enough on families without the worry 
that benefits will not be available because of the structure of 
the system. H.R. 3167, the legislation which I have introduced, 
will make several important changes to the current system.
    One, it will make it easier for states to provide extended 
unemployment benefits to workers who have been unemployed for 
long periods by broadening the trigger states can use to access 
benefits.
    Research has shown that the combination of the reduction in 
the Insured Unemployment Rate and the increase in the trigger 
level during the recession of the early `nineties, resulted in 
the failure of the Extended Benefits program to trigger on as 
unemployment continued to rise.
    As a result, Congress found it necessary to pass a series 
of emergency extensions of UC benefits. Put simply, no state 
was able to tap into Extended Benefits during the most recent 
recession. THat is a signal that the system is broken.
    Two, my legislation would encourage states to maintain 
sufficient unemployment trust fund balances to cover the needs 
of unemployed workers in the event of a recession. States that 
maintain adequate reserves, based on their own experience, to 
cover expenses in future recessions would receive slightly 
increased interest earnings on the part of their trust fund; 
states that fall short would receive slightly reduced interest 
earnings. This would provide an incentive for states to be good 
trustees of the system.
    Third, it would allow interest-free cash-flow Federal loans 
only for states that have sufficient trust fund reserves to 
last through a future recession.
    Fourth, it would allow states to collect the Federal share 
of unemployment insurance taxes from employers, allowing 
employers to fill out one form and write one check, not two, 
one of the benefits attributed to some of the devolution plans 
that this Subcommittee will also consider.
    It would also, fifth, require states to distribute 
information packets explaining unemployment insurance 
eligibility conditions to unemployed individuals.
    All of these provisions are based on recommendations from 
the Advisory Counsel on Unemployment Compensation. The findings 
from the Advisory Counsel, which was established in 1991, have 
been out there for a number of years and my legislation freely 
was modeled on them. I--the process of drafting H.R. 3167 
allowed me to utilize my experience when considering the 
effects each recommendation would have on the unemployment 
insurance system.
    And, finally, Madam Chair, I would also hope that the 
Subcommittee would consider the pernicious effects of the 
current Tax Code on the unemployment insurance system. 
Specifically for the--we now, unlike in the early eighties, tax 
unemployment insurance benefits as income. This has put many 
people who go through an extended period of unemployment and 
collecting benefits at a big disadvantage in the following year 
when they are forced to pay taxes. This is the cruelest tax of 
all.
    The tax on Unemployment Compensation kicks workers when 
they are down. Unemployment benefits are intended to stabilize 
the income of individuals and families in the face of layoffs. 
Yet someone who experiences lengthy unemployment, a situation 
that depletes the financial reserves of most middle class 
families, will face a large, and usually unexpected, tax 
liability the next year. That is unfair and I would hope we 
would move to address that at some point in the future.
    I thank you for the opportunity to testify and for the fact 
that you have been willing to take the Subcommittee and focus 
on this very important issue in this important system.
    [The prepared statement follows:]

            STATEMENT OF HON. PHILIP S. ENGLISH, 
 A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA

    Madame Chairwoman and fellow Members of the Subcommittee, I 
want to thank you for holding this important hearing and for 
allowing me to address my colleagues and everyone in attendance 
today on unemployment reform. As most of you may know, before 
being elected to Congress, I was the Research Director for the 
Senate of Pennsylvania Labor and Industry Committee. During my 
tenure, I dealt with many of the issues being discussed today 
and I can tell you from my own hands-on experience that the 
current unemployment insurance (UI) system is badly in need of 
reform. States are not equipped to tackle unemployment as we 
begin the new millennium with a UI system that has changed very 
little since its inception and cannot deal effectively with the 
changing nature of unemployment. I will discuss several changes 
to the system I am proposing as well as the unfair taxation of 
benefits during my testimony today.
    Late last year, I introduced legislation designed to 
empower states to meet the needs of the long term unemployed. 
The current unemployment insurance system was created to help 
states combat short-term unemployment. Unfortunately, workers 
who are laid off from their jobs now are less likely to return 
to their previous jobs as in the past--and long-term 
unemployment is increasing. The current system cannot 
adequately address long-term unemployment.
    Unemployment is hard enough on families, without the worry 
that benefits will not be available because of the arcane 
structure of the system. H.R. 3167, the legislation which I 
have introduced will make several important changes to the 
current system:
    1.) Make it easier for states to provide extended 
unemployment benefits to workers who have been unemployed for 
long periods by broadening the trigger states can use to access 
benefits.
    Research has shown that the combination of the reduction in 
the Insured Unemployment Rate and the increase in the Trigger 
level during the recession of the 1980's resulted in the 
failure of the Extended Benefits program to trigger ``on'' as 
unemployment continued to rise. As a result, Congress found it 
necessary to pass a series of emergency extensions of UI 
benefits. Put simply, no state was able to tap into Extended 
Benefits during the most recent recession. Therefore, it is 
absolutely necessary to reform the program prior to the onset 
of the next recession. Emergency extensions of benefits are a 
Jerry-Built policy prescription neither well-timed nor well-
targeted.
    2.) Encourage states to maintain sufficient unemployment 
trust fund balances to cover the needs of unemployed workers in 
the event of a recession. States that maintain adequate 
reserves (based on their own experience) to cover expenses in 
future recessions would receive slightly increased interest 
earnings on part of their trust funds; states that fall short 
would receive slightly reduced interest earnings.
    3.) Allow interest-free, cash-flow federal loans only for 
states that have sufficient trust fund reserves to last through 
a future recession.
    4.) Allow states to collect the federal share of 
unemployment insurance taxes from employers, allowing employers 
to fill out one form and write one check, not two.
    5.) Require states to distribute information packets 
explaining unemployment insurance eligibility conditions to 
unemployed individuals.
    All of these provisions are based on the Advisory Council 
on Unemployment Compensation's Collected Findings and 
Recommendations for 1994-1996. As most of you know, the 
Advisory Council was established under the Emergency 
Unemployment Compensation Act of 1991. That law instructs the 
Council to evaluate the unemployment compensation program and 
make recommendations for improvement. The process of drafting 
H.R. 3167 allowed me to utilize my experience when considering 
the effects each recommendation would have on the UI system. I 
have concluded that if the recommendation were enacted into 
law, as I propose in H.R. 3167, states (like Pennsylvania) 
would have the tools to assist workers faced with the long-term 
unemployment.
    Another important issue I would like to address is the 
current tax on unemployment compensation (UC) benefits. Before 
1979, UC benefits were excluded from inclusion in income tax 
purposes. UC benefits are currently fully subject to tax. This 
tax treatment, in place since 1987, puts UC benefits on par 
with wages and other ordinary income in regard to income 
taxation. Last year, I introduced legislation, H.R. 3169, the 
``Unemployment Tax Repeal Act,'' to gain exclude UC benefits 
from inclusion in gross income for tax purposes. The pre-1979 
exclusion was upheld by Internal Revenue Service rulings based 
on three arguments: 1.) the law did not explicitly require 
taxation of UC, 2.) the benefits were viewed as part of the 
social welfare system and not regarded as wages, and 3.) 
taxation would undercut UC's income support objectives. I feel 
the final justification is particularly true. The UC tax is not 
a tax on income; it is a tax on benefits--benefits received 
during one of the most difficult times in a person's life. The 
UC tax hurts the economic security of workers throughout 
America. Our system should be structured to provide benefits to 
taxpayers, not dump penalties on the unemployed.
    Madame Chairwoman I have talked to literally dozens of 
people in Western Pennsylvania who have collected unemployment 
benefits--and then paid taxes on the benefits as normal income. 
Their experiences highlight now grossly unfair tax is.
    The tax on unemployment compensation kicks workers when 
they are down. Unemployment benefits are intended to stabilize 
the income of individuals and families in the face of layoffs. 
Yet someone who experiences lengthy unemployment--a situation 
which depletes the financial reserves of most middle class 
families--will face a large (and usually unexpected) tax 
liability the next year. For many who have struggled to survive 
a layoff, this tax bill is the last straw.
    Simply allowing tax withholding on these benefits is no 
solution: it merely depletes the value of compensation that is 
already merely adequate. I would argue that however this tax is 
administered, it is fundamentally inequitable and perversely 
burdensome to a beleaguered middle class.
    Madame Chairwoman, I will conclude by emphasizing my strong 
support for reforming our unemployment system. It is my hope 
that our Committee will give its strongest consideration to 
developing legislation that will encompass may of the 
suggestions heard here today. Following through on these 
recommendations will result in a more manageable system and a 
more secure U.S. workforce.
    Thank you for the opportunity to testify today.

                                

    Chairman Johnson. Thank you. I appreciate you both 
providing us with a very thoughtful introduction to this 
hearing. And I am going to yield to Mr. McCrery to question 
first since we are short of time.
    Mr. McCrery. Thank you, Madam Chairman. Gentlemen, thank 
you for your testimony today and for your thoughtfulness in 
looking at our unemployment insurance system and the system of 
benefits for the unemployed. And you bring up some very good 
questions that we ought to take a look at.
    However, I am puzzled by your reluctance to promote a 
repeal of the .2 percent surtax. The point--the revenue from 
the .2 percent surtax is overflowing. It is causing our cups, 
our various funds, to overflow and we have continually jiggered 
the caps and created other funds that they could--excesses 
could flow into. It is a really bizarre, almost Byzantine--here 
is a chart showing all the funds that we now let over excess 
funds flow into.
    And really, the only reason we have been doing that is not 
for the benefit of the unemployed. It is for the--it has been 
for the benefit of the deficit. It was to hide the deficit. It 
was just to bring revenues into the Federal Government that 
mask the true size of our deficit. And now that we don't have a 
deficit, how can you justify not promoting, in your bills or in 
any bill addressing the UI system, repealing this burdensome, 
unnecessary tax on employers?
    Mr. Levin. Go ahead.
    Mr. English. I may have a different answer than some others 
might. My opposition to it at this stage is purely tactical 
rather than philosophical. I would like to see us deal with all 
of the problems in the UC system, or, at least, look for ways 
of improving the UC system overall. As part of doing that, I am 
perfectly willing to entertain the repeal of the .2 percent 
surtax. I think your criticism of the surtax has considerable 
merit.
    My concern is that, in the process of going forward to 
repeal it, we not also forget some of the other things that 
need to be fixed in the UC system, like the Extended Benefits 
Program. I would point out to the gentleman that fixing the 
Extended Benefits Program would be a very inexpensive thing to 
do in the big picture. And if we were to do that and several 
other reforms and also repeal the .2 percent surtax, you would 
see it as a win-win for workers and for small business. And I 
thank the chair----
    Mr. McCrery. Thank you.
    Mr. Levin. And, Mr. McCrery, my response is not so 
different. I think it is a mistake to take one piece of this. 
We should look at the larger picture. And I think the Advisory 
Committee--or there is a working group that is doing just that. 
And I would think we should encourage it.
    I looked at the figures for various states and it is true 
that there is a major discrepancy between what is paid in and 
what is paid out in administrative costs. For example--and the 
Governors will be here for Arizona--and I didn't copy down the 
year--45 million paid--no, 112 million paid in and 45 million 
paid back. But the percentage of unemployed who receive 
insurance in Arizona is 21 percent.
    And I mention your state because I think you will be 
unsatisfied--dissatisfied with the figure. You paid in with 
both figures 92 million and received back 38 in administrative. 
But your--the rate of coverage in Louisiana is 26 percent.
    Now, there is something wrong with the system that leaves 
only a fifth or a quarter coverage. So, in a word, I favor 
looking at all of these issues, the Extended Benefit Program, 
the coverage problem, as well as the two percent--the .2 
percent.
    Mr. McCrery. Well, Mr. Levin, I think you make a legitimate 
point in urging us to look at the reasons for such a low rate 
of coverage across the board. However, imagine what the states 
would have to be doing if their workloads were any higher than 
they are in terms of their administrative expenses, which they 
are being shorted on and have been shorted on for the last 
number of years. So----
    Mr. Levin. But they would be receiving more in 
administrative costs if they had a higher rate of coverage.
    Mr. McCrery. Well, it--I mean, I am not sure of that. That 
the----
    Mr. Levin. I see. I see.
    Mr. McCrery.--the appropriate is up to the Congress. And we 
have been the ones that have been shorting that appropriation 
year after year, making the formulas work to fit the 
appropriation. So I am not sure that you are accurate in saying 
that states would necessarily get more. And that is why in my 
bill I make it a mandatory spending item and then the states 
could draw down what they need for their administrative 
expenses.
    So I think that is a superior approach to this method that 
we have been using for a number of years that have shorted the 
states. So I don't mind looking at the rationale for the low 
rate of coverage. But I would urge you to look at the fact that 
we have been short-changing the states for years now on their 
administrative costs. And the tax was designed to cover those 
and we have not been fulfilling the promise of that tax.
    Mr. Levin. Could I just add briefly? The fact there is a 
surplus is also a reason for us to go to the Appropriations 
Committee and urge that they provide adequate funding for 
administrative costs.
    Mr. McCrery. Well, in my bill we wouldn't have to do that. 
They would be relieved of that burden. Thank you, Madam 
Chairman.
    Chairman Johnson. Thank you. Mr. Cardin.
    Mr. Cardin. I thank you, Madam Chair. Let me agree with Mr. 
McCrery in regards that the--our budget systems shouldn't force 
us into a conclusion. We should have--we should do what is the 
right policy here. And I agree with the essence of your point 
that we have done it--we have kept the FUTA tax in place 
because of the budget considerations, not because of the need 
for the funds, and it should be considered on its own merits.
    Having said that, let me just concur in the comments of 
both Mr. Levin and Mr. English. I thought both of you made 
very, very effective points which I concur in. And I think it 
was very important that we hold these hearings now to try to 
look at our unemployment insurance system and strengthen it. 
And the points that both of you raised about having a fair way 
to compensate the states for their administrative costs and to 
have incentives in the program to strengthen the solvency of 
the state funds are things that we need certainly to improve 
upon.
    One concern I have is that we are also looking at other 
fundamental changes. Mr. McCrery has some legislation that 
would devolve a good part of this to the states. I guess one of 
my concerns is that we are enjoying a very robust economy right 
now, very low unemployment rates. We are all very optimistic. 
But I remember a special session in the State of Maryland when 
we had a slight recession that nearly caused panic in our 
states about providing unemployment extended benefits to--and 
emergency benefits to our workers.
    So I am concerned that we might be lulled into a sense of 
security here, that we can make changes and allow the states to 
have more control over their own unemployment system, not 
recognizing the fact that when a recession hits, it doesn't hit 
evenly among all states. Certain sectors are--certain 
geographical areas are hit much more--have much more difficult 
problems than others. And that is our responsibility to make 
sure that we have a national unemployment system--unemployment 
insurance system that protects those regions, those areas, and 
helps them deal with the problems of a recession so they don't 
have to impose new taxes when it is the worst time in the world 
to impose those taxes.
    I just appreciate your testimony. Do you want to respond to 
that----
    Mr. Levin. Mr. Cardin, just briefly, I could not agree with 
you more. The recessions in the 'eighties, and it was also true 
in the 'nineties, hit regions--it was not national in its 
immediate impact. The largest newspaper sales in Michigan in 
the 'eighties was the newspaper from Texas, people looking for 
jobs outside of the State of Michigan.
    And I think we need to be sure that we have a national 
Unemployment Compensation system. Otherwise, we are going to 
rely on states coming here and regions coming here asking for 
Federal funds in massive amounts. That is what happened in the 
'eighties when we did not have an effective trigger on extended 
benefits. So we went through the difficult process of trying to 
convince people from one region, people all over the country, 
to essentially chip in.
    And then when the recession moved from the midwest, 
Pennsylvania, Michigan, and Ohio were terribly hit. Then down 
to the southwest. Then that process started all over again. And 
unemployed people move from place to place. We need a national 
system. And the problem with devolution proposals is that they 
fly in the face of the fact that unemployment can be, and 
almost always is, ultimately a national problem that requires 
some action on a community--an American community basis.
    Mr. Cardin. Another issue that would concern me is that the 
Extended Benefit Program has a funding--national funding source 
for part of the cost. And if we repeal that funding source, it 
wouldn't take too long in a recession for us to exhaust our 
funds nationally and have a difficult time meeting any Federal 
responsibility for extended benefits.
    Mr. Levin. Absolutely.
    Mr. Cardin. Thank you, Madam Chair.
    Chairman Johnson. I want to put on the record--I was going 
to do this in my opening statement, but I think it is really 
important to do it right now. Unemployment Compensation has 
been seen in Congress by members of both parties and, I 
believe, by the administration as a very partisan issue. I 
think your testimony demonstrates, and Mr. McCrery's bill 
demonstrates, that it is not a partisan issue. We have a system 
that was built for an entirely different era, when people were 
to be sustained until they were recalled to their jobs.
    And as we have changed our work force reinvestment, et al., 
our job training moneys and everything, I think we should be 
looking at how do we fix this system so it better serves the 
people?
    Sandy and I were both on the Committee when we struggled 
through those periods in the eighties. No matter what we did, 
we never were able to trigger and target in a way that New 
Britain, Connecticut benefited because we made bearings and 
machine tools and we had very high unemployment. The state 
generally didn't. And no matter what we did in Washington, we 
couldn't fix it.
    So I do think we need to look at the issues that you have 
pointed to. I am very pleased with the specificity of the ideas 
in both of your legislative initiative and I am very grateful 
for Mr. McCrery's hard work on this issue.
    The states, as you will hear later, need money because they 
are focused now on re-employment. They are not focused on 
sustaining people until they are rehired by their former 
employer. And they are doing a phenomenally better job than 
they were in the `eighties. And so they need some of this money 
for that.
    And we do have a system in which some states have 122 
months worth of benefits stored up; others only seven. So not 
only should we be concerned about the covered population, but 
we ought to be concerned about states that are stockpiling 
dollars they need to improve the quality of their program and 
to move people into jobs. So there are a lot of issues here and 
you have raised a number of them.
    And I would just hope that business and organized labor 
could lay aside the belief that this is somehow a divisive 
issue. It is as important to people's lives as fuel assistance, 
you know. And we ought to look at it in that way. Every bill 
that has come out of this Committee has been nonpartisan. And I 
personally have not taken a stand on any of the legislation. 
And I know, from working with Members of the Committee, that 
they are very substantively oriented.
    And I would just hope that we would all work together in 
this realm to see what we could do about the problems that are 
plaguing this system and the bizarre nature of the tax revenue 
and how it is used because it is really bizarre.
    Let me just conclude. We do have Governor Hull here. But I 
want to throw out for the two of you, and I want to throw out 
for the audience, you know, Unemployment Compensation doesn't 
require you to do anything but receive. If you are on Welfare, 
you are required to search for a job. You are required to 
participate in job training.
    Are we in an era any more where we can allow people to be 
unemployed, receive benefits, and not participate in developing 
computer skills and thinking about their career and changing 
their jobs and lives? Don't answer, because I don't want you on 
the record on this one. But I think we have to think about 
those things. And I think everyone in this room has to think 
about those things because, in the end, unemployment systems 
are to create re-employment. They are not a permanent support 
system.
    Mr. Levin. Could I just say quickly? As you know, the 
states, I think, in every case, have a looking-for-work 
requirement.
    Chairman Johnson. It doesn't work, though, Sandy. It 
doesn't work.
    Mr. Levin. Well, but that is--but there is that 
requirement. But, second, I believe fervently that we need to 
look at our training and retraining programs and our 
Unemployment Comp programs and figure out how to mesh them. We 
do not intervene early enough in this country, compared to----
    Chairman Johnson. Right.
    Mr. Levin.--Canada and many other places----
    Chairman Johnson. That is all--that is only----
    Mr. Levin.--where people are going to be laid off.
    Mr. Cardin. Would you yield just for one moment?
    Chairman Johnson. That is the only issue I am raising. Yes, 
sir.
    Mr. Cardin. And I appreciate the way that you phrased the 
dilemma. I must tell you, I have met many people who collect 
unemployment insurance who would love to have a job. It depends 
on the economy. It depends on the circumstances within the 
community. And there are people, I am sure, who are collecting 
unemployment insurance who could be working.
    But, by and large, the unemployment--and the people who are 
insured and are collecting unemployment insurance, want work. 
The problem is that their company has downsized or industry has 
left or their skills are no longer needed in the work force. 
And I agree with you, one of our focuses need to be to make 
sure that people are trained for the opportunities that are 
there, which is part of our system, and we need to make sure 
this is properly coordinated with any change we make in the 
unemployment insurance system. And I appreciate you yielding.
    Chairman Johnson. The reason I wanted to bring it up is, I 
think when you rethink a program that was established as long 
ago as our Unemployment Compensation program was established, 
and you look at the extraordinary pace of change in our economy 
now, the likelihood that that pace is going to accelerate, not 
diminish, that the nature of jobs people will be moving to will 
change more rapidly, not less rapidly, I think if we are going 
to look at how we deal with--how we provide people with 
security during periods of job change, we need to think of it 
at every level.
    And so I am happy to have your input and I want you to help 
us raise the questions at the biggest level. My goal, 
ultimately, is to address the personal security needs of people 
who lose their job through no fault of their own. That was 
always the purpose of the Unemployment Compensation system and 
it is an extraordinarily important purpose. And if we don't 
meet it better, it is not just the individual workers who will 
be the worse off, it will be the nation, because we are going 
to increasingly have a labor shortage as we move into the 
future.
    So it is incumbent upon us to develop a system that far 
better supports individual development of individual resources 
to create one's own best opportunity in life. And so I 
welcome----
    Mr. Levin. Thank you.
    Chairman Johnson.--this opportunity and I thank Mr. McCrery 
for his hard work to make this hearing possible. I would like 
to now welcome Governor Jane Hull of the great State of 
Arizona. I regret that at the last Bob Taft, of Ohio, was 
unable to join us and I very much appreciate, Governor Hull, 
your willingness to be here with us. This is an extremely 
important issue that states have a great stake in. And so we 
thank you for being with us.

  STATEMENT OF HON. JANE DEE HULL, GOVERNOR, STATE OF ARIZONA

    Governor Hull. Good afternoon, Chairman Johnson, and I am 
glad to be here, Mr. Cardin.
    Chairman Johnson. It is a tradition that your total 
statement will be inserted in the record and you could either 
adhere to it or not. But we welcome you.
    Governor Hull. Thank you.
    Chairman Johnson. Oh. Sorry.
    Governor Hull. Mr. Cardin----
    Chairman Johnson. Wait a minute. Excuse me. One moment, 
please. I didn't realize we had been joined----
    Governor Hull. Yes. We have got company.
    Chairman Johnson.--by an esteemed Member of the Ways and 
Means Committee from your very own state--Mr. Hayworth.
    Mr. Hayworth. Madam Chairman, thank you. And I shall not 
force the Governor to interrupt her testimony other than to 
thank her for coming all the way from our beautiful state, 
where spring training is starting, to be here in Washington and 
the National Governors' Association and also to spend time here 
in front of the Subcommittee. So on behalf of the entire Ways 
and Means Committee, Governor, thank you for coming and we look 
forward to your testimony. And, thank you, Madam Chairman.
    Chairman Johnson. I thank you.
    Governor Hull. Thank you.
    Chairman Johnson. Good to see you.
    Governor Hull. And, again, it is nice to be here and I 
appreciate your taking time to hear my testimony. As you have 
noted, Governor Taft was called back to Ohio, so you will get 
briefer testimony than if you had had both of us. I am sure 
some days it is probably a good idea for you.
    I am Governor Jane Dee Hull from the State of Arizona. And, 
again, I do truly appreciate the opportunity to appear before 
you. This issue, Mr. McCrery's bill, is of great significance 
to the economic future of the State of Arizona, as well as many 
other states. What I am representing is a shared bipartisan 
position that has been adopted by the Western Governors' 
Association and, today, by the Southern Governors' Association. 
The issue is reforming the National Employment Security System 
and repealing the Federal Unemployment Tax Act (FUTA) surtax 
begun in 1976.
    My state, like many others, is enjoying unbelievable and 
unprecedented economic growth. The prosperity has been aided by 
sound state and national policy decisions. We are going to 
continue to enjoy those benefits. We have got record increases 
in education spending and in our other priorities. We have the 
highest, depending on the day--between Nevada and Arizona, one 
of us is first in growth of population. We have low 
unemployment. We have a greatly increased per capita income, 
which, as Arizona is a low income state, we are very proud of 
that.
    We have to continue to make wise decisions based on this 
new economy that the Governors have all just spent so much time 
talking about and all Governors spend a lot of time talking 
about. The Western Governors and the Southern Governors, as of 
this morning, have joined me to support the repeal of the FUTA 
surtax and reform of the Employment Security System. It is 
administered, as you know, in partnership between the state and 
the Federal Government.
    As Governors, we share the challenge to maintain a solid, 
economic foundation upon which to build future prosperity. 
Members of the Subcommittee, I know, from your comments, Madam 
Chairman, all share the same concern. In Arizona, we minimize 
government interference in our economy. We maximize the 
effectiveness of the state's limited role by fostering 
reasonable growth and quality job creation. We cannot address 
these issues without your help.
    The reason I am here supporting legislation repealing the 
temporary FUTA surtax and to urge you to return these funds to 
the businesses in each of our states. Arizona business leaders, 
both small and large, have one clear top priority--work force 
development. We need to identify and supply a well-educated and 
a skilled work force.
    Washington is collecting a surtax that is being used to 
offset the Federal surplus, that $1.5 billion is something that 
if were turned to the states, we believe that we could provide 
better employment services, and also reducing the financial 
burden on businesses who employ our people.
    The money is being doled out to the state in ever 
decreasing amounts. Arizona right now is getting about 45 cents 
on the dollar. We are in the lower third of those states. And, 
again, we could do better with the return of those dollars. It 
is making it increasingly difficult for us to administer the 
unemployment services that we believe we need to be 
administering in order to get people into the work force.
    We share the commitment to use these funds in the 
administration of employment services to truly help our 
citizens who are seeking better jobs, seeking re-employment, or 
who are seeking to enter the work force for the first time.
    Likewise, you hear, from the same employers, who are 
begging for quality employees, so they can meet the 
opportunities and demands that our growing economy is creating 
for them. The funds are being collected by the Federal 
Government today, but they are not being used to address the 
need.
    As you well know, the temporary FUTA tax--surtax is padding 
the Federal budget surplus. It is not helping us take advantage 
of the potentially unique opportunity to get people into 
quality jobs that they need for themselves and for their 
families.
    Under the reform proposal that you are considering, 
Representative McCrery's bill, my state could see an increase 
of $36 million a year in funds available for quality jobs, to 
help our employers, and to serve the unemployed.
    We have worked out an innovative programs--several 
innovative programs in Arizona that meet the employment needs 
of our private sector as well as the needs of those who need to 
find jobs. It will be another chance for you to devolve to the 
states the opportunity of helping our people join the work 
force of tomorrow. It would allow Arizona to participate more 
effectively in the employment services programs with the 
Federal Government.
    The effectiveness would also extend the benefits to include 
utilizing a portion of the repealed temporary surtax to better 
ensure the quality of jobs in my state.
    I would respectfully ask that you would have included in 
the record the comments of Governor Taft too--as he has been 
called back to Ohio, the WGA, the Western Governors' 
Association resolution of yesterday, and the Southern 
Governors' Association of today. And I know that you do have my 
comments which I have tried to greatly shorten knowing that 
your time is limited and that you are all very capable of 
reading them yourselves. With that, I want to thank all of you 
for the opportunity to appear before the Subcommittee today on 
this issue of importance to the workers, citizens and employers 
in the State of Arizona. I welcome the chance to work with you 
to help move this proposal through Congress.
    [The prepared statement follows:]

Statement of Hon. Jane Dee Hull, Governor, State of Arizona

    Good afternoon Chairman Johnson and members of the 
Subcommittee. I am Jane Dee Hull, Governor of the State of 
Arizona. I appreciate the opportunity to appear before the 
Subcommittee today is discuss an issue of significance to the 
economic future of my state. I also come before you to present 
the shared, bi-partisan position adopted by the Western 
Governors Association in support of the issue under 
consideration here today--reforming the National Employment 
Security System and repealing the Federal Unemployment Tax Act 
(FUTA) surtax.
    The State of Arizona, like many other states across the 
country, has been enjoying unprecedented economic growth over 
the past decade. In addition to the hard work and ingenuity of 
the American people, I believe this prosperity has been aided 
by the sound policy decisions of elected leaders at the state 
and national level. If we are going to continue to enjoy the 
benefits of this success, which in my state has led to record 
increases in education spending and other important public 
priorities, then we must continue to make wise decisions on 
those matters impacting our economy.
    That is why my fellow Western Governors joined me several 
weeks ago in adopting a policy position supporting the repeal 
of the FUTA surtax and reform of the employment security system 
administered in partnership between the state and federal 
governments. (A copy of the Western Governors Association 
Resolution 99-029 on Employments Security is attached.) As 
Governors, we share of ensuring that we maintain a solid 
economic foundation upon which to build further prosperity and 
opportunity in each of our states in the new century ahead of 
us. I know the members of the Subcommittee have the same 
concern.
    In Arizona, we are building that foundation with a common 
commitment among state leaders to minimize the level of 
government interference in our economy while maximizing the 
effectiveness of the state's limited role by developing sound 
policies that foster reasonable growth and quality job 
creation. My fellow Western Governors share this view, and we 
have spent considerable time discussing how we can sustain the 
prosperity in our region, which has even outpaced the nation's 
success in many areas.
    Clearly we cannot address these challenges without your 
help. It is for the reason that I am here to ask for your 
support of legislation repealing the ``temporary'' FUTA surtax 
and urge you to return these funds to the businesses in the 
states where they have been collected. In anticipation of a 
possible repeal, there has been considerable discussion of how 
these funds might then be best used--by the businesses and the 
states--to achieve the economic policy objectives I mentioned 
earlier.
    Specifically, through regular meetings with Arizona 
business leaders, both small and large, I have heard one clear 
message about their top priority. Without exception, the number 
one issue facing Arizona businesses today is workforce 
development. Like many states, Arizona needs to meet the 
challenge of helping identify and supply a well-educated and 
skilled workforce.
    Frankly, we are constrained in our ability to address this 
challenge when a fund in Washington is continuing to grow by 
collecting a surtax that is padding the federal surplus, but 
not helping provide employment services or reducing the 
financial burden on the businesses that want to employ our 
citizens. However, the money is being doled out to the states 
in ever-decreasing amounts that make the employment services of 
states increasingly difficult to maintain at a time when these 
efforts could be their most effective by getting more of our 
people into the workforce.
    Let me restate that point, perhaps a little more directly. 
I know you share the commitment of Governors, like myself, who 
want to use these funds and the administration of employment 
services to truly help our citizens who are seeking better 
jobs, seeking reemployment, or who are seeking to enter the 
workforce for the first time. Likewise, you hear from the same 
employers who are begging for quality employees so they can 
meet the opportunities and demands that our growing economy is 
creating for them.
    The funds to meet these vital public and business needs are 
being collected by the federal government today, but they are 
not being used to address the needs. As you well know, the 
``temporary'' FUTA surtax is flowing into one of the many 
federal trust funds that are padding the federal budget 
surplus. The surtax is not helping us take advantage of the 
important, and potentially unique, opportunity to sustain our 
prosperity and ensure that our people are getting into the 
quality into the quality jobs they need for themselves and 
their families.
    More specifically, under the reform proposal you are 
considering in Representative McCrery's bill, my state could 
see an increase of $18 million in a year in funds available to 
help provide quality jobs, help our employers and serve the 
unemployed. At the same time employers in my state would see a 
tax reduction of $28 million--a portion of which they would 
like to commit to further workforce development. Finally, even 
without the FUTA surtax, the trust fund would continue to 
collect $4.23 billion a year for the administration of these 
services.
    Should you succeed in returning these funds to the states 
and businesses paying bills surtax, we have worked out an 
innovative program in Arizona that meets the employment needs 
of both the public and private sector. As with other programs 
and policies that the Congress has devolved to the states, this 
would allow Arizona to participate in a more effective 
employment services program with the federal government.
    Again, thank you for the opportunity to appear before the 
Subcommittee today on this issue of importance to the 
workforce, citizens and employers in the State of Arizona. I 
welcome the change to work with you to help move this proposal 
through Congress.

