Unofficial Transcript of W&M Human Resources Panel Hearing on Collection of Unemployment Taxes

The unofficial transcript is available of a June 23 Ways and Means Human Resources Subcommittee hearing on H.R. 3684, a bill that would transfer from the federal government to the states the responsibility for collection of unemployment taxes.

Panel Chair E. Clay Shaw Jr., R-Fla., said the legislation, the Employment Security Financing Act of 1998, would direct the states to collect all unemployment taxes, "cutting business and tax filing paperwork in half."

Some witnesses supported the bill. Florida Department of Labor official Douglas Jamerson said the bill will give relief to states such as his "that receive a disproportionately low return of FUTA tax revenues." New Hampshire Employment Security Department official Joseph Weisenburger predicted the bill would "increase tax collections" and "restore deteriorating services and program integrity." And John Davidson of the Chrysler Corp. favors the bill because it would establish state-specific accounts for deposit of FUTA revenues and would cost less than the present federal/state system.

But there was a downside to the testimony. AFL-CIO policy official Marc Baldwin called H.R. 3684 "unworkable" for several reasons, including a cut of one-fourth of the funding for administration, the use of a "Council of Lesser States" to distribute funds among these states, and language that "effectively dismantles Department of Labor oversight of nationally important" unemployment issues. Janet Norwood of the Urban Institute faulted the bill for making the appropriation of funds to administer state activities to produce state and national data dependent on state legislatures, providing "little or no federal role for working toward trust fund solvency" and ignoring the treatment of low-wage workers' eligibility for funds. [Editor's note: This transcript originally appeared with an incorrect headline summary at 98 TNT 125-14.]

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P R O C E E D I N G S

Human Resources Subcommittee -- June 23, 1998 [3:12 p.m.]

[1] CHAIR SHAW: The committee will come to order.

[2] Keeping the nation's unemployment insurance system operating effectively is important to more than 100 million employees, to millions of employers and to the strength and vitality of the United States economy.

[3] Yet, despite this important mission, today less than 60 cents out of every dollar in federal taxes collected to run the unemployment insurance system is used for its intended purpose -- that is to administer benefits and get the jobless back to work.

[4] Florida's Labor Secretary, Mr. Doug Jamerson, will testify that in 1996 about 35 cents per dollar in federal taxes was returned to the state of Florida. In fact, the difference between federal unemployment taxes paid by Florida businesses from 1991 to 1996, and "What my state received back from Washington," totaled more than $1 billion.

[5] Florida's not alone. Nationally, over the next five years, more than $10 billion in federal unemployment taxes will probably get lost in Washington, instead of helping jobless workers. When jobless workers don't benefit from billions of dollars in unemployment taxes collected specifically for them, something is terribly wrong.

[6] That's one reason why working with a bipartisan coalition of employers and 27 states, I introduced H.R.3684, the Unemployment -- excuse me, the Employment Security Financing Act of 1998. This legislation's goal is simple, to get jobless Americans back to work sooner. H.R.3684 is endorsed by the United States Chamber of Commerce, the National Association of Manufacturers, the National Restaurant Association; and even the National Broiler Council.

[7] Now, if the nation's fried chicken lobby is on our side, who can possibly be against us at this point.

[8] [Laughter.]

[9] CHAIR SHAW: For recipients, little would change. Benefits would remain set by states, as part of the national system; small states would retain the extra federal payment; and extended benefits and special assistance for veterans and the disabled would continue.

[10] But states would collect all taxes that support the system, cutting business paperwork and tax filing in half. More employment services would help the jobless find work sooner; and federal unemployment taxes would fall with the end of the 0.2 percent surtax, which its defenders label "temporary," even though it's been around for the last 22 years.

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

[12] The funds are there. But as with welfare reform, we need to repair an outdated system so it works better for jobless Americans and their families.

[13] Now I will recognize Mr. Levin for his opening statement.

[14] MR. LEVIN: Thank you, Mr. Chairman.

[15] Let me start by saying, I agree with the need to reform a system -- the nation's unemployment compensation system that was enacted over 60 years ago, to help provide assistance to laid-off workers.

[16] The strength of today's economy provides us with a good opportunity to begin making some of these changes, or to put it another way, to fix the roof while the sun is shining.

[17] However, I have deep concerns that the legislation that's being proposed, H.R.3684, would do much more harm than good. Rather than fixing the roof, it might put a huge hole in it.

[18] First the legislation ignores many of the current problems faced by our unemployment compensation system, such as the decline in the number of unemployed Americans receiving UI benefits, a figure that I think is shocking, and the threatened solvency of the state unemployment trust funds.

[19] To remain silent when the percentage of workers qualifying for unemployment comp has declined from nearly 50 percent in the '50s to about 35 percent today is a mistake.

[20] To ignore the fact that 22 states have insufficient reserves in their unemployment trust funds to weather a sustained recession is equally unwise.

[21] Second, the bill would create new problems for our unemployment comp system. For example, H.R.3684 would eliminate the current benefit for extended unemployment benefits, EB, without proposing a reliable replacement.

[22] It's true the legislation calls on states to establish their own EB programs, but there is no enforcement mechanism on the federal level to ensure they do so. This could place dislocated workers in jeopardy during severe economic downturns.

[23] I might add that I think this is a national, not only a state, problem. Because in times of downturns, people move from one state to another.

[24] Further, H.R.3684 would undermine the insurance principle of shared risk under which the current UI system pays states based on their administrative workloads, not on the amount of taxes paid in that state.

[25] Under this bill, it will not matter if one state has an unemployment rate of three percent and another has an unemployment rate of ten percent.

[26] I believe we can build upon the current state/federal partnership, rather than ripping it apart. After all, unemployment is a national problem, requiring shared responsibility and oversight between the states and the federal government.

[27] Therefore, along with Mr. English and Mr. Rangel, I've introduced legislation proposed by the administration to make improvements to the current unemployment compensation system while still maintaining a state/federal partnership.

[28] This legislation, H.R.3697, would help states voluntarily improve UI coverage among low-wage workers; encourage states to improve the solvency of their unemployment trust funds; establish a more accurate and more equitable trigger for extended unemployment benefits; and provide new supplemental funding to help states with their administrative costs.

[29] On this last issue, let me explain that our legislation would provide an additional $106 million in mandatory funding for state administrative expenses in FY 1999, as well as additional mandatory funding in subsequent years.

[30] Let me also add, in terms of federal/state partnerships, it seems to me that we need to step back and take an even broader look at unemployment compensation in 1998. There's been a lot of change in the recent years, perhaps in recent decades, as to the nature of unemployment.

[31] Fewer and fewer people are temporarily laid off, more and more are permanently laid off; and it may well be that we need to look at ways to integrate unemployment compensation with training and re-training programs.

[32] If we're going to do that, I would think on a federal/state partnership basis, that the notion of devolution could work against the need to address unemployment -- the response to unemployment -- as it is occurring in 1998 and 1999 as compared with 1978 or 1968.

[33] Mr. Chairman, I look forward to hearing from today's witnesses and to an open discussion about our unemployment compensation system. Thank you.

[34] CHAIR SHAW: Thank you, Mr. Levin.

[35] Our first witness today is Grace Kilbane, who is the director of Unemployment Insurance Service, United States Department of Labor.

[36] Welcome. We have your full statement, which will be placed in the record in full and you may proceed and summarize as you see fit.

[37] MS. KILBANE: Thank you, Mr. Chairman and members of the subcommittee for this opportunity to testify before you today on the Employment Security Financing Act of 1998.

[38] First of all, I would really like to applaud the coalition and this bill's objective to both reform of the funding for employment security, as well as to increase the funding and return on FUTA for our employment security system.

[39] However, we do have some concerns that we would also like to share with you about this bill today from the administration's perspective. I also would like to commend you and members of this subcommittee for taking your time to look at these programs during this good economy. This is the best time to look at the unemployment insurance program so that we're ready if and when the economy takes a downturn.

[40] In the interest of time, I would like to do two things today. One is to summarize what our concerns are with this bill; and secondly, to present what the administration's proposals are regarding these issues.

[41] So, first of all, I think that the stated primary purpose of this bill, H.R.3684, is to remedy the insufficient administrative funds that are in the system. The concern that we have is that the solution that is proposed to this major problem, which is to transfer the funds from Congress to the states, is not guaranteeing that you're going to fix the problem.

[42] Most state legislatures meet for only a portion of the year, and six state legislatures meet bi-annually. There's no guarantee in this legislation that you'll be able to respond quickly to economic downturns at the state level, either unforeseen economic downturns, or even those that are caused by large, national disasters -- which we've seen particularly in small states.

[43] Transferring funding from Congress to states, too, has

[44] In addition to having the states appropriate funds instead of Congress, the bill also transfers the responsibility for collecting the federal unemployment tax or FUTA from the IRS to the states. We think that we need to take a close look at this because having the states collect federal revenue and having the legislatures then appropriate federal dollars, with no federal requirements -- no guidelines, no standards, no -- any kind of federal requirements, actually we think flies in the face of the Government Performance and Results Act, which Congress passed a few years ago in order to make sure we were spending federal dollars wisely and achieving outcomes.

[45] We would like to see other options considered in terms of

[46] Another idea that has been considered in the past is to create a permanent cap adjustment on the discretionary side, so that you could fund these programs based on work load. When work load went up, you'd have sufficient funding to pay for it.

[47] A third idea is that if there is a public policy -- good public policy reason to transfer the administration to the states -- that is, the states being responsible for administration of these programs -- then perhaps we should consider a state-based, administrative tax just like a state- based benefits tax that they would collect together, and keep a reduced FUTA tax through federal activities that Congress would still appropriate.

[48] This bill basically restructures our current trust fund and elements the three federal accounts, and creates 53 specific state accounts. In doing that, it creates a federal administrative account for federal activities. It limits to Congress and to the federal government two percent of the federal funds -- or the FUTA funds collected. So the states keep 98 percent of the money and they give two percent to the states.

[49] This would produce right now about $125 million a year. For Department of Labor administration alone this year it cost $195 million. So we are under-funding the current federal activities by 36 percent by this proposal.

[50] Basically, the Secretary of Labor's responsibilities stay pretty much the same under this bill. Congress would be limited to only the two percent; and in addition, this two percent in this bill would cover the IRS activities, which would be an additional amount of money. We're not sure how much. Currently it costs a little over $100 million for the IRS, but they wouldn't be collected in the taxes, but would still be maintaining the accounts. So this would even further under-fund federal activities.

[51] Under H.R.3684, the extended benefit program would basically be also given over to the states to be administered solely by states. So the whole federal partnership -- state partnership, when the economy starts going down in certain areas or regions would be eliminated. We would have no special funding mechanism, but for EB. Congress would be faced with enacting special compensation programs -- extended unemployment compensation programs; and if we look at our experience in the last recession where Congress did this in the '90s, it cost $28.5 billion in federal funds in order to enact these programs, $12 billion of which was funded by FUTA, which we would be eliminating in this proposal; and $16.5 billion of which was funded by general revenue which had to be offset.

[52] We also believe that this proposal weakens state accountability for performance. The bill does require states to determine what they want to achieve, and then report to the governor. There's no requirement that these be comparable, state-by-state. So we could look at the country and see what the performance is.

[53] Finally, when we look at this bill, and we look at -- we're right now in an era of more and more international corporations and global economics -- we just have to wonder if it makes sense to reduce our ability to respond as a nation by reducing our federal and national roles.

[54] What we think in terms of the administration in looking at this program is that in order to enact reform and strengthen the unemployment insurance program, we need to address three key issues.

[55] The first one is recipiency, which Mr. Levin referred to earlier in his remarks; secondly, recession readiness; and finally, administrative funding -- which is where we agree with the overall objective of H.R.3684.

[56] If we could look at recipiency for a moment -- and we do have some charts over here which I've also made available to you -- copies for the record -- you can see that those able to receive unemployment compensation had been steadily trending downward, or eroding since the 1950s. It used to be that about half of unemployed workers could get unemployment insurance, now nationally, about 36 percent can in 1990. That's what that chart shows you.

[57] In some states, it's under 25 percent, or only one in every four unemployed workers are eligible.

[58] If we could look at the next chart, what we know is that -- and studies have shown that this downward trend in recipiency has negatively impacted even the program's ability, both to help individuals with their economic stabilization during periods of joblessness, as well as the economy.

[59] What this chart shows you is that post-World War II,

[60] Before that, the squeeze on our economy was much broader. What economists have agreed to is that the unemployment compensation and insurance program, as well as other fiscal activities that have been taken, have been part of contributing to smoothing out the economic cycles in our economy.