                                

    Chairman Johnson. Yield to Mr. McCrery of Louisiana to 
question first.
    Governor Hull. Yes.
    Mr. McCrery. Thank you, Madam Chair. And, Governor Hull, 
thank you for coming to Washington and sharing with us your 
views on the state of affairs in our unemployment insurance 
system. And your testimony speaks for itself, but I want to 
make--let you make it clear that you and your Western 
Governors' Association are supporting the bill that I have 
introduced on the House side, 3174. Is that right?
    Governor Hull. Yes. Absolutely. The Western Governors--and 
this is a, again, bipartisan group--have all endorsed the 
proposal strongly as have the Southern Governors.
    Mr. McCrery. Now, while it is commendable, in my view, that 
Governors are concerned about the employer community in their 
states and want to cut taxes--and I think certainly it is a tax 
that was imposed for a good reason, but that reason has gone 
away and so we ought to repeal that tax, as you have stated--
but certainly another factor in your support of my legislation 
is the ever-increasing demand on states to assist in finding 
people jobs.
    With Welfare reform, with recent Federal legislation, it is 
more and more incumbent on the states to provide services to 
people to find jobs, to get training, get education, to get 
into worthwhile jobs. Is that a fair statement?
    Governor Hull. Absolutely. And I appreciate it.
    Mr. McCrery. And right now, you are basically being 
shortchanged. Are you not?
    Governor Hull. Absolutely. We are.
    Mr. McCrery. By the Federal Government.
    Governor Hull. And as--I think as you have looked at the 
list that we have looked at, say, we are at 45 cents, we can't 
provide the services that we need and want to be able to 
provide. It would be just a boon to our economy to be able to 
do a better job with job services.
    Mr. McCrery. And when you say you are getting 45 cents, 
what you are saying is that you are sending $1 to Washington--
--
    Governor Hull. That is right.
    Mr. McCrery.--in the form of payroll taxes that were 
designed to provide the administrative expenses to states for 
administering the unemployment insurance company--unemployment 
insurance program and you are only getting 45 cents out of that 
dollar back for the purposes for which the tax was imposed.
    Governor Hull. Yes. Absolutely. If they--when you get the 
Governors together we talk about whether we are donor states or 
donee states. And I am very aware, and you have compensated for 
it in your legislation, the fact that there are smaller states 
that are doing--are getting more than that and appropriately 
should be. I am----
    Mr. McCrery. Right.
    Governor Hull. I am aware of that.
    Mr. McCrery. Yeah. And that is taken care of in my 
legislation. Now, to be fair, I want to point out that of that 
federally imposed payroll tax that is collected from employers, 
sent to Washington, and then sent back to the states, actually 
20 percent of that is intended to go into the Extended Benefits 
Program. So really only 80 percent of that payroll tax is, on 
paper, designed to go back to the states for administrative 
expenses.
    So I want to make that clear. Where--it is accurate to say 
you are only getting 45 cents back of every dollar you send, 
but perhaps it is more accurate to say you are getting maybe 65 
percent of what you were intended to get when the tax was 
imposed. Either way, you are getting shortchanged and you are 
having to come up, are you not, with funds from other sources 
to cover your expenses in administering this program?
    Governor Hull. Yes. We have to juggle--and, you know, 
again, I think we could do a much better job if it was 
adequately funded.
    Mr. McCrery. Well, again, thank you very much for coming 
here on behalf of Arizona and also bringing us the news of the 
Western Governors' Association endorsement of my legislation. 
Thank you very much.
    Governor Hull. Uh-huh.
    Chairman Johnson. Mr. Cardin.
    Mr. Cardin. Thank you, Madam Chair. And, Governor, it is a 
real pleasure to have you before our Committee. Let me start 
off by saying that I do have certain concerns about this 
legislation. But let me ask you a specific question. If I 
understand H.R. 3174, it would allow the states to collect and 
keep most of the Federal FUTA tax, 96 percent of it.
    My question is, why should we have a Federal tax then? 
Wouldn't it be just more efficient for the--to allow the states 
to impose whatever tax they want to impose which they currently 
can do? Why have a Federal unemployment tax?
    Governor Hull. Madam Chairman, and, Mr. Cardin, that is the 
way you all have designed it and that is the way we accepted 
it. And I think you are looking at kind of reforming the whole 
system. I believe there is certainly a place for you and that 
it should not be entirely our system. But I think what we would 
like to do is--as things are devolving to the states, that we 
would like to be able to do a better job of running our share 
of the program.
    Let me just comment, too, because I realize that when you 
get into the unemployment issues, there is always the concern 
whether we are underbenefited or are we overcharged. And we 
have certainly faced that in the State of Arizona over the last 
few years. In the late 'eighties, Arizona was in a major 
recession. And I certainly--you know, we looked at those funds 
as something that we used a lot. We now have a work force that 
is largely employed.
    But we have been able in the--last couple of years ago, we 
basically, again, cut our own employers unemployment insurance 
and raised benefits too. So we have had statewide experience as 
to what we can do.
    Mr. Cardin. Yes. Now, I guess my concern is that if the 
revenues are more than you need, but we are imposing the tax, 
if we let you impose your own tax, you wouldn't have to worry 
about that. But let me--if I might say, your state has the 
distinction--this might be--I don't know how to look at it, but 
you have the distinction of having the lowest percentage of 
unemployed people who are receiving unemployment insurance--21 
percent.
    I guess my question to you is, one of the things that 
Arizona does that two-thirds of states are in a similar 
situation, is that you deny unemployment benefits to part-time 
workers. That is, people who have become qualified for 
unemployment insurance who are part-time employees, many of 
whom are women who can only work part time because of their 
family commitments. They get laid off. They are seeking part-
time employment, but they are unable to collect unemployment 
insurance because of your state's requirement that the person 
be ready for full-time employment, even though they qualified 
for their insured benefits by part-time employment. Is that 
fair?
    Governor Hull. Madam Chair, and, Mr. Cardin, we have--
again, we have a very successful unemployment program and I 
would contend, having been in the State Legislature for many 
years and being active in it, probably one of the reasons it 
has been appropriately funded and, I believe, appropriately 
benefits is because it was always a discussion between the 
employers and the employees. The legislature rarely comes in 
and changes things.
    So obviously what you are talking about is something that 
has been negotiated through state terms with employers and 
employees. And I think it is fair. I think we talk about full-
time employment and not part-time employment. And, again, you 
have to look at Arizona as a state that has much seasonal 
employment.
    Mr. Cardin. Well, I would just urge you to perhaps take 
this back to your coalition of employers and employee groups. 
We all want to be more family friendly these days and we 
certainly don't want to discriminate against a family where 
they need income, but cannot work full time because of the 
needs of their family.
    Particularly, in the times, when you were having large 
surpluses and the percentage of your unemployed population 
receiving insurance benefits is at a historic low--21 percent. 
And historically, nationwide, we have been at 50 percent or 
more.
    Governor Hull. Yes.
    Mr. Cardin. So it seems to me that you need to sort of 
evaluate what are you trying to accomplish by your unemployment 
insurance system. And I would urge you to take another look at 
that. And, Madam Chair, thank you very much for your courtesy.
    Chairman Johnson. Governor, I am going to have to leave for 
just a couple of minutes----
    Governor Hull. Okay.
    Chairman Johnson.--to testify at another Committee on 
behalf of the cleaning up of Long Island Sound, which is very 
important to my district. But just before I leave, in your 
discussion with the Governors who support this bill, did you 
discuss at all the problem of extended benefits? And do you 
think there would be opposition to retaining at the Federal 
level enough of the tax stream to fund an extended benefits 
program so that when it was triggered in, there would be money 
there to redistribute among the states? I mean, that is really 
what the Extended Benefits Program does.
    Governor Hull. Yes.
    Chairman Johnson. It redistributes money from the gross 
national product to states where there is a high unemployment 
for a temporary period. Do you think that reserving some of the 
current system to fund that kind of program would be a problem 
for the Governors?
    Governor Hull. Madam Chairman, the Governors actually did 
not discuss it. We discussed really this surtax and that was 
the extent of it. On my own side speaking for myself, no, I 
don't think it would be.
    Chairman Johnson. Uh-huh.
    Mr. McCrery. Madam----
    Chairman Johnson. Thank you. Yes. Mr. McCrery.
    Mr. McCrery. Madam Chair, if I could respond to that before 
you go so you could hear it?
    Chairman Johnson. Okay.
    Mr. McCrery. In my legislation we do preserve an Extended 
Benefits Program. There is now in the Extended Benefit Trust 
Fund--well, the cap is about $16 billion, I think. So Congress 
has decided, through legislation, that that cap, which is .5 
percent of covered wages, is sufficient to meet the needs of an 
Extended Benefit Program in a recession.
    My bill would reduce that to $14.4 billion or .25 percent 
of covered wages, whichever is higher. So I would maintain a 
very healthy balance, roughly twice what we have experienced we 
have needed in past recessions to take care of extended 
benefits. I think the legitimate point that could be made is if 
we do have a recession and we deplete that fund or even cut it 
in half, there is nothing in my bill that would replenish the 
fund. And I think that may be a shortcoming in my legislation 
and I am willing to work with other Members of the 
Subcommittee----
    Chairman Johnson. Well, thank you.
    Mr. McCrery.--the Governors to cure that. But----
    Chairman Johnson. Well, I thank you.
    Mr. McCrery.--my bill does not ignore the Extended Benefits 
Program at all.
    Chairman Johnson. No. My concern more has been the 
replenishment. And I think it is a small issue----
    Mr. McCrery. It is a legitimate point.
    Chairman Johnson.--that can be discussed in more time. And 
I would like to ask you to come take the chair while I am gone, 
Mr. McCrery, and recognize Mr. Foley of Florida.
    Mr. Foley. Thank you very much. Governor, we are honored to 
have your presence today testifying before the Committee on 
this important on this important issue, and to particularly 
have Mr. Hayworth, who is such a capable representative not 
only of your state, but, in particular, Native Americans. And 
that is an issue I would like to discuss today. And it is an 
issue, if you will, of fairness.
    Mr. Shadegg, from your delegation, has brought to light an 
issue that I wanted to explore quickly with you, if I may. As 
you know, we recognize tribal governments as sovereign nations, 
yet we also do not exempt them as we do exempt state 
governments from paying the Federal Unemployment Tax. Given the 
importance of tribes in your state, do you think this 
Subcommittee should explore providing that exemption as a 
matter of fairness?
    Governor Hull. Mr. Chairman, Mr. Foley, this was something 
that was just brought to my attention and I appreciate your 
bringing it to my attention and I appreciate the Congressman 
and my own Congressman, Mr. Shadegg, having legislation 
regarding it. Yes. As I said, I did not actually know there was 
a difference and I think it is a very good idea and I would be 
very supportive of it.
    Mr. Foley. Thank you. And I also wanted to obviously share 
the credit with Mr. Hayworth. He has, as I said earlier, and as 
a prestigious Member of the Ways and Means Committee, been a 
strong vocal advocate not only for your state, but for Native 
Americans. And many of these issues we are considering 
obviously have to be brought forward in the light of fairness.
    Governor Hull. Absolutely.
    Mr. Foley. And I think in order to make equity particularly 
as it relates to their business and their tribal issues, that 
we would like to see this. And I commend the now Chair, whose 
bill we are debating to work with myself and Mr. Shadegg to 
look at this issue and see if we can define in such a way to 
provide a provision in your bill to allow for a fairness, if 
you will. And I yield back.
    Chairman McCrery. Does any other Member of the Subcommittee 
or Member of the Full Committee have questions for the 
Governor? If not, Governor Hull, once again, thank you very 
much----
    Governor Hull. Thank you, gentlemen.
    Chairman McCrery.--for sharing your views with us and we 
would welcome you back anytime.
    Governor Hull. Thank you. I appreciate it. I will catch a 
plane back to Phoenix.
    Chairman McCrery. And now the Subcommittee would call Hon. 
Raymond J. Uhalde, Deputy Assistant Secretary, Employment and 
Training Administration, United States Department of Labor.
    Mr. Uhalde, your written testimony will be entered into the 
record without objection and you are free to summarize those 
remarks as you please in the timeframe roughly equivalent to 5 
minutes.

     STATEMENT OF HON. RAYMOND J. UHALDE, DEPUTY ASSISTANT 
    SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S. 
                      DEPARTMENT OF LABOR

    Mr. Uhalde. Thank you, Mr. Chairman, and Members of the 
Subcommittee. Thank you for the opportunity to testify on the 
unemployment insurance program. With me today is Grace Kilbane, 
who is the administrator of the Office of Work force Security.
    As this is our first time for testifying on this program 
under the leadership of the Madam Chairwoman, I am hopeful that 
today's hearing is as meaningful a step as changes we have had 
in the employment and training system because of passage on a 
bipartisan basis of the Work force Investment Act. Today's 
hearing, I hope, proves to be an important step toward 
reforming and strengthening unemployment insurance and the one-
stop Employment Service programs, known collectively as the 
employment security system. I will address the employment 
security reform initiative first.
    Extensive research by the Advisory Council on Unemployment 
Compensation, a large national dialog for reform and other 
activities, have laid the groundwork for UI/ES reform. Based on 
a large part on what we have learned, the President committed 
in the Fiscal Year 2000 budget proposal to work with our 
partners and stakeholders toward developing a comprehensive 
bipartisan legislative proposal centered on five principles--
expand eligibility for benefits, streamline filing and reduce 
employer taxes where possible, put people back to work sooner, 
combat fraud and abuse, and improve administrative funding.
    To accomplish this considerable task, a work group 
comprised of partners and stakeholders, specifically employers 
and worker representatives, state agency officials, and 
Department of Labor officials, was convened. Discussions of 
this group have been very open and creative and more than 70 
ideas for reform were addressed.
    I especially want to thank the Interstate Conference of 
Employment Security Agencies, ICESA, for organizing the work 
group and chairing the meetings. At this time, I would like to 
address some of the work group's suggestions for a 
comprehensive reform proposal organized around the five 
principles. In the interest of time, I will be brief. My 
written statement provides more detail.
    First principle, to expand eligibility, the work group 
suggests that we examine, first, fixing the Extended Benefit 
Program now in this good economy so that it can respond more 
effectively to any future economic downturns.
    Second, to expand benefits to part-time and low wage 
workers who are laid off. Employers already pay taxes on the 
wages of these workers, but in many cases they are not eligible 
for benefits.
    Third, allow victims of domestic violence, who are forced 
to flee work for safety reasons, to qualify for benefits while 
seeking new employment.
    To streamline filing and reduce employer taxes where 
possible, the work group suggests accelerating the termination 
of the 0.2 percent FUTA surcharge, and, second, streamlining 
the filing of the FUTA tax by making minor, largely technical 
changes to Federal law.
    To put people back to work sooner, we should amend the 
Social Security Act to require states to provide job search 
assistance to those identified as likely to exhaust 
unemployment benefits under state profiling systems. Even in 
this super hot economy, workers exhausting their benefits 
remain high at about 31 percent for 1999, and duration is 14\1/
2\ weeks, higher than it should be by as much as maybe \1/4\ 
weeks, according to a recent study. Jobs search assistance 
would put people back to work sooner.
    Now, also I am pleased to note that the Fiscal Year 2001 
budget continues the President's Universal Re-employment 
initiative, which aims to serve all dislocated workers in need 
of assistance. Specifically, the budget request includes $50 
million for re-employment service grants to states for 
providing re-employment services to unemployment insurance 
claimants.
    To combat fraud and abuse, the work group suggests we grant 
states access to the National Directory of New Hires for 
purposes of administering the UI program. A similar provision 
allowing state UI agencies access to the new hire database was 
included in the House passed Fathers Count bill thanks to 
Chairman Johnson's leadership on this provision.
    To improve administrative funding the work group believes 
that the administrative costs of the UI and ES programs are 
underfunded due to Federal budgetary rules and constraints. 
Underfunding of UI is affecting the program as evidenced by the 
reduction in benefit payment and appeals timeliness, by 
increases in overpayments, and decline in employer tax/wage 
reporting timeliness.
    The work group also believes the best way to arrest this 
program erosion caused by funding shortages is to move 
administrative costs to the mandatory side of the budget so 
funding better tracks workload.
    At this point, I would like to ask for the Subcommittee's 
support with the Appropriations Committee to achieve an interim 
step toward improving administrative funding for state UI 
programs. The Administration's Fiscal Year 2001 budget request 
proposes to fund a larger proportion of each state's projected 
total workload in the base grant at the beginning of the year. 
This would give states additional funds to meet their 
infrastructure costs, more certainly about funding for the 
year, and an improved ability to plan utilization of resources.
    In summary, we acknowledge the difficultly in creating a 
comprehensive proposal since it must include features which, if 
offered as free-standing items, would draw opposition from one 
or more partners and stakeholders, including the Department of 
Labor.
    In fact, if a major area such as benefit expansion were 
eliminated from any package, we would not be able to reach 
agreement to include the termination of the FUTA 0.2 percent 
surcharge in the package. I firmly believe that an opportunity 
exists now to secure funding and program reform only if a 
proposal which addresses the major concerns and garners broad 
support can be developed.
    Before addressing last year's legislative action, I would 
like to recognize Representative Cardin for his efforts on 
behalf of part-time workers. The bill he introduced today, 
requiring the payment for certain part-time workers, is an 
important aspect of reform. I am pleased that this inequity is 
being addressed, both in the discussions with the reform work 
group and by Mr. Cardin's bill.
    I will address H.R. 1830. This legislation was based on the 
administration's proposal, and represents an important step 
toward ensuring that the UI program fulfills its mission in 
today's changing economy. I want to thank Representatives Levin 
and English and others who introduced this bill.
    Key among the bill's provisions are providing incentive 
grants to states to voluntary implement administrative changes, 
which would take account of a claimant's more recent earnings, 
making EB more readily available during recessions by using a 
trigger based on total unemployment, and strengthening 
administrative funding for UI by increasing the amounts 
distributed under the Reed Act for Fiscal Years 2000 through 
2002.
    The significant reforms proposed by H.R. 1830 would result 
in expanding eligibility, and improving administrative funding 
of the UI program. Accordingly, we would fully support H.R. 
1830 as a first step in comprehensive reform.
    As to H.R. 1975, this bill would repeal the 0.2 percent 
surcharge imposed under the FUTA. We strongly believe that any 
repeal should only be considered as part of a comprehensive UI 
reform package, which couples this relief to employers with 
assistance to states which administer the program and the 
workers who depend on it. Therefore, we would oppose H.R. 1975 
and any stand-alone proposals to accelerate the termination of 
the surcharge.
    H.R. 3174, Mr. McCrery's bill. While I certainly agree that 
the states should be fully funded to provide appropriate 
services to UI claimants, other job seekers, and employers, 
this proposal would make some very fundamental changes in 
Federal laws governing the employment security system--changes, 
which I believe compromise the Federal-State balance and erode 
the system as a safety net for the nation's work force.
    Significant among the bill's provisions are transferring 
the collection of the FUTA tax from the Federal Government to 
states, allowing states to retain 96 percent of the 
collections, and shifting an additional 2 percent to small 
states. In effect, the Federal Government would establish the 
tax, but yield the authority to appropriate 98 percent of the 
tax's revenue.
    Under such a funding system, the FUTA revenue does not 
necessarily track with the workload and there is no guarantee 
the states would appropriate sufficient revenues either in good 
times or in downturns. Transferring only 2 percent of the 
congressional appropriation grossly underfunds the Federal 
activities. While we agree the administrative funding mechanism 
for employment security needs repair, we do not believe 
transferring funding from the Congress to the states ensures 
full funding. We, therefore, oppose H.R. 3174.
    In closing, we have an excellent opportunity to use this 
period of time in this good economy to move this successful New 
Deal program to a successful new millennium program. Not only 
is the economy right, but the time is right. The Administration 
has made a commitment to change. This Subcommittee and the 
various House Members have demonstrated their great interest in 
reform. States, employers, organized labor advocates, and 
Department of Labor staff have been diligently working on UI 
reform. We are hopeful that this dedicated interest and 
leadership can produce a comprehensive approach that would do 
four things.
    First, help part-time and low-wage workers receive the 
benefits for which they have earned when they were laid off, 
just as other workers do. The benefit ideas that are on the 
table would produce equity among workers and assist 
approximately an additional 850,000 workers a year.
    Second, help employers by making it easier to file FUTA 
taxes, cutting taxes, and providing more resources to help 
workers get jobs faster to reduce their time on unemployment 
benefits.
    Third, help the economy by making sure the UI program meets 
the needs of today's labor force and also is prepared for any 
future economic downturns by making the Extended Benefit 
program more responsive.
    And, fourth, help with the Federal-State administration of 
these programs by providing adequate funding, needed 
flexibility, and new tools to prevent fraud and abuse and 
promote re-employment.
    This may seem like a tall order, but the groundwork has 
been done and a chance of consensus is near, and with the 
leadership of this Committee and that of this Subcommittee and 
Madam Chairwoman, we could achieve great success.
    This concludes my formal remarks. And, again, I appreciate 
the opportunity to speak and look forward to your questions.
    [The prepared statement follows:]

Statement of Raymond J. Uhalde, Deputy Assistant Secretary, Employment 
and Training Administration, U.S. Department of Labor

    Madam Chairwoman and Members of the Subcommittee:
    Thank you for the opportunity to testify on the 
unemployment insurance (UI) program. As this is our first time 
testifying on this program under your leadership, I want to 
recognize your efforts on behalf of the millions of people who 
depend on the UI program each year. Just as the Congress and 
interested parties successfully negotiated changes to the 
employment and training system with the Workforce Investment 
Act, I am hopeful that today's hearing is a meaningful step 
toward reforming and strengthening the UI and one-stop/
Employment Service (ES) programs, known collectively as the 
employment security system.
    My testimony will focus on the development of the UI reform 
initiative, what I hope will be a bi-partisan reform proposal, 
and on several legislative proposals introduced last year.
    With me is Grace Kilbane, Administrator of the Office of 
Workforce Security.

BACKGROUND

    I would like to begin by providing some background 
information and current activities relevant to the UI program. 
Enacted in the Social Security Act nearly 65 years ago as a 
Federal-State partnership, UI is the primary source of 
temporary, partial wage replacement for the nation's laid-off 
workers who are seeking jobs. It is also the nation's leading 
economic stabilizer during downturns, returning $2.15 to 
national output for every $1.00 spent on UI benefits and 
helping workers put food on the table. It was designed to be 
administered in connection with the ES program which has helped 
UI beneficiaries and others find jobs, and assisted employers 
in finding new workers since 1933. Since the 1930s, the economy 
has changed, the workforce has changed, and the way we work has 
changed. Workers and businesses have all been affected.
    Previously, this Subcommittee has heard testimony on the 
Advisory Council on Unemployment Compensation's (ACUC's) final 
report, issued in 1996. The findings of this group influenced 
the legislation proposed by the Administration, which was first 
introduced by Representatives Levin, English, and Rangel in 
early 1998. This legislation was meant to be a first step to 
further reform.
    In mid-1998, the Department of Labor, in consideration of 
the ACUC recommendations and other research, announced its plan 
to conduct a broad dialogue on the UI and ES programs and 
released a white paper to start that dialogue. The paper 
focused on the effectiveness and design of the UI and ES 
programs in today's economic environment. We requested comments 
from all interested parties in such major areas as the 
stabilization of the nation's economy, financing benefits, and 
administrative funding. We convened 65 dialogue sessions 
throughout the country to provide the public additional 
opportunities to offer suggestions for reform and over 3,800 
individuals participated. The intent of this effort was to 
listen and learn from partners, stakeholders, and other 
interested parties.
    Based in large part on what we learned, the President 
committed in the fiscal year 2000 budget proposal to work with 
our partners and stakeholders toward developing a 
comprehensive, bi-partisan legislative proposal centered on 
five principles:
     expand coverage and eligibility for benefits;
     streamline filing and reduce tax burden where 
possible;
     emphasize reemployment;
     combat fraud and abuse; and
     improve administration.
    Obviously, any legislative proposal resulting from this 
process would need to be accomplished within the framework and 
concepts established in the President's budget.
    To accomplish this considerable task, a workgroup comprised 
of partners and stakeholders--specifically, employer and worker 
representatives, State agency officials, and Department of 
Labor officials--was convened. The discussions of this group 
have been very open and creative in identifying areas where 
consensus for change is possible and discussing more than 70 
ideas for reform. I especially want to thank the Interstate 
Conference of Employment Security Agencies (ICESA) for 
organizing the workgroup and chairing the meetings.

A COMPREHENSIVE REFORM PROPOSAL

    At this time I would like to address some of the 
workgroup's suggestions for a comprehensive reform proposal. It 
should be noted that in approaching their work, all parties in 
the workgroup accepted the fact that, since they were 
representatives of broader groups, any final package would need 
to be ratified by additional parties. For example, the 
participating States have been working through ICESA to brief 
all States, and DOL would need to secure Administration 
approval of any final package. For ease of discussion, the 
proposal is organized by the five principles mentioned above.
    Expand Coverage and Eligibility for Benefits. Many agree 
that the UI program has not responded to changes in the 
workplace (i.e., increases in part-time, temporary, and short-
term jobs) and is not always equitable to low wage workers. We 
have seen the recipiency rate drop from an average 49 percent 
in the 1950s to a low of 32 percent in 1993. A number of 
factors have been identified as underlying the observed decline 
in recipiency rates, although not all of the decline has been 
explained. More restrictive eligibility requirements and 
stricter penalties for disqualifications are part of the 
reason. Research shows that the changing labor force also 
contributed to the decline. Factors include the shift in 
unemployment from geographical areas with traditionally high 
recipiency rates to areas with lower rates; reduced growth in 
industries with traditionally high claims, such as mining, 
construction, and manufacturing; the decline in union 
membership where members are usually well informed about UI 
rights; and increases in new entrants to the labor force (e.g. 
more women). Although there is not consensus on benefit 
expansion, we are encouraged by the fact that the following 
proposals have been part of the workgroup's discussions:
     Fix the extended benefit (EB) program now in this 
good economy, so that it can respond more effectively to any 
future economic downturns.
     Expand benefits to part-time workers and low wage 
workers who are laid off. Employers already pay taxes on the 
wages of these workers. Even so, part-time workers may not be 
eligible for benefits even if they are seeking work equivalent 
to the type they lost, and low-wage workers may not be eligible 
due to low earnings even though they may have a stronger 
attachment to the workforce than eligible higher-wage workers.
     Allow victims of domestic violence who are forced 
to flee work for safety reasons to qualify for benefits while 
seeking new employment.
    Streamline Filing and Reduce Tax Burden Where Possible. 
Employers are concerned with complex tax forms, multiple tax 
filings, and complex record keeping requirements. They are also 
concerned about a tax burden which serves to build up Federal 
UI account balances in the Federal budget beyond apparent need. 
A comprehensive proposal could include:
     Accelerate the termination of the ``temporary'' 
0.2 percent Federal Unemployment Tax Act (FUTA) surcharge.
     Streamline the filing of the FUTA tax. The 
workgroup has identified several largely technical changes to 
Federal law which would simplify reporting for employers.
    Emphasize Reemployment. The UI and ES programs could be 
improved to greater facilitate the return to work of laid-off 
workers. An early return to work means a reduction in the 
duration of benefits and exhaustion levels--in other words, 
overall economic improvement.
     Require States to provide job search assistance to 
those identified as likely to exhaust UI benefits under State 
profiling systems.
     I am pleased to note that the fiscal year 2001 
budget continues the President's Universal Reemployment 
initiative which aims to serve all dislocated workers in need 
of assistance. Specifically, the budget request includes $50 
million for Reemployment Service grants to States for providing 
reemployment services to unemployment insurance claimants who 
have been profiled as likely to exhaust their UI benefits.
    Combat Fraud and Abuse. Although there are a number of 
ongoing administrative fraud and abuse prevention activities 
connected with the UI program, there remains a legislative 
barrier which prevents more from being done.
     Grant States access to the National Directory of 
New Hires (NDNH) for purposes of administering the UI program; 
the NDNH's primary use currently is for child support 
enforcement. A similar provision allowing State UI agencies 
access to the NDNH for purposes of the UI program was included 
in the ``Fathers Count'' bill that was passed by the House last 
year.
    Improve Administration. The workgroup believes that the 
administrative costs of the UI and ES programs are underfunded 
due to Federal budgetary rules and constraints. Underfunding of 
UI is affecting the program as evidenced by the reduction in 
benefit payment and appeals timeliness, increase in 
overpayments, and decline in employer tax/wage reporting 
timeliness. For example, since 1995 the percent of intrastate 
first payments made within 14 days (or 21 days for States with 
a waiting week) declined from about 93 percent to about 90 
percent in 1998, the last year for which data are available, 
despite the fact that workload dropped from 7.8 million to 7.1 
million intrastate first payments. With respect to 
overpayments, while falling workloads would suggest that staff 
would be able to devote more time to resolving issues and 
ensuring accurate payments, the nonfraud overpayment rate 
increased from 1.26 percent of benefits paid in 1995 to 1.43 
percent in 1997 and 1.37 percent in 1998. Finally, in 1996 , 89 
percent of employers filed tax and wage reports in a timely 
manner and 98 percent of delinquent reports were resolved by 
the end of the quarter in which they were due, while by 1998 
there was a decline in these percentages to 86.9 and 97 
percent, respectively. A continued erosion of program 
performance will damage public confidence in the UI program and 
result in losses to the unemployment trust fund. The workgroup 
believes the best way to arrest this erosion caused by funding 
shortages is to move administrative costs to the mandatory side 
of the budget.
    At this point, I would like to ask for the Subcommittee's 
support with the Appropriations Committee to take an immediate 
step toward improving administrative funding for State UI 
programs. The fiscal year 2001 budget request proposes to fund 
a larger portion of each State's projected total workload in 
the base grant at the beginning of the year. This would give 
States additional funds to meet their infrastructure costs, 
more certainty about their funding for the year, and an 
improved ability to plan the efficient utilization of 
resources.
    In summary, we acknowledge the difficulty in creating a 
comprehensive proposal since it must include features which, if 
offered as free-standing items, would draw opposition from one 
or more of the partners and stakeholders, including the 
Department of Labor. In developing the proposal, the members of 
the workgroup are striving to achieve a comprehensive package 
which contains elements that address all major concerns. In 
fact, if a major area such as benefit expansion were 
eliminated, we would not be able to reach agreement to include 
the termination of the FUTA 0.2 percent surcharge in the 
package. I firmly believe that an opportunity exists to secure 
funding and program reform only if a proposal which addresses 
the major concerns and garners broad support can be developed.

LEGISLATIVE PROPOSALS

    Now I would like to turn to several bills which were 
introduced during the first session of this Congress and affect 
the Federal-State employment security system. They include:
     H.R. 1830--Unemployment Compensation Amendments of 
1999
     H.R. 1975--Temporary Tax Termination Act of 1999
     H.R. 3174--Employment Security Financing Act of 
1999
    H.R. 1830--Unemployment Compensation Amendments of 1999. 
This legislation was based on the Administration's proposal and 
represents an important step toward ensuring that the UI 
program fulfills its mission in today's changing economy and 
that it remains on a sound financial footing for the 21st 
Century. I want to acknowledge Representatives Levin and 
English for the introduction of this legislation.
    First, the proposal would provide incentives to States to 
implement administrative systems--commonly called alternative 
base periods--that will make the program more accessible to new 
entrants into the labor force who tend to be lower wage 
workers. Specifically, it would provide $20 million in grants 
to States in each of fiscal years 2000, 2001, and 2002 to 
voluntarily implement a base period (for determining 
eligibility for benefits) that takes into account the 
claimant's more recent earnings.
    Second, the proposal would make EB more readily available 
during a recession. EB triggers would be based on total 
unemployment rates that are more responsive to rising State 
unemployment and more accurately reflect when it is most 
difficult to find work.
    Third, the proposal would encourage States to voluntarily 
build adequate reserves in their unemployment trust fund 
accounts and as a result avoid having to increase employer 
taxes, reduce benefits, or borrow during a recession. More 
precisely, it conditions receipt of a portion of funds 
distributed under the Reed Act in fiscal year 2003 on State 
trust fund accounts meeting or making acceptable progress 
toward a solvency target.
    Fourth, the proposal would strengthen funding of the States 
for administration of the UI program by increasing the amounts 
distributed under the Reed Act (which is on the mandatory side 
of the budget) for fiscal years 2000 through 2002.
    Finally, the proposal would clarify technical requirements 
relating to short-time compensation programs, under which 
employers that choose to participate reduce the workweek of 
their employees in lieu of temporary layoffs, and the affected 
employees receive partial UI.
    In summary, the significant reforms proposed by H.R. 1830 
would result in expanding eligibility and improving 
administrative funding of the UI program. Accordingly, we fully 
support H.R. 1830 as the first step in comprehensive UI reform.
    H.R. 1975--Temporary Tax Termination Act of 1999. This 
proposal would repeal the 0.2 percent surcharge imposed under 
the FUTA.
    Right now the Administration projects that Reed Act 
distributions to the States of excess FUTA balances will occur 
in 2003. Nonetheless, we believe the repeal of the 0.2 percent 
surcharge prior to its expiration at the end of 2007 must be 
accomplished within the framework of the President's budget. 
Also, we strongly believe that any repeal should only be 
considered as part of a comprehensive UI reform package, which 
couples this relief to employers with assistance to the States 
which administer the program and the workers who depend on it. 
Therefore, we oppose H.R. 1975 and any stand-alone proposals to 
accelerate termination of the surcharge.
    H.R. 3174--Employment Security Financing Act of 1999. As 
you know, this bill was developed by a coalition of State 
officials and employer groups for the most compelling reason of 
addressing administrative funding problems, as well as to 
reduce the tax and streamline reporting under FUTA. While I 
certainly agree that States should be fully funded to provide 
appropriate services to UI claimants, other job seekers, and 
employers, this proposal would make some very fundamental 
changes in Federal laws governing the employment security 
system--changes which I believe compromise the Federal-State 
balance and erode the system as a safety net for the nation's 
workforce. Of the many changes contained in H.R. 3174, I would 
like to highlight several of particular concern.
    This proposal would change the administrative funding 
system by transferring the collection of the FUTA tax from the 
Federal government to States, with the States retaining 96 
percent of the collections. Another 2 percent would fund a 
``supplemental'' account which would provide additional funds 
to small States. The remaining 2 percent would be available to 
the Congress to appropriate for Federal activities. The basic 
question here is: What incentive does the Federal government 
have to establish a Federal tax while yielding its authority to 
appropriate 98 percent of the tax's revenue? That authority 
would be transferred directly to States.
    We believe that administrative funding for the employment 
security system should be related to the number of claims filed 
for UI benefits, the number of employers from whom taxes are 
collected, and the number of unemployed workers and others 
seeking job-finding assistance. These workload factors do not 
necessarily track with FUTA revenues. Under a devolved system, 
it is anticipated that small States would expend all their FUTA 
revenue, while other States would have more than is needed for 
administration.
    There is no guarantee that States would appropriate 
sufficient revenues. State legislatures could transfer their 
FUTA proceeds to the benefit accounts, allowing for tax 
reduction, rather than expending for administration. Also, most 
State legislatures meet for only a portion of a year and six 
meet on a biennial schedule. This might make it difficult for 
States to respond quickly to changes in workload caused by an 
unforeseen economic downturn.
    The proposal would grossly underfund the Federal 
administration of UI, ES, labor market information, Veterans 
Employment and Training, and foreign labor certification 
programs, which are currently funded out of FUTA proceeds. 
Assuming that the proposal would have been applicable for 
fiscal year 1999, the 2 percent of revenue that States would 
have transferred for congressional appropriation would have 
been less than half the amount the Congress appropriated for 
Department of Labor activities for that year. I emphasize that 
the Federal staff provide national leadership, policy 
direction, and coordination for these programs. Key among the 
many functions provided by Federal staff are:
     Administering (through the Bureau of Labor 
Statistics) statistical programs essential for development of 
national statistical series, including core economic statistics 
related to employment and unemployment.
     Reviewing and certifying that State laws conform 
with Federal law and State activities substantially comply with 
the requirements of State and Federal law, and negotiating 
resolution of issues.
     With State partners, establishing standards, 
policy, and programs to promote and appraise the effectiveness 
and efficiency of the administration and operation of UI and ES 
programs for performance management and facilitating the 
sharing of best practices.
     Assisting States in the establishment and 
maintenance of actuarially sound systems of UI by providing 
consultative and supportive services in the fields of actuarial 
analyses and special studies.
    Concerning State collection of FUTA, simplifying employer 
tax reporting and filing is an important issue; however, the 
mere collection of the tax by States does not alleviate the 
current complex tax offset system, and could actually be 
burdensome because the States would be working under two sets 
of UI rules--State law and the Internal Revenue Code. Likewise, 
employers would still have to comply with different 
definitions. Additionally, there are questions concerning 
enforcement, underpayments, and back-up systems. Further, 
multi-State employers, who now report only to the Internal 
Revenue Service (IRS), would have to report to many States. As 
far as saving costs, a joint Treasury/Labor report indicated 
that there would be no real cost saving without harmonizing 
definitions of wages, employment, employee, etc.; the coalition 
proposal does not propose to harmonize these definitions.
    As an aside, I would like to mention the Simplified Tax and 
Wage Reporting System (STAWRS) project which is an inter-
departmental initiative comprised of staff from the Department 
of the Treasury, the IRS, the Social Security Administration, 
and the Department of Labor. STAWRS is currently working on a 
``Targeted Harmonized Wage Code'' that State UI agencies and 
the IRS (and other taxing authorities) could adopt to reduce 
employer burden caused by different definitions. Thirteen wage 
components in 96 different laws have been identified for 
harmonization. The STAWRS project office and the UI office have 
entered into an agreement to conduct a joint study on the 
impact of the Targeted Harmonized Wage Code on UI benefit 
amounts. The study is scheduled to be completed in September, 
2001.
    Finally, and most significantly, this proposal would 
effectively repeal important provisions of Federal UI law. 
Currently, to receive administrative grants, States must meet 
the requirements of Title III of the Social Security Act. 
Although Title III is not repealed, there would be no effective 
mechanism to enforce State compliance with its requirements 
since the Federal government would no longer provide 
administrative grants. Some of the significant requirements 
which would be nullified are ``methods of administration'' 
assuring prompt and accurate payment of benefits ``when due,'' 
a fair hearing for all claimants whose claims are denied, and a 
limitation restricting UI grant funds to expenditure for proper 
and efficient administration of the UI program. For the same 
reason, the proposal would effectively nullify the requirements 
that State UI programs participate in the Income and 
Eligibility Verification System and the Systematic Alien 
Verification for Entitlement system, and cooperate with child 
support enforcement agencies.
    In summary, while we agree that the administrative funding 
mechanism for the employment security system needs repair, we 
do not believe that transferring funding from the Congress to 
States ensures full funding. We oppose H.R. 3174. We believe a 
reform bill must address the most fundamental principle of the 
UI program--assurance of adequate benefits for a sufficiently 
large number of unemployed job seekers so that the program is 
an effective economic stabilizer. This has been and remains, 
after all, the primary purpose of the UI program.