[61] The second goal is recession readiness. What we're concerned about there is that during the last recession in this country in the early '90s, only nine states triggered on to extended benefits, which caused Congress to act with a whole national program for all states.

[62] Secondly, we're concerned about state trust fund levels, or solvency levels. These levels are below where they should be in this recovery of the economy, in our opinion, and we're concerned that a large economic downturn would cause major state filing.

[63] Finally, we believe we need to pay attention to administrative funding, which again is also the purpose of H.R.3684. Since 1995, fiscal year 1995, appropriations for the unemployment insurance program have remained static; have not accounted for increases in work load or inflation.

[64] The employment service funding has been steadily cut since 1984, hindering our ability to re-employ workers quickly. In 1997, evidence of this is that states had to pitch in $200 million of their own money. So we see evidence of this.

[65] So, what our approach to reform is, therefore -- and our budget request, which the President set in motion for 1999 -- he set in motion a plan to reform the employment security system. This is a two-phase strategy that we have put in place.

[66] The first phase is a bill, H.R.3697, which was introduced by Representatives Levin, English and Rangel, to provide incentives to strengthen the unemployment insurance program in these areas: recipiency, recession-readiness, and administrative funding; and to really provide a down-payment for further and larger discussion of, how do we permanently form this program?

[67] What this bill does is that it would provide $20 million in each of the next three fiscal years for states to install an alternative base period. This would help if every state did this. This would help an additional 450,000 people become eligible for benefits today.

[68] Mostly, these are low-wage workers; and this would increase recipiency by six to eight percent and start reversing that trend that we saw on the first chart.

[69] In terms of recession-readiness, H.R.3697 would prepare the unemployment insurance program for a recession. It would strengthen the extended benefit program by revising the program triggers, so that the program could respond during recession.

[70] If we could look at just the next chart real quickly, this will show you that if the proposed law was in place in the '90s recession, it would have cost the country a total of $7.2 billion; and it would have triggered on in 29 states. Instead, its trigger only happened in nine states, which is that really skinny color on the current law, and Congress enacted five extensions of extended unemployment compensation for a total cost of $28.5 billion.

[71] We believe that if the program was more responsive, it would go on quicker, it would be more effective in the white places, and it would cost less money.

[72] We also in this bill provide incentives for helping to improve the solvency of the trust fund. Again, if you look at the next chart, you will see --

[73] CHAIR SHAW: Ms. Kilbane, could you go ahead and wrap up here?

[74] MS. KILBANE: Yes.

[75] CHAIR SHAW: You're about three times your five minutes right now.

[76] MS. KILBANE: Okay. Essentially, if I could just move on to the end.

[77] Basically, we would also fix administrative funding by adding some additional funds; and the bill also proposes to extend the self-employment assistance program, which is due to expire December 8, and ten states currently have that.

[78] One of the issues that we have in both extended benefits and administrative financing, is return on FUTA. If I could just show our final two charts here, return on FUTA is more than administrative dollars and also includes extended benefits and loans.

[79] If you would look at -- here's an example of 1989, which was a pretty good economic time for our country, almost every state got back less than 70 percent of their FUTA dollars that they put in.

[80] But if you look a few years later, just three years later to 1992 when we were in fact in a recession, you will see that almost every state in the country got back more than the dollar that it put in in the FUTA funding.

[81] So that we need more administrative funding and we need more FUTA funding for extended benefits, when our work load goes high, when the economy goes down.

[82] I would like to thank you for your time and this concludes my formal remarks, Mr. Chairman.

[83] CHAIR SHAW: Ms. Kilbane, we've seen all the charts and we've seen the maps and we know the amount of money and what have you that's in a recession and what doesn't. I think through both of those years, I've been serving in the Congress; but the question remains that some $6 billion has been paid in and about $3.5 billion have paid out. Where is the money? Where does it go?

[84] MS. KILBANE: Well, first of all, we agree that we do need to get more administrative funding back to the states.

[85] Currently, as you mentioned --

[86] CHAIR SHAW: No, don't answer the question as to where we're going. If you could tell us what happened? I'm just asking for the history.

[87] MS. KILBANE: What happened.

[88] CHAIR SHAW: What happened to the money. The only way we're going to keep history from repeating itself is to find out what happened.

[89] MS. KILBANE: The money is retained in the federal accounts. The federal accounts are three -- for three purposes: administration of the program, federal loans and for extended benefits; and we don't need the federal loans and extended benefits when times are good. But we do need to build up those accounts.

[90] Currently, there is an $18 billion balance in the federal loan accounts, which is where these balances are going. So they've been building up over the last few years.

[91] CHAIR SHAW: Do you think that it's necessary to build them up to that extent?

[92] MS. KILBANE: Well, as I mentioned --

[93] CHAIR SHAW: I mean, at some point, don't you think we ought to maybe get rid of that temporary tax, that 0.2 percent?

[94] MS. KILBANE: I mean, I think to the extent that we don't need the taxes that we shouldn't collect them. But I also think that we want to run an insurance program --

[95] CHAIR SHAW: Is that the administration's position?

[96] MS. KILBANE: I'm sorry?

[97] CHAIR SHAW: Can I take that as the administration's position? That as long as you don't need it, you shouldn't collect it.

[98] MS. KILBANE: Right, and the administration's position is that we should have an actuarially sound trust fund, including the federal accounts. In the last recession, we went --

[99] CHAIR SHAW: Is that going in to make it part of the surplus that the administration and the Congress are bragging about so much, what's in that account? Does that go in the unified budget?

[100] MS. KILBANE: It goes into the unified budget, that's right.

[101] CHAIR SHAW: So there's about $18 billion in it and another $18 billion we're finding out that's in the trust fund that you really shouldn't be calling a part of the surplus.

[102] So, as I take it the way you've answered my question, unless there's some actuarial reason to keep that 0.2 tax on there, that we ought to get rid of it.

[103] MS. KILBANE: I think that's correct, but I think the administration's position is that at this point, actuarially, we need to make sure those accounts are built up to cover --

[104] CHAIR SHAW: What amount is necessary?

[105] MS. KILBANE: Well, the administration has put forward and extension of the 0.2 percent through the year 2007; but we are also expecting that the REDAC -

[106] CHAIR SHAW: So, the administration -- the administration thinks that 0.2 percent should stay in 'til the year 2007?

[107] MS. KILBANE: That's the current law.