CONCLUSION

    In closing, we have an excellent opportunity to use this 
period of time, in this good economy, to move this successful 
New Deal program to a successful new millennium program. Not 
only is the economy right, but the time is right. The 
Administration has made a commitment to change; this 
Subcommittee and various House members have demonstrated an 
interest in reform; and States, employers, organized labor 
advocates, and Department of Labor staff have been diligently 
working on UI reform in various forums. We are hopeful that 
this dedicated interest and leadership can produce a 
comprehensive approach that would:
     Help part-time and low-wage workers receive the 
benefits they have earned when they are laid off, just as other 
workers do. The benefit ideas that are ``on the table'' would 
produce equity among workers and assist approximately an 
additional 850,000 mostly low-wage workers per year.
     Help employers by making it easier to file FUTA 
taxes; cutting taxes; and providing more resources to help 
workers get jobs faster to reduce their time on unemployment 
benefits.
     Help the economy by making sure the UI program is 
responsive today and also prepared for any future economic 
downturns by changing the extended benefit program.
     Help with the Federal-State administration of 
these programs by providing adequate funding, needed 
flexibility, and new tools to prevent fraud and abuse and 
promote reemployment.
    This may seem like a tall order, Madam Chairwoman, but the 
groundwork has been done, a chance of consensus is near, and 
with your leadership and that of this Subcommittee, we could 
achieve success.
    This concludes my formal remarks. Again, I appreciate the 
opportunity afforded me to speak to the Subcommittee and look 
forward to working with you, the States, and all other 
stakeholders.

                                

    Chairman McCrery. Thank you, Mr. Uhalde. Before I begin 
questioning Mr. Uhalde, I want to point out that in our effort 
to get Governor Hull on, on time, we dispensed with opening 
statements. At this time, I would tell any Member of the 
Subcommittee if you have an opening statement, you may present 
that and it will be included in the record. And I have one that 
I have presented to the Subcommittee staff for inclusion in the 
record and any other Member may do so without objection.
    Mr. Cardin. Thank you, Mr. Chairman. It is my understanding 
that the Chairman and I do have opening statements that we 
would be ask made part of the record.
    [The opening statements of Chairman Johnson, Mr. Cardin, 
and Mr. McCrery follow:]

Opening Statement of Hon. Nancy L. Johnson, a Representative in 
Congress from the State of Connecticut

    Most of the issues that our Subcommittee has undertaken in 
the last two years have been fundamentally bipartisan. Don't 
get me wrong. We still found issues to argue about in child 
support, child protection, Title XX, and welfare reform, but in 
the end all of our legislation has enjoyed solid bipartisan 
support. In fact, many of our bills have emerged from 
Subcommittee on voice votes.
    But now we come to the Unemployment Compensation system. 
Although we all agree that the nation must have a strong, well-
funded program for unemployed workers with a history of labor 
force attachment, there are lots of diverse views about how the 
system should be strengthened. At the risk of over-
simplification, let me claim that there are three big issues 
that we are trying to resolve.
    First, the 0.2 percent FUTA surtax was imposed in 1976 when 
the Unemployment Compensation system was in serious financial 
trouble. Many businessmen and members of Congress thought that 
there was an understanding that when the federal parts of the 
system were back on firm financial footing, the surtax would be 
dropped. That was almost a quarter of a century ago, and still 
the surtax continues to impose additional taxes of over $1.7 
billion each year on American businesses. Most Republicans want 
to repeal the surtax; the Administration and most Democrats 
would rather retain the money in federal accounts.
    Second, under Mr. McCrery's leadership, a substantial group 
of Republicans, joined by a few Democrats, are proposing to 
simplify the collection of the state and federal taxes that 
support the unemployment system and to provide states with 
greater control over funding for state administration of the 
program. Democrats seem to generally oppose this proposal 
because, in their view, it weakens the federal commitment to 
the program.
    Third, Mr. Levin and Mr. English have introduced 
legislation that would make unemployment benefits more 
accessible to unemployed workers and strengthen the solvency of 
state accounts. Most Republicans seem to oppose this bill, 
however, because it could lead to increased unemployment taxes.
    There is a fourth issue that is now brewing; namely, 
whether unemployment benefits should be used to pay cash 
benefits to parents who take family leave after having a baby 
or adopting a child. Many Democrats and the Administration 
support this proposal while Republicans generally oppose the 
proposal because it seems to violate a long-standing tenet of 
the unemployment system that benefits go to those who are 
involuntarily unemployed. We have called a hearing next week to 
deal with this issue in great detail.
    Despite the seemingly partisan nature of these various 
proposals, a remarkable bipartisan group of about 25 
representatives from the Clinton Administration, workers, 
business leaders, and state administrators has met seven times 
over the past year to explore whether a compromise among these 
various proposals might be possible. Although this group has 
not reached a final compromise, it is my understanding that 
they have reached agreement on many issues. We will hear more 
about this important effort today.
    For my part, I am not at all certain what if any action our 
Subcommittee should take. I plan to listen carefully to our 
distinguished witnesses today, to discuss these matters further 
with my colleagues on both sides of the aisle, and then decide 
whether there is enough agreement to move forward.

                                

OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN 
CONGRESS FROM THE STATE OF MARYLAND

    Madame Chairwoman, reviewing proposals to reform our 
Nation's unemployment system is an important and timely duty. 
With unemployment at a 30-year low, we have a rare opportunity 
to fix the roof while the sun is shining.
    Before we evaluate various plans to modify the current 
unemployment compensation system, we should first agree upon 
what we want and expect from such a system. In this context, 
let me quickly mention what should be three consensus 
objectives: (1) providing a timely and reliable source of 
partial wage replacement for unemployed Americans; (2) 
stabilizing both the national and regional economies during 
recessionary periods; and (3) linking individuals to re-
employment programs.
    Measured against these goals, the so-called devolution 
approach taken by HR 3174 falls short. The bill focuses too 
much on dismantling the Federal role in combating unemployment, 
and not enough on implementing reforms to improve the long-term 
solvency and accessibility of our Nation's unemployment 
compensation system.
    Let me mention a few specific concerns about HR 3174. 
First, the legislation would sever the link between 
administrative funding and need. For States hitting a 
recession, this would mean they could no longer expect a boost 
in their administrative funds without raising taxes in the 
middle of an economic downturn.
    Second, by eliminating the ability of the Federal 
government to disburse administrative funds, HR 3174 guts the 
primary enforcement mechanism for Federal protections in the 
unemployment system, such as assuring prompt and accurate 
payment ``when due'' and providing a fair hearing for 
individuals whose claim was denied.
    Third, the bill undercuts the future solvency of the 
Extended Benefits (EB) program by eliminating its funding 
source (proceeds from the FUTA tax).
    And fourth, the legislation ignores one of the primary 
problems with the current Unemployment System--a declining 
percentage of unemployed Americans receiving UI benefits. In 
fact, because the bill breaks the connection between 
administrative funding and UI workloads, HR 3174 would 
disproportionately benefit those States with the lowest UI 
recipiency rates among the unemployed.
    This is not to say that we should remain unresponsive to 
one of the major complaints that HR 3174 seeks to address, 
namely inadequate Federal funds for the administration of the 
unemployment compensation system.
    Congressman Levin has introduced legislation to increase 
administrative funding for States that make progress in 
improving the solvency of their State UI Trust Funds. 
Furthermore, the so-called working group on unemployment 
compensation, which represents employers, unions, the 
Administration, and the States, have discussed making UI 
administrative funds mandatory, rather than discretionary.
    And finally, the Administration has requested an increase 
in funding for both UI administration and re-employment 
services. All of these proposals deserve our attention.
    As we consider these and other proposed reforms, I want to 
highlight one issue that should be addressed in any 
comprehensive package. Currently, unemployed, part-time workers 
who meet monetary eligibility requirements are prohibited from 
receiving Unemployment Insurance in two-thirds of the States 
solely because they are seeking part-time rather than full-time 
employment. This means that a laid-off parent can be denied 
unemployment compensation simply because they are seeking to 
continue to work part-time in order to care for a child.
    Such a policy is neither family-friendly, nor fair to part-
time workers. Both the research-oriented Advisory Council on 
Unemployment Compensation and the business-driven Committee for 
Economic Development have recommended prohibiting this type of 
discrimination against part-time workers.
    To address this inequity, I introduced legislation today to 
prohibit States from denying UI benefits for individuals who 
otherwise qualify for unemployment compensation based on part-
time work. I believe the bill is particularly relevant for 
unemployed women since they comprise roughly 70% of our 
nation's part-time workforce.
    Madame Chairwoman, I look forward to the testimony of our 
distinguished guests today, particularly my friend Sandy Levin, 
who is the former Ranking Member of this Subcommittee.
            Thank you.

                                

OPENING STATEMENT OF HON. JIM MCCRERY, A REPRESENTATIVE IN CONGRESS 
FROM THE STATE OF LOUISIANA

    Chairman Johnson, I want to thank you for scheduling this 
hearing today on Unemployment Insurance administrative 
financing reform. As you know, I have introduced legislation to 
restore common sense to the administrative financing of the UI 
system and look forward to working with you and the other 
members of the Subcommittee to address this issue.
    As you and the other members of the Subcommittee know, the 
employment security system, established as a federal-state 
partnership more than 60 years ago, is the system employers use 
to provide unemployment insurance and a public labor exchange 
for workers. Since its inception, major structural changes to 
our country's economy have taken place as a result of rapid 
technological advances and the growth of globalized trade and 
investment. Adjusting to meet the demands of our changing 
economy, our nation's labor market has fundamentally changed as 
well. Therefore, the employment security system should be 
reformed to meet the demands of the changing labor market and 
to ensure that states are able to provide the services 
necessary for employment and re-employment services aimed at 
matching employers and qualified job-seekers.
    Madam Chairman, a major focus of reform should be to 
improve the efficiency of the current administrative financing 
mechanism and to reduce the tax burden imposed on employers.
    Unfortunately, states aren't receiving a proportionate 
return on the FUTA tax dollars contributed by their employers. 
Since 1990, less than 59 cents of every FUTA dollar has been 
sent back to the states for the purpose of administering their 
unemployment system, and the percentage is shrinking. Now less 
than 52 cents is returned. As a result, states are being forced 
to either make up for the shortfall from their own general 
funds, impose new payroll taxes, or cut back on services 
provided to workers.
    Madam Chairman, to address this issue, I have introduced 
H.R. 3174, the Employment Security Administrative Financing Act 
of 1999. H.R. 3174 is designed to address the problems that the 
current system continues to impose on the states and the FUTA 
taxpayers, while preserving and strengthening protections for 
workers.
    Specifically, the bill would: reduce the tax burden on 
large and small businesses by repealing the unnecessary, 
``temporary'' 0.2% FUTA surtax imposed in the 1970's; eliminate 
inefficiencies experienced by employers by transferring 
responsibility for collection of the FUTA tax to the states; 
strengthen administration of the system by ensuring that states 
get a greater return on their employers' FUTA tax dollars and 
by ensuring greater accountability for the use of these funds; 
improve employment services with an emphasis on re-employing 
dislocated workers; combat fraud and abuse in the present 
system; and, increase state flexibility to administer their 
unemployment insurance and employment services programs to 
serve local needs.
    Without these reforms, the current system will continue to 
overtax and overburden employers, shortchange states, and, most 
importantly, underserve those who need it most--the 
involuntarily unemployed and those striving to move up the 
career ladder.
    Madam Chairman, I applaud you for scheduling this hearing 
and look forward to working with you to bring about a much-
needed reform of the current system which will bring our 
employment security system into the 21st Century.

                                

    Chairman McCrery. Without objection. Mr. Uhalde, to you, 
and, Mr. Cardin, who have both questioned the efficacy or the 
rationale behind a federally imposed tax basically being 
shifted to the states for their use, we would point out to you 
that is exactly what we do with the highway trust fund. We 
federally impose a gasoline tax, we collect the money, and then 
we ship it to the states and they may use it basically however 
they like within the parameters that we set, which is exactly 
what we propose to do in my legislation. And I don't hear 
anybody from the administration here saying we need to change 
the operation of the highway trust fund.
    In your conclusion, you point out four goals, one of those 
being to help employers by cutting taxes. And I am certainly 
pleased that the administration supports repeal of the .2 
percent surtax. However, isn't it so that if we federally 
impose an expansion of benefits, that that will require the 
states to increase taxes to cover the costs of those expanded 
benefits?
    Mr. Uhalde. Mr. Chairman, you are right, the administration 
does support a repeal of the 0.2 percent FUTA surcharge earlier 
than its scheduled time if, and only if, we have a more 
comprehensive agreement and that agreement includes expansion 
of benefits.
    Chairman McCrery. Well, if I may interrupt?
    Mr. Uhalde. Yes, sir.
    Chairman McCrery. In fact, you said if legislation did not 
contain expansion of benefits you would not support the repeal 
of the 0.2 percent surtax.
    Mr. Uhalde. That is correct.
    Chairman McCrery. So it is--while I appreciate your call 
for compressive reform, what you are really saying is you have 
got to have expanded benefits or it is no deal. And that--
hence, my question, if we have expanded benefits, don't we have 
to pay for them?
    Mr. Uhalde. But the whole point of this exercise, as you 
well know, is that the unemployment insurance fund, at this 
point, does have a good balance. And if there is any time that 
we are going to use the revenue that currently resides in the 
trust fund, it is now to be able to expand benefits to workers.
    The purpose of the trust fund is not just to collect 
revenues and to keep them there. Having recipiency rates of 21 
percent in states, I don't believe is necessarily a badge of 
honor that we are not being able to pay benefits out to 
individuals, individuals for whom UI taxes are being paid. The 
part-time workers--taxes are being paid on the part-time 
workers. They are laid off. They then are looking for part-time 
work and they are denied benefits. It seems to me it is a 
matter of equity and justice that these workers be able to 
receive benefits.
    Chairman McCrery. Well, so are you proposing that the 
Federal Government finance the increased cost of providing 
services from trust fund balances?
    Mr. Uhalde. No. I believe in the discussions that we have 
had and we have had some questions about how one would cover 
any extensions of eligibility benefits, and I think there have 
been some interesting discussions. There is not agreement on 
that. But, you know, one obvious way is to cover it through the 
states as it is--has been in the past.
    Chairman McCrery. Which would necessitate an increase in 
their taxes.
    Mr. Uhalde. Well, if the states didn't have adequate 
balances in their trust funds.
    Chairman McCrery. And I would assume that they would 
increase their payroll tax for employers. So what you give with 
one hand, you would take back with the other.
    Mr. Uhalde. Well, it is not clear to me that states are in 
a position, certainly the vast majority of states, that would 
necessitate tax increases.
    Chairman McCrery. Well, Mr. Uhalde, you have mentioned that 
you would favor an increased appropriation as a transition to 
making the administrative expenses a mandatory Federal expense 
rather than a discretionary public Federal expense. Is that 
right?
    Mr. Uhalde. Yes. That is correct.
    Chairman McCrery. And do you--can you expound a little bit 
on the structure of the mandatory regime once that is in place?
    Mr. Uhalde. I am sorry. Could you repeat it?
    Chairman McCrery. Could you expound a little bit on the 
mandatory regime that you had put in place to ensure adequate 
funding of administrative expenses?
    Mr. Uhalde. Well, I think we have been at least discussing 
as--amongst the work group, a couple of different mechanisms. 
First of all, the advantage on the mandatory side is we are 
trying to get the amount for administration to better match the 
workload. And we think, since the benefits are on the mandatory 
side, that the administrative dollars ought to be on the 
mandatory side.
    Regarding the mechanism for actually distributing funds to 
the states, we have considered several options, one of which 
would be by a formula driven by workload that would have some 
floor for small states and be able to distribute resources to 
states on an automatic basis.
    The second option would be some sort of a matching grant 
approach. Actually, this Committee is very familiar with this 
approach, where states would appropriate some portion of the 
money and then that would drive the distribution from the 
Federal trust fund--say \25/75\ or something else.
    Right now, we are looking at the advantages and 
disadvantages of each of these approaches and other approaches. 
And so there are different ways to actually distribute the 
funds if it is on the mandatory side of the budget.
    Chairman McCrery. Well, Mr. Uhalde, it is the Federal 
Government that is imposing a tax rate on employers in the 
various states. And we say to them that the purpose of exacting 
that tax is to pay for the administrative expenses of 
administering the unemployment insurance system. So how can we 
justify having any mandatory program that falls short of 
returning every penny of that back to the states minus whatever 
expenses that we legitimately need for Federal administration?
    Mr. Uhalde. Well, first of all, yes, there is Federal 
adminstration. There is also, as was pointed out in discussion 
before, Extended Benefits. But----
    Chairman McCrery. But short of that----
    Mr. Uhalde. Yes. Your question is, why has the Congress and 
the administration collectively over the last several years, 
not returned a higher proportion back to the states.
    Chairman McCrery. Well, I know why we haven't done it over 
in the past, because we have had a deficit. Now, we have a 
surplus. And I am saying to you, I can't think of a rationale 
now for--in fact, the rationale we did use wasn't a public 
rationale; it was a hidden rationale. We all knew it and we all 
kind of winked and went ahead with it. But now, we don't even 
have the cover of the deficit. So how can we possibly justify 
not putting in place a mandatory regime to ship back to the 
states every penny based on this?
    Mr. Uhalde. Well, first of all, as you well know, while we 
may now have a surplus, we also have an overall Federal budget 
strategy collectively with the Congress and the administration 
that you have to develop this UI program policy in concert with 
that entire overall policy. Currently revenues coming in from 
the FUTA tax are, what, six-and-a-half--$6 billion? The 
administration of the programs is currently funded at something 
like $3.5 billion. And the question that is going to arise is, 
what is going to happen in the overall Federal budget strategy 
with that difference of $2.5 billion?
    Now, the administration believes that there ought to be 
more of that money devoted to administration of the 
unemployment insurance program. I think it is an overall 
strategy, budget and administration strategy, as to whether 
that is every dime or not.
    Chairman McCrery. Well, thank you. I appreciate the 
administration moving in what I think is the right direction. 
Mr. Cardin.
    Mr. Cardin. Thank you, Mr. Chairman, and thank you very 
much for your testimony. We may have projected surpluses, but 
we still have the same budget rules. And that makes it 
difficult for us. And you give a very diplomatic response to 
the Chairman's question. Maybe we can find a bipartisan way to 
deal with the budget caps and deal with the size of a tax bill 
and deal with this FUTA surcharge also. So maybe we can find a 
bipartisan way to do it.
    But until we do, we are stuck with the budget rules. We are 
stuck with the appropriation process and their caps and your 
stuck with whatever--you--I think you have been very clear that 
you want to spend more of this money.
    Mr. Uhalde. Absolutely.
    Mr. Cardin. And the states need it.
    Mr. Uhalde. Absolutely.
    Mr. Cardin. So let's try to figure out a way that we can 
get this done in a fair way to the states. And, Mr. Chairman, 
let me point out--I thought I did in my question to Governor 
Hull that my reasons for raising the issue of whether the 
states should impose the tax that they collect, was not to 
suggest that as a solution, but to just raise a question about 
the bill that you filed. I certainly support the national 
system with a national tax for unemployment.
    And it gives us--and I stated this in my opening 
statement--gives us the ability to have a framework for 
unemployment insurance in this country, a way we can enforce 
the states establishing certain standards and having the 
Federal Government act as a backstop to deal with national 
economic turns.
    So I guess let me just ask a couple of questions, if I 
might, about H.R. 3174 and try to get your response to some of 
these issues. As I understand it, it would sever the link 
between the administrative fundings of the states and their 
needs so that some states would be getting a lot--do a lot 
better, other states would do a lot worse as to their needs. 
And it does not really have a relationship to the ability of 
the state to deal with these additional burdens.
    Mr. Uhalde. Well, while the principle reason for the 
proposal is to address the adequacy of administrative funding, 
there is no guarantee with state appropriations that 
necessarily states are going to appropriate the adequate 
amounts for administration. There is no guarantee that that 
will happen when one enters a downturn and states are trying to 
shepherd their resources as much as has been done in the 
Federal Government through deficits. So there is no automatic 
guarantee that that is going to happen at the local level.
    Mr. Cardin. A second concern I have that is more 
fundamental is that there would be no--I don't know of any way 
that we could enforce standards if the states have all the 
money and remit to us just that extra four percent of the total 
amount. For example, let us say a state didn't have any 
effective appeal mechanism for someone denied unemployment 
insurance. What could you do to get the state to impose an 
effective appeal process for that individual?
    Mr. Uhalde. Well, there are currently two ways right now. 
There is the sort of the big club, which is the offset credit.
    Mr. Cardin. You would lose that though under H.R. 3174.
    Mr. Uhalde. No. We would retain that. That assures state 
laws are in conformity with Federal law. The second----
    Mr. Cardin. Oh. OK. Correct.
    Mr. Uhalde. And that is the big club. And it is when we 
certify that states' laws are in conformity with Federal law 
and our regulations. Then we certify the offset credit. But 
that is a big deal. The second----
    Mr. Cardin. But if you did do that you would be imposing 
another five percent tax and save which is----
    Mr. Uhalde. Absolutely. At 5.4 percent----
    Mr. Cardin. Right.
    Mr. Uhalde.--offset credit. The second and the one that is 
an important lever in ensuring the types of issues that you 
talked about, prompt appeals hearings, proper and efficient 
administrative methods, is that we are making grants to states 
conditioned on states applying proper methods of adminstration 
that are laid out in the Title III of the Social Security Act.
    If we are not making grants, as under a devolution 
proposal, then, in fact, the Federal Government doesn't have 
that mechanism for enforcement.
    Mr. Cardin. Thank you. And just let me also thank you for 
your comments about the part-time employee issue. And you 
raised a very good point on that. This unemployment insurance 
is an insurance program. Part-time employees insurance premium 
or insurance is paid on their employment. They have to remit 
the money under their state program, so the state is taking the 
revenue without providing any uninsurance protection.
    Mr. Uhalde. Well, exactly. I mean, the system as a whole is 
essentially making a profit off of part-time workers who--in 
many states, part-time workers who seek to return to work in a 
part-time status. And increasingly, that is an important work 
force component that employers who are scrambling to get 
workers are putting together all sorts of benefit packages to 
attract nontraditional pools of work. And part-time workers are 
an important source for employers.
    And having the ability to tell workers that they will be 
treated like every other worker, as long as they earn the 
qualifying amount of wages, I think, is important as both an 
efficiency argument for employers as well as an equity 
argument.
    Mr. Cardin. Thank you. Thank you, Mr. Chairman.
    Chairman McCrery. Mr. English.
    Mr. English. Thank you, Mr. Chairman. Mr. Uhalde, my 
formative experience with Unemployment Compensation came in the 
Pennsylvania and state government in the early eighties, when 
after a long period of maintaining relatively low unemployment 
in the late 'sixties and early 'seventies, and relatively low 
tax rates, Pennsylvania abruptly went into a recession and then 
went into a series of recessions. And by the early eighties, we 
had, as I recall, a trust fund negative balance approaching $3 
billion, which, in the state government, is real money.
    I wonder, looking at the proposals that have been laid out 
here, including the Levin bill, which I have cosponsored and 
which the administration supports, my bill and Mr. McCrery's 
bill, how would you assess their relative incentives for state 
solvency? And do they provide--how do each provide for states 
to maintain adequate balances even when we recognize state 
officials frequently find it very difficult to focus on these 
issues in the long-term and there is a tendency in state 
government maybe to short some of these commitments and not 
provide adequate funding?
    Mr. Uhalde. Well, Mr. English, of course, I think your 
bill--yours and Congressman Levin's bill--directly addresses 
the solvency question. And I think it is a serious question 
that we have to look at. This bill does it through a system of 
incentives. I think there is criticism that the approach of 
setting some de facto standard of 1 year of benefits is 
arbitrary; but it is voluntary. And it uses an incentive 
approach using distribution of funds from the Reed Act.
    Why that is important? There is some significant number of 
states, large states, that effectively have in their trust 
funds--they are not quite on a pay-as-you-go basis, but they 
have one quarter worth of resources there for any type of 
recession.
    Now, the question we have to ask in that kind of system is, 
are we going to pay now or are we going to pay more later? And 
the experience with Pennsylvania, the experience with Michigan, 
and many other states through the eighties, was that through 
the need to borrow, that they would end up paying more.
    But the other thing is the timing. To repay substantial 
amounts of borrowings and to sort of make the trust funds whole 
after the recessions have happened is to either have to lower 
benefits or raise taxes during a downturn--
    Mr. English. Sure.
    Mr. Uhalde.--or during a recovery.
    Mr. English. Mr. Uhalde, I think we understand, you know, 
broad-stroke----
    Mr. Uhalde. Uh-huh.
    Mr. English.--the need to move in the direction of 
encouraging states to maintain their solvency. And I guess the 
question I wanted to pose to you directly on the last point, on 
Mr. McCrery's bill, do you have any concerns about the 
incentives built into that bill that allows states to run 
balances and then potentially, down the road, make some use of 
them? Is--do you feel that there are adequate incentives in Mr. 
McCrery's bill to provide long-term solvency at the state 
level?
    Mr. Uhalde. Well, I don't believe there is a direct 
response to the solvency question in Mr. McCrery's bill. And 
the question on the Extended Benefits was already addressed. 
And I think there was a fair conversation on that where once 
that pot was exhausted or whittled down, there is no mechanism 
currently to replenish it.
    Mr. English. Okay.
    Mr. Uhalde. But, no, there isn't a direct response on that.
    Mr. English. Okay.
    Mr. Uhalde. And I am concerned that problems with 
addressing unemployment insurance and adequately funding it at 
the Federal level, would be repeated 50 times over at state 
legislatures----
    Mr. English. Sure.
    Mr. Uhalde.--in trying to appropriate the----
    Mr. English. Before my time runs out, I do have one last 
question. And that is, you have talked about being willing to 
be flexible as part of an overall package on the .2 percent 
surtax. One of the tax issues that doesn't typically get 
brought up in the context of tax reform is the fact that since 
1986 or '87, we have been taxing UC benefits in a way that 
substantially reduces their value to the workers.
    Is the administration willing to consider taking the tax 
off of Unemployment Compensation benefits as part of an overall 
fix to this system? And is it the view of the Department of 
Labor that taking the tax off of UC benefits would 
substantially improve their value to the people that we are 
trying to serve?
    Mr. Uhalde. Well, clearly, the answer to the latter is, 
yes, that taking the tax off would improve the value to 
workers. I have not been involved in any Administration 
discussion of taking the tax off. Again, we are caught in the 
whole issue of the overall budget package. And there has been 
discussion in the work group, frankly, to whether or not some 
of those revenues from the tax ought to be targeted toward some 
of the aspects of expansion, for example, in this.
    Mr. English. Sure. Thank you. And, Mr. Chairman, I thank 
your indulgence. Let me say, I hope that the administration 
will take a look at the tax on UC benefits. I think this is an 
extremely important issue. It is one that has been long 
neglected and has needed a champion. The rollback of this tax 
has never been proposed by the administration. I think the time 
has come to take a look at this. I think this is one tax cut 
that even the administration will concede is not tax cuts for 
the rich. Thank you, Mr. Uhalde.
    Chairman McCrery. Thank you, Mr. English. I thank you, Mr. 
English. As to your point about incentives, I can--my 
experience comes from the State of Louisiana with the 
Unemployment Compensation system. And I can assure you that 
that experience in the eighties has made us very much aware of 
the need to prepare for downturns. We were hit very hard, as 
was Michigan and a few other states. We had to borrow sizeable 
amounts of money from the Federal Government and pay it back 
with interest.
    And, as a consequence, we had to increase, on a temporary 
basis, a true temporary basis, I might add, the payroll taxes 
on our state's employers, which was a heavy burden. But once we 
paid off those sizeable loans that we got from the Federal 
Government, we took the temporary surtax off, which should be a 
lesson to Federal policy makers. Once the need for the 
temporary tax is gone, you should do away with the temporary 
tax. And, Ms. Johnson, do you have questions for Mr. Uhalde.
    Chairman Johnson. I am sorry I had to miss your testimony, 
but I do look forward to working with the Adminstration on this 
issue. I don't see that anyone who has testified today can say 
this is a program that is working. And when you listen and you 
look at the chart that I was reading from, some states have 
four or 6 months of benefits in reserve and others have 168 
months. This is not a system that is healthy.
    It is also true that there has been a dramatic change in 
the kinds of services that unemployed people need. Really, a 
radical change from 10 years ago. And the kinds of services 
that states need to be able to provide are more expensive. They 
are more technologically based. There are not just 
transportation--they are doing a lot of different things. And 
they need the resources and the flexibility. I don't see any 
reason why we can't think this through in a way that gives 
states better resources, since we all acknowledge that part of 
this was deficit-driven, and, at the same time, guarantee that 
the Extended Benefits program will not only be in place, but 
will be funded.
    I think the regular benefits program has always had the 
backup only of Federal loans. And my state, as well as 
Louisiana, was one that borrowed heavily, spent years paying 
back the costs of recession, and then, when those costs were 
gone, they did gradually lower the rate. Now, that can be done 
at the local level. It is very hard to do that at the Federal 
level. Once we get it in there--I mean, the FUTA surtax is 25 
years old. That is my understanding--my recollection. Is that 
correct? Twenty-five years? So, you know, it is not a temporary 
tax.
    So the degree to which we are able to really honestly 
manage a program like this, it is not great. So if we focus our 
interests and our expertise and our commitment to funding what 
we need to fund, which is the Extended Benefits program, 
because that really does require a redistribution, in a sense, 
of wealth between states that are doing well and states that 
aren't in a period of recession, then I think we have a chance 
to reform and strengthen that program and, at the same time, 
give states better resources to meet what is a very different 
and very exciting and very positive demand. And the better the 
states meet it, the better people getting unemployment benefits 
will do getting back into the work force.
    I don't see any reason why we can't do this in a way that 
is a win-win for everybody. And I just hope the administration 
will get back to us on sort of the key things that you are 
concerned about. And I don't know whether we can open it up to 
part-time people right now. We will look at every idea that is 
brought up here today.
    But I think we also need to look at what is the incentive 
we provide for unemployed people to participate in job 
training, because many are afraid of it. I mean, they don't 
participate because, frankly, they have never seen a computer 
and they are hoping like heck they will get a job that will 
require the old skills. And I think we need to think also about 
what help and what incentives do people need to change careers 
and change their lives, because it isn't easy, but it does 
work. So I thank you for your testimony and I look forward to 
working with you.
    Mr. Uhalde. Thank you, Madam Chairman.
    Mr. McCrery. Thank you, Mr. Uhalde, very much for your 
testimony and your patience in answering our questions. And 
now, as Ms. Johnson and I have changed chairs, I would ask the 
final panel to approach the witness table as Mr. Robert C. 
Gross. Chuck Yarborough, David Smith, Mark Wilson, Hon. Gary 
Forster, and Van Doorn Ooms.
    Chairman Johnson. I would like to welcome this panel. You 
may be aware that the Subcommittee has been doing some field 
hearings, and those have generally brought us to visit some of 
the one-stop centers that have developed at this end of the 
country. And I would have to say I am very pleased to have with 
us Mr. Robert Gross, who has developed a level of integrated 
services at these one-stop centers that, frankly, I have not 
had the privilege of visiting. So we look forward to the 
panel's testimony. Feel free to stray from your written 
testimony. We do include all of your statements in the record 
of our Committee proceedings. So if you would like to summarize 
your hearing and maybe address issues that have been raised, 
that is always very helpful to us.
    Mr. McCrery. Madam Chair.
    Chairman Johnson. Oh, and I should mention, you know, the 
light. It is red, yellow, and green. When you get to yellow, 
you should recognize your 5 minutes is coming to a conclusion, 
and then we will have more time for questions.
    Mr. McCrery. Madam Chair.
    Chairman Johnson. Yes, Mr. McCrery.
    Mr. McCrery. If I might just take a minute to introduce a 
colleague from the State of Louisiana, Mr. Garey Forster, who 
is the Secretary of Labor in Louisiana, and comes to that 
position with considerable experience from the legislative end. 
He was a State Representative for many years, representing the 
New Orleans area. So he comes to us with a great deal of 
experience from both the policymaking side and the policy 
enforcement side. So welcome, Mr. Forster, and thank you for 
making the trip.
    Mr. Forster. Thank you, Jim.
    Chairman Johnson. Thank you, Mr. McCrery, and also for 
pointing out his background because it is very useful to us to 
have someone who has had your breadth of experience before us. 
Let us start with Mr. Gross, Robert Gross, who is President of 
the Interstate Conference of Employment Security Agencies and 
Executive Director of Utah Department of Work force Services.

STATEMENT OF ROBERT C. GROSS, PRESIDENT, INTERSTATE CONFERENCE 
 OF EMPLOYMENT SECURITY AGENCIES, AND EXECUTIVE DIRECTOR, UTAH 
                DEPARTMENT OF WORKFORCE SERVICES

    Mr. Gross. Thank you, Madam Chair and Members of the 
Subcommittee. I am pleased to be here and certainly grateful 
for the extension of your invitation to testify here. As you 
indicated, Madam Chair, I wear a couple of different hats. In 
fact, I am wearing several hats, although, I am here to testify 
today on behalf of the Interstate Conference of Employment 
Security Agencies. I am also a state administrator, and also 
have had the privilege of chairing the work group to which Mr. 
Uhalde and others have referred to during the course of the 
past year, in which we have attempted to forge a comprehensive 
and bipartisan approach to Unemployment Insurance and 
Employment Service reform.
    You have my written testimony, as was acknowledged. So I 
will attempt to extrapolate five or six key points that we 
think are important. And again, I would reiterate that while my 
positions here--I will be articulating positions on behalf of 
the Association and my 53 colleagues from the states and 
territories, and not exclusively and obviously my feelings or 
concerns about my own State of Utah.
    Let me first address the point that has already been 
addressed, and that is plain and simply, the Federal grants to 
administer Unemployment Insurance and the Employment Service 
systems need to be sufficient. They have been inappropriately 
low for the past several years. In fact, Department of Labor 
statistics indicate that the Unemployment Insurance 
administration system has been under-funded by about 10 percent 
per year for several years, and the employment service 
purchasing power has been eroded by nearly 60 percent since the 
early eighties.
    Again, as you have heard in previous testimony, there is 
almost uniform and unanimous consensus among work group members 
that we need ways to better fund the system and, yet, adequate 
funds seem to be inherent within the amounts collected from the 
employees of this country. One of the things that we need, we 
would encourage this Subcommittee to look at, of course, is 
moving the funding of this from the discretionary side to the 
mandatory side of the budget. We commend Mr. McCrery for his 
approach. We think that offers one thoughtful approach for that 
important budget consideration.
    As you have also heard, there has been other testimony 
today that there are other proposals that our work group has 
looked at, including a formula approach and a matching grant 
approach. We think there is good in each of those approaches, 
and we would like to work--continue to work together as a work 
group, but also work with this Subcommittee in finding a 
solution.
    Second, I would like to reiterate that we need to invest 
more in the Employment Service and Reemployment Services for 
claimants. Madam Chair, as you indicated, and as we had an 
opportunity to talk earlier, states are in the vanguard of an 
increasingly complex work force service--public work force 
service delivery system. The system of Unemployment Insurance 
and Employment Services that was provided for sixty years ago 
is no longer a match for today's complex economic 
circumstances.
    My own state, for example, of Utah, is one of a handful of 
states that is in this vanguard of looking at the comprehensive 
array of services, and we deal with such diverse issues as 
Public Assistance, food stamps, in addition to being the 
administrators of the Employment Security System, Employment 
Training, and so on.
    The hallmark of our system and, increasingly, the system 
that we see throughout the country, is a system that is built 
on the need for adequate programs to deal with employment and 
employability. And certainly, a hallmark of that is adequate 
funding for the employment service. A recent Department of 
Labor study found that job search has reduced the average 
duration in the Unemployment Insurance by one-half to 4 weeks, 
depending on states. And the government has saved $2 for every 
dollar spent in Employment Service activities. It is, frankly, 
a good investment, and one that we do not believe has been 
sufficiently attended to in the past several years.
    The third point I would like to make is that we obviously 
believe that there needs to be a reduction in the tax burden, 
and we need to minimize the tax filing burdens that are 
currently imposed. ICESA, our organization, does support a 
repeal of the two-tenths percent Federal unemployment tax for 
many of the reasons which have been articulated here in 
previous testimony. We question the accumulation of an $18 
billion reserve in the Federal Unemployment account at a time 
now when we have moved into a budget surplus. We also would 
strongly urge the retention of quarterly tax depositing, rather 
than a monthly system as proposed by the administration.
    The fourth point I would make for my testimony is that we 
also support efforts to reduce fraud and abuse by granting 
State Unemployment Insurance programs to the National Directory 
for New Hires. We commend the Congress for the approach that 
was taken last year although it did not pass. Frankly, over 20 
states are currently cross-matching their intrastate new hire 
data with Unemployment Insurance Claim data, and the number is 
growing.
    In my own State of Utah, we believe that we have cut 
Unemployment Insurance overpayment by nearly 50 percent as a 
result of our ability and the consolidation of the services in 
our agency, and the fact that our Employment Security programs 
are also housed with the efforts in terms of the Directory 
itself.
    We need the access to this Directory, because new hires in 
other states, claimants find jobs in other states, and the 
intrastate new hires sometimes are reported under current 
statute by multi-state employers to other states. We know a 
concern that was expressed last year was over the 
confidentiality and privacy in terms of the sharing of this 
data. We, too, in the states, are just as concerned about the 
confidentiality and privacy as are those of you in the Federal 
Government. Since we are the ones to collect the data in the 
first place, our rules need to be strict in order to protect 
privacy and confidentiality.
    A fifth point I would make is that we are in favor of 
repealing the special eligibility requirements on the Extended 
Benefit program. Again, the EB program has been previously 
discussed. And finally, I would suggest that our association is 
unanimous in indicating that we believe that we need to stop 
the application of the Federal budget principle of budget 
neutrality to self-financing Unemployment and Employment 
Service programs. The Unemployment Insurance and Employment 
Service systems have been under-funded and overtaxed as a 
result of this principle, and this has been previously 
testified. During these economic times, now is the time to 
prepare for the next downturn or the next recession, and 
correct these principles. As we have previously articulated 
today, one of the ways that we believe insures this is moving 
the funding of these programs to the mandatory side of the 
budget.
    [The prepared statement follows:]

STATEMENT OF ROBERT C. GROSS, PRESIDENT, INTERSTATE CONFERENCE OF 
EMPLOYMENT SECURITY AGENCIES, AND EXECUTIVE DIRECTOR, UTAH DEPARTMENT 
OF WORKFORCE SERVICES

    Madame Chair and Members of the Subcommittee on Human 
Resources, I am Robert C. Gross, President of the Interstate 
Conference of Employment Security Agencies (ICESA) and 
Executive Director of the Utah Department of Workforce 
Services. Thank you for inviting me to testify today on behalf 
of ICESA and its 53 state and territorial members. ICESA 
represents state workforce agencies in general and the 
Unemployment Insurance (UI) and Employment Service (ES) 
programs in particular. Many of our state members also 
administer welfare-to-work programs and some administer other 
public assistance programs, such as TANF, under the 
jurisdiction of the Subcommittee on Human Resources.
    I want to thank and commend the Chair for scheduling a 
hearing on UI and ES reform. It is not easy to gain attention 
for this subject during a time of sustained economic growth and 
low unemployment, but the system is in need of reform before we 
experience another economic downturn.
    In addition, I want to thank the U.S. Department of Labor 
for its commitment to working on comprehensive UI and ES reform 
with business, workers, and states.
    During the past year, ICESA has sponsored seven meetings of 
a UI and ES reform workgroup representing the state and federal 
partners and business and worker stakeholders. We discussed 
principles and options, and identified where we agree, where we 
disagree, and where we hold out the possibility of compromise. 
Although we have not agreed on a package, my testimony today 
reflects the substantial progress we have made toward that end. 
I want to emphasize that I wear multiple hats as I discuss 
these issues with you. As executive director of the Utah 
Department of Workforce Services, I have been one of the state 
administrators who has supported the state-business coalition 
approach to UI and ES reform as embodied in Mr. McCrery's bill. 
As a state member of the UI-ES reform workgroup that has 
labored over the past year, I recognize that our federal 
partner in this critical safety net system feels very strongly 
about expanding coverage and eligibility for benefits in any 
comprehensive reform package. The state members of that 
workgroup have been clear that worker advocates and business--
the principal stakeholders in the system--should agree on 
components of a comprehensive reform package. Finally, as 
President of ICESA, I represent 53 state and territorial 
administrators with whom I must coordinate any official 
organization position. In this statement I have attempted to be 
clear on which reform principles we have an official position 
and on which states have shown interest, or recognize others' 
interests, but need to discuss further. Most importantly, the 
state administrators want to work directly with you in 
addressing UI and ES reform this year.

ADMINISTRATIVE FINANCING REFORM

    ICESA believes grants to states for the administration of 
state UI and ES programs have been inadequate. The U.S. 
Department of Labor has estimated grants for administration of 
the UI program have been under-funded each year by roughly 10 
percent and the purchasing power of grants for administration 
of the ES program has diminished by around 60 percent since the 
early 1980s. In response, states have been forced to spend 
their own funds just to maintain essential services. 
Preliminary results from a recent ICESA survey show that states 
spent nearly $320 million of their own funds on the 
administration of the UI and ES programs. About one-third of 
this sum was spent on UI administration and the remaining two-
thirds was allocated to the ES program.
    ICESA believes the UI and ES programs must be funded 
adequately. Members of the UI/ES reform workgroup have 
concluded this cannot happen as long as the federal government 
treats grants to states for administration of the UI and ES 
programs as discretionary federal spending. These grants should 
be on the mandatory side of the federal budget so that states 
can receive sufficient funds to administer the UI program in a 
proper and efficient manner and provide effective reemployment 
services to unemployed workers. Mr. McCrery's bill takes this 
approach and is one way to reform administrative funding.
    Mr. McCrery's bill would authorize states to collect the 
Federal Unemployment Tax and retain most of the funds for state 
spending on administration of the UI and ES programs. Such 
funds would remain in the federal unemployment trust fund in 
new separate state administrative accounts, but would be 
appropriated by states and treated as mandatory federal 
spending. We don't know whether the Appropriations Committees, 
Budget Committees, the U.S Treasury, or the Office of 
Management and Budget (OMB) would agree to these unprecedented 
changes, but many states and businesses are supporting this 
approach.
    The states participating in the reform workgroup find 
another approach, a matching grant, worth exploring also 
because it is used already for mandatory spending on 
administration of such programs as child support enforcement 
and child welfare, both of which are under the jurisdiction of 
the Subcommittee on Human Resources. In this approach, the 
Federal government would continue to collect the Federal 
Unemployment Tax, but about one-fourth of the revenue would be 
deposited into new state administrative accounts in the 
unemployment trust fund to finance state matches to federal 
funds for administration of the UI and ES programs. Although 
this approach has not been developed fully by the UI/ES reform 
workgroup, it holds promise because there are precedents in 
other Human Resources programs for classifying such spending on 
administration as mandatory.
    ICESA does not know which approach best assures adequate 
funding for UI and ES administration, but it believes states 
are willing to accept additional responsibility in this system 
and are willing to be held accountable by the public for 
results. We would like to work with you and the Administration 
to achieve this end.

REEMPLOYMENT

    ICESA believes the federal government should invest more 
funds in the Employment Service and reemployment services 
because unemployed workers can return to work sooner, save 
taxpayer dollars, and help employers find qualified workers to 
produce their goods and services. We commend Mr. McCrery for 
provisions in his bill establishing new mandatory spending for 
providing job search and other employment services for UI 
claimants. The potential return on this investment was 
summarized in a recent USDOL report entitled, ``Evaluation of 
Worker Profiling and Reemployment Services Policy Workgroup: 
Final Report and Recommendations:''
    (1) Individuals receiving job search assistance found new 
employment one-half to 4 weeks sooner (depending upon the 
state) than similar individuals who did not receive assistance.
    (2) Savings to the government (savings in UI benefit 
payments plus the increase in tax receipts due to faster 
reemployment) averaged around $2 for every $1 invested in 
targeted job search assistance.
    (3) Individuals receiving job search assistance found jobs 
with wage rates comparable to those found by individuals who 
did not receive assistance.

TAX BURDEN AND TAX FILING BURDEN

    ICESA believes the federal government should reduce federal 
unemployment taxes by repealing the temporary 0.2 percent 
federal unemployment surtax. The federal government has not 
only been under funding the administration of UI and ES, but 
also it has been overtaxing the taxpayers, apparently to fund 
non-UI and non-ES federal activities. When the federal 
government extended this tax in 1997, there was little or no 
need for these additional funds in the UI program. The funds 
were added to ``paper balances'' in the Federal Unemployment 
Account and backed by a promise to make loans to insolvent 
state programs in future recessions. Even though this account 
shows these funds as ``reserves,'' the funds were used to 
finance non-UI/ES spending when the federal budget was running 
a deficit. Now that the federal budget is running a surplus, 
these funds are being used for non-UI/ES debt retirement, non-
UI/ES tax cuts, or non-UI/ES spending. This practice should 
stop. These funds should be used for UI and ES purposes as 
needed and excess amounts should be returned to the taxpayers.
    Many ICESA members are interested in a new idea discussed 
by the reform workgroup--the possibility of repealing the 
Federal Unemployment Account and distributing the ``reserves'' 
to the state accounts. In an ideal world for states, 
distributing these ``reserves'' to state UI accounts could--at 
individual state's option--increase the solvency of state UI 
programs, fund coverage or eligibility expansions, or fund 
state unemployment tax cuts. Employers, for example, might want 
these funds to be used for tax cuts. Worker representatives and 
the Clinton Administration might press for linking the 
distribution of these funds to potential coverage and 
eligibility expansions. Such expansions might include lowering 
state minimum qualifying earnings for claimants, providing 
benefits to workers who restrict their job search to part-time 
work, taking into account recent earnings through the use of 
``alternate base periods,'' and providing benefits to claimants 
who left their jobs to avoid domestic violence. ICESA 
understands that the Department of Labor might link FUA 
distributions to such eligibility expansions, but it strongly 
believes decisions about eligibility for state benefits should 
be made by states, not the federal government.
    ICESA is interested in reducing employer tax filing burden 
through simplifying tax forms and consolidating wage and tax 
reporting with states and would not preclude considering such a 
proposal in a comprehensive reform package.
    ICESA strongly supports quarterly (not monthly) tax 
depositing and commends Mr. McCrery for including this 
provision in his bill. The Clinton Administration proposal to 
collect unemployment taxes on a monthly rather than quarterly 
basis is another bad example of a budget gimmick proposed to 
finance non-UI/ES expenditures at the expense of the integrity 
of the system.
    ICESA member states are likely to support Internal Revenue 
Service (IRS) disclosure of information to states for the 
purpose of combining state and federal employment tax reporting 
and would not preclude considering such a proposal in a 
comprehensive reform package. A recent federal law authorized 
disclosure to the State of Montana for this purpose. Other 
states are interested in working with IRS on combining 
employment tax reporting, but they need legislation to proceed.

FRAUD AND ABUSE

    ICESA supports reducing fraud and abuse in the UI program 
by granting state UI programs access to the National Directory 
of New Hires (NDNH) and commends the House Committee on Ways 
and Means for including it in the ``Fathers Count'' bill it 
reported last year. Individual states already contribute most 
of the quarterly wage and new hire data in the NDNH, but this 
national database is not shared with the states. As a result, 
although states are able to cross match intrastate new hire 
data with UI claims data, they are not able to run similar 
cross matches with new hire data from other states. The 
intrastate cross match enables states to cut overpayments to UI 
claimants who obtain jobs within their states, but they cannot 
catch UI claimants who have been reported as new hires in other 
states. There are nearly one million UI claimants per year 
nationwide who might be hired in one state while claiming 
benefits in another state. In addition, there are countless 
other UI claimants whose intra-state new hires are reported by 
multi-state employers to other states, a practice explicitly 
allowed under federal law to lessen employer reporting burden. 
If the state paying benefits is not promptly informed that such 
a UI claimant has been newly hired, substantial overpayments 
occur. These overpayments can be substantially reduced. Utah, 
for example, was able to cut its average UI overpayment nearly 
in half by cross matching intra-state new hire data with UI 
claimant data.
    ICESA is aware that the provision granting access to the 
NDNH was deleted from the ``Fathers Count'' bill last year 
because of concerns about privacy and confidentiality. I assure 
you that states are equally concerned about privacy and 
confidentiality. In fact, states have strict rules about the 
wage data and new hire data they submit to the NDNH and are 
currently working on strict rules for sharing wage data among 
themselves in the new interstate Wage Record Interchange System 
(WRIS). We believe states are in a unique position as the 
source of the NDNH data to protect these data and to use them 
in an effective manner. Please work with us to grant state UI 
agencies access to the NDNH. The integrity of the UI program 
will be enhanced as a result.

ELIGIBILITY

    In general, ICESA believes states should determine 
eligibility for state UI programs, not the federal government. 
However, a comprehensive reform that solves the problem of 
inadequate funding, provides additional resources for 
reemployment services, reduces unemployment tax burden and 
employer tax filing burden, and combats fraud and abuse, and 
requires or provides incentives for expanded eligibility, could 
be attractive to some states.
    ICESA believes applicants for Federal Unemployment 
Compensation, such as benefits for ex-military service 
personnel or ex-federal employees, should not be required under 
the Personal Responsibility and Work Opportunity Reconciliation 
Act (PRWORA) of 1996 to prove their citizenship or qualified 
alien status in person. ICESA has filed its objections to this 
policy with the Immigration and Naturalization Service (INS) 
and is awaiting the final version of its proposed regulations 
implementing this provision of PRWORA. Because inadequate 
federal funding for UI and ES administration has forced states 
to close many local offices and adopt remote claims taking via 
telephone and the Internet, states no longer can verify 
citizenship or qualified alien status in-person, which the 
draft INS regulations seem to require. In addition, since 
monetarily eligible UI claimants' citizenship or qualified 
alien status is already supposed to be verified by the 
employer, we see no reason to duplicate this effort when the 
worker applies for unemployment benefits.
    ICESA supports repeal of special eligibility requirements 
under the Extended Benefits (EB) program. ICESA believes states 
should have the authority to set eligibility requirements. In 
addition, when these requirements differ from state 
requirements, they impose an added administrative burden on 
already overburdened states. These requirements include:
     EB claimants must conduct ``systematic and 
sustained'' work searches and provide tangible evidence of the 
work searches.
     EB claimants must accept any offer of suitable 
work that they can perform.
     EB claimants must have either worked 20 weeks or 
earned an amount equivalent to either 40 times the weekly 
benefit amount or 1.5 times the highest quarterly wages in the 
base period.
     EB claimants who are disqualified for voluntarily 
leaving, misconduct or for refusing suitable work can receive 
EB only if they perform work following the disqualification.
     For interstate claims, individuals can only be 
paid for two weeks of benefits if the state in which they 
worked is activated on EB and the state where the individual 
filed his claim is not activated on EB.
    ICESA is interested in a proposal to increase the federal 
share of Extended Benefits from 50 percent to 75 percent and 
would not preclude considering such a proposal in a 
comprehensive reform package. Coupled with some reform in the 
trigger mechanism, such a change might help the federal 
government avoid the need to enact an emergency federal program 
during another recession. The last such emergency program in 
the early 1990s cost the federal government about $28 billion.

BUDGET NEUTRALITY

    Finally, ICESA strongly objects to the continuing 
application of the federal budget principle of ``budget 
neutrality'' to the self-financing UI and ES system. This has 
led to the under-funding of administration of UI and ES and 
over taxing of taxpayers in order to finance other federal 
spending during deficit years and now the retirement of other 
federal debt, spending on other federal programs, and cutting 
of other federal taxes during surplus years. It is time 
Congress corrected this problem. Our system, and the programs 
under the jurisdiction of the Subcommittee on Human Resources, 
should not have to cut services even more and impose even more 
taxes for a problem that was largely created by the wrongful 
application of this principle.
    Madame Chair, ICESA, its federal partner, and business and 
worker representatives have done much work in the last year on 
UI and ES program reform. We are ready to work with you and the 
Subcommittee to solve these problems this year. Time is short. 
Let us begin.
            Thank you.

                                

    Chairman Johnson. Thank you very much, Mr. Gross. And I do 
appreciate your offer to continue working with us and with the 
administration. It is very helpful that there has been a 
working group. It is time that the working group realize that 
we need to bring this to a substantive project.
    Mr. Chuck Yarbrough, Chairman, Board of Directors, UWC-
Strategic Services on Unemployment and Workers' Compensation. 
Mr. Yarbrough.

  STATEMENT OF CHUCK YARBROUGH, CHAIRMAN, BOARD OF DIRECTORS, 
UWC-STRATEGIC SERVICES ON UNEMPLOYMENT & WORKERS' COMPENSATION, 
AND DIVISION PERSONNEL MANAGER, TYSON FOODS, INC., SPRINGDALE, 
                            ARIZONA

    Mr. Yarbrough. Thank you, Madam Chairman and Members of the 
Committee. It seems only natural that we have an opportunity to 
discuss FUTA on the 29th of February, a day that only comes 
about in the year ending in double zeroes every 400 years.
    I am a Division HR, Human Resource Manager in a 16-state 
employer with 66,000 employees. I do serve as Chairman of UWC, 
a group that is dedicated to look at the Workers' Compensation 
as well as Unemployment Insurance issues. I am a volunteer and 
a user in the system of Unemployment Insurance, Employment 
Service, as well as Employment and Training for the past 25 
years in doing my job.
    With just 5 minutes to impress you about the need for true 
and effective FUTA reform, I will try to do both, but that is a 
lot of pressure. Should I spend my time discussing problems of 
the past or the future? And so I am going to try to do a little 
bit of both, so here goes. A couple of things on why I believe 
3174 is important to us.
    My company recently paid $18,000 to pay the building rent 
on a Texas Employment Commission office just so that local 
office could maintain and stay open. This provided East Texas 
with service where the rural people in Texas were going to have 
to drive 60 miles to get service. This helped us staff a local 
plant as well as provide service to that geographical region. 
We see many veterans lose their representatives out of their 
local office.
    And in Arkansas, we seen the layoff of permanent state 
employees in a reduction of full-time offices to part-time 
offices. Since 1980, in Arkansas, my home state, we have 
experienced across-the-board economic industrial growth with 
11-percent growth in population and 1998 Census estimate, a 22-
percent growth in the number of men and women in the work 
force, and a 37-percent growth in the number of employers. But 
yet, our permanent staffing in the Employment Security 
Department has been reduced by 50 percent because of the lack 
of funding.
    These reductions, instituted by an employer fund service 
provider are not based upon any business decision, nor are they 
based on a technological enhancement, nor are they based upon 
the decline for the desire of the services. These reductions in 
personnel and service availability are based upon the fact that 
the taxes being paid by Arkansas employers are not being 
returned to the state but, yet, staying in Washington to pad 
the surplus. These services which taxes are being collected for 
which the citizens have a great need.
    Many states have stopped providing I-nine certification, 
which puts employers right in the middle of the Immigration 
Naturalization Service and the Equal Employment Opportunity 
Commission. Many employers have had to open up main street 
recruitment and employment offices even though we are still 
paying FUTA, and this is another way of us being taxed.
    Many work force investment boards are concerned about the 
money for their one-stops, and unless reform happens, there 
will be no money. Job seekers are confused on where to go for 
service. This is a system that is different from any other 
system. A state agency whose funding comes from a Federal 
Government, paid by the employers in that state, the budget 
issues dealing with the dedicated trust fund that is counter-
cyclical by nature with discretionary funding by Congress but, 
yet, is a mandated state system. Therefore, it should be 
treated differently.
    So what will 3174 do? For job seekers in their first 
because of a labor shortage, it will truly provide a one-stop 
no wrong door; more employment counselors to provide job 
matching and better retention and better increased services for 
the veterans; an effective UI system that will get them their 
benefits in a timely manner. With proper funding and control, 
the states could consider providing increased benefits and 
expanded eligibility for UI for claimants that fits their local 
state needs.
    For the state agency, and they are in the middle because 
they provide the labor exchange, proper funding would allow a 
forward thinking approach as to what service are we going to 
reduce next, deal with local elected officials to help them 
improve their system, and provide long-range funding for one-
stops instead of worrying about what grant they are going to 
receive. Provide employment services for all Federal work force 
investment programs into one-stop, which is the future, and 
still giving the veterans first choice.
    For employers, because we are the long-term solution to 
provide better retention and longer term careers, it improved 
employment service and a better applicant flow in the time in 
which the Unemployment rate is at its lowest. Access to state 
elected officials for proper funding for the one-stop, a 
reduction of FUTA by 25 percent, a reduction of $100 million 
that the IRS collects for tax dollars, collect in the 
distribution of FUTA. Single payment system collected 
quarterly, state certified I-9's that would help us in our 
employment group, and moneys to support the work force 
investment boards, and refer those veterans who help us fulfill 
our affirmative action plan requirements. Unemployment 
Insurance system that seeks to prevent fraud in greater 
integrity. This is a win-win-win for veteran job seekers, state 
agencies and employers.
    Thanks for your time, and please enact H.R. 3174 for all 
the right reasons. I would like to say that I have served in 
Region VI National Employer Council since 1992, an elected 
representative of employers for the states of Arkansas, 
Louisiana, New Mexico, Oklahoma and Texas. I have also served 
on the local PIC. I have also served in a job service advisory 
council. I am a member of the IAPES, which is the association 
which the people that work in the system belong to, and I have 
spent 25 years working inside this system.
    Although I am not going to receive a pension, I have 
received a lot of excellent service from this group of people 
and they have been tremendously beneficial in allowing me to 
perform my job. Thank you.
    [The prepared statement follows:]

STATEMENT OF CHUCK YARBROUGH, CHAIRMAN, BOARD OF DIRECTORS, UWC--
STRATEGIC SERVICES ON UNEMPLOYMENT & WORKERS' COMPENSATION, AND 
DIVISION PERSONNEL MANAGER, TYSON FOODS, INC., SPRINGDALE, ARIZONA

    Good afternoon, Madam Chairman and members of the 
committee. My name is Chuck Yarbrough, and I am Division 
Personnel Manager for Tyson Foods, Inc., the nation's leading 
producer, processor and marketer of poultry and poultry based 
food products, as well as other convenience food products.
    I am testifying on behalf of UWC--Strategic Services on 
Unemployment & Workers' Compensation. I am proud to serve as 
the Chairman of the UWC Board of Directors. UWC, which was 
founded in 1933, is the only business organization specializing 
exclusively in public policy advocacy on national unemployment 
insurance (UI) and workers' compensation issues. UWC is 
intimately acquainted with UI laws; our research arm, the 
National Foundation for Unemployment Compensation & Workers' 
Compensation, publishes numerous materials on UI, including the 
annual Highlights of State Unemployment Compensation Laws. I 
have also been a member of the National Employers Council (NEC) 
since 1992. I served as NEC's elected representative for 
employers in the Department of Labor's Region VI (Arkansas, 
Louisiana, New Mexico, Oklahoma, and Texas). In this capacity, 
I represented employers before the Department of Labor (DOL) 
and state employment security administrators.
    UWC is business leader of the Coalition for Employment 
Security Financing Reform, an informal coalition of business 
organizations and states who support H.R. 3174, the Employment 
Security Financing Reform Act.
    H.R. 3174 was introduced by Rep. Jim McCrery with the 
bipartisan support of 35 co-sponsors. Support for the proposal 
is growing daily. UWC and the Coalition believe that the swift 
enactment of H.R. 3174 is essential to strengthen the state 
unemployment insurance and employment services (UI/ES) system 
and the workers and employers whom it is designed to serve. 
Unlike the Administration's proposals, the bipartisan 
Employment Security Financing Reform Act will improve the 
method by which FUTA taxes are collected and funds are provided 
to administer the state UI and ES programs. The Employment 
Security Financing Reform Act will fix serious problems with 
the state UI and ES system resulting from the federal 
government's failure to provide adequate funding and will also 
provide funds needed to implement the Workforce Investment Act. 
The Administration's proposals will not achieve these goals.
    UWC supports a strong UI/ES program through which employers 
provide fair and affordable insurance benefits for a temporary 
period of time to workers with a strong attachment to work who 
are temporarily and involuntarily jobless when suitable work is 
no longer available. UWC believes that a sound UI program is 
best embodied through the state UI/ES system, with a limited 
federal role where uniformity of state law is considered 
essential.
    Unfortunately, the present system is not working 
effectively. Workers are under-served, employers are over-
taxed, and state UI/ES agencies are under-funded. Under the 
current system the federal government collects 100% of Federal 
Unemployment Tax Act (FUTA) receipts but returns only 50% to 
the states.
    Because of the chronic under-funding of UI/ES agencies, 
workers in the midst of a labor shortage are collecting more 
weeks of unemployment benefits--at employer expense--and states 
are reaching into their own general revenues--and employer 
pockets--by levying add-on taxes to make up for the shortfall 
in FUTA funds coming back to the states.
    The good news is that we have a historic opportunity to 
enact H.R. 3174 and thereby improve efficiency and streamline 
the system by fully covering UI/ES administrative costs. This 
funding is necessary to improve services for jobless workers, 
reduce taxes on employers, and alleviate the financial pinch on 
state administrators. Now that's what I'd call a ``win-win-
win'' situation.
    In evaluating legislative proposals to improve and simplify 
UI/ES administrative financing reform, UWC believes there are 3 
core ingredients:
    1. Eliminate the unnecessary ``temporary'' 0.2% Federal 
Unemployment Tax Act (FUTA) surtax on employers which should 
have expired in 1987 as promised
    2. Impose employer taxes to finance the system consistent 
with sound UI operations rather than inflexible federal budget 
rules
    3. Maintain the FUTA tax at a level that is neither 
excessive nor inadequate for UI/ES program needs.
    These concepts are embodied in H.R. 3174, the Employment 
Security Financing Act of 1999. Under H.R. 3174, the basic 
framework of the federal-state UI partnership will remain 
intact, and all benefits and legal protections for jobless 
workers will be unchanged. Let me repeat: All worker 
protections and benefits will remain in place or even be 
strengthened.
    In addition, under H.R. 3174 there will be no change in the 
rules governing the state unemployment trust accounts used to 
finance UI benefits. The 0.2% FUTA surtax will expire at the 
end of this year rather than the year 2007. However, instead of 
pooling all FUTA payments in a single federal UI/ES 
administration account (ESAA), FUTA taxes paid by employers in 
each state will be credited to a new administration account set 
up for each state. Each state legislature, rather than 
Congress, will determine how much it needs to administer its UI 
program. A small amount will be transferred into a special 
account to be used for additional grants to small states which 
need additional funds to administer their program, and a small 
amount will be set aside for U.S. Labor Department operations 
related to UI. FUTA funds that are not needed for 
administration--and excess FUTA funds that have already been 
accumulated--will automatically flow into the state's UI 
benefits account.
    Under H.R. 3174, FUTA and state unemployment taxes will be 
payable no more often than quarterly, and employers will no 
longer have to fill out duplicative FUTA and state unemployment 
tax forms. Instead, states will collect FUTA on the same form 
used for state unemployment taxes. This approach will simplify 
tax payment for employers and states, as well as the federal 
government. It will also increase tax compliance, because 
states are closer to the situation and in a better position to 
detect under-payments of FUTA.
    Finally, accountability for use of the money will be 
enhanced by requiring each state agency to report annually to 
its legislature and the public on services provided to UI 
claimants.
    Some specific advantages of H.R. 3174 are as follows:
     Better service for UI claimants, jobseekers, 
veterans and employers. States will have the necessary 
resources and flexibility to provide needed services.
     Funding to serve workers and employers in rural 
areas. Cutbacks in FUTA grants have forced states to close 
offices--this has been an acute problem for workers in rural 
areas and others who are costly to serve. H.R. 3174 will 
provide the funds needed to keep these lifelines open.
     Greater oversight by state and local worker, 
veterans, and employer groups. These groups will now have a 
critically important role in assuring the state UI/ES system 
delivers needed services effectively and efficiently.
     More resources for administration of the UI 
program. All states will be ``winners.'' With FUTA funds for 
states currently getting lost in the federal budget process, 
all states are being shortchanged.
     Greater responsiveness to local needs and 
circumstances. State legislatures, rather than federal 
appropriations committees and DOL and Office of Management and 
Budget (OMB) staff in Washington, D.C., will determine how much 
is needed to run state UI programs. This will maximize 
effectiveness by providing greater flexibility--and 
accountability for state UI/ES agencies. States are responsible 
for establishing benefit levels and eligibility, salaries of 
state employees, and other factors that affect the cost of 
administering the state programs.
     Provide more resources to prevent and detect UI 
fraud and abuse. Improper UI payments are a serious and costly 
problem, and states will have the resources they need to 
address them.
     The elimination of unnecessary paperwork for 
employers.Employers will complete and submit a single 
unemployment tax form rather than two separate state and 
federal unemployment tax forms.
     Greater accuracy in the collection of the 
administrative tax. Currently enforcement efforts relating to 
the FUTA are a low priority, but states will be motivated and 
have the ability to detect errors and delinquencies.
     Savings to the Federal government. The cost of 
having the U.S. Treasury Department collect FUTA taxes will be 
substantially reduced.
     Lower net taxes on employers/greater solvency of 
state UI trust funds. Currently the federal government keeps 
half of FUTA taxes paid by employers. If the additional revenue 
flows into state benefit trust accounts, it will improve the 
solvency of state UI benefits accounts (a DOL concern). Where 
funds are not needed for benefits, employers will pay lower 
state UI taxes, in some cases automatically, and in other cases 
through reductions in state UI tax rates.
     Greater employment opportunities. Because UI taxes 
are based on payroll, a reduction in employment taxes will make 
it easier for employers to hire additional workers--such as 
individuals coming off of welfare rolls.
     Elimination of the unnecessary 0.2% FUTA surtax. 
This payroll tax cut will contribute to employment 
opportunities by saving employers $1.5 billion or more a year.
     Additional savings. These savings are possible 
through the release of surpluses in FUTA receipts into state 
benefit accounts and through the repeal of state tax diversions 
and add-on taxes on employers, which will no longer be 
necessary.
     No reduction in legal rights or unemployment 
benefits for workers. However, better service to UI claimants 
will reduce the duration of UI claims, which has been growing 
as a result of the squeeze on state UI agencies. An average 
reduction of as little as one week will save another $1.5 
billion a year for employers by reducing their state 
unemployment tax. To many of our members, this is the element--
along with elimination of the 0.2% FUTA surtax--that offers the 
greatest promise of future savings and associated job creation 
opportunities.
     Funds will be available for states to implement 
the Workforce Investment Act and operate One-Stop Centers which 
deliver UI benefits and coordinate employment services. Without 
H.R. 3174, there will be no funding for states to deliver the 
services mandated by DOL.
    We recognize that today the UI program is not perceived to 
in a ``crisis'' mode and therefore may not be high on the 
agenda for immediate action by Congress. However, this is the 
most propitious time to institute meaningful reforms that can 
improve service for jobless workers, save money for the federal 
government, free resources for the states, and reduce the tax 
burden on employers.

ADMINISTRATION PROPOSALS

    The Administration has asked Congress to consider several 
UI proposals.
    As it has done in previous years, the Treasury Department 
has submitted a budget proposal for FY 2001 which again will 
require employers to file FUTA and state unemployment taxes 
monthly rather than quarterly. UWC and the Coalition are 
staunchly opposed to such a requirement. Monthly filing is a 
budget ``gimmick'' that will permanently triple the paperwork 
for employers and state UI agencies, while raising virtually no 
additional revenue (it would allow some revenue to be 
``scored'' for budget purposes because a relatively small 
amount of taxes would be received in an earlier fiscal year). 
Conversely, H.R. 3174 will codify quarterly filing of 
unemployment taxes.
    DOL has asked Congress to enact its ``UI Safety Net'' 
proposal, H.R. 1830. The major provisions of H.R. 1830 will (1) 
provide monetary rewards to states that meet or make progress 
on new federal standards for state trust fund solvency; (2) 
provide additional funds for UI/ES administration to states 
which implement an alternative base period in place of (or in 
addition to) the ``first 4 of the last 5 quarters'' test used 
in most states; and (3) expand eligibility for extended 
benefits.
    We believe H.R. 1830 will take the UI program in the wrong 
direction and will hurt the workers it is designed to help. 
H.R. 3174 is a much more flexible, effective and efficient way 
to improve the UI system.
    The problems with H.R. 1830 are as follows:

1. A federal solvency standard for state UI programs is 
inappropriate

    Although UWC encourages states to exercise fiscal 
responsibility by establishing taxes at the level reasonably 
needed to fund benefit costs, and we believe that DOL has 
performed a public service by calling attention to trust fund 
balances, UWC does not advocate adoption of a federal solvency 
standard for state unemployment trust accounts, either 
directly, or indirectly by rewarding states that meet the 
standard with the release of more FUTA funds. There are simply 
too many differences among the states for a single federal 
standard to make sense. UWC is a strong proponent of the 
present requirement to pay interest on federal loans, which 
must be levied separate from state unemployment taxes. The 
existence of the interest requirement provides significant 
incentive for states to act responsibly. Furthermore, many 
states may reasonably choose more flexible funding approaches, 
if their costs are lower through borrowing on the open market 
rather than relying on interest-bearing federal advances.
    The accumulation of large surpluses in periods of economic 
prosperity can stimulate calls to liberalize benefit 
eligibility and/or increase benefit levels, which would 
increase the risk of insolvency. A one-size-fits-all standard 
fails to take into account triggers under existing state laws, 
which rapidly and automatically raise additional funds when the 
balance drops below a given figure; if the trigger is only 
slightly lower than the minimum funding level DOL recommends, 
the state is still acting responsibly, but the standard would 
treat the state as out of compliance. Finally, the DOL proposal 
would rely on historical experience that may not be indicative 
of future experience. During the past 20 years, there has been 
a dramatic change in the American economy and work place 
demographics. In many (if not most) states, using old figures 
that are now obsolete will produce misleading results.
    We reiterate our strong conviction that reducing the FUTA 
rate rather than returning some excess FUTA funds with new 
strings attached is a more sensible tax policy than the 
solvency mechanism in H.R. 1830. H.R. 3174, by lowering the 
FUTA rate and providing making more funds available to state 
benefits trust accounts, is a more effective approach to 
improve state solvency.