[108] CHAIR SHAW: I mean, do you think that's where it ought to be?

[109] MS. KILBANE: We are anticipating that in the year 2003 that the REDAC distribution would reduce those federal accounts by spilling over excess administrative funds to the states; and we think that's the proper way of taking care of that.

[110] CHAIR SHAW: Is that $18 billion that's in the surplus fund, does that account for most of the imbalance of what's paid in compared to what comes out?

[111] MS. KILBANE: That's where all of the --

[112] CHAIR SHAW: I don't know of any -- I don't know of any program that's crazier than this, as far as the imbalance of the monies.

[113] It's a question -- this isn't just a question of socking the employer, this is a question -- this is part of the employees' compensation, so I think we need to put this on the right plain. This is part of the compensation paid to labor today. So this is not a big business issue any more than it is a big labor issue, and it's one that I think currently we should address and do something about.

[114] I mean, if the numbers are not necessary; and we've got these huge surplus funds, let's give the guy a break.

[115] MS. KILBANE: Right, and Mr. Chairman, I guess I would say that the administration does not agree that the funds are not necessary. We think that we need to -- just like a private insurance --

[116] CHAIR SHAW: I'm just talking about now just the 0.2 percent.

[117] MS. KILBANE: Well, the 0.2 percent is part of the overall FUTA funds that go to build the federal accounts; and as those two charts show that when you --

[118] CHAIR SHAW: Let's cut it short.

[119] When are you going to stop it? At $25 billion? $80 billion? What do you think is reasonable?

[120] MS. KILBANE: Well --

[121] CHAIR SHAW: It's $18 billion now.

[122] MS. KILBANE: Well, the analysis we did last year when the 0.2 percent was continued showed that, if we hit an economic downturn like the '80s, we would end up -- states would end up borrowing somewhere in the neighborhood of $25 billion. We would also be paying extended benefits.

[123] So, we didn't think that $18 billion at that time looked like too much money, nor do we now. I don't have a magic figure off the top of my head. We look at the percentages of the caps as a relation to our past experience with recession.

[124] CHAIR SHAW: Do you think you could supply this committee with what would be a reasonable figure, according to the administration, to be put in this trust fund?

[125] MS. KILBANE: I will give you whatever we can give you and --

[126] CHAIR SHAW: Now, this trust fund -- this trust fund really is a fiction, isn't it? I mean, is there actually money in it? It's just an account, isn't it?

[127] MS. KILBANE: My understanding is that all trust funds are part of the unified federal budget.

[128] CHAIR SHAW: Yeah, they're all fraudulent. I mean, there's no money out there, is there? I mean, we couldn't go write a check on the trust fund; so, what we're really looking at -- even though we can put that in this trust fund and say, "Hey, it's out there for a rainy day," there's really no money.

[129] It's what would be today coming out of the deficit of tomorrow, if it's needed, to be drawn down. Isn't that correct? Because it's all in the unified budget.

[130] MS. KILBANE: It's my understanding that's correct, but it is still part of the trust fund. The balance, like other trust funds, my understanding is are tracked separately.

[131] CHAIR SHAW: Well, I can tell you that if lawyers would all treat their trust funds like the United States government that we wouldn't have any more lawyers because they'd all be in jail; and I think that's something we ought to really be thinking about.

[132] We're setting up these fictions and we need to take care of it. I mean, I'm all for "pay-as-you-go," but this is no pay-as- you-go. This is a fiction. It's stealth. It's not out there. It's something we talk about. It's a "feel-good" type thing, but what it is, we're just taxing the hell out of the employer and the employee in order to build up something that will make our surplus look good. I mean, it hasn't nothing to do with a trust fund, because it's not a trust.

[133] MS. KILBANE: And I think that the administration -- from our perspective -- in launching a broad dialogue on reforming the unemployment insurance program -- of which I have also brought copies of our complete paper that was released today -- would hope that we could get into all areas of, how do we fix this program.

[134] Certainly, to the extent that we would get into a broader discussion about trust funds, or how to fund it, or where to fund it, where to shift the funding to, we would see that as being a better way of approaching this issue.

[135] CHAIR SHAW: Okay.

[136] Mr. Levin?

[137] MR. LEVIN: Well, I think that the last exchange has been useful and we need to trace what's happening with the federal monies. They're a part of the unified budget -- all the trust funds are. I don't think that makes them fraudulent.

[138] We have a highway trust fund and an aviation trust fund, and there is some sense of obligation as to the use of those monies. In the sense it's a fiction, it isn't a trust fund in a strictly legal sense; it is, I think however, something that has some meaning to it.

[139] I've been one who has suggested we don't spend the surplus because, it essentially exists because of the inflow from Social Security compared to the outflow. I don't think that means it is a fraudulent system.

[140] But, most importantly, I don't see why that means we should simply throw all of this into the states and have a -- if that's true, let's have a 50-state unemployment comp system. The trouble with that is, what do you do when there's a recession; and there's a recession is some states and not in others?

[141] We talk about the flow in being greater than the outflow, and we have this surplus -- and this is complicated. I once sat through a long explication of the three trust funds. It's very complicated and perhaps we can simplify it. But it turned out in the '80s, we did not have enough money to pay for extended benefits.

[142] We, as a result, had to dip into the general fund. Isn't

[143] MS. KILBANE: Yes, Mr. Levin, that was in the '70s recession and that's the reason that the 0.2 percent temporary tax was put on.

[144] MR. LEVIN: Also in the '80s, when we had the recession, I remember the fights we had relative to Pennsylvania and other states that were in difficult positions; and had trouble using the laws. We amended it and the triggers did not really help.

[145] We had tens of thousands of unemployed workers who had exhausted their benefits, and simply -- through no fault of their own -- could not find a job. I think it would interesting to get a breakout of which states are in trouble in terms of administrative funds, and which states are in trouble in terms of solvency.

[146] I think it also would be interesting to compare the benefits that are paid state-by-state; and to look at the recipiency rate, state-by-state. They vary substantially, don't they?

[147] MS. KILBANE: Yes, there's a wide range like between 20 percent and 50 percent on recipiency, for example.

[148] MR. LEVIN: My guess is that some of the states that are

[149] So I hope we can take an objective look at what's going on. This is a very mixed system. It's a partnership in a very mixed system.

[150] What would happen if we just said to every state, "Do your own unemployment comp? Just tax your own employers."

[151] MS. KILBANE: I think that our position is that we should take a look at this as a federal/state system, that there are national issues, that we do have a global economy, that recessions happen in regional pockets, not just state-by- state; and that we should agree on what we want to achieve as a federal state system and make sure that we've got at least some standards or goals laid out and then proceed with making sure that we're funding adequately.

[152] MR. LEVIN: Then why have any standards?

[153] MS. KILBANE: Well --

[154] MR. LEVIN: I mean, right now it's a very mixed -- I think, you could argue, a very mixed subsystem. There are standards, but there are very different levels of eligibility, of benefits -- why not just let every state do what it wants?

[155] MS. KILBANE: I think that our concern would be that we have had a very successful, in the past, economic safety net for this country which has involved a federal/state partnership; and if you look at, for example, the macro economic stabilization chart and the contributions that we've made to smooth some of the recessions that we've had, that it's important to keep that federal/state partnership in place.

[156] MR. LEVIN: I think the answer is that if every state did what they wanted, it would mean that some of them would simply shuffle responsibilities to other states and people would move during recessions -- or they would try to move -- and we would end up with national, economic emergencies where the federal government would have to bail out states that did not meet their responsibilities.

[157] We would have an unemployment system somewhat like we have with our hurricane system and the federal government would end up as the "payer of last resort," with states coming in pleading for help. The unemployed would be left -- talking about a hurricane -- high and dry.

[158] CHAIR SHAW: Mr. McCrery?

[159] MR. McCRERY: Thank you, Mr. Chairman. Before I ask a couple of questions, I want to join Mr. Jefferson in welcoming the state of Louisiana's Secretary of Labor, Gary Forrester, whose not testifying, but he's here observing today.

[160] Welcome, Secretary Forrester.

[161] Let me just try to clear up this trust fund concept. I mean, "actuarially sound" may be a good phase, but let's examine what that means. You say there's about $18 billion in the trust fund. Where's that $18 billion? Where's it kept?

[162] MS. KILBANE: Well, as part of the unified budget, the $18 billion in the federal accounts is kept as part of that account, as part of the unified budget.

[163] MR. McCRERY: Is there cash in the bank, so to speak, for that trust fund?

[164] MS. KILBANE: Again, my understanding of how Congress has set up the federal unified budget is that all trust funds are part of it; and that for trust funds, you account for the funding separately so that you know it's there for those purposes.

[165] MR. McCRERY: So it's accounted for, separately, but the fact is, there's no cash in the bank in the trust fund, it's all IOUs, federal securities? It's the safest IOU in the world, but it's an IOU. It's paper.

[166] So, if we were to have a recession and there would be a call on this supposed trust fund, there wouldn't be any money there, would there? We'd have to get the money from current revenues? And, we'd use those current revenues, maybe to redeem the IOUs -- big deal. We've still got to find the cash. We've got to find it from current revenues.

[167] So there's a difference if we've got a paper trust fund or not -- it doesn't make any difference, as a practical matter. So, I think this is all a fiction we've been talking about, about this trust fund.

[168] The chairman is right, if we're collecting more money than we need to finance the system, let's don't collect it. Knowing that some day we're going to have a recession, we're going to have to make accommodations for that expenditure -- as we have in the past -- out of the deficit spending and be done with it. But let's not have this fiction and create this need, this supposed need for more taxes. That's all we're doing.

[169] So I think the chairman's legislation's perfectly correct in saying, let's give the 0.2 percent surtax back and the next time we have a recession and we have to expend a bunch of money, maybe we can create another surtax to repay ourselves; but, let's don't do it when we don't have to.

[170] Have federal unemployment taxes ever gone down to your knowledge?

[171] MS. KILBANE: No, not to my knowledge?

[172] MR. McCRERY: Have they gone up?

[173] MS. KILBANE: By 0.2 percent. That's correct.

[174] MR. McCRERY: That's all since the beginning?

[175] MS. KILBANE: Yes.

[176] MR. McCRERY: Just 0.2 percent? Under the chairman's bill, employers --

[177] MS. KILBANE: May I clarify that?

[178] MR. McCRERY: Yes.

[179] MS. KILBANE: The tax base has gone up -- has increased -- the federal tax base over the years.

[180] MR. McCRERY: Yes, and taxes have never been cut, nor has the base been reduced.

[181] MS. KILBANE: The base is currently $7,000.

[182] MR. McCRERY: So, it's gone up. The initial base has gone up.

[183] MS. KILBANE: That's correct.

[184] MR. McCRERY: Under the chairman's bill, employers would

[185] Now, the current system requires eight filings. The administration, therefore, in the '99 budget proposal would require 24 tax filings. Is that still the administration's position?

[186] MS. KILBANE: That is in the administration's request. That's correct.

[187] MR. McCRERY: If you were an employer, which would you prefer?

[188] MS. KILBANE: If I were an employer, I would probably prefer the former.

[189] MR. McCRERY: Then I suggest we try to find a way to make it easier, not harder on the employer and just use common sense.

[190] If you can collect the same amount of money through an easier system with consolidated filings, let's work together to try to find a way to do that.

[191] Thank you, Mr. Chairman.

[192] CHAIR SHAW: Thank you.

[193] Mr. Jefferson?

[194] MR. JEFFERSON: Mr. Chairman, I would also like to

[195] This is a rather complicated matter made more simple by the solutions which are offered today. I'm concerned about the issues you raise about the lack of guarantees, particularly with respect to the lack of guarantees with respect to what the states would do with the money.

[196] How do you see that concern can be addressed in the context of the bill Mr. Shaw offers, or is it something we can't remedy in the context of this legislation?

[197] MS. KILBANE: Well, I would think that -- what we were hoping to with the administration by putting forward the dialogue paper was to discuss all of these: The proposals included in H.R.3684, as well as other ways to look at it, including maybe putting performance standards in place, ala GPRA, or other ways of guaranteeing that we maintain a federal/state system, even if we restructure it and reform it and completely change the way we've done business.

[198] Maybe we should take our trust funds out of the federal unified budget, which would resolve some of the other issues that have been raised.

[199] MR. JEFFERSON: You speak of a lack of a guarantee with respect to the states responding quickly, in the case of an economic downturn, or in the case of -- I think you described it as -- an emergency, is this because it's based on our experience in doing this sort of thing; or they might have a different set up, state-by-state?