2. States should be free to determine the base period for 
establishing UI benefit eligibility

    The base period used to determine whether a worker has 
sufficient wages to qualify for benefits is both a test of 
attachment to work and a measure of efficiency of 
administration. Using the first 4 of the last 5 quarters is the 
more efficient approach, considering resources of state 
agencies and employers, because this information has already 
been reported. At one time, many states used the ``wage 
request'' method, under which the employer is asked for wage 
information only when a worker files a claim. However, the 
federal government mandated submission of quarterly wage 
reports for all employees--for reasons of efficiency. Now that 
this costly change has been implemented, employers are opposed 
to a federal mandate to use both wage request and wage report 
systems, which is the most inefficient approach. Of course, the 
limited amount of additional FUTA grants for states with 
alternative base periods--which we do not believe would be 
sufficient to offset the cost to states--does nothing to reduce 
the added burden on employers.
    Litigation attempting to interpret the FUTA as somehow 
requiring states to adopt alternative base periods was 
initiated in Illinois and California. In 1997, however, 
Congress enacted legislation expressly amending FUTA to preempt 
federal courts from misinterpreting the FUTA in this fashion. 
H.R. 1830 appears to reverse this congressional determination, 
and we believe it is ill-advised in this respect.
    Although UWC opposes a federal mandate for state adoption 
of alternative base periods, or an inducement in the form of 
``greenmail'' (higher grants for states with alternative base 
periods), we do not oppose the voluntary adoption of 
alternative base periods by states. States should continue to 
be free to consider alternative base periods, as a number have 
already done. Unlike a unilateral federal mandate, states can 
consider these proposals as part of a balanced examination of 
its unemployment insurance statute, taking into account various 
UI-related concerns of workers, employers, and the state 
agency.
    By making more funds available for state administration of 
UI and employment services, H.R. 3174 is a more flexible and 
permanent way to provide administrative resources for those 
states which choose to use alternative base periods.

3. ``Trigger'' levels for extended benefits should not be 
changed

    The DOL proposal reflects its concern that the present 
extended benefits (EB) triggers may be too difficult to satisfy 
during economic downturns, leading to congressional 
intervention that is more expensive than a more liberal EB law 
would have been. We believe further study of EB triggers is 
warranted, but also observe that Congress has a propensity to 
mandate supplemental benefits as part of its response to an 
economic downturn, regardless of EB trigger levels.
    DOL and other supporters of benefits expansion cite state 
UI ``recipiency'' rates, i.e., the percentage of all unemployed 
workers who collect UI benefits to justify extending UI 
eligibility to individuals with weak attachment to work or who 
are not involuntarily unemployed because the employer does not 
have suitable work available. Using the DOL formula, the 
percentage of all unemployed individuals who now collect UI 
benefits is lower than at previous times. However, while this 
information is of interest, it does not justify the conclusion 
that the UI program is not working as intended.
    First, let me say that UI benefit recipiency should be low 
during our present prosperous economic conditions. Jobs are 
plentiful, and in most areas of the country workers who want to 
work can easily find employment. In today's economy, workers 
realize that a new position may be available almost immediately 
and may not believe it is worth filing for UI benefits for the 
brief time between jobs.
    Furthermore, using the recipiency rate as a test of whether 
UI is serving its intended purpose is misleading for several 
reasons.
    1. The recipiency rate counts as unemployed many people who 
are not and should not be receiving UI:
     Workers who are disqualified because they 
voluntarily quit their jobs
     Workers who are disqualified for misconduct or 
fraud
     UI claimants who have exhausted their benefits
     New entrants or recent reentrants to the labor 
force
     Workers who do not qualify for UI because they 
have a weak attachment to work
    2. Many eligible UI claimants choose not to file for UI 
benefits. In many cases, they have been discouraged from filing 
for benefits because of the closure of state UI/ES offices due 
to inadequate FUTA funding. Another important factor is the 
fact that jobs currently are plentiful--many people do not file 
a claim knowing they can quickly and easily return to work at 
any time.
    3. Statistics on the number of UI claimants and the 
individuals who are considered in the total unemployment rate 
use different geographic tests, leading to distortions in 
computing the recipiency rate in areas of the country with 
extensive numbers of workers who live in one state but work in 
another.
    4. Recipiency rates vary widely from state to state. Some 
states which use expansive eligibility criteria have low 
recipiency.
    The federal government must fix the UI/ES problems it has 
created
    Employers, who finance the UI program through federal and 
state payroll taxes, regard UI as an integral part of the array 
of the employee benefits they provide. Because employers pay 
for UI, UI costs are a part of business overhead. UWC believes 
it is important to keep UI costs as low as possible consistent 
with its basic goals: prompt return to suitable work by workers 
with a strong work attachment who lose their jobs through no 
fault of their own, as the result of action taken by their 
employer in managing its workforce. By design, UI allows such 
workers to collect benefits partially replacing wages during 
short-term unemployment, while they are able to work and are 
actively seeking suitable full-time employment. How much work 
constitutes ``attachment,'' what percentage of lost income is 
sufficient ``partial wage replacement,'' how long is ``short-
term,'' what makes unemployment ``involuntary,'' and which work 
is ``suitable,'' are all key issues that bear on the cost of 
the program to employers. We believe these questions are best 
resolved by each state under its own UI statute, in light of 
its own needs and economic circumstances.
    During the past 20 years, many American businesses have 
undergone a basic restructuring to achieve efficiencies 
necessary for them to be competitive in the global economy. 
This restructuring, while painful at times, has produced a 
healthy economy in the United States, including a booming stock 
market, a budget surplus, and the lowest unemployment rate in 
more than 25 years. American workers have shared in this 
prosperity.
    UWC supports responsible funding for the UI system and 
opposes over-taxation. Payroll taxes for UI should be at the 
minimum level necessary to provide the protections promised, 
because unnecessary taxes harm corporate competitiveness in the 
United States. It is especially important for the counter-
cyclical UI program to be mindful of this principle, because 
benefit improvements instituted during periods of low 
unemployment could create damaging cost increases when the 
economic cycle turns, as it eventually will.
    The greatest problem most employers are experiencing with 
the UI program--and according to Alan Greenspan, the greatest 
threat to continued economic growth--is a labor shortage. The 
tight labor market makes it important to avoid policies that 
will increase utilization of transfer payments such as UI at a 
time when employers are having difficulty finding applicants 
for job openings.
    We want to provide some additional specifics about employer 
concerns with the present federal role in the UI system.

1. FUTA tax rate is too high

    Under current law, the Federal Unemployment Tax Act (FUTA) 
rate is 0.8%. This rate is 25% too high as the result of a 0.2% 
``temporary'' surtax which is no longer needed and which is now 
being collected only because inclusion of the FUTA surpluses in 
the unified federal budget allows the federal government to 
meet budget targets for other spending programs. Federal law 
expressly limits the use of FUTA funds to UI/ES functions 
spelled out by statute. The practice of counting FUTA funds for 
spending on other programs, leaving only an IOU and an 
accounting entry behind, is contrary to the very reason why 
Congress placed these funds in the Unemployment Trust Fund in 
the first place. In effect, the budget rules allow the misuse 
of FUTA funds for purposes unrelated to the UI/ES system.
    Congress originally imposed the surtax in 1976 to pay for a 
temporary federal program of supplemental benefits for workers 
who had exhausted the 6 months of regular state UI and the 3 
month extension under the permanent Extended Benefits (EB) 
program. The deficit created by the supplemental program was 
retired in 1987 but the surtax has been extended until 2007.
    Despite the fact that the ceilings on the FUTA accounts in 
the Unemployment Trust Fund were doubled when the surtax was 
last extended, balances in these accounts now far exceed their 
statutory ceilings. When the FUTA accounts are all at their 
maximum, as they are today and into the foreseeable future, a 
law known as the ``Reed Act'' requires any surplus to be 
distributed into the state UI benefits accounts. However, 
instead of making this disbursement, the Reed Act distribution 
has been limited to $100 million a year. Consequently FUTA 
funds are building up despite the statutory ceilings.
    Let me make repeat: The revenue from the FUTA surtax is not 
needed for the UI program. Only 50 cents out of every FUTA 
dollar is being spent as intended on administration of the UI 
program and state employment services. Furthermore, no 
additional accumulation of funds in the account used to pay the 
50% federal share of extended benefits (EB) is necessary to 
meet foreseeable needs, even if EB triggers were lowered as 
proposed by DOL in H.R. 1830.
    Some proponents of an increased federal presence in the 
state UI system and expansion of state UI benefits and 
eligibility propose to hold the elimination of the unnecessary 
FUTA surtax ``hostage'' to justify new federal mandates or 
``incentives'' for states to expand their UI programs. 
Similarly, in H.R. 1830 DOL has proposed that new ``strings'' 
be tied to the distribution of Reed Act funds by allowing the 
funds to flow only to states that meet new DOL solvency. DOL 
has also proposed that additional Reed Act distributions be 
tied to state expansion of eligibility for benefits. However, 
it is better unemployment insurance policy and tax policy to 
lower the FUTA rate and let states continue to determine their 
own reserve needs and benefits and eligibility standards.

2. State administrative grants are too low for efficient 
administration

    To effectively serve its customers, UI/ES agencies must be 
efficiently administered. In recent years, this goal has been 
frustrated because appropriations for state UI agencies have 
been inadequate, leading to a reduction in claims services for 
jobless workers that in turn results in indirect state tax 
increases. This indirect tax comes about because the average 
claim duration is longer (and thus cost is higher) than 
necessary. Average claim duration is extraordinarily high for 
the present period of low unemployment.
    Although (as mentioned above) FUTA revenue is legally 
dedicated to funding the operations of state UI administrative 
agencies, in practice U.S. budget laws and the appropriations 
process force state UI administration to compete for funding 
against other social welfare programs that are funded from 
general revenues. UWC believes that this process is fatally 
flawed and that the funding decision for state UI agencies 
should be handled at the state level. We recommend that each 
state, rather than Congress, be given authority to control the 
appropriation of FUTA funds paid by its own employers.

3. Employers are quadruple taxed

    Employers pay more than enough in FUTA taxes to provide 
proper funding for state UI and ES agencies, but because of 
inadequate flat-line federal administrative grants for state 
UI/ES agencies we've been asked to pay a second, third, and 
fourth time--quadruple taxation. The inadequate federal grants 
have directly increased the state tax burden on employers in 
several ways.
     Many states have been forced to dip into their own 
general revenues or impose new add-on payroll taxes on 
employers--above and beyond the state tax used to finance UI 
benefits--to make up some of the shortfall in FUTA funding from 
Washington. Most of the additional tax burden directly or 
indirectly falls on employers.
     In addition to the add-on taxes, basic state UI 
taxes are inflated because inadequate funding for fraud and 
abuse and re-employment services results in workers collecting 
additional weeks of UI benefits. DOL estimates that UI claims 
on average now last 2 weeks longer than expected in this tight 
labor market.
     On top of paying higher state taxes, many 
employers are forced to expend additional resources for 
employment services we've already paid for through FUTA but 
don't receive because states have been forced to close offices 
and eliminate employment counselors and other services. For 
example, my own company has actually paid the rent to keep the 
local employment service office open in Carthage, Texas.
    Freeing FUTA funds already contributed by employers for the 
very purpose of providing efficient and effective UI and ES 
services-as proposed in H.R. 3174--will eliminate the need for 
supplemental taxes and unnecessary direct expenses.

4. Ineffective work search enforcement and excessive amount of 
improper payments

    The UI system is designed so that claimants generally can 
collect unemployment benefits only while they are actively 
seeking work. However, lax enforcement of the work search test 
continues to be a major weakness of the UI program, resulting 
in more costly claims and higher taxes than necessary. We 
recommend that state agencies be required to be publicly 
accountable for their use of FUTA funds.

5. Unemployment taxes are too complicated

    The present unemployment tax system is needlessly 
complicated. Although the federal government holds all the 
money, employers must file two separate federal and state 
unemployment tax returns. This situation only doubles the 
paperwork. Moreover, the Internal Revenue Service often pays 
relatively little attention to small FUTA payments, which 
causes inaccurate and inconsistent enforcement and is unfair to 
honest, conscientious taxpayers. We advocate that states 
collect FUTA on the same form used for filing state 
unemployment taxes--cutting the paperwork in half, and 
increasing accuracy.

6. Income tax on UI benefits should be repealed

    Although we believe benefits adequacy determinations should 
be made at the state level, there is one step UWC would support 
at the federal level that will increase the purchasing power of 
UI benefits. Under the present federal income tax, amounts 
received as unemployment benefits are considered taxable 
income. UI benefits are also taxable as income under state 
income tax codes that ``piggyback'' onto federal income tax. 
However, similar types of benefits that replace involuntary 
loss of wages--workers' compensation, for example--are not 
taxable. UWC believes this hidden tax on UI claimants should be 
repealed, and we support H.R. 3169, the Unemployment Tax Repeal 
Act, proposed legislation introduced by Rep. Phil English that 
eliminates this unwarranted tax.

CONCLUSION

    UWC supports a strong UI system and the concept of a 
federal-state partnership, under which the UI system has been a 
general success. However, the present UI/ES system is not 
working effectively. The federal budget process as now applied 
to FUTA taxes and UI/ES administrative funding is detrimental 
to a sound, efficiently administered program. UWC has always 
advocated that state law be responsible for basic 
determinations of benefit levels, eligibility, and financing. 
The federal ``partner'' now proposes to increase federal 
involvement in areas traditionally left to the states, leading 
to higher spending and higher payroll taxes on employers. 
Considering that federal stewardship of program administration 
has resulted in over-taxation of employers and under-financing 
of administrative agencies, we believe that workers, employers, 
and the public will be better served if instead of an expanded 
federal presence, states are allowed greater control over FUTA 
resources contributed by their own employers, as provided in 
H.R. 3174.
    Federal expansion of the UI program, as proposed in H.R. 
1830 or other proposals, will take the program in the wrong 
direction. Expanding the program through relaxed eligibility 
rules and higher weekly benefits will ultimately weaken the 
system and hurt those individuals it is designed to protect. 
The UI system is designed for workers with strong attachment to 
work who become involuntarily unemployed because their 
employers no longer have suitable work available for them. 
Federally mandate or financial incentives for state benefit 
expansions will dilute the purposes of the UI program. They 
will also increase federal spending and restore policies that 
greatly contributed to the bankruptcy of the UI program in the 
1970's and 1980's in many states. These policies will produce 
the same result when the economic cycle turns by making the UI 
program much more costly. Instead of sending more money to 
Washington, UWC believes that it would far more sensible 
instead to improve the system and direct funds where they are 
needed, as provided in H.R. 3174.
    I therefore urge that you actively work to enact H.R. 3174 
on a bipartisan basis, while opposing the Administration's 
proposals. H.R. 3174 is sound public and fiscal policy, and we 
respectfully urge you to support its speedy enactment.

                                

    Chairman Johnson. Thank you very much, Mr. Yarbrough. Mr. 
Smith, David Smith, Director of Public Policy Department, AFL-
CIO.

  STATEMENT OF DAVID A. SMITH, DIRECTOR, DEPARTMENT OF PUBLIC 
POLICY, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL 
                         ORGANIZATIONS

    Mr. Smith. Madam Chair, thank you. Members of the 
Committee, I am delighted to be here on behalf of our almost 14 
million members. You have my testimony so let me try to briefly 
focus on a couple of issues.
    Chairman Johnson. Excuse me. Mr. Smith, do we have your 
testimony?
    Mr. Smith. You should.
    Chairman Johnson. Oh, thank you. Okay. Thanks.
    Mr. Smith. It looks like you do, Madam Chair. As the 
previous panelists have said and as you heard earlier today, we 
have an enormous opportunity now to take advantage of the 
expansion, to take advantage of the relatively burgeoning 
coffers in the system to make some long needed reforms and 
address the sort of absurdities, Mrs. Johnson, that you talked 
about, the widely uneven levels of funding, the growing 
disparity of benefits, and frankly, I think the increasing 
fragmentation of the system.
    Let me emphasize two things and then briefly touch on three 
or four others that Mr. Yarbrough and others mentioned. This 
system is out of date in important ways. It is out of sync with 
the work force. It hasn't changed either to keep up with 
changing patterns of employment or changes in the employment 
relationship itself.
    First, as more and more women have entered the workforce 
and their attachment is not so regular. It is interrupted by 
child-care and other reasons; and as more of us have contingent 
or part-time relationships to the work force, the sort of 
assumptions that underlie the structure of benefit provision 
that assume all of us work full-time for an employer for most 
of our lives and are only disrupted by cyclical movements in 
the economy simply don't work. We need to change eligibility 
rules to reflect those changes in the work force, and the 
workplace.
    You know, in over a dozen states today, less than 25 
percent of workers who experience unemployment are eligible for 
Unemployment benefits. There are a number of suggested 
eligibility reforms that are talked about in my testimony. Let 
me mention six of them briefly.
    Most importantly, we need to move to an alternative base 
period that captures the most recent period of employment. That 
is the single largest cause of the enormous falloff in coverage 
that I described. We need to lower the earnings threshold to 
something on the order of 400 times the state's minimum wage. 
And we ought to increase the taxable base. The FUTA base at the 
moment, as you know, is only $7,000. It has been there for 
almost two decades.
    Several people have, and others will, commented on the 
inequity out current funding. As all of you know well, the best 
way to address inequity in funding is to broaden the base and 
lower the rate. But with the base so low, it is very difficult 
to think about that. As I think Mr. English mentioned, we 
certainly need to address the extended benefits trigger, and we 
ought to speak to the issue of taxation of benefits. Mr. Cardin 
has been very interested in coverage of part-time workers and 
eliminating the exclusion for those who wish to continue to 
seek part-time work. He is absolutely right, we ought to do 
that.
    As both of the previous speakers have said, this is a 
system that is badly underfunded. But I think we too quickly 
come to the conclusion that devolution is the answer. First, 
there are important administrative coherence reasons that Mr. 
Uhalde talked about, which would suggest that too much 
devolution will magnify the problems of our currently 
fragmented system rather than fix them. But I would add 
another.
    Our labor market is no longer only a local labor market or 
a metropolitan area labor market, it's a national labor market. 
And the Employment Service system needs to have the same kind 
of scope and reach that labor markets do in order to adequately 
address both the Employment Service needs and the Unemployment 
Compensation administrative needs.
    I think I agree with what several of you have said, both my 
colleagues have said, that the first place to start fixing the 
administrative funding issue is that we ought to move it from 
the discretionary to the mandatory side of the budget. There is 
no reason to continue the current practice. And as we move it, 
that will obviously require the development of a formula. There 
are some principles that ought to guide the development of the 
formula. We ought to hold states harmless against current 
levels of funding. There should be adequate funding to support 
both a technological and a personal infrastructure that is 
appropriate. And we ought to consider building in some 
flexibility between ES and UI functions.
    Three concluding points, Madam Chair. You know, the 
question of fraud is an interesting one. Now, clearly, none of 
us are going to come out in favor of fraud, but as I think you 
know, and as the Department of Labor has testified, the most 
serious problem facing the system that might be described as 
fraud is underpayment by employers, not overpayment to 
employees. We think the resources devoted to going after 
overpayment as opposed to those that go after underpayment by 
employers ought to be looked at. We think they are upside down 
at the moment.
    Repeal of FUTA is not the answer. Surely, it should be 
considered as part of a comprehensive reform as Mr. English 
mentioned, but it ought not to be considered on its own. We 
can't, on the one hand, sensibly talk about a system that is 
badly underfunded and talk about repealing part of its revenue 
base in a single isolated stroke. In a comprehensive reform 
package that addresses the issues that we have raised and that 
others have raised, we certainly ought to think about that. But 
we ought not to begin with the assumption that the answer to 
our problems is repeal of FUTA.
    Lastly, a comment on the stakeholder process which Mr. 
Gross has chaired and that many in this room have been involved 
in. It hasn't reached a conclusion, Madam Chair, that can come 
to you and your colleagues at the moment, but the effort is 
moving in that direction. It is one we intend to continue to 
participate in and we look forward to working with you to bring 
us all to a conclusion that can address--take the opportunity 
we now have to address some of these overwhelming problems. 
Thank you.
    [The prepared statement follows:]

STATEMENT OF DAVID A. SMITH, DIRECTOR, DEPARTMENT OF PUBLIC POLICY, 
AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

    Madam Chair, and members of the Human Resources 
Subcommittee, I would like to take this opportunity to thank 
you for holding this hearing on the unemployment insurance and 
employment services system, and for inviting the American 
Federation of Labor and Congress of Industrial Organizations to 
testify on behalf of the workers whom these programs were 
intended to serve. Contrary to the views of others, we believe 
that now--as the unprecedented economic expansion continues and 
state trust funds fill with money--is the time to carefully 
consider and craft reforms to this important system that 
economically sustains workers during a particularly hard time 
in their lives and links them to re-employment services, 
including job training and a job search, and that operates to 
enhance the economy's capacity to respond to downturns and 
change. Certainly, the middle of a recession will be too late 
to make the reforms we will mention in our testimony.
    The union movement believes that the unemployment insurance 
(UI) and employment services (ES) systems are in desperate need 
of repair and reform. Currently, the UI and ES system is 
failing to serve its three principle objectives: (1) providing 
income replacement during periods of unemployment; (2) 
improving the economy's counter-cyclical capacity; and (3) 
serving as a gateway to re-employment. We believe that the 
goals and interest of all who have an important stake in the UI 
system--workers and their representatives, the Department of 
Labor, states and employers--can be best accomplished with a 
comprehensive proposal that addresses the concerns of all 
interested parties.
    In its 1994 Report and Recommendations, the Advisory 
Council on Unemployment Compensation stated that the core 
mission of the UI/ES system is to ``serve as the foundation of 
economic security for millions of workers who are temporarily 
laid off or permanently lose their jobs.'' What is best for the 
working families the UI program serves and what is best for the 
economy as a whole are dependent upon each other and lead to an 
inevitable conclusion about the appropriate course of action: 
Federal and state unemployment insurance reforms that 
strengthen program capacity, expand eligibility, and improve 
benefits for workers. These same considerations counsel against 
major program changes, such as the devolution of administrative 
financing, that will further fracture and fragment an already 
highly decentralized system that already vests extensive 
authority in the states.

THE UNEMPLOYMENT INSURANCE PROGRAM FAILS TO MEET NEEDS OF 
TODAY'S WORKING FAMILIES.

    The national UI system has fallen into a state of 
disrepair. It pays too few of the unemployed too little in 
benefits for too short a time with too little help in finding 
re-employment. Falling wages, more women in the workforce, 
declining manufacturing employment, the growth of 
``contingent'' work, and reduced unionization have combined 
with higher eligibility requirements and tougher penalties to 
reduce access to benefits for the unemployed. States continue 
to maintain eligibility standards for UI benefits that are 
largely based on the concept of a workforce that is comprised 
mostly of men who are their families' principal breadwinners 
and who work on a full-time permanent basis in blue collar 
manufacturing jobs. This conceptualization of the workforce no 
longer fits:
     Women comprise almost half of the workforce. 
Sixty-five percent of the mothers of young children are working 
for pay.
     Over the last decade, ``non-standard'' or 
``contingent'' work, such as part-time, temporary or contract 
positions, has accounted for almost one-third of all jobs. 
These positions are often not the ``choice'' of workers: many 
employers only hire on a part-time basis, while other workers 
are forced to take part-time work to care for a dependent 
child, or elderly parent.
     The share of workers earning the poverty level or 
less rose from 24% in 1973 to 29% in 1997.
    The failure of the states to change their eligibility rules 
to reflect the realities of the workplace and work force have 
resulted in ever increasing numbers of workers being excluded 
from UI and ES benefits and services. More than a dozen states 
(Kansas, Florida, Virginia, Utah, Texas, New Mexico, South 
Dakota, New Hampshire, Colorado, Georgia, Arizona, Louisiana 
and Oklahoma) pay benefits to 25% or less of their unemployed 
workers. Of course, unemployed workers who do not receive 
benefits have already had unemployment insurance taxes withheld 
from their wages (like any other payroll tax, workers pay by 
reduced wages; employers simply write the check) and as such, 
are paying for a social insurance system that does not provide 
them benefits.
    Several UI reforms would address these eligibility problems 
and, in the process, also make the UI/ES system run in a more 
fair manner for all parties involved.
    Alternative (Movable) Base Periods--States should be 
required to count the most recent wages of a worker when 
calculating minimum earning for UI eligibility. Failing to 
count these wages disqualifies more workers from UI benefits 
than any other eligibility rule. Six to eight percent of the 
unemployed would gain access to benefits if states simply 
counted their most recent earnings.
    Lower the Earnings Threshold--The monetary eligibility 
tests of UI were intended to measure attachment to the labor 
force. As wages have fallen and work patterns are increasingly 
irregular, state monetary requirements no longer accurately 
account for a worker's commitment to work. The Advisory Council 
on Unemployment Compensation recommended that earnings 
requirements not exceed 800 times the state's minimum wage. 
However, even this amount is too high given the growth of low-
wage and contingent work. Reducing the earnings threshold 
further, to an amount equal to 400 times a state's minimum 
wage, will allow more hardworking, low earning workers to 
qualify for benefits.
    Increase the Taxable Wage Base--The federal taxable wage 
base has been fixed at $7,000 since 1983. This low base 
violates a fundamental principle of equity in generating UI 
revenue: it regressively taxes a larger portion of payroll for 
lower wage employers than high wage employers. Raising the 
taxable wage base will restore progressivity to the system, 
generate needed resources , and reduce burdens on small 
employers. Today, 41 states have taxable wage bases that exceed 
the federal level.
    UI Benefits Should not be Subject to Taxation--Currently 
all UI benefits are taxed as income. This is a cruel tax on 
individuals suffering economic hardship. As state benefits have 
declined, unemployment insurance benefits now replace an 
average of 46% of previous wages. The additional reduction of 
benefits through taxation reduces the value of benefits for 
individuals and limits the counter-cyclical impact of the UI 
system.
    The Extended Benefits Trigger Should be Fixed Before the 
Next Recession--Due to reforms in the 1980s, the current 
trigger does not accurately reflect labor market difficulties. 
A lower trigger, tied to the state's total unemployment rate, 
would be more responsive to recessionary conditions. Special 
Extended Benefit eligibility requirements, which often mandate 
an even-greater job search during a recession, should be 
eliminated.
    Coverage of part-time workers--As we previously stated, 
part-time work is often not a ``choice'' for the worker. In 
recognizing both the changing job market and workforce family 
obligations, searching for part-time work should not disqualify 
claimants.
    Expanding Coverage for Personal Cause Reasons for 
Separating From Employment--State laws vary in their treatment 
of personal issues such as quitting work to move with a spouse, 
domestic violence, child and elder care and part-time work 
requirements. The union movement supports efforts to expand 
personal cause exemptions as a valid response to new labor 
market realities.
    Tying Workers to Temporary Help Agencies--In some states, a 
worker who loses a job which she obtained through a temporary 
help firm must reapply to that temporary firm or be ruled 
ineligible. These laws essentially lock unemployed workers into 
temporary jobs by preventing them from seeking alternative 
employment. The AFL-CIO opposes this effort to degrade the 
employment opportunities of the unemployed.
    Eliminating Non-Monetary Disqualifications--The use of 
durational disqualifications--penalties which eliminate 
eligibility during the entire period of unemployment instead of 
reducing weeks of eligibility--has expanded to include a wide 
range of both separation issues and continued eligibility 
decisions. Re-qualification requirements have also increased, 
forcing unemployed workers to find jobs and work extensively 
before regaining eligibility for benefits. Regardless of the 
cause of separation, at some point in the duration of an 
unemployment spell, the initial cause of separation is no 
longer the determining factor in individuals condition of 
unemployment and that person should be eligible for benefits.

IMPROVEMENTS IN ADMINISTRATIVE FINANCING

    By all accounts, the UI and ES systems have been badly 
underfunded in recent years. Insufficient federal funding is 
leading to harmful state responses. Recent efforts to devolve 
administrative financing decisions entirely to states, however, 
in response to this shortfall is a step in the wrong direction, 
adding greater state authority to a system which already relies 
too heavily on state discretion. Devolution will result in a 
less responsive national system as the federal government loses 
the ability to shift funds among states to match ability to pay 
and need. A state-based financing system will also effectively 
destroy federal oversight by eliminating the incentive which 
the rebate of federal taxes provides. Devolution of 
administrative financing will likely exacerbate competition and 
the corresponding race to the bottom among states, as it 
increases states' capacity to use their UI programs as lures to 
attract business. Finally, the additional fracturing and 
fragmenting of the federal-state UI program resulting from 
devolution makes no sense in an economy that increasingly 
operates nationally and competes internationally.
    As states' reaction to the recent economic expansion has 
shown, devolution will do nothing to address the UI systems' 
problems for workers, though it very one-sidedly implies that 
states will use their additional funding to shore up the system 
for workers. As the economic expansion has resulted in ever-
increasing amounts in state trust funds, the end result has not 
been an expansion of eligibility or an increase in benefit 
levels. Instead states have fallen all over themselves to 
provide tax break after tax break to employers. Devolution of 
administrative financing will add even more fuel to this race 
to lower employer taxes, resulting in continued downward 
pressure on benefits.
    We believe that the answer to the administrative financing 
crisis is mandatory reclassification of administrative funding 
for the Employment Security trust fund using a formula that 
reflects need. To this end, the AFL-CIO has established 
principles for guiding formulation of both the budget 
formulation and an interstate distribution.
     No state should receive less than it currently 
receives.
     There should be stable funding to support stable 
infrastructure for both ES and UI, which is not affected by 
economic fluctuations and which reflects state variations in 
costs and policies.
     While reflecting actual state needs, the base 
budget also can and should reflect other policy goals and be 
supplemented by additional resources to promote certain policy 
objectives.
     Consider flexibility of funding between ES and UI 
functions.
     Contingency funding should be continued.
    While we continue to search for an effective solution to 
the administrative financing problem, the AFL-CIO firmly 
opposes proposals based on the concept of a state match. We 
have yet to see administrative finance proposal based on a 
state match that is workable. Under a state match financing 
system, states determine how much money will be spent on their 
UI/ES programs, no matter how inadequate. In a climate where 
the UI system is highly politicized, Governors may attempt to 
curry favor with business by proposing tax cuts rather than 
benefit and coverage improvements. Given that the federal 
government would have no control over the accounts states will 
use to fund their share of the state match, there is nothing to 
stop states from taking significant amounts from their general 
revenue funds to pay for their match, even if these programs 
are equally important to vulnerable populations. This becomes 
especially problematic during a recession when additional funds 
are needed for both UI and other programs.
    Handing this type of control to states is tantamount to 
devolution Because the state match system leaves little control 
over state behavior, there is no way to ensure that states will 
contribute additional funding to their UI/ES systems during a 
recession. Perhaps worst of all a state match will lead to a 
``race to the bottom'' as states forgo good practices such as 
keeping UI/ES open, depending less on telephone claims, 
providing multilingual staff and materials and extending 
benefits for training. A state match provides a perverse 
incentive for states to cur investments in administrative 
reforms that serve workers, while providing tax cuts to 
employers, leading to further benefit cuts.

ADDRESSING FRAUD AND ABUSE

    The AFL-CIO agrees that the UI/ES system should address 
problems of fraud and abuse, whether perpetrated by recipients 
or by employers. It is troubling, however, that many in 
government, especially at the state level, focus largely on 
overpayments to workers due to error (whether on the part of 
the worker or the state) as fraud, while showing considerably 
less concern about underpayments by employers. It is our 
experience that most recipients who receive overpayments after 
they have begun work at a new job often do not understand that 
they are not entitled to the money, and do not understand that 
states may seek recoupment in the near or distant future.
    DOL reports that since the early 1990s, the number of 
employer audits performed by the state Employment Services 
agencies declined by 30 percent, indicating that it is 
increasingly easy for employers to get away with cheating on 
their UI taxes. As of last year, DOL states underpayment by 
employers have cost the system far more money than overpayments 
to workers. Administrative financing reform will allow states 
and the federal government to target employers and industries 
that routinely underpay taxes, and aggressively pursue taxes 
that are owed the system. The AFL-CIO believes that 
implementation of employer profiling would target those 
employers who consistently underpay UI taxes. Employers in 
certain industries, and those with a high use independent 
contractors should be the focus of monitoring and collection 
efforts. Employer profiling will create more equity among 
employers and can have a positive effect overall on employer 
tax rates.

RESPONDING TO EMPLOYER CONCERNS

    For years, many of the most vocal of employer 
representatives have declared devolution and repeal of .2 
percent FUTA surtax as the panacea to their UI problems. In 
truth, neither proposal really addresses employer's tax and 
paperwork concerns. Consolidation and piggy-backing of 
reporting requirements at the federal level (for example, FICA 
and FUTA) would have the same effect of reducing employer 
burdens without creating the problems devolution will spawn. 
Technology advances will greatly alleviate employer paperwork 
burdens, if only they were fully utilized. The Social Security 
Administration requires that employers with 100 or more workers 
file the W-2 forms electronically, and will accept voluntary 
electronic filings from smaller employers. These types of 
advances, rather than devolution, will save employers time and 
money.
    The AFL-CIO strongly opposes repeal of the .2% surtax 
unless it is tied to a package of comprehensive UI/ES reform 
that includes a solution to the administrative financing issue 
and significantly expands eligibility for workers. Repeal of 
the surtax without comprehensive reform amounts to taking a 
significant amount of money out of the system, money that would 
have been available in the case of an economic downturn, while 
the problems left unsolved for workers compound. To separate 
repeal of the surtax from comprehensive UI/ES reform is 
irresponsible and unnecessary, and will serve only to further 
fragment the parties involved in the system.
    With the understanding that all parties, worker advocates, 
DOL, state administrators and business have legitimate concerns 
for a program that is not working, the AFL-CIO participated in 
good faith for almost a year long effort to craft comprehensive 
UI/ES reform. Clearly, because we do not have a comprehensive 
reform package to present to you, the work of the stakeholder 
group is not finished. However, we do view the efforts as more 
than a mere exercise, perhaps the only means of fixing a system 
that all parties admit is badly in need of repair. It is our 
hope that the work of this group will continue and ultimately 
culminate in reforms for a system that will truly serve as the 
financial lifeline to workers who lose their jobs, the bridge 
to successful re-employment, and a stabilizer for the economy.
    In conclusion, we all must face the reality that the good 
economic times will ultimately end, and in the past, efforts to 
``fix'' the UI/ES system were hurried, leading to decisions 
that we now know hurt, rather than help the situation of 
unemployed workers. But worst of all, efforts to ``fix'' the 
UI/ES system came far too late for working families seeking 
assistance during economic hard times. Therefore, it is 
essential that we reform the UI/ES system while there is time 
and money, and work to strengthen the program to become the 
national economic safety net for unemployed workers, and their 
path to re-employment as it was created to be.

                                

    Chairman Johnson. Thank you. I do hope that one of the 
things that will come out of this meeting is that there is some 
urgency about that. And there are some things that we can do at 
this time and there are some things we can't do. So maybe we 
will get better parameters out of this.
    Next I would like to recognize Mark Wilson from the 
Heritage Foundation.