[200] Is this something that can be fixed? If it is -- if it can be, how can it be fixed in the context of this legislation; or is it something that we have to worry if each state is going to have to develop some capacity to do?

[201] MS. KILBANE: Well, we believe that the legislation that we've proposed through Representatives Levin, English and Rangel would put forward a target for solvency, for example, that states would have to work toward having at least one year of benefit payments at the average of a high three bad year; and that that would help in terms of having a goal where we would have states work toward that.

[202] The other is, of course, you don't have any goals and you end up with perhaps under-funding the program, which then costs more money during recession. What we know is that, if we have to borrow money, we raise the taxes on employers during a recession.

[203] MR. JEFFERSON: Our secretary talked about the need for -- at least with me he did -- moving the state's part out of these funds. Does Mr. Levin's legislation address this issue; and does it address it -- right now, one matter that I was concerned about is, whatever we do, it ought to be done fairly quickly. The idea of having it done in 2003 or whatever seemed an idea that was just too distant for him to get his arms around, because he thought basically, who knows about 2003? It's too far out to make much of a plan for, even for his own career plan it's too far out.

[204] So, the idea is, if we're going to do something, why does it take us that long to do it; and does Mr. Levin's bill address this issue in a more timely way?

[205] MS. KILBANE: Yes, H.R. 3697 would make sufficient funds available from unemployment insurance this year, in 1999, as well as in the next five years. This is a temporary funding fix until we can work on a more permanent one, which is what we would like to see through the dialogue and through the coalition proposal.

[206] MR. JEFFERSON: Can you move toward a solution -- not so much as a temporary federal/state partnership like Mr. Shaw's appears to do now, but that would address some of the concerns that he has in greater detail; and at the same time, keep this partnership going, but use Mr. Levin's approach as a temporary one or kind of a bridge one until we can make more changes that would be in place over a longer period of time?

[207] MS. KILBANE: Yes, exactly. We believe that these bills can both -- that they're not competing bills, that one takes place in the next five years, and one is a more permanent reform that becomes effective subsequent to the five-year window.

[208] MR. JEFFERSON: Thank you, Mr. Chairman.

[209] CHAIR SHAW: I'd just like to comment with regard to the year 2003, the problems are budgetary because we're using this stealth surplus which goes into the stealth trust fund as a budget problem. It creates a budget problem because of the unified budget. That's the problem. That's the reason why it's got to -- we've got to work with those type of years.

[210] MR. JEFFERSON: What's the number we're dealing with?

[211] CHAIR SHAW: I don't know which one you're looking at.

[212] MR. LEVIN: There'S $106 million for administrative funds, and about $20 million for low-income workers.

[213] MR. JEFFERSON: Oh, that's what I'm thinking about.

[214] MR. LEVIN: If I might use your time, Mr. English is next, then I just want to ask a quick question, Mr. Shaw.

[215] CHAIR SHAW: Mr. English?

[216] MR. ENGLISH: I'm happy to yield to the gentleman from Michigan.

[217] MR. LEVIN: I just wanted in the FUTA tax to just be clear, so I'll ask it if I might.

[218] What bill extended the 0.2 percent to the year 2007? Do you know?

[219] MS. KILBANE: It was the Balanced Budget Act.

[220] MR. LEVIN: It was the Balanced Budget Act.

[221] MS. KILBANE: That's right.

[222] MR. LEVIN: Which I think most people on this panel voted for.

[223] The bill of Mr. Shaw would extend it until when?

[224] MS. KILBANE: Until the year 2004.

[225] CHAIR SHAW: I would like to point out that the President made that a condition for his signing the bill. That was the reason it was in there.

[226] MR. ENGLISH: I'll reclaim my time, if that's okay.

[227] [Laughter.]

[228] MR. LEVIN: That's why I hesitated to raise it during your time.

[229] I hope the chairman will give you a full five minutes.

[230] [Laughter.]

[231] CHAIR SHAW: We'll reset the clock.

[232] MR. ENGLISH: Mr. Chairman, I'll keep my questions relatively brief, but I want to ask a couple of specific questions of Ms. Kilbane.

[233] One, would you elaborate on your concerns of the effect of devolution, or the chairman's approach to devolution might have on the VETS program?

[234] MS. KILBANE: Well, this is -- our VETS organization believes that the way the bill is written would put the responsibility for funding this program at the state level and they have concerns that states could independently make decisions to reduce services to veterans by reducing funding for veterans.

[235] MR. ENGLISH: I think that's a legitimate concern and it's one that I don't think is necessarily fatal to a significant overhaul of unemployment compensation, but certainly it's an issue that I think would have to be addressed as part of an overhaul of unemployment compensation.

[236] I wonder, under the bill that the chairman has proposed, what options would the federal government have to impose sanctions for noncompliance on states?

[237] MS. KILBANE: The federal government currently has two ways to offset their noncompliance or lose their offset credit reduction. So their taxes would go from 0.8 percent to 6.2 percent.

[238] The other method we currently have is, we can withhold administrative grants from states under Title III. We would lose that under this bill because we would no longer be in the grant-making business, but we would still be in the business of being able to basically enforce it on employees losing their offset credit.

[239] MR. ENGLISH: In your view, from your recent experience, is this a significant loss of leverage or not?

[240] MS. KILBANE: We believe that both are important, because one goes after a certain way the employers -- which is known as the "atomic bomb" around our office, because it's so huge. But the second is, the threat of loss of administrative grants; which is, through the usual way that federal agencies are able to manage and oversee federal grants.

[241] MR. ENGLISH: I guess I'd like to close with a couple of observations. One, I think there is some agreement on the panel that the level of administrative funding for the states has not been adequate. I do believe that needs to be addressed.

[242] Second of all, I hope the administration will appreciate this perspective. I used to work as a legislative aide, specifically dealing with some of these issues for the Pennsylvania State Senate; and I think the way the law's written right now does provide for a level of micro management at the federal level, which is not entirely appropriate.

[243] It seems to me that the micro management could be significantly reduced without necessarily moving toward a radical restructuring as envisioned in the chairman's bill. My concern is that I think it clearly is a federal role in unemployment compensation; and I would feel probably a greater one than the chairman's bill actually allows.

[244] But I wonder if this micro management couldn't be addressed and still maintain an essentially federal system. Do you want to comment on that?

[245] MS. KILBANE: Well, I think clearly the dialogue that we have watched on how to reform unemployment insurance and the employment service programs is open to, not only things like, "How do you do recipiency rate and economic stabilization," but what is the federal/state role; and how can that be done better looking into the 21st Century.

[246] So we would certainly be open to all kinds of comments about how to improve that.

[247] MR. ENGLISH: Thank you, and I'll yield back the balance of my time, Mr. Chairman.

[248] CHAIR SHAW: Thank you.

[249] MS. KILBANE: Thank you, Mr. Chairman.

[250] CHAIR SHAW: Our first panel consists of the Honorable Robert Cupp, president pro tempore, and co-chair of the Senate Finance Committee and past chairman of the Unemployment Insurance Authorizing Committee for Ohio State Senate; Joseph Weisenburger, deputy commissioner, New Hampshire Department of Employment Security; Douglas Jamerson, secretary, Florida Department of Labor and Employment Security; and Janet Norwood -- Dr. Janet Norwood, who's a senior fellow at the Urban Institute.

[251] I welcome all of you. This last witness took more time than I had anticipated. I am going to try to enforce the five-minute rule. We do have all of your statements and they will be made a part of the complete record; and I would request that you might try to summarize.

[252] Mr. Cupp?

[253] MR. CUPP: Thank you, Mr. Chairman, members of the committee. My name is Bob Cupp, and I'm the president, pro tem of the House Senate; and Mr. Chairman, for eight years before being selected for that position, I chaired the Ohio Senate's Commerce and Labor Committee, which had jurisdiction over unemployment and employment compensation issues. I'm also a member of the Senate's Finance Committee, which handles budget issues and appropriations.

[254] Mr. Chairman, I was just told that you are the Bill Archer of Ohio.

[255] [Laughter.]

[256] CHAIR SHAW: Thank you, I think.

[257] MR. CUPP: I have sat on your side of the bench in the Ohio Senate, so I appreciate your request for brevity. And I appreciate the opportunity to testify in support of H.R.3684, and I just want to make two issues.

[258] One, I want to explain why as a state legislator, who has dealt with unemployment compensation issues, I think this bill is important for states and for providing a better system of employment security; and to assure you that states like Ohio are fully capable of assuming the new duties and flexibility provided by the bill, but the funds we get from the FUTA trust fund are seriously inadequate to meet the cost of properly administering employment services program.

[259] This has resulted in the closing of 22 local employment offices just in the last four years alone. Ohio once had 120 offices. We're now down to 57.

[260] In my center district, which includes seven counties, there are only three employment offices left, and I represent a geographical area that is as big as the states of Rhode Island and Delaware combined.

[261] He Bureau of Employment Services has also cut staff and are operating at historically low levels. If we were to have a recession, we would not have the capacity to respond. More offices would have been closed, except the state has put in general tax revenue -- $50 million in the last four years alone, and that pays for the FUTA funds that were paid by employers to support.

[262] So, Ohioans are double-taxed in this regard. Employers pay enough in FUTA taxes to fund employment security operations, but still, money that's paid in by all Ohio taxpayers must be used to support the very things that employers are paying the FUTA tax for.

[263] In our new state budget year, which begins July 1 of this year, funding from Ohio's general revenue fund to support district offices and other support services for our system, will go up 85 percent. The money could be used for schools, it could be used for children's health needs, it could be used for economic development purposes, but it's basically supplementing something that employers are already paying for. Without this additional state money, we would have to close an additional 15 employment offices.

[264] Employers pay the FUTA, which is a dedicated tax to pay for administering the system for public employment service, for veterans' re-employment assistance, and for labor market information. In fact, Ohio employers in 1995, paid $259 million. We got back on $102 million, less than 39 cents on the dollar.

[265] I understand the newly released '96 figures has made the situation even worse; and it's not unique to Ohio alone.

[266] The general assembly has passed Senate concurrent resolution 10, without dissent, to ask Congress to return adequate dollars to the state to give employers a fair return on the taxes they pay; and I'm pleased to say that five members of Ohio's congressional delegation are co-sponsoring the bill, Mr. Chairman.

[267] H.R.3684 would correct the flawed system, it would give states adequate money to operate the system, give employers a fair return, it ensures unemployed workers adequate levels of service in the payment of benefits, and in assistance in finding new jobs. It would allow states the flexibility they need to meet current needs, to be able to shift some money here or there, as is necessary, to have the best-run system, and also the predictability to meet their long-term needs.

[268] Mr. Chairman, members of the committee, I want to assure you that state legislatures are fully capable of handling this new responsibility. We already collect the state portion of the unemployment compensation tax. That amount that we already collect is two to three times greater than the FUTA tax we would be collecting under your bill, Mr. Chairman.

[269] For 60 years, states have set unemployment benefits in tax rates. States already appropriate the special administrative funds from employer penalty and interest charges.

[270] The legislature in Ohio, and in other states, is experienced in deciding how much to allocate for employment services around the state. We are experienced in meeting FUTA conformity requirements in our unemployment laws. We're experienced in utilizing dedicated funds only for dedicated purposes, in proper budgeting and balancing budgets year- after-year, similar to what they would be doing if your bill passes, Mr. Chairman.

[271] We're doing it capably -- and thank you for sponsoring the bill, because if it is passed, it will allow us to do an even better job of administering the system and serving the unemployed.

[272] Thank you.

[273] CHAIR SHAW: Thank you, sir.

[274] Mr. Weisenburger?

[275] MR. WEISENBURGER: Thank you, Mr. Chairman, committee members. My name is Joe Weisenburger, and I'm the deputy commissioner of the New Hampshire Department of Employment Security.

[276] H.R.3684, a measure to reform the employment security system, is not about power and control. It's about restoring the integrity of the unemployment insurance system and the public employment service. It's about helping unemployed workers get back to work as quickly as possible.

[277] These programs have been devastated by budget cuts and mismanagement. The current system is inefficient, it's rule-bound and short-changes employers and workers alike.

[278] Budget shortfalls have led to errors in our system, errors that have caused overpayments and longer periods of unemployment duration. Both of those issues have raised employer taxes at the state level, and have caused unnecessary expenditures from the federal unified budget.

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

[280] The work test, a function necessary to determine an individual's continued eligibility for unemployment benefits is a thing of the past in most states. H.R.3684 would reverse the negative direction our program is experiencing. It is a mechanism that would allow for adequate appropriations, while at the same time having a minimum impact on the federal taxes collected by the states, and most importantly, it ties the public employment service to the unemployment insurance system.