 STATEMENT OF MARK WILSON, RESEARCH FELLOW, HERITAGE FOUNDATION

    Mr. Wilson. Thank you, Madam Chairwoman, Members of the 
Committee, for giving me this opportunity to testify before you 
today. As the 106th Congress begins its debate over the 
Unemployment Compensation system, I would like to encourage the 
members to consider three important principles to ensure that 
both workers and employers receive the greatest benefit from 
any reform.
    First, we need to reduce the record high tax burden on 
American jobs. Second, we should consolidate to the greatest 
extent possible the responsibility for the Unemployment 
Compensation system to one level of government. And finally, 
Unemployment Compensation benefits should be paid only to 
individuals who are involuntarily out of work.
    Members of the Committee, the third largest tax increase in 
the Taxpayer Relief Act of 1997 was an extension of the 
temporary FUTA surtax that was scheduled to expire at the end 
of 1998. Ending the FUTA surtax would reduce the overtaxation 
of American jobs and allow workers and employers to keep nearly 
$8 billion more of their hard earned money over the next 5 
years to spend and invest as they see fit.
    Consolidating responsibility for the UC system at one level 
of government is important. The taxing and spending authority 
for the UC system should not be split between the Federal and 
government states. In 1996, Congress passed Welfare reform that 
provided states with greater flexibility while holding them 
accountable for reducing Welfare caseloads.
    In 1998, Congress passed the Work force Investment Act that 
created one-stop career centers and gave states greater 
responsibility for job training and employment service programs 
while demanding more effective results. Instead of federalizing 
Unemployment Insurance benefits, Congress should now do the 
same for Unemployment Compensation. And a positive step in that 
direction is H.R. 3174.
    It would provide states with sufficient funding to deliver 
UC services and maintain program integrity. It would reduce the 
length of unemployment for many unemployed claimants. It would 
provide a better capacity to provide job search assistance, and 
the Employment Security system would help more claimants return 
to work sooner, which is the primary function of the 
Unemployment Compensation system. It would reduce employer tax 
and paperwork burdens and would eliminate burdensome Federal 
mandates that cause inefficiencies and impose increased costs.
    When both the UC system and the Social Security program 
were created in 1935, policymakers knew there would be 
political pressure to use tax revenue that builds up in the 
trust funds for other government programs. That is why they 
placed limits on those funds. Now the Department of Labor is 
rushing to remove those limits by regulatory fiat. Congress 
should not allow the President to unilaterally convert the UC 
program into a huge new government entitlement program 
unrelated to unemployment.
    I would like to talk a little bit about recipient rates. 
There has been a number of percentages that have been thrown 
around here, both at the state level and the national level. 
And I think it is important to remember that when looking at 
recipient rates, be it a third, be it 40 percent, be it 25 
percent, depending on whether it is a national average or a 
state average, that one use the appropriate denominator when 
calculating this percentage. It is not total unemployed, it is 
the number of job losers that is the appropriate denominator. 
It is important to remember that over half of the people who 
are currently unemployed either quit voluntarily, they recently 
reentered the labor market, or they are new entrants. They are 
not job losers. And when one uses the appropriate denominator 
when calculating this percentage, the recipients rates look far 
less onerous than they currently--some people would like to 
have you believe.
    Finally, I would like to strongly discourage you from 
moving UI and the Unemployment Compensation program to the 
mandatory side of the budget. The last thing we need is to put 
another program on autopilot here and take it out of the reach 
of Oversight or more careful, and direct, and thoughtful, and 
deliberate, of Oversight by Congress. Thank you very much.
    [The prepared statement follows:]

STATEMENT OF MARK WILSON, RESEARCH FELLOW, HERITAGE FOUNDATION

    Madam Chairman, Members of the Committee, thank you for the 
opportunity to testify before you today. The views I express in 
this testimony are my own and should not be construed as 
representing any official position of The Heritage Foundation.
    As the 106th Congress begins its debate over the 
Unemployment Compensation (UC) system, members should consider 
three important principles to ensure that both workers and 
employers receive the greatest benefit from any reform.

1. Lower the tax burden on American jobs.

    The third-largest tax increase in the Taxpayer Relief Act 
of 1997 was an extension of the temporary Federal Unemployment 
Tax Act (FUTA) surtax that was scheduled to expire at the end 
of 1998. The FUTA surtax was extended to December 2007 because 
many Members thought they needed to increase tax revenues to 
balance the budget. As a result, the tax burden on American 
workers has hit a record post-World War II high. Moreover, 
surplus unemployment taxes continue to be used for purposes 
totally unrelated to the UC system. Surplus FUTA surtax revenue 
that builds up in federal trust funds, like the Social Security 
payroll tax, is converted to federal government bonds and spent 
as general revenue or used to pay down publicly held debt.
    Ending the FUTA surtax would reduce the overtaxation of 
American jobs and allow workers and employers to keep $8.3 
billion more of their hard-earned money over the next five 
years to spend or invest as they see fit.

2. Consolidate responsibility for the UC system at one level of 
government.

    The taxing and spending authority for the UC system should 
be at one level of government and not split between the federal 
government and the states. Effective program accountability 
requires the states to be responsible for both raising and 
spending the revenue to run the UC system. Maintaining 
bifurcated taxing and spending authorities diminishes direct 
accountability.
    In 1996, Congress passed welfare reform that provided 
states with greater flexibility while holding them accountable 
for reducing welfare caseloads. In 1998, Congress passed the 
Workforce Investment Act that created one-stop career centers 
and gave the states greater responsibility for job training and 
employment service programs while demanding more effective 
results. Congress should now do the same for the unemployment 
compensation system and a positive step in that direction is 
contained H.R. 3174 the Employment Security Financing Act of 
1999.
    H.R. 3174 would:
     Provide states with sufficient funding to deliver 
UC services and maintain program integrity.
     Reduce the length of unemployment for many 
unemployment claimants. With better capacity to provide job 
search assistance, the Employment Security system will help 
more claimants return to work sooner.
     Reduce employer tax and paperwork burdens. 
Employers will no longer pay the temporary FUTA surtax and they 
will only have to deal with one tax collection agency--the 
state, not the IRS.
     And eliminate burdensome federal mandates that 
cause inefficiencies and impose increased costs.

3. UC benefits should be paid only to individuals who are 
involuntarily out of work.

    When both UC and Social Security were created in 1935, 
policymakers knew there would be political pressure to use the 
tax revenue for other government programs. That is why they 
placed limits on the use of those funds. Now the Department of 
Labor is rushing to remove those limits by regulatory fiat. 
Congress should not allow the President to unilaterally convert 
the UC program into a huge new government entitlement program 
unrelated to unemployment. Surplus UC tax revenue should be 
returned to employers and workers and not used to expand the 
program to cover family leave. Any new expansion of the program 
to cover new parents would pit employees who voluntarily choose 
(and in many instances can afford) to be out of work against 
workers who involuntarily lose their jobs.
    If Congress follows these three principles and 
recommendations, Members would strengthen and improve the UC 
system while reducing the record high tax burden on American 
jobs. Thank you for your time and I will be happy to answer any 
questions you may have.

                                

    Chairman Johnson. Mr. Forster, The Honorable Mr. Forster.

     STATEMENT OF HON. GAREY FORSTER, SECRETARY, LOUISIANA 
          DEPARTMENT OF LABOR, BATON ROUGE, LOUISIANA

    Mr. Forster. I am glad to be here today, not only on behalf 
of the Louisiana Department of Labor, but on behalf of my boss, 
Governor Mike Foster, who was going to be here, is the Second 
Vice Chairman of the Southern Governors' Association, 
introduced the resolution supporting Congressman McCrery's 
bill. But unfortunately, we are having a few budget problems 
back in Louisiana and he chose not to come to Washington at 
this time.
    As Congressman McCrery stated, I served for 15 years in the 
Louisiana House, and that entire time served on the Labor 
Committee and, in fact, was Chairman when the Governor asked me 
to take over the Labor Department. So I am very familiar with 
the issues. And when I arrived at the Department, I saw a 
different side of what the Department of Labor was about, and 
that was as a result of its budget being reduced over the last 
ten to twelve years, $5 million going from around $26 million 
down to $21 million, and the consumer price index over that 
time going up about 40 percent. What the state had done is 
closed ten local offices and consolidated five others. So where 
we used to be in about 40 plus parishes, out of 64 parishes in 
Louisiana, we are now down to about half of the parishes. So we 
have gone from a presence of two-thirds of the state to around 
half the state.
    And why do I raise that issue? Chuck Yarbrough mentioned 
it, and I don't know if it is as clear to everyone as it is to 
me. And that is, when you close offices, Members of the 
Committee, you don't close the big cities. You don't close the 
office in Shreveport. You don't close New Orleans. You close 
the little rural offices. And if you are worried about 
services, and if you are worried about trying to achieve full 
employment, and if you are worried about somebody who is laid 
off and has to drive 60-70-80-100 miles to go and file a claim, 
then you don't do that stupid thing. You don't close those 
rural offices. And that is what all the states have been forced 
to do. They are forced to economize. We serve the big cities 
and we leave the rurals to, basically, to die.
    What has happened in Louisiana is we have had to go find 
funds and work with the employers to try to come up with a 
temporary solution until, hopefully, the urgency of this 
Chairman moves this bill to some kind of fruition where we 
begin to stabilize funding. Let me tell you a little story, 
quite briefly. My first day on the job, 30 months ago, we had a 
major garment manufacturer, which as a result of NAFTA, laid 
off over 4,000 employees. Now, they didn't do this in 
Lafayette. They did it in St. Martinville, they did it in 
Abbeville, the did it in Jeanerette, they did it in Port Barre.
    Do you know what? We didn't have a labor office in any of 
those small communities, in any of those small parishes. They 
had to, at a tough time in their life, drive into Lafayette. 
Now, the employer worked with us and we sent staff to the plant 
site to try to help them. But I want you to understand the 
reality of when something hits, and I would also like you to 
know that that is not the only layoff in Louisiana. I carry 
around with me, and have it updated bi-monthly, all the WARN 
notice layoffs in the state. And they are not all in one city 
and they are not all in one industry. They are all over the 
state and those people need help.
    And just to give you some idea of it, 230 people in LaPlace 
getting laid off is a big deal; 130 in Braithwaite, a real big 
deal; 94 in Jonesville; 138 in St. Martinville; 210 in Narco; 
106 in Rayville, 160 in Gramercy; 308 in Tallulah; 177 in 
Jennings. Those are real live people who congressman represent 
who don't have offices around to solve their problems because 
the staff has been cut and we have been forced to close those 
offices.
    And what I want you to understand is as we try to move in 
the direction of full employment and the new Work force 
Investment Act, and all the great things that my buddy, Ray 
Uhalde, talked about, we didn't get ten extra cents to 
implement this new legislation. We have to survive with what we 
have been getting over the last few years with all of the cuts, 
and try to reach out, reengineer an old system that was built 
when unemployment was high and not looked at while the economy 
has changed.
    In summary, since I see I am running out of time, let me 
just tell you that what is important is that Congressman 
McCrery's bill, I believe, does have a comprehensive look at 
why FUTA was implemented at a time of high unemployment and 
hasn't been reengineered. Somebody is doing something, finally, 
about that in a major way. And it looks at, I think, the 
changes in the economy and the workplace. Employers, as well as 
unemployed and underemployed individuals, demand different 
services from the system than was thought at the inception of 
FUTA legislation.
    Therefore, my Governor, Mike Foster, and the Southern 
Governors' Association support the bipartisan bill that 
Congressman McCrery has introduced, which among other things, 
repeals the temporary FUTA surtax, transfers the collection of 
FUTA tax to the states, ensures that states get a greater 
return on their employers' FUTA tax dollars, improves 
Employment Services, combats fraud and abuse in the system, and 
increases state flexibility to administer the Unemployment 
Insurance and Employment Services program at a time we 
desperately need it.
    I implore the Committee to act as soon as possible to begin 
to change a system that I think is broke. And it needs fixing, 
and it needs fixing immediately. Thank you very much.
    [The prepared statement follows:]

STATEMENT OF HON. GAREY FORSTER, SECRETARY, LOUISIANA DEPARTMENT OF 
LABOR, BATON ROUGE, LOUISIANA

    Good afternoon, Chairman Johnson and members of the 
Subcommittee on Human Resources of the Committee on Ways and 
Means. I am Garey Forster, Secretary of Labor for the Louisiana 
Department of Labor, appearing on behalf of the Honorable M. J. 
``Mike'' Foster, Governor of the state of Louisiana and Second 
Vice Chairman of the Southern Governors' Association. For the 
15 years prior to my appointment as Secretary, I served as a 
member of the Louisiana House of Representatives and worked in 
the private sector. During my entire tenure as a legislator, I 
served on the House Committee on Labor and Industrial 
Relations, serving as chairman for the two years immediately 
preceding my appointment. I was the floor leader for the 
business community and the Republican Administrations on 
legislation regarding unemployment insurance, workers' 
compensation, and job training reform. As a result, I bring to 
you years of experience on unemployment insurance and 
employment services from the viewpoint of a private sector 
businessman, a legislative policy-maker, and now as an 
administrator of the program. I am very familiar with the 
administrative funding problems of the programs, and I look 
forward to upcoming discussions on reforming the present 
system.
    When I arrived at the Louisiana Department of Labor 
approximately 30 months ago, in August of 1997, the department 
was near the breaking point resulting from many years of under-
funding. From Fiscal Year 1988 to FY 2000, administrative 
funding for the Louisiana Department of Labor actually 
decreased by $5 million, from $26 million to $21 million. At 
the same time that administrative funding was decreasing, the 
cost to the Department to provide the mandated services was 
increasing. As a result of the decreased funding, the 
department was forced to close ten local offices, and five 
other offices were consolidated into two offices. The greatest 
impact of these closures and consolidations was felt in the 
rural areas. Unfortunately, it is the rural areas of a state 
which usually have the highest rates of unemployment and house 
residents who need the most intensive services to move into 
employment. These closures were based on the fact that it is 
more expensive, or less cost effective, to maintain an office 
in a rural area since such offices serve fewer customers on a 
daily basis.
    On my first day on the job as Secretary, I was confronted 
with the initial phase of a major layoff by a garment 
manufacturer in our state. The layoff affected approximately 
4,000 individuals at four facilities in four rural parishes, 
only one of which had a local office. This experience exposed 
me to the particular challenges presented to a local economy by 
a major layoff in a rural area. Since transportation is a 
significant issue in the rural areas, it is especially 
important to deliver services in the immediate vicinity. It is 
critical for the Department to be in a position to respond 
timely and effectively to provide services to both employees 
and businesses in order to mitigate and address the devastating 
effect a major layoff can have on a rural economy.
    The legislation proposed to reform the administrative 
funding portion of the Federal Unemployment Tax Act will 
alleviate many of the budget shortfalls experienced by state 
labor departments in the past. Reform proposals introduced by 
Congressman Jim McCrery and Senator DeWine along with numerous 
co-sponsors represent a collaborative effort of many persons 
with a stake in the system. These proposals could provide 
resolutions to many problems currently faced by states. It has 
long been recognized that the level of funding provided to the 
states to administer the unemployment insurance and employment 
services programs is inadequate. Since 1976, employers have 
paid a surtax that was originally designated as a temporary tax 
to fund a deficit in the employment security system. This 
deficit has been extinguished, but the surtax remains as a 
burden on employers. In addition, employers have paid 
substantial amounts of employment taxes to the federal 
government. Over time, less and less of these federal taxes 
have been returned to the states for administrating state 
unemployment taxes and claims and employment services.
    Declining funding has resulted in inefficiencies in the 
system and the inability of customers to receive adequate 
services. With the national unemployment rate at the lowest 
level that it has been in 30 years, labor departments are more 
likely to see customers with multiple barriers to employment. 
Typically, these individuals are harder and more expensive to 
serve and require a more personal and ``hands-on'' approach. 
More personal interaction means that agency workers spend more 
time with each customer and will ultimately require additional 
resources to provide an adequate level of service. We all 
recognize that the days when offices were fully staffed are 
gone and will never return. As new and innovative programs are 
implemented with specific mandates on the provision of 
employment services, such as the Workforce Investment Act, 
additional resources become more critical. The work processes 
of state labor department programs must be reengineered to meet 
these new demands. Yet, the state's already under-funded system 
did not receive any additional resources to accomplish this.
    In conclusion, FUTA was implemented at a time of high 
unemployment and has not been reengineered in many years to 
adapt to changes in the economy and the workplace. Employers, 
as well as unemployed and underemployed individuals, demand 
different services from the system than was thought of at the 
inception of the FUTA legislation. Therefore, my governor, 
Governor Foster, and the Southern Governors Association support 
FUTA reform which, among other things: (1) repeals the 
temporary FUTA surtax; (2) transfers collection of the FUTA tax 
to the states; (3) ensures that states get a greater return on 
their employers' FUTA tax dollars; (4) improves employment 
services; (5) combats fraud and abuse in the system; and (6) 
increases state flexibility to administer the unemployment 
insurance and employment services programs.
    This concludes my comments, Chairman Johnson and members of 
the Subcommittee; however, I would be pleased to answer any 
questions that you may have. I would like my oral and written 
comments to be made a part of the official record for today's 
hearing.

                                

    Chairman Johnson. Thank you very much. Now, to conclude 
then, Van Doorn Ooms, Senior Vice President and Director of 
Research, Committee of Economic Development. Thank you, Mr. 
Ooms.

STATEMENT OF VAN DOORN OOMS, SENIOR VICE PRESIDENT AND DIRECTOR 
        OF RESEARCH, COMMITTEE FOR ECONOMIC DEVELOPMENT

    Mr. Ooms. Thank you, Madam Chairman. I am honored to accept 
your invitation to testify on behalf of CED on Unemployment 
Insurance.
    CED is a nonprofit, nonpartisan, nonpolitical research and 
policy organization of over 200 business and education leaders. 
Its purpose is to recommend policies to promote economic 
growth, higher living standards and equal opportunity for all 
Americans. CED's policy positions are adopted by a vote of the 
62 members of its Research and Policy Committee, who speak in 
their individual capacities.
    My testimony is going to be fairly narrowly focused, 
because CED has not addressed directly a number of the 
Unemployment Compensation reform proposals before you today 
and, therefore, does not have an official policy position on 
them. However, CED has considered and made recommendations on 
certain aspects of the UI system, and in particular, the extent 
to which it covers the American work force, and that is the 
issue I wish to address in this testimony.
    In summary, CED's view is that a number of longer term 
trends and recent developments in the American economy have 
significantly changed the nature of the American work force and 
the nature of employment, as you noted earlier, Madam Chairman. 
As is well known, one of the major results of this change is 
that the proportion of unemployed workers that receives 
Unemployment Compensation has fallen sharply, from roughly one-
half of the fifties to about one-third recently.
    CED believes that the fundamental purposes of Unemployment 
Compensation and the national economy would be served better by 
somewhat broader UI eligibility and coverage. Consequently, CED 
has supported several proposals to broaden eligibility among 
certain low-wage, part-time and seasonal workers that were made 
by the Advisory Council on Unemployment Compensation 4 years 
ago.
    The Committee, I am sure, is familiar with the Council's 
report, so I will not describe its recommendations in detail, 
but there are four, essentially. Two of them would remove 
categorical prohibitions against eligibility--one with respect 
to part-time workers, which Mr. Cardin mentioned earlier, and 
one with respect to seasonal workers. To deal with the issue of 
lower wage workers, CED believes that the earnings requirement 
should be set at levels that better reflect the attachment to 
the workforce of many low-wage workers that work many hours 
but, nevertheless, have relatively small earnings.
    Finally, we also believe that there should be an adjustment 
of the base period where that is appropriate and necessary to 
create the eligibility of workers who would be eligible if 
their more recent earnings records were taken into account in 
the calculation.
    The reason for our position on these, Madam Chairman, has 
to do with the profound changes in the economy over the last 
few years that have made our UI system, which was created in a 
very different world somewhat obsolete. Let me just note those 
changes very briefly.
    First of all, rapid technological change. In the process of 
creative destruction, as new sectors, firms, and workers 
advance, others decline. Downsizing and growth now often go 
hand-in-hand. The transfer of resources required for this 
process is not instantaneous and it is not smooth. And the 
larger the resource transfers required, the larger the likely 
temporary unemployment and the demands on the UI system.
    There is evidence, although it is still preliminary, that 
productivity growth is now accelerating and has been over the 
last several years. At the moment, of course, the 
extraordinarily strong demand for labor and the very tight 
labor market masks the amount of resource transfer that is 
going on. We don't observe what will happen when the labor 
market slackens, which will be higher temporary unemployment.
    The organization of work has also changed, and a major 
result of those changes has been an increase in the importance 
of temporary part-time and other irregular employment 
arrangements, many of which are not covered under the current 
UI system. In part, technological change has meant that skill 
requirements have increased; as a result, the skill bias in the 
system has widened the gap between the earnings of highly 
skilled workers and less skilled workers. That means that 
earnings have become a less reliable index of labor force 
attachment, and we believe that needs to be taken into account 
in addressing adequacy of the system.
    Globalization is another important aspect of change. Like 
technological change, globalization results both in great 
benefits for the society as a whole and substantial adjustment 
costs. We believe that to address the concerns about 
globalization that were revealed most dramatically in Seattle, 
we need to have safety net mechanisms that are seen as 
equitably sharing those adjustment costs.
    Finally, as you noted yourself, Madam Chairman, there are 
two other major things that are going on at the present time. 
One, the composition of the labor force has changed 
dramatically over many years and is about to change even more 
dramatically as the baby-boomers reach retirement age. When 
that happens, either for reasons of preference or reasons of 
requirement, many older workers will remain employed past the 
ordinary retirement age. There is no doubt that part-time, 
short-term and seasonal work arrangements will become more 
important in that world.
    Finally, on the subject of welfare reform, with which the 
Subcommittee is also concerned, we are now engaged in a major 
experiment in this country with respect to the integration of 
several million low-income and typically low-skill single 
parents into the mainstream of American life. The success of 
that experiment is going to depend to a very large extent on 
whether, when the economy slackens, those workers are forced 
back into some kind of dependency or remain as part of the 
American workforce. Some of the reforms that have been 
mentioned today that would address part-time and low-wage work 
would make it more likely that that very important experiment 
succeed. Thank you, Madam Chairman.
    [The prepared statement follows:]

STATEMENT OF VAN DOORN OOMS, SENIOR VICE PRESIDENT AND DIRECTOR OF 
RESEARCH, COMMITTEE FOR ECONOMIC DEVELOPMENT

    Madam Chairman and Members of the Committee:
    My name is Van Doorn Ooms and I am the Senior Vice 
President and Director of Research of the Committee for 
Economic Development (CED).\1\ I am honored to accept your 
invitation to testify on behalf of CED on the Unemployment 
Insurance system (UI). Before joining CED in 1991, I served as 
the Chief Economist for the Senate Budget Committee, the Office 
of Management and Budget, and the House Budget Committee. My 
curriculum vita is attached, as requested in your letter of 
invitation.
---------------------------------------------------------------------------
    \1\ CED has a long-standing policy of neither seeking nor accepting 
Federal government grants or contracts, and neither CED nor I 
personally have received any such grants or contracts during the 
current or preceding two fiscal years.
---------------------------------------------------------------------------
    CED is a nonprofit, nonpartisan, and nonpolitical research 
and policy organization of over 200 business and education 
leaders. Its purpose, pursued throughout its 58-year history, 
is to recommend policies to promote economic growth, higher 
living standards, and equal opportunity for all Americans. 
CED's policy positions are adopted by a vote of the 62 members 
of its Research and Policy Committee, who speak in their 
individual capacities.
    In line with these concerns about national economic growth 
and equal opportunity, CED produced a number of policy 
statements during the 1980s and 1990s recommending measures to 
improve the functioning of our labor markets and to extend the 
opportunities for all workers to participate in the nation's 
growth and prosperity: Work and Change: Labor Market Adjustment 
Policies in a Competitive World (1987); An America That Works: 
The Life-Cycle Approach to a Competitive Work Force (1990); 
American Workers and Economic Change (1996); New Opportunities 
for Older Workers (1999); and the recently released Welfare 
Reform and Beyond: Making Work Work (2000).
    CED has not addressed directly some of the unemployment 
compensation reform proposals before you today and therefore 
does not have an official policy position on them. However, CED 
has considered and made recommendations on certain aspects of 
the UI system, and in particular the extent to which it covers 
the American workforce. I will address that issue in this 
testimony.
    In summary, CED's view is that a number of longer-term 
trends and recent developments in the American economy have 
significantly changed the nature of the American workforce and 
employment. As is well known, one important result of these 
changes is that the proportion of unemployed workers that 
receives unemployment compensation has fallen sharply, from 
roughly one-half in the 1950s to about one-third recently. CED 
believes that the fundamental purposes of unemployment 
compensation, and the national economy, would be better served 
by somewhat broader UI eligibility. Consequently, CED has 
supported the proposals to broaden eligibility among certain 
low-wage, part-time, and seasonal workers made by the Advisory 
Council on Unemployment Compensation in 1996.

FUNCTIONS OF UNEMPLOYMENT COMPENSATION

    CED believes there are at least three major functions to be 
served by a well-functioning UI system. It should:
    1. provide temporary, partial wage replacement for 
involuntarily unemployed workers who are significantly attached 
to the labor force and actively seeking work;
    2. facilitate the dynamic economic change on which our 
higher living standards depend by shifting some of the costs of 
adjusting to that change to the larger society; and
    3. help to stabilize the national economy by supporting 
consumer purchasing power when unemployment rises.

ECONOMIC CHANGES AFFECTING THE UI SYSTEM

    A number of major changes in the American economy have 
affected, or soon will affect, the effectiveness with which the 
UI system performs these functions. Some of these changes have 
been ongoing for decades, while others await us in the future, 
but all have important implications for unemployment 
compensation.
    Technological change New knowledge and its applications are 
the major source of growth in our productivity, incomes, and 
living standards. Productivity growth has accelerated in the 
last 4-5 years, driven both by rapid technical change in 
information technology and the investment boom associated with 
it. But while the benefits of technological change are large, 
they carry with them the costs of adjusting to that change. In 
the process of ``creative destruction,'' as new sectors, firms, 
and workers advance, others decline. ``Downsizing'' and growth 
now often go hand-in-hand. The transfer of resources, including 
labor, required for this process is neither instantaneous nor 
smooth; the larger the resource transfers required, the larger 
the likely temporary unemployment and demands on the UI system. 
These effects, of course, remain in abeyance during periods of 
very strong labor demand such as the present, but are likely to 
appear when demand again slackens.
    The organization of work Both rapid technical change and 
the increasingly competitive structure of the U.S. economy have 
brought major changes to the operations of American business 
and the workplace. New structures of production, decentralized 
operations, new relationships with suppliers, and increased 
flexibility have characterized the last two decades in 
particular. A major result of these changes has been an 
increase in the importance of temporary, part-time, and other 
``irregular'' employment arrangements. Our UI system, of 
course, was designed with a more traditional model of 
employment arrangements in mind, and does not always cover such 
workers when unemployed.
    Skill requirements and earnings During the last several 
decades, the changes described above have increased the demand 
for highly skilled workers relative to those with fewer skills. 
This ``skill bias'' has produced a sharp increase in the wage 
premium paid for skills and in the earnings differentials 
between high-and low-wage workers. Indeed, the real earnings of 
low-wage male workers declined absolutely and substantially 
until very recently. As a result, earnings per se have become 
less reliable indicators of employment and labor force 
attachment. The UI system, of course, bases benefits 
eligibility primarily on an earnings history. Given the large 
population of low-wage workers potentially affected, a 
reexamination of the minimum earnings required for UI 
eligibility may be warranted.
    Globalization Like technical change, the expansion of 
international trade, investment, and immigration has produced 
both large overall economic benefits and significant adjustment 
costs that impact particular industries, workers, and 
communities. While some of the reactions against globalization 
recently displayed in Seattle reflect misunderstanding and 
misplaced apprehension, those concerns must be addressed if 
further progress is to be made in trade and investment 
liberalization. This will require safety-net mechanisms that 
equitably share adjustment costs. Trade-specific mechanisms 
appear less promising in this respect than a UI system with 
broad coverage that addresses economic adjustment generally.
    Composition of the labor force In the last half-century, 
female participation in the labor force has nearly doubled 
(from 34 percent in 1950 to 60 percent today) and the need for 
more flexible and ``family friendly'' work arrangements has 
become apparent to many, if not most, employers. A new set of 
changes lies just ahead, as the baby-boomers age and their 
preferences or circumstances lead many of them to continue to 
work past the traditional retirement age.\2\ While new models 
of employment suited to both older workers and employers will 
certainly evolve, there can be little doubt that part-time, 
short-term, and seasonal work arrangements will become more 
important than at present, and that our social insurance 
systems will have to adapt to such change.
---------------------------------------------------------------------------
    \2\ See CED, New Opportunities for Older Workers (1999), Chapter 1.
---------------------------------------------------------------------------
    Welfare reform The U.S. is now engaged in a major economic, 
social, and cultural experiment that attempts to integrate 
several million low-income and typically low-skill single 
parents into mainstream American economic life. Although 
welfare reform, aided by an extraordinarily tight labor market, 
has been more successful to date than many observers expected, 
the experiment is far from over.\3\ Its ultimate success will 
hinge on whether welfare-leavers can be incorporated into the 
labor force on a permanent basis, rather than falling back into 
dependency of one kind or another. An important test of this 
will come when the labor market softens. A large proportion of 
these workers are in part-time, temporary, or short-term jobs 
that are categorically excluded from UI coverage in some states 
or in jobs with earnings too low to meet UI eligibility 
requirements. It is estimated that no more than 20 percent of 
persons leaving welfare for work are likely to become eligible 
for UI through their post-welfare employment.\4\
---------------------------------------------------------------------------
    \3\ CED, Welfare Reform and Beyond: Making Work Work (2000), 
Chapter 2.
    \4\ See Wayne Vroman, Effects of Welfare Reform on Unemployment 
Insurance, (The Urban Institute, 1998) p. 2

---------------------------------------------------------------------------
RECOMMENDATIONS

    As a result of these considerations, CED supports four key 
recommendations of the Advisory Council on Unemployment 
Compensation that would extend UI eligibility to more low-wage, 
part-time, and seasonal workers with significant labor force 
attachment. A number of states already have policies that 
accord with some or all of these recommendations, but CED urges 
those that do not to adopt such policies.
    The first two of these recommendations would remove the 
categorical exclusion of part-time and seasonal workers who 
would otherwise be eligible. Some states categorically exclude 
workers applying for part-time work even though they have met 
the state's monetary eligibility requirements. Fifteen states 
permit workers in seasonal industries to collect benefits only 
during the season in which that industry is active, and 
thirteen states do not allow seasonal earnings to count towards 
the earnings requirement even if the worker later works in a 
non-seasonal job.
     States should eliminate seasonal exclusions; 
claimants who have worked in seasonal jobs should be subject to 
the same eligibility requirements as all other unemployed 
workers.
     Workers who meet a state's monetary eligibility 
requirements should not be precluded from receiving UI benefits 
merely because they are seeking part-time, rather than full-
time, employment.
    The third recommendation would reduce the number of workers 
made ineligible by low wages. The base period and ``high 
quarter'' minimum earnings requirements in 9 states would 
exclude workers who worked two days per week for a full year 
(about 800 hours) at the minimum wage, whereas workers earning 
$8.00 per hour for the same employment would be eligible in all 
states but one.
     States should set their earnings requirements so 
that a worker with 800 hours of work, evenly distributed over 
the year, at the state's minimum hourly wage would be 
monetarily eligible for benefits
    Finally, a fourth recommendation would reduce the number of 
workers made ineligible merely because their last completed 
quarter of earnings was not used in the calculation of monetary 
eligibility. Many states compute workers' monetary eligibility 
on the basis of their earnings during the first four of the 
last five completed quarters of work, a practice once required 
by pre-computer technology. Some states now use a ``moveable 
base period'' to allow the most recent four quarters to be used 
as an alternative.
     States should use a moveable base period in cases 
in which its use would qualify a UI claimant to meet the 
state's monetary eligibility requirements.
    CED recognizes, in making these recommendations, that the 
payroll taxes that finance UI are a tax on labor services that 
may have a negative impact on employment, especially at low-
wage levels. It would be counterproductive to discourage the 
employment of low-wage workers at the same time that we attempt 
to facilitate both their labor force participation and their 
employment by extending UI benefits to them. In addition, there 
is evidence that, in the longer term, a substantial portion of 
such taxes is borne by workers themselves in the form of lower 
wages.
    CED therefore also recommends that the federal and state 
governments consider ways to support broader eligibility for 
benefits with general revenues rather than higher UI payroll 
taxes. Some degree of general revenue financing would also seem 
to be indicated by the fact that the benefit extensions would 
serve several broad social goals, such as the facilitation of 
change and the success of welfare reform, in addition to 
meeting the needs of individual firms and workers. One possible 
approach would be to credit the UI trust fund with income taxes 
paid on UI benefits, as is done with the Social Security and 
Railroad Retirement trust funds. This arrangement would 
generate at least $3.6 billion annually for the UI trust fund, 
which would more than cover the estimated $2.0 billion dollar 
cost of the four recommendations.
    CED believes that the implementation of these 
recommendations in all the states would substantially improve 
the effectiveness of the Nation's unemployment compensation 
system in performing its essential economic and social 
functions.

                                

    Chairman Johnson. Thank you all very much for your 
testimony. I am going to start with Mr. English. Unfortunately, 
the Ways and Means Committee does have a meeting a little later 
today, and we have been asked to conclude by 4. Whether we will 
be able to do exactly that, I don't know, but it does shorten 
our question period. Mr. English.
    Mr. English. And Madam Chairman, I appreciate the 
opportunity to question perhaps the best and most stimulating 
panel I have heard on this subject in a long time. I note that 
Mr. Smith and Mr. Yarbrough come at this issue from rather 
different philosophical perspectives, but both of you have 
concluded on one of my favorite topics, that there should be no 
Federal taxation of Unemployment Compensation benefits. Would 
the two of you like to very quickly elaborate on that?
    Mr. Yarbrough. Go ahead, sir.
    Mr. Smith. Let me do it very briefly, Mr. English. Folks 
aren't getting Unemployment benefits because they are living 
high off the hog. They have lost a job, it is an enormously 
difficult time. Not only has eligibility for Unemployment 
Compensation decreased, but the replacement value of the check 
has decreased. This is one way to stretch those resources 
further at a time of difficult adjustment for a lot of the 
reasons that my friend from CED talked about.
    So I think you were right when you said earlier this is a 
tax cut that even some of us unexpected taxcutters could 
support, although, we might set some limits on it.
    Mr. English. Thank you. Mr. Yarbrough.
    Mr. Yarbrough. Thank you, Mr. English. Yes, I think that 
the employer community feels like that the taxation of the UI 
benefits diminishes the benefits in which we are paying for. 
You know, it is--and when people get reemployed and they get 
the services and they come back, and then it rolls around again 
in taxation time, they are having to spend more of their 
additional income that they are trying to get back on their 
feet and recover, you know, back to pay more taxes.
    Mr. English. Mr. Yarbrough, on a couple of other points, I 
am curious. You come out very strongly against establishing a 
Federal solvency standard on the theory that there is 
substantial differences among the states. Do you feel those 
differences are so difficult to quantify that we can't 
establish at least some Federal standard that establishes a 
clear bench mark so we don't see the states reverting to the 
situation that we had back in the `seventies and' eighties?
    Mr. Yarbrough. Well, I think when it comes to, you know, 
solvency issues, you know, and how each state, and whether or 
not there should be a standard--let me also, I guess, look at 
something that has just recently been passed, which is our Work 
force Investment Act. And we have given that down to the local 
level and given the local people the opportunity to decide how 
they are going to do what they are going to do, when they are 
going to do this. And it involved the employer community as 
well as the state agencies to do this. So you know, anything 
along those lines, I think, that forces it down and gives the 
states the opportunity.
    I am not necessarily--feel like different states probably 
need different solvency levels just as they have different 
requirements. You have some states that are benefit receivers 
because they pay less than what they return. So you know, does 
that change their solvency ratio any different than someone who 
in the region that I serve in the National Employer Council who 
receive an average of about 46 cents? So you know, I think 
there is still a lot of variety that is----
    Mr. English. I think you make a very good point, that there 
is a lot of variety. It just seems to me that solvency is 
something that is a little more easy to quantify than some 
other things in public policy. And there ought to be some sort 
of a Federal standard if there are going to be Federal tax 
dollars.
    Mr. Yarbrough. Let me say that if you return these dollars 
back to the states and give them the opportunity to have, you 
know, like control that money and provide local service and 
things like that, that adds a lot of solvency back to their 
general treasuries.
    Mr. English. The point is well taken. Mr. Wilson, should 
states raise taxes during a recession?
    Mr. Wilson. No, of course not. They should try to maintain 
as low a tax rate as possible. And when it comes to--I would 
like to mention a few things about solvency.
    Mr. English. Could I go----
    Mr. Wilson. Sure, go ahead.
    Mr. English. I appreciate it. But isn't the implication--
you have testified that, essentially, we should consolidate 
Unemployment Compensation within one level of government, the 
state government, and that the McCrery proposal is a--what you 
view as a useful transition to that. May I ask, isn't the 
implication of that, that states, individual states that might 
have a protracted recession, would be more or less on their own 
under the system you envision? And wouldn't they be required to 
dramatically increase taxes if they don't have an adequate 
solvency in their system, and they don't have Federal 
standards, and they face a severe protracted recession?
    Mr. Wilson. The H.R. 3174 allows and enables the states to 
borrow from the Federal Government.
    Mr. English. That is true.
    Mr. Wilson. And currently--or for that matter, they have 
the ability now to go to the private sector and borrow funds in 
the private sector----
    Mr. English. That is true.
    Mr. Wilson.--and they should if their solvency levels--the 
point I would like to make about solvency is there is no money 
in the trust funds. These are bonds. These are government bonds 
like Social Security in the trust funds. The Federal Government 
is going to have to borrow that money. So what difference is it 
whether the state borrows it from the private sector, or that 
the state borrows it from the Federal Government, or when the 
Federal Government turns around and has to borrow it from the 
public sector again?
    Somebody is going to have to borrow the money somewhere in 
order to prevent taxes from rising during a recession because 
neither the states nor the Federal Government are going to do 
that, nor should they. So somebody is going to have to get the 
money from somewhere. It is going to be borrowed somewhere, 
whether it is borrowed at the state level, either in private 
markets or from the Federal Government, as H.R. 3174 allows or 
whether the Federal Government turns around and does it. It is 
just six of one or half-dozen of the other.
    Mr. English. It is very possible though. My time has 
expired, but it is very possible for a state or a region to 
experience a recession at a time when the Federal Government 
and the nation as a whole is maybe doing rather better. You 
look at the recent experience of Hawaii. I yield back my time. 
Thank you.
    Chairman Johnson. Thank you. Mr. Cardin.
    Mr. Cardin.--the major difference here, when the Federal 
Government borrows the money, it need not raise taxes to pay it 
back. That is one of the aspects of the Federal budget system, 
it has the capacity to respond to economic conditions and put 
more money into the economy or less money into the economy. The 
states aren't quite as--have the same flexibility. If they 
don't have enough money in their Unemployment Insurance fund, 
yes, they can borrow it from the Federal Government, but they 
will be required to raise taxes in order to repay that money to 
the Federal Government, and that is how the current system 
operates.
    So Mr. Yarbrough, I am somewhat puzzled by your position 
that we shouldn't have national solvency standards. We have two 
of the large states right now, California and Texas, that have, 
I think, about 25 percent of what the recommended levels are. 
And if we were to let that--and then when we go through a 
recession, then we are going to be encouraging states raising 
taxes during a recessionary period in order to deal with our 
Unemployment Insurance needs, and that seems to me to be 
counter-intuitive. So I don't quite understand your position of 
allowing a system to evolve that could very well encourage 
raising taxes during recessionary times.
    Mr. Yarbrough. I believe the two-tenths was added during 
recessionary times. Is that not a true statement?
    Mr. Cardin. It was--I don't know the exact year----
    Mr. Yarbrough. I mean, you know, you are answering your own 
question from the standpoint that the two-tenths was added 
during recessionary time.
    Mr. Cardin. But the Federal Government has the opportunity 
to make that judgement as to whether it needs the revenue. But 
it can--the Federal Government is fully capable of responding 
to a recession by pouring more money into an economy. It can do 
that if it wishes to, and it has done that in the past, and it 
has incurred more debt in doing that. The states can't do that.
    Mr. Wilson. But it has to pay off that with interest at 
some point in time.
    Mr. Yarbrough. Absolutely. I mean, the Federal Government, 
yes, maybe--there is no legal requirement. I mean, right now it 
is politically fashionable to speak about retiring the entire 
Federal debt. And based upon the strength of our current 
economy, there are economists who say that may well be the 
right thing to do. But if you talk to economists, they will 
quickly point out that debt is useful to our economy at 
different times. The states, on the other hand, have to run a 
much more balanced operation.
    I guess the point I am bringing up is if you believe in 
Unemployment Insurance and you believe that the Federal 
Government should develop a system that makes sure that during 
recessionary times there is adequate income to people who 
through no fault of their own have lost their jobs, then I am 
somewhat puzzled by why you do not believe there should be an 
adequate standard, national standard, to make sure that there 
is adequate resources at the state level to deal with this.
    And employers continue to be somewhat puzzled about why 
there is not proper funding for the Employment Service and the 
UI whenever the trust funds are at an all time high and an all 
point level but, yet, we can't seem to come up here for 25 
years and knock on the door, trying to help those local people 
in the local community. You know, the work force investment 
boards and what is out there, basically, what the statements 
are made in here, we divested all this information and all of 
this down to the local level but, yet, we are not willing to 
fund them.
    Mr. Cardin. I agree with you. And I think that one of the 
matters that we may have to look at in this Committee is the 
relationship to the appropriation process, because I am 
somewhat amazed that there is not a more adequate funding 
during this period of our economy to the Unemployment Insurance 
accounts of the states. So it is something we need to take a 
look at and it is a fair comment, something that is not within 
the jurisdiction of this Committee, but something that, 
clearly, we are very, very concerned about.
    One last point if I might make. Mr. Smith, one thing that 
concerns me, it seems to me under the current system where 
interstate competition among the states drives states to use 
the stingiest standards for accepting Unemployment Insurance 
eligibility because of the competition among the states. And if 
we pass a bill that devolves the revenues to the states, that 
might just be exaggerated and worked to the disadvantage of 
working people. I am just curious as to your assessment on 
that.
    Mr. Smith. Well, I think you are absolutely right. And the 
two points that you have raised are related. If we don't set 
Federal solvency standards, states can compete and will compete 
with each in ways that reduce their solvency. The lesson of the 
`eighties is unmistakably clear, and we forget it at our peril. 
It is also true that we ought not to encourage states to 
compete by lowering benefits for many of the reasons that you 
talked about and that both Van Ooms and I talked about. This 
work force has changed a lot. We need a different benefit 
structure than we have had over the past five decades.
    This is an opportunity to address both the solvency issue 
and the benefit adequacy issue that is almost impossible to 
address during recessionary times. But if we take the step now 
of foregoing our opportunity to insist on solvency, to help 
states assure solvency in some of the ways that Mr. English has 
proposed, we will relive the `eighties a couple of months after 
the next recession hits.
    Mr. Cardin. Let me make just one last point. And I 
appreciate the references that have been made to Welfare 
reform. And it just seems to me, again, counter-intuitive that 
if we are concerned about people leaving Welfare for permanent 
employment, and we know that many of them will have low-paying 
jobs and part-time jobs, and they are not going to be qualified 
for Unemployment Insurance. That doesn't seem to me to be 
consistent with our strategy to get people off of Welfare 
permanently into the employment structure. I thank you for your 
comments.
    Chairman Johnson. Mr. McCrery.
    Mr. McCrery. Well, thank you all for your testimony, for 
bringing us your particular perspectives to this discussion 
about our Unemployment Insurance system. Just at couple of 
things I want to comment on: (1) The solvency issue. I am 
looking at the list of states here and their trust fund 
balances, and my State of Louisiana has about 8 years worth of 
excess benefits in the trust fund. I hope we don't have an 8-
year recession. If we do, we are all in trouble.
    There are very few states on this list that have what I 
would consider to be low trust fund balances; there are a few, 
and shame on them, I guess, if they get into a tight--because 
we did that in Louisiana, as I pointed out before, and paid 
through the nose for it. But we have recovered, and we have 
reduced taxes, and we have a sufficient--more than sufficient--
trust fund balance for a rainy day. So I think all this talk 
about solvency is perhaps a little overblown and maybe even a 
red herring.
    The fact is we have huge surpluses in our Unemployment 
trusts funds at the Federal level. The only reason for that--it 
has nothing to do with the workers, it has nothing to do with 
taking care of people. The only reason is we were hiding our 
deficit. We were masking the size of the Federal deficit. So I 
am a little bit upset that we are talking about all these other 
things, solvency, and increasing benefits, and all this stuff, 
as a roadblock to doing what we should have done a long time 
ago in being honest with the taxpayers and say we are not using 
this money for the purpose for which we told you we were 
collecting it and we are going to give it back to you. That is 
point one. So to say--for the administration to say we will not 
accept any bill that reduces the employment tax unless you 
attach all these other reforms on it is really disingenuous, I 
think.
    In my bill we do exactly with the Unemployment system what 
we have done with Welfare and had so much success with. And Mr. 
Smith, I have not read your testimony, and I will, but you made 
reference to, or you started to tell us why devolution was a 
bad idea. But you only mentioned one thing, and that was some 
vague reference to there being a national labor market now. I 
don't understand that comment. What do you mean by that? What 
is a national labor market? Why is that argument against 
devolution? What do you mean by national labor market?
    Mr. Smith. Well, Congressman, we have a much more 
integrated national labor market than we did a few decades ago 
and, certainly, than we did when the Social Security Act was 
passed. We are more mobile. Not only do we move among jobs, but 
we move among places. And the structure of the economy is now 
evolving in much more rapid ways, partly due to technology, 
partly due to telecommunications. The old assumptions about a 
place and a worker no longer describe either the employment 
relationship or the employment experience of most of us. And we 
need to help people prepare for a labor market which isn't 
defined in as simple geographic terms as it used to be.
    Mr. McCrery. So in other words, the folks in South 
Louisiana that lost their jobs recently, you would just tell 
them to move?
    Mr. Smith. Congressman, I didn't say that. You did. No, I 
wouldn't just tell them to move, but I would want to make sure 
that the system of employment assistance, the one-stop centers, 
the way in which benefits are structured, encourage them to 
have the same kind of flexibility and ability to move, and 
information about opportunity, and access to national 
information that employers have.
    Mr. McCrery. Well, but surely, you are not suggesting that 
conditions in Louisiana are the same as conditions in 
California, or New York, or Michigan. Surely, you are not 
suggesting that the people in my state who have lost their jobs 
don't deserve at least the chance to find a job in their home 
state and get serviced by an employment benefits office in 
their home state?
    Mr. Smith. They do, Congressman. And I think you and I 
would agree that that is an argument the AFL-CIO has made with 
great regularity. My point here is that it may not be true any 
longer that the best and most promising opportunity for an 
employee who loses their job in one parish is in that same 
parish. You talk about 108 months of coverage, but your 
colleague talked about closed offices. There is something wrong 
with a system that creates both of those outcomes at the same 
time. It is not at all clear----
    Mr. McCrery. My bill would solve that.
    Mr. Smith.--that your bill will solve that or that 
devolution is the magic bullet here.
    Mr. McCrery. Well, the reason that devolution works so 
well, one reason that devolution works so well with Welfare 
reform, is because different areas of the country have 
different needs, have different resources, different assets. 
The same thing holds true with employment. And therefore, I 
think devolution makes a lot of sense in the area of Employment 
Insurance as well. Louisiana knows its needs. They know where 
they need to put offices. They know the kinds of jobs that 
might be available to somebody who loses their job in a garment 
factory. They are not necessarily going to be able to get a job 
in Houston even at the shipyards where there might be jobs. But 
they might be able to get a job in the timber industry right 
next door because that is the kind of jobs that we have. We 
know that. Ms. Johnson doesn't know that, Mr. Cardin doesn't 
know that, people up here in Washington don't know that. Mr. 
Forster does. It is his job. So I question your conclusion that 
devolution is not possible because of the changing labor 
market.
    And I want to look at this alternative base period, because 
I have to admit I am not as up to speed on this as I hope to 
be. But it seems to me that you are talking about simply making 
an effort to include more recent wages in the calculation of 
benefits. Is that correct?
    Mr. Smith. That is correct.
    Mr. McCrery. So it is not any alternative. It is not some 
alternative----
    Mr. Smith. Right. It is an alternative to the current----
    Mr. McCrery. It is really just capturing that data or most 
recent wages and including that, which seems to be an eminently 
reasonable thing. However, I want to ask the folks from the 
private sector, and maybe Mr. Forster, does that involve a cost 
to gather that data? Is it reasonable to get that data or is 
there a problem with that?
    Mr. Forster. Yes. I don't think that is a problem. I don't 
think that data would be the problem, you know, assuming that 
they are working for a contributing employer, then we have that 
information.
    Mr. Yarbrough. Even though I represent a large employer, my 
dad is a small employer. And they pay taxes on a quarterly 
basis, and they still use their accountant and their bookkeeper 
to calculate, and estimate, and pay their taxes. And therefore, 
if they did have a small shutdown or a layoff, some of that 
information will not be as capturable in the small employer, 
small segment, of the economy. Remember that small employers 
have created more jobs and have created more opportunities for 
folks than all of the Fortune 500 companies have in the last 5 
years. So the small employer is the one who would be at risk in 
trying to provide information on an alternate base period.
    Mr. Smith. If I could just briefly, Congressman----
    Mr. McCrery. Sure.
    Mr. Smith. It might be more difficult for small employers 
but, you know, this is an opportunity to take advantage of the 
technology that is available to us that doesn't discriminate 
based on size. This information is available. Just remember, 
the alternative is a large number of hardworking men and women 
who don't quality for Unemployment Insurance when they most 
need it.
    Mr. Yarbrough. One follow-up. We continue to try to 
permanently expand coverages with a temporary tax.
    Mr. McCrery. Are we talking about a month's worth of wages 
or a quarter's worth of wages?
    Mr. Smith. A quarter.
    Mr. McCrery. A whole quarter's worth that are not 
reflected----
    Mr. Smith.--that are not counted in the current calculation 
as to eligibility and benefit level.
    Mr. McCrery. Well, Madam Chairman, thank you for allowing 
me that time to question the witnesses, and thank you all for 
appearing with us today.
    Chairman Johnson. I am getting a sort of hook from behind 
me here, because the Full Committee begins its proceedings in a 
few minutes, but I did want to point out this. I think that the 
comments that have been made here are very, very helpful, and 
it helps me to see places that we could all agree, places that 
we will clearly not be able to resolve in the context of a 
session this year. But I think there is an urgency here that 
merits our consideration of action, even though this isn't the 
ideal session to make such significant changes.
    But it is very disturbing to see how the system as it is 
currently structured does disadvantage the most rural, the most 
isolated workers. And that is an enormous concern and a very 
clear insight that you brought to us. It is also true that as 
we move into a global era, we absolutely have to have a better 
way of responding to the substantial adjustments that have to 
be made. And we have not been very successful at this in the 
past. It is also true that our Trade Adjustment Assistance Act, 
whose goal it was to deal with this, does have the merit of 
allowing people to be trained while receiving some income.
    So there are a number of issues that I think we need to 
think further about here. There have been some very good 
suggestions, I think, some very doable suggestions. But one 
thing you haven't talked about much, and we don't have time to 
talk about, so I am just going to talk about it and then you 
can think about it and get back to me.
    The strength of our workforce, the opportunity for welfare 
recipients who are moving into the workforce to advance, and 
the opportunity for people who are moving from one sector to 
another to do well all depends on training. And I have been 
very impressed with the extent to which some of my employers 
who have had significant layoffs have been quite generous about 
training. And I have had a number of people say to me, oh, yes, 
I got a job offer, but I am going to finish this training 
first. I haven't had this opportunity in my life. And that is 
very important.
    So I think we need to give some significant thought to the 
difference between the Unemployment benefit for someone who is 
getting training for reemployment and Unemployment benefits for 
someone who isn't attending, in a sense, to the business of 
future employment. I know this is hard. I am not intending that 
we mandate it, but I am proposing that we at least think about 
differential issues or freeing states to do that, because 
education is so key.
    Look at the difference between the rich/poor statistics of 
every organization, and the one thing in which they are all in 
agreement is that if you have less education, you earn less. 
And the people who are sort of condemned to do poorly in life 
are the people who didn't graduate from high school or now who 
graduated from high school but who had no other additional 
training. Mr. Forster.
    Mr. Forster. Madam Chairman, you--and it was one of the 
things that I left out and you just hit on it--and that is, as 
this country and as our states move down to record low 
unemployment, 3 percent, 4 percent, whatever it might be, those 
people that are left, that you are talking about, they are the 
ones that have the most barriers, need the most help, need the 
most people help. You can't give them the Internet and say go 
find a job.
    So you do need training, you do need people, they do need 
the help more than if--during a recession when unemployment is 
up at 6, 7, 8 percent. Those people have work experience, they 
have got work ethic, they can move back into the work force 
much quicker than what the country is experiencing now, not 
only with Welfare recipients but with people coming out of 
jail, another critical group that we have to do something with 
that the Department of Labor has really ignored, that those 
people are coming out regardless, and they don't have any 
training, and we give them $20 and we say good luck.
    Chairman Johnson. And one of the reasons that welfare 
reform has worked is because it has accepted part-time 
employment and complemented that with a lower but still real 
benefit. Now, you know, I think we have just got to look at 
part-time employment and part-time training. What should be our 
position as a support program to someone who wants to work 
part-time so they can take this three, or four, or five, or 6-
month training program? We have got to really begin to think 
about these things. It is really breaking away from the past 
well beyond where these legislative proposals are, but 
opportunity is so clearly a function of skill growth that I 
think we cannot just be blind to that real fact. Mr. Smith.
    Mr. Smith. You are surely right about that, Madam Chair, 
and this country sinfully underinvests in training our workers, 
not simply those who have lost their job. I would caution, as 
you would expect me to, this is an insurance program. Workers 
pay for it all of their life. Many of them are cyclically and 
truly temporarily unemployed. The notion that we might treat 
them differently than someone who was unemployed in a place 
like some of the garment factories that Mr. Forster talked 
about who really do need training, we need to be very careful 
here.
    This is an insurance program. Most economists, I think we 
would all agree, one way or another, this it is paid for out of 
the wage packet. We ought to spend more money on training for 
each and every worker, with or without a job, but I am not sure 
we want to think about turning this insurance program that 
people rely on during temporary spells of unemployment as well 
as more permanent, into a training program that is mandatory.
    Mr. Yarbrough. Madam Chairman, I would like to mention that 
in the Work force Investment Act, the 134 Federal programs that 
were put down to four block grants, and that is an essential 
part of the one-stop but, yet, we have not expanded the job 
service side in order to help place these people who are now 
being referred to those programs. And states by states, there 
are states who exempt the job search requirement for people 
that are going to training. Our company alone, we have GED 
classes and additional training from outside voc-technical 
schools that are conducted inside our plants and inside our 
locations every day to help increase the skills of our current 
work force. We have to continue to do that.
    But the Employment Service side, what we are talking about 
here is such a flat funded level that they are not going to be 
able to refer people that are going to be coming out of these 
Work force Investment Act training programs in the next couple 
of years. Remember July 1, 2000, when that becomes mandatory 
this year, you know, if we don't send some money their way, 
they are not going to have the ability to deliver those folks 
to the employers that are needing them in high skilled jobs and 
medium skilled jobs that employers are looking for.
    Chairman Johnson. I do appreciate the tremendous pressure 
on our Unemployment services and how creative they have been, 
and how remarkably different they are from 5 years ago. And I 
think it is almost criminal to be holding a state with 161 
months of benefits, which they will probably never use, and not 
give them the resources for a much more vital employment 
support system.
    I was very interested in the low wage issue. I am, however, 
concerned that, apparently, under the current system, if you 
earn $7 an hour, which is above a number of states' minimum 
wages--not that I support that, but I mean this is just a 
fact--that you would have to work 4.5 out of every 13 weeks for 
two quarters in order to qualify. In other words, you would 
only have to work five-and-a-half weeks out of a quarter in two 
successive quarters to qualify. So I mean I am interested in 
following up on this because I do think--I am concerned about 
the lack of eligibility of the low earners, but that is not a 
very high threshold, five-and-a-half weeks out of thirteen 
weeks, two quarters in a row.
    So lets give that some thought. I welcome your follow-up 
input and, you know, if we all recognize that nobody is going 
to get everything they want, there is an opportunity to make a 
very significant stride forward this year. And you know, if we 
don't do it this year, we are going to have a new president. I 
don't care what party, a new president will take a long time to 
ever get down to an interest at this level of legislative 
activity. Truthfully, there will always be big item issues that 
will take precedence.
    So this is nobody's favorite issue. That is why the system 
is so grossly outdated. And we do have an opportunity here if 
we can do something together that would be better for people 
who are unemployed, better for state systems that have shown 
extraordinary creativity in helping the least likely workers to 
get into the work force and begin to advance. But my whole 
view, as many of you have heard me say before, is that the 
challenge to Welfare reform is now how do you help people move 
up the career ladder and how do you help them earn more. Well, 
that takes a different kind of unemployment system than we have 
in place now.
    And if we can use this opportunity to move forward an 
employment service that not only helps you look for a job but 
helps you keep in touch. Some of the one-step centers have gone 
to actually keeping track of people and moving them into the 
next higher level job and bringing some unemployed person into 
the bottom level job. There is a lot of opportunity out there 
for career advancement, for wage development. And I don't know 
how much of that we can do from the Federal level or, 
particularly, through this lever, but I do think we have an 
opportunity. It would be unfortunate if we couldn't find some 
agreement on a number of the very specific recommendations that 
all of you have made. And I thank you for being here.
    [Whereupon, at 4:25 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

STATEMENT OF AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL 
EMPLOYEES

    The American Federation of State, County and Municipal 
Employees (AFSCME) submits the following statement for the 
hearing record on legislative proposals to reform the 
employment security system. AFSCME represents 1.3 million, 
federal, state and local government employees and workers in 
health care facilities and other private sector institutions, 
including the employees of employment security agencies in 19 
states.
    Since its inception in the 1930s, the unemployment 
insurance system has played a crucial role in stabilizing the 
American economy during recessions and providing unemployed 
workers with temporary wage replacement income when they lose 
their jobs. However, dramatic structural changes in the 
nation's economy and employment arrangements are making the 
system increasingly less effective. In addition, persistent 
underfunding of the state infrastructure is leaving the system 
so weak that it is doubtful it could respond effectively and 
efficiently to a surge in unemployment.
     Today's employment security system needs to be 
strengthened and modernized to make it work effectively in the 
new economy. These reforms must address:
     The changing nature of the workplace. Low-wage and 
part-time employment continues to increase, as does contingent 
work, which does not follow traditional employer-employee 
relationships on which the unemployment insurance program is 
based. This trend is due to a variety of developments, 
including the growth of two-earner families and their desire 
for more employment options; industry's interest in a more 
flexible workforce; and rapid technological change. With few 
exceptions, the states have failed to adjust their systems to 
cover workers in these employment situations and continue to 
use outdated measures of workforce attachment, which exclude 
many workers in the new economy. They also have maintained 
restrictive policies implemented in the 1980s when federal law 
changed to require states to pay back federal loans with 
interest. As a result, recipiency rates are at an all-time low, 
with some states experiencing rates as low as 19-20 percent.
     The decline in stable long-term employment with 
one employer. The old model of lifetime employment with one 
manufacturer and cyclical periods of unemployment has become 
less common. As the information technology and service sectors 
have grown and displaced the old industrial economy, 
increasingly workers change employers and even occupations one 
or more times in their lives. In order to minimize personal 
hardship and promote national productivity, we need to make 
these transitions as smooth as possible. The employment 
security system is the natural gateway for income replacement 
and reemployment services to workers who experience 
dislocations and need retraining.
     Deterioration of the system's infrastructure. 
Chronic federal underfunding of the states' unemployment 
insurance and employment services operations has reached a 
critical stage. The employment service has lost half its staff 
since the 1980s while most states have had to close offices. 
New technology, such as America's Job Bank and America's Talent 
Bank, can enhance the system's productivity, but states have 
reacted to the funding shortfalls by relying heavily, if not 
exclusively, on automated systems. For example, many now use 
centralized telephone systems for taking unemployment insurance 
claims. Telephone claims can provide added convenience and 
increased efficiency, but it is not well suited to handling 
mass layoffs or appeals of denied claims. In addition, highly 
automated systems are likely to undermine the unemployment 
insurance ``work test.'' Replacing local offices and personnel 
with automated systems has created new access problems for 
unemployed workers and can undermine their statutory rights to 
a fair appeals process and to timely payments when due.
    These problems result from both federal and state neglect 
of this important safety net program. The solution, however, is 
not for the federal government to withdraw from its small, but 
critically important, role in the system as H.R. 3174 proposes, 
or just to cut the federal unemployment tax as H.R. 1975 
proposes. Instead, the solution lies in a comprehensive package 
that addresses the issues of recipiency rates, solvency of 
state trust funds, the adequacy of administrative funding, and 
the correct level and structure of the federal unemployment 
tax.
    AFSCME opposes H.R. 3174 because it will result in a 
maldistribution of administrative resources and undermine the 
central national risk-pooling feature of the unemployment 
insurance system. In doing so, it will create a new set of 
incentives which may actually favor continued underfunding of 
administrative costs and new employer tax cuts at the expense 
of unemployed workers.
    H.R. 3174 addresses the problem of federal underfunding of 
state operations by giving states authority to set 
administrative funding levels. It does this by creating 50 
state administrative accounts, returning to the states the 
percentage of Federal Unemployment Insurance Tax Act (FUTA) 
revenues which their employers pay into the Federal Trust fund, 
and empowering the state legislatures to set annual 
administrative spending levels. This is in distinct contrast to 
the current practice of pooling the FUTA revenues among the 
states and then distributing the funds based on their actual 
workload needs. It means that states with relatively large FUTA 
payments but low recipiency rates will get a windfall, while 
states which pay benefits to more workers will not.
    Furthermore, H.R. 3174 is likely to encourage continued 
underfunding of state operations. It requires that unused FUTA 
administrative funds be transferred from each state's 
administrative account into its benefit account thereby 
eliminating the current separation between federally-funded 
administrative accounts and state-funded benefit accounts. 
Since states directly control the level of employer taxes and 
revenues for the state benefit accounts, H.R. 3174 is likely to 
create new pressures at the state level to transfer as much 
federal FUTA revenue as possible to state benefit accounts in 
order to hold down or reduce state employer taxes.
    The pressures at the state level to create a ``business 
friendly'' environment have been strongly evident in recent 
years. Between 1992 and 1999, total yearly increases in state 
trust fund balances overall averaged an unprecedented 85.62 
percent as economic activity surged. Yet even as recipiency 
rates and wage replacement rates were dropping nationally, at 
least 25 states have cut their unemployment taxes over the last 
few years, according to a recent analysis by the National 
Employment Law Project. At least nine states, which adopted tax 
cuts, had recipiency rates below the national average of 33S 
percent, and three of these states were among the four states 
with the lowest recipiency rates in the country. Three of the 
states that awarded tax cuts did so despite the fact that their 
trust funds are below the national average in terms of solvency 
and could not withstand a serious recession.
    There is no reason to expect this dynamic will be different 
with respect to the administrative funding accounts. In the 
end, pressures to cut state employer taxes will thwart the goal 
of adequate administrative funding.
    H.R. 3174 also will cripple the federal government's 
ability to enforce federal accountability requirements. These 
requirements include: 1) proper and efficient administration of 
the program using state merit-staffed employees; 2) ``methods 
of administration'' assuring prompt and accurate payment of 
benefits; and 3) due process and fair hearing protections for 
claimants who are denied benefits. These standards are critical 
to ensuring strong accountability in the system and protecting 
the rights of unemployed workers to fair treatment and prompt 
action by state agencies.
    AFSCME has participated in the stakeholder dialogue 
meetings that began last spring. The stakeholder dialogue 
process focused on three basic aspects of the system: 
administrative funding, recipiency rates, and the federal 
unemployment tax. We believe these meetings have been extremely 
valuable in educating the participants about each others' 
viewpoints and in identifying areas of potential consensus.
    All of the stakeholders agree on the need to make the 
financing of unemployment insurance and employment service 
administrative costs mandatory in light of the failure of the 
appropriations process to provide adequate infrastructure 
funding. AFSCME supported and continues to support a workload 
driven formula, which retains the current federal role in 
pooling risk and resources and encourages states to respond to 
demands of the national economy. We opposed and continue to 
oppose the idea of a state match to draw down federal resources 
which emerged as an alternative to full devolution.
    As conceived to date, the state match proposal would return 
to the states a certain percentage of their proportionate share 
of FUTA taxes paid by employers in their states which they 
would use to draw federal trust fund revenue. We oppose this 
approach because it contains key elements of the full 
devolution proposal. By basing the state share on FUTA tax 
receipts, the proposal runs into the same distribution problems 
inherent in full devolution. In addition, the state match 
contains the same requirement to transfer unused administrative 
funds to state benefit accounts, thereby undermining the 
national insurance features of the present arrangement and 
potentially encouraging states to use federal unemployment tax 
revenue to help lower state unemployment taxes. And, finally 
the proposal would create 50 state administrative accounts, 
setting the stage for full devolution.
    AFSCME strongly believes that federal FUTA resources should 
be allocated based on state workload needs and that a formula 
approach does this best. In addition, a formula has the 
advantage of allowing the federal government to guide state 
behavior from a national perspective in a way that the states 
by themselves may not. For example, the Department of Labor 
(DOL) has been instrumental in moving states to participate 
fully in America's Job Bank, a highly successful endeavor. It 
also has awarded technology grants to states to increase the 
system's productivity, and federal law has made worker 
profiling a national requirement.
    True unemployment insurance reform, however, would be 
seriously lacking if it were defined only as administrative 
financing improvements. The administration's proposal, 
introduced as H.R. 1830 by Reps. Sander Levin and Phil English, 
represents a good first step by recognizing that the scope of 
UI reform must be more comprehensive. It provides incentives 
for states to implement alternative base periods that will help 
more lower wage workers qualify for benefits; improves the 
extended benefits trigger to make it more effective during 
recessions; encourages states to improve the solvency of their 
trust funds; and increases Trust Fund distributions to provide 
some very modest interim administrative funding relief to the 
states. However, we do not believe the legislation goes far 
enough in either the area of benefit expansions or tax reform.
    It should be a matter of major concern to anyone who 
believes in the value of employment security as an economic 
stabilizer that recipiency rates are as low as they are. The 
system's ability to soften the economic effects of recession 
will be seriously compromised if the percentage of unemployed 
workers it reaches continues to decline. Furthermore, workers 
on whose behalf employers pay unemployment taxes should not be 
denied the income replacement they have earned because of 
inequitable and outdated rules. A reform package that does not 
improve recipiency rates in a meaningful way would not be true 
reform at all. Accordingly, AFSCME strongly supports the 
following measures to improve recipiency rates:
     Alternate Base Period: There is no good reason for 
states not to use an alternative based period now that 
technology allows for speedier reporting and posting of wages. 
Furthermore, mandating an alternate base period would allow 
450,000 more workers to receive unemployment benefits. 
Requiring states to use available technology in a way that 
benefits unemployed workers is consistent with the federal duty 
to ensure the ``proper and efficient'' administration of the 
program and federal requirements for payments to be paid in a 
timely fashion.
     Part-time Workers: Workers seeking at least 20 
hours of work per week should not be disqualified from 
receiving unemployment benefits if they have met the earnings 
requirements. Part-time employment has become a major component 
of the economy and increasingly is recognized as an acceptable 
option in a society in which workers face intense pressures in 
balancing the demands of work and family. Furthermore, 
employers often prefer to hire part-time workers in their 
search for a more flexible workforce.
     Lower or Replace Earnings Requirements: The 
increase of low-wage and intermittent employment arrangements 
has acted as a barrier to many workers, and many states have 
been slow to adjust their earnings requirements in recognition 
of these trends. Requiring or encouraging states to have an 
earnings requirement of 400 times a state's minimum wage and 
eliminating the high quarter earnings requirement would address 
this problem. Alternatively, the federal government could award 
technology grants to states to encourage them to establish 
information systems that can replace earnings with hours worked 
as the measure of labor force attachment. The technology is 
available now, and such an approach would eliminate the current 
discriminatory treatment of low wage earners.
     Extended Benefits: AFSCME supports eliminating the 
federal work search requirements so that the federal and state 
rules are consistent. We also urge a lowering of the federal 
trigger and the use of a trigger based on total, instead of 
insured, unemployment.
     Separations for Personal Cause: Workers may have 
to leave work for personal reasons, such as domestic violence 
or the transfer of a spouse by the employer to a different 
state. While, in the very strictest sense, the decision to 
leave work for these reasons may be viewed as ``voluntary,'' in 
reality it rarely is. Some states have begun to recognize this 
fact as evidenced by the recent adoption of new laws that 
provide unemployment benefits to victims of domestic violence. 
AFSCME supports encouraging state adoption of such policies.
    Of the current proposals relating to taxes, AFSCME strongly 
supports Rep. English's proposal in H.R. 3169 to repeal the 
income tax on unemployment benefits. This tax was adopted to 
increase revenue at a time of federal deficits and creates 
undue hardship on many workers when they most need assistance. 
With surpluses projected well into the future, the need for 
this unfair tax no longer exists.
    AFSCME opposes repealing the FUTA surtax before 
comprehensive reform is considered. While amounting to only $14 
per worker per year, the surtax raises 25 percent of current 
FUTA revenues. Repealing the surtax before comprehensive reform 
can be debated would distort congressional consideration of 
broader reform and potentially jeopardize it.
    AFSCME believes that reforming the federal FUTA tax is a 
much more complicated matter than simple repeal of the surtax. 
The current federal wage base of $7,000 has not been updated 
since 1983. At the time, the $7,000 wage base was roughly 
equivalent to the federal minimum wage. (In 1939, the federal 
FUTA tax was .30 percent on a taxable wage base of $3,000 which 
was much closer to the average weekly wage than the minimum 
wage of $.30 per hour or $624.) Since 1983, 41 states have 
established state taxable wage bases that are higher than the 
federal taxable wage base. They range from $8,000 all the way 
up to $25,500.
    A substantial increase in the federal wage base could allow 
the FUTA tax rate to be adjusted downward in a way that could 
relieve the tax burden on small employers with low wage 
earners. For example, with a $19,000 wage base, it would be 
possible to lower the FUTA tax rate from the current .8 percent 
to .34 percent while still raising the same amount of revenue 
currently raised. The tax on employers with workers earning a 
wage equal to the new minimum wage just approved by the House 
of Representatives would drop by $7.00 or half the $14 cut they 
would enjoy under the surtax repeal.
    While these figures could be adjusted to accommodate the 
revenue needs of a comprehensive reform package, the example 
serves to demonstrate a key point. Repealing the surtax is not 
the most efficient way to provide small employers tax relief, 
and it does not address the fact that they are carrying a 
disproportionate burden of the FUTA tax. A better approach 
would be to restructure the FUTA tax to achieve more 
progresssivity and equity among employers. This could be done 
in concert with a possible decrease in total revenue should 
that be justified on the basis of a final package.
    In closing, AFSCME believes that the current strength of 
the economy and the broad concern about underfunding of state 
administrative costs present a unique opportunity to enact the 
most significant changes to the unemployment insurance system 
since the early 1980s. H.R. 3174 looks to the past of the early 
1930s, when the federal government had no meaningful role in 
the nation's economy. Instead, we urge the committee to 
transform the unemployment insurance system into a modern 
employment security system by building on and strengthening the 
federal-state partnership.

                                

STATEMENT OF HON. BOB TAFT, GOVERNOR, STATE OF OHIO

    Good afternoon, Madam Chairman, Congressman Cardin and 
members of the Subcommittee. My name is Bob Taft, Governor of 
Ohio. It is an honor and a pleasure to appear before the 
Subcommittee today, to testify in favor of Congressman Jim 
McCrery's legislation, H.R. 3174, the ``Employment Security 
Financing Act.'' I would like to start by asking that my full 
written statement be included in the hearing record.
    You may recall I appeared before the full Ways and Means 
Committee in June, 1999 to speak in favor of the concepts that 
ultimately were included in the bill Congressman McCrery 
introduced in October. Last June, I asked Congress and the 
White House to embrace needed reforms to the Federal 
Unemployment Tax system. I said FUTA reform is necessary to 
eliminate a needless, 24-year old ``temporary'' surtax on the 
nation's employers, and to allow state re-employment services 
access to the dedicated revenue flow that helps them put the 
unemployed into jobs, and helps place the under-employed into 
better jobs.
    Since my testimony last Summer, the FUTA system has not 
improved. It still fails to serve the workers who need it and 
employers who pay for it.

                    FUTA--A System in Need of Reform

    Employers continue to be overtaxed. In 1976, Congress 
enacted the FUTA surcharge to provide funds to reimburse 
depleted trust fund accounts that have long since been 
restored. The Tax Relief Act of 1997 extended this surcharge 
much longer than necessary, through the year 2007. There is no 
justification for the 30-year extension of this ``temporary'' 
surcharge.
    Not only are employers being overtaxed, but appropriations 
from this dedicated source of administrative funding also have 
been reduced. In 1997, 48 of the 53 states and jurisdictions 
receiving administrative funding for unemployment insurance and 
employment service functions received less than the FUTA taxes 
collected from employers in those states. Since 1990, less than 
58 cents of every employer FUTA tax dollar has been returned in 
administrative funding for states.
    A comparison of the taxes paid by employers to 
administrative funds provided to the states paints a dramatic 
picture. From 1993 to 1998, annual FUTA tax collections 
increased from $4.23 billion to $6.37 billion while 
administrative funding was cut from $3.81 billion to $3.47 
billion. I have provided several graphs demonstrating this 
trend, which are appended to my statement. Although the latest 
data are only available though 1998, the trend line has 
continued in 1999 and 2000, rendering the return of employer 
taxes to the states an increasingly smaller percentage each 
year.
    In Ohio, we receive 39 cents on the dollar. Inadequate 
funding in recent years has forced us to close 22 local 
offices, significantly reduce staff, and use State general 
revenue to make up for cuts in federal funds that are being 
maintained in trust, ostensibly to provide the very services 
that have been cut through the federal appropriations process.
    The differential between federal administrative funds 
provided and actual costs continues to increase. In 1993, the 
state deficit in federal funding compared to cost was $13.3 
million. By 1998, the deficit had grown to $17.5 million.
    We must do a better job of supporting state efforts to 
ensure the ability of American families to adjust to the 
demands of the workforce in this new century by providing 
adequate funding for employment services for those who become 
unemployed.
    It is time for a change. We need a system that properly 
provides sufficient funds to states for administration, and 
minimizes the tax burden on the employers who pay for it.
    Congressman McCrery's bill, and a similar measure 
introduced by Senator Mike DeWine of Ohio, S.462, are carefully 
crafted to reform a federal-state partnership that does not 
adequately serve its state partners. We need Federal 
Unemployment Tax reform that will do each of the following:
     Repeal the 0.2 percent FUTA surcharge;
     Provide adequate dedicated funds for 
administration of the unemployment insurance program and public 
employment services;
     Increase flexibility on the use of funds as states 
develop their integrated workforce development systems, as 
Congress has mandated; and
     Transfer responsibility for collection of the FUTA 
tax to the states.

FUTA REFORM: A CATALYST FOR EFFECTIVE WORKFORCE DEVELOPMENT

    FUTA reform no doubt has considerable fiscal significance 
for states. But I believe the larger, more compelling story is 
how important it is for meaningful, effective workforce 
development. I view the McCrery and DeWine legislation as a key 
tool with which to complement earlier reforms that were the 
product of bipartisan cooperation between this Congress and the 
White House. The ``Employment Security Financing Act'' really 
completes the work on landmark successes such as Welfare Reform 
and the Workforce Investment Act. I regard the ``Employment 
Security Financing Act'' as a necessary next step toward 
ensuring that more of our citizens and their families can enjoy 
our booming economy, and thrive as members of an ever-changing 
workforce.
    Since 1997, when Congress enacted Welfare Reform, states 
have risen to the challenge and have used their new flexibility 
in ways that have guided more of our citizens toward self-
sufficiency. From a federal point of view, Welfare Reform 
provided much-needed budgetary certainty, replacing an open-
ended federal entitlement with a capped entitlement in the form 
of a block grant. Near-term efforts to balance the federal 
budget clearly were aided by states' acceptance of the Welfare 
Reform package crafted by Congress and the Administration.
    States continue to invest heavily, and creatively, in those 
areas which will empower more of our fellow citizens to break 
the cycle of dependency through state-and local-based 
strategies. We are investing great resources in our schools, in 
health care and other areas to let more Americans participate 
in the best social program ever devised--steady employment.
    The nation's employers have been a key component to this 
success story. As you know, many employers provide an array of 
benefits to employees and their families that go beyond a 
paycheck.
    Now states and employers are wrestling with the next 
challenge: Workforce Investment Act implementation. States face 
tremendous challenges in the 21st Century to develop workforce 
investment systems with the resources and the flexibility to 
develop skilled workers and match them to employers' needs. The 
enactment of H.R. 3174 will give states greater flexibility and 
adequate resources to meet this challenge.
    With the Workforce Investment Act of 1998 (WIA), Congress 
and the President took an important step in requiring 
coordination of workforce development activities at the state 
and local level. The legislation, now being implemented across 
the country, requires the participation of a number of agencies 
involved in workforce development activities as part of a 
coordinated state plan. Although WIA contemplates the 
coordination of various workforce activities covering a number 
of categorical programs as part of a one-stop system, funding 
of core employment services to be available to a universal 
population is not sufficient. The McCrery bill addresses the 
need for adequate funding for critical public employment 
services, which include: job search and placement services; 
counseling; testing; occupational and labor market information; 
assessment; and referral services.
    Throughout the WIA implementation process, funding 
flexibility has been identified as an absolute necessity for 
effective workforce system development. Categorical funding 
streams, each with specific limitations, create barriers to the 
effective use of resources at the state and local level to 
serve our worker and employer customers. H.R. 3174 eliminates 
barriers by providing maximum flexibility for the use of 
funding for unemployment insurance and public employment 
services, with primary emphasis on returning unemployed 
individuals to work.
    We need this additional flexibility and funding to make the 
link for individuals from welfare to work, from training to 
work, and from unemployment to work. In this time of economic 
boom and worker shortages, employers desperately need 
assistance in finding skilled workers. Without the funding 
necessary to develop an integrated, universal workforce 
development system, our effectiveness in serving employers and 
the full range of workers is limited.
    Experience has taught Ohio that many of the same 
populations most reliant on employment services are often the 
people most in need of other support services. My state has 
demonstrated its commitment to successful service integration 
by merging our Department of Human Services with our Bureau of 
Employment Services. The new agency will be the Ohio Department 
of Job and Family Services. Besides making administrative 
sense, I believe the title of the revamped agency underscores 
the commonality of the missions it will serve.
    Many employers, large and small, currently are having 
difficulty locating workers as the nation's unemployment rate 
hovers near a record low and the economy enters its ninth year 
of expansion. All employers are burdened with the costs of 
locating, training and retaining employees, when they should be 
receiving these services through state and local workforce 
development systems. Employers have a right to expect federal 
and state governments to honor their commitment to construct 
the integrated workforce development systems that are mandated 
under the Workforce Investment Act and provide the employment 
services for which employers pay nearly $7 billion in taxes 
annually.
    Businesses and workers deserve reliable re-employment 
services, both in a booming economy, and when the economy 
cools. States are the principle providers of those services, 
and proper FUTA financing will give them the resources and 
predictability that are missing from the current federal-state 
partnership.
    It is true that states now confront the task of finding 
jobs for some of our hardest to place individuals. As 
governors, we must be prepared to serve all of our citizens, 
particularly those requiring extra assistance in joining the 
workforce. To be successful, to the degree envisioned by 
Congress and the President, we must have employment services 
that are properly funded and have sufficient flexibility. That 
will be true no matter what shape our economy is in.
    As the federal government now has achieved an on-budget 
surplus, the time is right to embrace reforms which will help 
states meet their responsibilities to all workers and to the 
employer community.
    Since my testimony to the Full Committee last June, the 
number of states that have embraced the FUTA reforms contained 
in H.R. 3174 has grown to 32. Congressman McCrery now counts 
some 40 cosponsors for his legislation.
    Please join me in support of these necessary reforms, which 
represent a logical next step to guaranteeing the other 
historic reforms which Congress and the White House have 
enacted during these past several years.
    I urge your favorable consideration of H.R. 3174.
            Thank you.
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STATEMENT OF SOCIETY FOR HUMAN RESOURCE MANAGEMENT, ALEXANDRIA, 
VIRGINIA

    Madam Chair and Members of the Subcommittee:
    The Society for Human Resource Management (SHRM) is the 
leading voice of the human resource profession. SHRM provides 
education and information services, conferences and seminars, 
government and media representation, online services and 
publications to 130,000, professional and student members 
throughout the world. The Society, the world's largest human 
resource management association, is a founding member of the 
North American Human Resource Management Association (NAHRMA) 
and a founding member of the world federation of Personnel 
Management Associations (WFPMA). On behalf of NAHRMA, SHRM also 
serves as president of WFPMA.
    SHRM urges the Subcommittee to support the swift enactment 
of H.R. 3174, the bipartisan Employment Security Financing 
Reform Act. H.R. 3174 is essential to strengthening the state 
unemployment insurance and employment services (UI/ES) system 
and the workers and employers whom it is designed to serve. 
SHRM is a member of the Coalition for Employment Security 
Financing Reform, an informal coalition of business 
organizations and 32 states that support H.R. 3174. This 
legislation would amend the Internal Revenue Code, the Social 
Security Act, the Wagner-Peyser Act, and the Federal State 
Extended Unemployment Compensation Act of 1970 to improve the 
method by which Federal unemployment taxes are collected and to 
improve the method by which funds are provided from Federal 
unemployment tax revenue for employment security 
administration. Specifically, the bill would:
     repeal in the year 2004 the ``temporary'' 
unemployment surtax that employers have been paying since 1976;
     increase the flow of dollars from the Federal 
Unemployment Tax back to the states; and
     streamline how the tax is collected.
    H.R. 3174 was introduced by Rep. McCrery (R-LA) with the 
bipartisan support of 35 co-sponsors. Unlike the 
Administration's proposals and Rep. English's (R-PA) H.R. 1830, 
the bipartisan Employment Security Financing Reform Act, H.R. 
3174, will improve the method by which FUTA taxes are collected 
and funds are provided to administer the state UI and ES 
programs. The Employment Security Financing Reform Act will fix 
serious problems with the state UI and ES system resulting from 
the federal government's failure to provide adequate funding 
and will also provide funds needed to implement the Workforce 
Investment Act. The Administration's proposals will not achieve 
these goals.
    For more than 60 years, employers have paid payroll taxes 
to fund programs collectively known as the Employment Security 
System. The program is a Federal-State partnership that 
provides four major programs:
    --Employment Services,
    --Unemployment Insurance,
    --Veterans' Employment Services, and
    --Labor Market Information
    The programs are operated by State Employment Security 
Agencies (SESAs) using federal grants financed from a federal 
payroll tax on employers. In addition, states collect a 
separate state payroll tax to finance unemployment insurance 
benefit payments. The Federal government establishes the 
overall legal framework, provides technical assistance, 
collects and allocates funds for administration and provides 
oversight. States provide services to customers and establish 
laws for the collection of state unemployment taxes and payment 
of benefits.
    The Employment Security System is founded on a ``compact'' 
by employers, workers and the State and Federal government, 
through which employers provide financing through payroll 
taxes, and workers receive unemployment benefits along with re-
employment services to shorten their spells of unemployment. 
Employers also receive services to assist them in meeting their 
needs for skilled workers.
    Although the federal budget is now described as balanced, 
some of that balance has been achieved over the years by 
offsetting balances in trust funds, including those within the 
employment security system. Consequently, employer payroll 
taxes are underwriting federal general revenue and providing 
funds for domestic spending unrelated to employment security. 
In 1976, Congress established the 0.2 percent ``temporary'' 
surtax to pay a debt arising from repeated supplemental 
extensions of unemployment benefits. This ``temporary'' tax has 
been extended numerous times and is now scheduled to continue 
until December 31, 2007. SHRM has historically supported the 
repeal of the FUTA 0.2 percent surtax and supports the 
provision in H.R. 3174 and other pending legislation that would 
quickly accomplish this important goal.
    SHRM has historically supported the repeal of the FUTA 0.2 
percent surtax and supports the provision in H.R. 3174 and 
other pending legislation that would quickly accomplish this 
important goal. On February 11, 2000, the SHRM Board of 
Directors approved the following position statement on 
Unemployment Expansion and Reform:
    Changes are needed to improve efficiencies in the 
Unemployment Insurance (UI) program. Unemployment Insurance 
reform can be accomplished without taking away any legal 
protections or benefits for workers under current law and 
without creating unnecessary burdens on employers. Legislation 
is crucial to reduce burdensome paperwork for employers, 
promote efficiencies in returning UI claimants to work, weed 
out fraud, and promote greater government accountability and 
efficiency in the use of FUTA funds. Many of the tax dollars 
that employers pay to finance the nation's Employment Security 
System are being used to artificially offset the federal 
deficit. For example, in 1997 alone, employers paid over $6 
billion in FUTA taxes and only $3.5 billion came back to pay 
for programs. The remaining $2.5 billion is being used to 
artificially offset the federal deficit.
    States should determine the circumstances under which 
unemployed workers collect benefits under state Employment 
Security programs and how much they receive. However, the 
fundamental nature and purpose of the UI system should not be 
changed to allow individuals who are not unemployed to collect 
funds from the Unemployment Insurance Trust Fund. The UI Trust 
Fund should be reserved for involuntarily unemployed 
individuals who are able and available to work, and should not 
be diverted for other purposes, regardless of the merits of 
that purpose. Allowing states to divert funds away from 
unemployed individuals is short sighted and would 
inappropriately change the fundamental nature and purpose of 
the UI system. Allowing the misdirection of unemployment 
benefits for family and medical leave or other non-employment 
benefit purposes will shred the safety net that the 
unemployment insurance system is designed to provide to 
workers.
    SHRM supports proposals to allow for faster and more 
efficient employment security services and to shift decision 
making closer to home where unemployment services/training can 
be customized to local conditions. SHRM supports the efficient 
collection of employment taxes and opposes proposals to 
accelerate FUTA and state unemployment tax collections due to 
the unnecessary paperwork burdens that would be imposed. 
Moreover, SHRM believes tax dollars that employers pay to 
finance America's employment security system should not be used 
to artificially offset the federal deficit.
    SHRM opposes the extension of the 0.2 percent FUTA 
surcharge because it represents a breach in the 1976 
congressional commitments that the tax would be temporary. This 
unnecessary increase will ultimately result in a tax increase 
at the cost of job creation.
    Consistent with the SHRM board approved position, SHRM 
strongly supports the Employment Security Financing Reform Act, 
H.R. 3174 and urges its speedy enactment.
    The Administration has repeatedly proposed a provision in 
its annual U.S. Treasury Department budget requests that would 
accelerate FUTA and state unemployment tax collections from a 
quarterly to a monthly basis. SHRM does not support the 
Administration's proposals as presented in Unemployment 
Compensation Amendments of 1999, H.R. 1830. H.R. 1830 would 
continue the 0.2 percent FUTA surtax through calendar year 2007 
and would permit the Secretary of the Treasury to collect FUTA 
on a monthly or other basis.
    H.R. 3174 will provide that FUTA and state unemployment 
taxes will be payable no more often than quarterly, and 
employers will no longer have to fill out duplicative FUTA and 
state unemployment tax forms. Instead, states will collect FUTA 
on the same form used for state unemployment taxes. This 
approach will simplify tax payment for employers and states, as 
well as the federal government. It will also increase tax 
compliance, because states are closer to the situation and in a 
better position to detect under-payments of FUTA.
    Accountability for use of the money will be improved by 
requiring each state agency to report annually to its 
legislature and the public on services provided to UI 
claimants. More resources will be provided to prevent and 
detect UI fraud and abuse. Improper UI payments are a serious 
and costly problem, and states will have the resources they 
need to address them.
    The greatest problem most employers are experiencing with 
the UI program is a labor shortage. The tight labor market 
makes it important to avoid policies that will increase 
utilization of transfer payments such as UI at a time when 
employers are having difficulty finding applicants for job 
openings. With H.R. 3174, funds will be available for states to 
implement the Workforce Investment Act and operate One-Stop 
Centers, which deliver UI benefits and coordinate employment 
services. Without H.R. 3174, there will be no funding for 
states to deliver the services mandated by DOL.
    Federal expansion of the UI program, as proposed by the 
Administration and in H.R. 1830, will take the program in the 
wrong direction and will hurt the workers it is designed to 
help. Expanding the program through relaxed eligibility rules 
and higher weekly benefits will ultimately weaken the system 
and hurt those individuals it is designed to protect.
    On a related issue, SHRM also urges the Subcommittee to 
quickly hold hearings on and to pass legislation to stop the 
Administration's proposed Birth and Adoption Unemployment 
Compensation (BAA-UC) Rule (Federal Register, Vol. 64, No. 232/
Friday, December 3, 1999). The rule would allow states to use 
their unemployment insurance trust funds to provide paid family 
leave. The proposal would allow states to amend their state 
``able and available'' requirements to include individuals on 
temporary leave for birth or adoption. This proposal could be 
finalized at any time.
    SHRM strongly opposes the BAA-UC proposal on both policy 
and process grounds. Allowing the misdirection of unemployment 
benefits for family and medical leave or other non-employment 
benefit purposes will shred the safety net that the 
unemployment insurance system is designed to provide to 
workers. While SHRM strongly agrees that paid leave is a 
desirable benefit and encourages its members to provide a whole 
host of work-life benefits to employees, including leave for 
the birth or adoption of a child, we take strong exception to 
the approach taken in the BAA-UC rule. We strongly disagree 
with the President's May 23, 1999 statement that, through the 
BAA-UC: ``We can do this in a way that preserves the soundness 
of the unemployment insurance system and continues to promote 
economic growth.'' May 23, 1999 Statement of President William 
J. Clinton at Grambling State University.
    The BAA-UC proposed rule violates the clear and unambiguous 
intent of the letter and the spirit of both the Unemployment 
Insurance and the Family and Medical Leave Act laws.
    SHRM supports a strong Unemployment Insurance system and 
believes that the present system needs reforms in order to 
effectively improve services for jobless workers. H.R. 3174 
will allow for greater responsiveness to local needs and 
circumstances. State legislatures, rather than federal 
appropriations committees and U.S. Department of Labor and 
Office of Management and Budget (OMB) staff in Washington, 
D.C., will determine how much is needed to run state UI 
programs. This will maximize effectiveness by providing greater 
flexibility--and accountability for state UI/ES agencies. H.R. 
3174 provides more resources for administration of the UI 
program. All states will be ``winners. With FUTA funds for 
states currently lost in the federal budget process, all states 
are being shortchanged.
    SHRM commends the Subcommittee for holding this important 
hearing on Unemployment Insurance reform. As we move into the 
21st century, it is important that we strengthen the 
unemployment insurance system so that it meets the increasingly 
complex needs of the changing workforce. Therefore, SHRM urges 
the members of the Subcommittee to actively work to enact H.R. 
3174 on a bipartisan basis, while opposing the Administration's 
proposals.

                                

STATEMENT OF HON. GARY LOCKE, GOVERNOR, STATE OF WASHINGTON

    Nearly 65 years ago, the Social Security Act forged a 
partnership between the States and the Federal Government to 
provide for the needs of unemployed workers. It blended a mix 
of basic Federal requirements with State flexibility in 
designing programs to meet local needs. The States financed the 
actual benefits, while the Federal Government financed the 
administrative costs. For the most part, the system has worked 
well.
    But, much has changed since the 1930s. The work world is a 
dynamic one. What we produce, where we work and how we work now 
would seem like science fiction to most workers in 1935. 
Technology, too, has improved our services so we can do more 
with less and serve our UI customers by telephone and computer. 
All these changes have created new needs and new opportunities.
    We need services for the unemployed and underemployed that 
are relevant to the 21st century--not the early 20th century. 
We need a comprehensive approach.
    Recipiency rates need to improve. In some states, as few as 
17% of all unemployed workers actually receive benefits. The 
national average is too low--just over one-third of all workers 
are eligible for benefits. Washington State, with a recipiency 
rate of about 53%, has long been among the leaders in making 
the UI Program accessible to a broad range of workers:
     In 1977, our Legislature recognized the weaknesses 
of conventional employment and earnings thresholds and 
established Washington's unique 680 hours-worked test.
     We've long had the alternate base year in place. 
New workers who can't meet the standard hours-worked test 
become eligible based on their most recent completed calendar 
quarter of work.
     Our state's injured workers are able to freeze 
wage credits until they are again able to work and are seeking 
work. Our Temporary Total Disability (TTD) program is an 
unqualified success.
     We were quick to recognize the benefits of short-
time compensation and enacted our Shared Work Program in the 
early 1980's.
     In some cases, Washington law allows good cause 
for voluntarily quitting work to follow one's spouse to new 
employment.
     Due to continued underfunding even though federal 
account balances were full, Washington State is one of several 
that found it necessary to seek state money and enact state law 
to finance reemployment services for UI claimants provided 
through our Claimant Placement Program, and to use state 
penalty and interest funds to detect and collect overpayments, 
contributing to our efforts to combat fraud and abuse.
     We are currently trying to address the needs of 
our contingent workforce, and are especially hampered by 
federal law that requires different standards for educational 
employees in a labor market that has changed dramatically since 
those federal laws were passed in the 1970's. We believe the 
federal law is out of step with the current working conditions 
of teachers and needs to be changed to allow benefits to 
teachers between school years when they don't really have a 
guaranteed job for the next term.
     In Washington State, job search assistance, 
monitoring and verification are important enough that our 
Legislature specifies these activities in state statute. We 
know from the Work Search Study in Tacoma, Washington, and a 
more recent analysis in Maryland, that monitoring and 
verification make a difference by reducing the length of time 
unemployed, but the current federal funding formula doesn't 
reward states to fully operate these components.
    Wage replacement rates must increase. When the Social 
Security Act was written, UI benefits were envisioned as 
replacing half a worker's weekly wage. Today, only 13 states 
replace at least half, the lowest state is at 32% and the 
national average is about 46%. In Washington State the 
replacement rate is 50%, just meeting the target and eighth 
highest in the system. Clearly, there's room for improvement.
    Worker retraining needs to be supported. For most 
dislocated workers, retraining for new jobs is just hit or 
miss, with support dependent on a hodgepodge of Federal grants 
or targeted programs. Often, adequate financial support for 
living expenses is missing.
    We actively supported retraining and I just signed 
legislation that provides up to 22 weeks of additional, state-
funded benefits to workers in approved retraining programs. In 
some targeted industries up to 44 weeks of benefits are 
available. This action recognizes that, although unemployment 
is at its lowest point in generations, there are still 
structural changes taking place and dislocated workers need new 
or updated skills in order to find suitable work in our dynamic 
labor market.
    There are issues, however, with the effective use of state 
and federal dollars for dislocated workers in training. When 
silo-funded federal benefits programs like Trade Readjustment 
Assistance (TRA) must be replaced by state-funded benefit 
programs when available, other dislocated workers lose out. If 
Washington had the flexibility to pay TRA benefits to certified 
TRA workers, we have estimated that an additional $5-10 million 
in state-funded retraining benefits would be available to other 
dislocated workers who do not qualify for TRA.
    There are financing issues, too.
    States must maintain actuarially sound trust funds. Aside 
from the obvious logic for a sound foundation for the UI 
system, underfunding UI by some states puts other responsible 
states at an economic disadvantage.
    The 30-year temporary tax must be repealed.
    To achieve and maintain the economic growth that Washington 
and other states have had over the last decade, we urge you to 
repeal the ``temporary'' FUTA surtax, returning those tax 
dollars to the employers who paid them. In Washington State, 
we've estimated that repeal would put an additional $34 million 
dollars in the pockets of our employers. Nationally, possibly 
$1.6 billion. This would go a long way to helping businesses to 
continue to invest in their workforce and improve the economy.
    A comprehensive proposal is needed.
    In the past, we've supported H.R. 1830 as a good first step 
toward a multi-faceted piece of legislation, expanding 
eligibility and improving administrative funding. But there is 
more that needs to be done.
    With H.R. 1975, employers get relief of the temporary .2% 
FUTA surcharge, but that legislation does not address reforms 
needed in eligibility standards and administrative financing. 
Repeal of the .2% FUTA surcharge should only occur as part of a 
comprehensive proposal.
    On the other hand, H.R. 3174 focuses all its energy toward 
a revamp of the UI program's financing structure, without 
addressing the other side of the equation--benefits, and in 
fact may reward states that have low recipiency rates. We do 
not believe this is the answer either.
    H.R. 3167 would change extended benefits requirements, 
offer incentives to states with healthy trust funds, allow 
states to collect the federal portion of the FUTA tax, and 
require states to fully inform UI claimants of their rights. It 
is a mix of fixes, but incomplete.
    The Administration's request for FY 2001 starts to address 
one of our issues--under-funding of UI and ES activities--by 
requesting an additional $50 million for the One Stop 
Employment Service to provide targeted, staff-assisted 
reemployment services to UI claimants identified as being at 
risk of exhausting benefits. What is not evident is an expanded 
investment in the technology solutions we need to serve the 
unemployed.
    These bills and budgets all have pieces of the solution, 
but none provide the comprehensive reforms that we believe are 
necessary. We are encouraged by the efforts of the ICESA State-
Federal UI/ES Reform Workgroup as it works toward consensus on 
a proposal that combines broader access to benefits with 
simplified tax collection, and administrative funding changes 
while focusing on putting people back to work and combating 
fraud and abuse. Our stakeholders, worker advocates and 
businesses must agree on any comprehensive reform.
    The Western Governors' Association passed a resolution in 
December calling for reform of the National Employment Security 
System. We felt the need to respond to continuing the 
``temporary'' FUTA surtax, the use of FUTA funds to offset the 
deficit rather than pay for employment services, and the long 
term under-financing of the system that has caused us to close 
offices. Taken together, these federal policies and laws have 
reduced access to and lowered local levels of service.
    Western states gave a substantial commitment to job trainin 
gand workforce development. Resolution 99-029 supports a 
comprehensive reform through federal legislation of the 
financing and administration of the National Employment 
Security System. This resolution was delivered to your 
committee on February 29, 2000 by my colleague, Governor Jane 
Dee Hull of Arizona.
    The strength of a comprehensive and fully supported 
proposal is that it will generate the support needed for the 
more difficult components of reform like mandatory funding and 
increased access to benefits. Such a proposal must solve 
inadequate funding, provide additional dollars for 
reemployment, reduce UI tax burdens and employer filing 
burdens, combat fraud and abuse, and expand eligibility. We 
believe this is possible.
    We support
    1. Moving UI and ES funding to the mandatory side of the 
budget.
    2. Fully funding the costs of administering UI and ES 
Services, including:
     the baseline technological infrastructure needed 
to offer unemployment and reemployment services;
     integrity activities such as collection/detection 
of UI overpayments and finding fraudulent employers;
     strengthening the administration of the system by 
ensuring that states get a greater return on their employers' 
FUTA tax dollars, with greater accountability for the use of 
these funds;
     a funding strategy that ensures that states with 
small tax bases will have administrative funds to deliver the 
employment security system.
     Repealing the 0.2 percent FUTA surcharge, but only 
as part of a comprehensive proposal.
     Eliminating inefficiencies experienced by 
employers by transferring responsibility for collecting the 
FUTA taxes to the states. Simplifying the UI tax process and 
employer reporting process.
     Increasing the states' flexibility to administer 
their UI and ES programs to serve the needs of their employers 
and workers while providing incentives.
     Improve employment services with an emphasis on 
re-employing dislocated workers;.
     Making it clear that job search and placement 
services are to be provided UI claimants. States must have the 
resources to ensure a strong link for UI recipients to the 
employment services that will get them back to work. Current 
federal funding formulas do not reward states to fully operate 
these components;
     Granting access to the National Directory of New 
Hires to state UI overpayment detection programs--it would 
provide access on hiring information from multi-state employers 
in order to detect individuals who work while claiming UI 
benefits;
     Making the Directory of New Hires a more valuable 
tool for Child Support Enforcement and UI Programs by including 
the actual start-work date in reports required by employers;
     Eliminating all extended benefit special 
eligibility requirements including the complicated computations 
for eligibility and the often-penalizing work search 
requirements placed on these individuals during recessions;
     Providing a higher federal share of extended 
benefits during periods of high unemployment;
     Correcting the triggers for extended benefits so 
that they work;
     Eliminating in-person citizenship verification on 
federal UI claims;
     Enabling states to implement alternative base 
periods;
     Repealing the federal income tax on UI benefits, 
which would increase the purchasing power of UI benefits and 
would treat UI benefits like other wage replacement benefits 
such as workers' compensation;
     Expanding coverage for part-time and contingent 
workers. Part-time work is often not an individual's choice--
but ever more typical in the changing job market with increased 
family obligations. Coverage for workers who are monetarily 
eligible but who are seeking part-time work is a valid response 
to current labor market realities;
     Allowing more state flexibility for payments to 
educational employees with a different labor market than in the 
past. Federal law needs to be changed to allow benefits to 
teachers between school years when they don't really have a 
guaranteed job for the next term;
     Providing effective use of federal dollars for 
dislocated workers in training. Federal benefits programs like 
Trade Readjustment Assistance (TRA) must be able to be used 
even when state-funded benefit programs are available.
    We can not support:
     Requiring states to adopt 400 times the minimum 
wage as the workforce attachment threshold. A minimum threshold 
based on wages penalizes low-wage workers. Since 1977, 
Washington State has used the best measure of workforce 
attachment--hours worked. It is independent of wage level and 
determines the amount of work--the true attachment to the labor 
force. Oregon is also now using an hours threshold as an 
alternative test for UI eligibility, following discussions with 
Washington State on the effectiveness of using hours as a true 
consideration of an individual's attachment to the labor force. 
If there is a need to set a national threshold, set it at 400 
hours of employment which would allow more hardworking, low 
earning workers to qualify for benefits.
     Shifting to monthly tax reporting. This would 
triple the burden on employers and the administrative costs of 
processing taxes.
     Standalone repeal of FUTA surtax. This repeal is 
important, but only as a part of a comprehensive reform.
    We are still considering:
     Offering incentives to states to maintain 
recession-proof balances in their trust fund. In the event of 
economic downturns, when states use their funds the most, 
incentive-based funds would be non-existent since Average High 
Cost Multiples would drop below targeted levels.
    Our state has a strong interest in a strong UI program. Our 
legislature has authorized several studies of the Unemployment 
Insurance system in Washington State in the coming year. We are 
ready for federal help with reforms that make will our system 
more effective.
    The time is right. The partners are at the table. 
Comprehensive reform is possible. We agree with Chairman 
Johnson that we must improve and strengthen the system to meet 
the increasingly complex needs of our workforce. We look 
forward to working with you and the Department of Labor, our 
federal partners, as well as our stakeholders, to make informed 
public policy that will guide the UI system into the 21st 
century. Thank you for the opportunity to provide comment on 
this important subject.

                                

STATEMENT OF WESTERN GOVERNORS' ASSOCIATION, DENVER, COLORADO

A. BACKGROUND

    1. The National Employment Security System has been 
systematically under funded for over a decade as a result of 
reduced Congressional appropriations and the impact of the 
Budget Enforcement Act and prior budget reduction legislation.
    2. In 1976, Congress enacted a 0.2 percent Federal 
Unemployment Tax Act (FUTA) surtax as a temporary measure to 
fund deficits in the employment security system. These deficits 
were addressed long ago by this temporary measure.
    3. A substantial portion of the employer-paid FUTA taxes 
dedicated for the purpose of employment security administration 
are now being collected and withheld by Congress to off-set the 
Federal deficit rather than expending them for the purpose they 
were intended.
    4. Access to services and the level of services provided 
have declined as a result of this under-financing of the 
employment security system. For example, a number of states 
have had to close employment services offices resulting in both 
employers and workers not receiving the services they paid for 
and need.
    5. Inadequate administrative funding has hindered states' 
abilities to provide job search assistance to help more 
claimants return to work. This has resulted in additional 
benefit payments to these claimants.
    6. As a result, states have been forced to assume these 
administrative costs in ways that essentially tax employers 
twice for services that should be paid for from the FUTA 
revenues already paid by employers.
    7. Inadequate administrative funding has undermined the 
ability of state administrators to fully maintain the integrity 
of the system, leading to unnecessary program inefficiencies.
    8. Employers are burdened by having to make separate 
federal and state unemployment tax filings.
    9. Western governors have made a substantial commitment to 
job training and work force development within their states.

B. GOVERNORS' POLICY STATEMENT

    1. Western governors support reforming through federal 
legislation the financing and administration of the National 
Employment Security System. These reforms should:
     Reduce the tax burden placed on large and small 
businesses by repealing the unnecessary and ``temporary'' 0.2 
percent FUTA surtax, thereby cutting FUTA taxes to 0.6 percent.
     Develop a funding strategy that utilizes the FUTA 
tax dollars for their intended purpose and adequately funds the 
employment security system.
     Preserve the protections for workers and more 
adequately address the needs of the workers.
     Eliminate the inefficiencies experienced by 
employers by transferring responsibility for collecting the 
FUTA tax to the states.
     Strengthen the administration of the system by 
ensuring that states get a greater return on their employers' 
FUTA tax dollars and ensure greater accountability for the use 
of these funds.
     Improve employment services with an emphasis on 
re-employing dislocated workers.
     Combat fraud and abuse in the present system.
     Increase the states' flexibility to administer 
their unemployment insurance and employment services programs 
to serve the needs of their employers and workers.
     Develop a funding strategy that ensures that 
states with small tax bases will have administrative funds to 
deliver the employment security system.

C. GOVERNORS' MANAGEMENT DIRECTIVE

    1. The Western Governors' Association shall transmit a copy 
of this resolution to the President, the Office of Management 
and Budget, the Secretary of Labor and the chairman and ranking 
minority member of the Senate Finance, Budget and Health, 
Education, Labor and Pensions committees, and to the chairman 
and ranking minority member of the House Ways and Means, Budget 
and Education and Workforce committees.
    Approval of a WGA resolution requires an affirmative vote 
of two-thirds of the Board of the Directors present at the 
meeting. Dissenting votes, if any, are indicated in the 
resolution. The Board of Directors is comprised of the 
governors of Alaska, American Samoa, Arizona, California, 
Colorado, Guam, Hawaii, Idaho, Kansas, Montana, Nebraska, 
Nevada, New Mexico, North Dakota, Northern Mariana Islands, 
Oregon, South Dakota, Texas, Utah, Washington and Wyoming.

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