[281] This year it is likely that the Congress will reform the job training program. Governors need the flexibility to manage both of these programs, along with the unemployment insurance program, to leverage the resources of these programs to provide the needed services at the state and local levels.

[282] Transferring authority to collect the taxes and to administer this program to the governors at the state level through state legislatures will allow us to make the changes necessary to require the Secretary of Labor to provide adequate funds for the proper and efficient administration of the state's unemployment compensation laws.

[283] As you know, employers this year will pay about $6 billion in FUTA taxes. Only 80 percent of that will go into the administrative account. The administration's budget for this year is $3.7 billion, $200 million of that is for a one- time expenditure for the Year 2000 problem, leaving $3.5 billion available to the states for the proper and efficient administration, for not only the unemployment insurance system, but the public employment service, labor marketing information program, veterans programs, labor marketing opportunity tax credits, a whole number of programs that support the work force.

[284] This year, the President's budget is the same $3.5 billion. By the department's own admission, the fiscal year 1998 appropriation for the unemployment insurance program is $305 million short of what is necessary for the proper and efficient administration of the state's unemployment compensation laws.

[285] The President's budget for fiscal year 1999 raises that to $365 million short. If the secretary has a lawful responsibility to request funds for the proper and efficient administration of the program from the Congress, why isn't the Department of Labor doing that?

[286] This shortfall is the result of the department funding other initiatives for which there is no revenue in the Department of Labor budget, programs such as "school-to-work;" programs such as "one- stop" career centers.

[287] Mr. Chairman, bad things happen to people when they're unemployed. Families break apart, child abuse, spouse abuse, crime increases, drug and alcohol abuse increases, debt rises, individual families stop investing in their children's education, they stop volunteering -- these are social ills that follow unemployment.

[288] The employment security system wants to relieve the workers of this terrible burden of unemployment. Why wouldn't this country invest fully in the employment security system? This year, 18 million unemployed workers -- one out of every seven workers in this country -- went to the public employment service looking for work. We were able to place three million of those 18 million. That means 15 million unemployed workers did not get help from the public employment service, because we did not have the resources to help them.

[289] Thank you, Mr. Chairman.

[290] CHAIR SHAW: Mr. Jamerson?

[291] MR. JAMERSON: Good afternoon, Mr. Chairman and members of the subcommittee. I'm very pleased to be here today and to have this opportunity to testify before you on House Resolution 3684 --

[292] CHAIR SHAW: Douglas, pull that mike to you, if you would, sir?

[293] MR. JAMERSON: -- the Employment Financing Act of 1998.

[294] Let me begin my remarks by commending you, Mr. Chairman, for your prescience in sponsoring such a comprehensive reform package. House Resolution 3684 will provide welcome relief to states such as Florida, that receive such a disproportionately low return of FUTA tax revenue.

[295] H.R.3684 represents a bold departure that holds the promise of a future in which the unemployment compensation system will be able to fulfill its mission at a rapidly changing workplace.

[296] We in Florida are blessed by a continuing strong national economy that supports the lowest level of unemployment in modern history. However, we would be naive to think that the cycle of growth will continue unabated. The very nature of work and one's relationship to the workplace is in the process of being re-designed; the dynamics of the employer/employee relationship is undergoing profound evolution.

[297] In this setting, the goals and vision by H.R.3684 could not come at a more opportune time.

[298] I would like to discuss the provisions of H.R.3684 with you in the context of the impact that I believe that they will have on the state of Florida and the system that I am charged with overseeing.

[299] [Buzzers sound for roll call.]

[300] MR. JAMERSON: I don't know if I'm stopping, but you might have to stop me.

[301] [Laughter.]

[302] MR. JAMERSON: As I understand it, major tenets of the bill would assign responsibility for collection of FUTA taxes to the state agency beginning in the year 2000, it would also authorize expenditures from state administrative funds of an amount not to exceed $245 million, annually, for fiscal years 2000 through 2003, subject to appropriation by the state legislature.

[303] These administrative dollars could then be used to provide for collection of the FUTA tax toward effectively, I believe, determining whether or not those claiming benefits have made themselves available or are able for suitable employment, to provide job search and placement services, including job counseling, testing, occupational and labor forecasting; to enhance employees' skills assessment and referral to employers, and to appropriate recruitment services and technical assistance for employers.

[304] Mr. Chairman and members of the subcommittee, this bill further provides for annual appropriation of 100 percent of the amount collected in both FUTA taxes and REDAC monies to the states beginning in fiscal year 2004, eliminating some of the caps that have been placed in the way.

[305] It authorizes expenditures up to 140 percent of the amount appropriated to the state from employment security funds for the previous fiscal year, and repeals the 0.2 percent FUTA surtax effective 2004.

[306] You've heard it said here before and I will reiterate, the repeal of this temporary tax fulfills a promise made to employers when it was originally enacted, that it is indeed a "temporary" tax and that its goal was to, in fact, reduce the burden on employers by economic factors in place at the time.

[307] By shifting the tax collection process to the states, H.R.3684 holds the promise of decreasing the administrative cost to employers by establishing the state agency as the sole point of payment -- reducing or even eliminating paperwork with the filing of one state tax return versus both a state and a federal return, providing more localized services, thus, ensuring quicker response patterns to the specific needs of the taxpayer.

[308] It is my opinion that allowing the states greater flexibility to appropriate administrative funds for unemployment compensation and employment services will lead to more efficient operation of the program, more exact tailoring of services rendered to the unemployed and job seekers, as designed by state legislators and the executive branch.

[309] A sharper focus by UC agencies on the business of employment, rather than dealing with budget shortfalls and administrative uncertainties that are inherent in the current system. A greater accountability by those charged with the mission of putting people back to work, and a direct link between the state appropriations' process, and the services rendered by the responsible state agency.

[310] I would like to mention that there are a few areas of H.R.3684 that we believe need to be addressed. We believe the government plays a very important role in ensuring that unemployment compensation funds are dispersed properly. Clearly this bill gives greater flexibility to integrate these programs into the work force development system, which we applaud; because in Florida, we're moving very quickly in our work force development effort.

[311] Our caution is that we do believe that eligibility and payment of unemployment compensation claims is inherently a function of government. We encourage you to remember to maintain the integrity of the unemployment compensation and services program.

[312] The current safeguards that are needed to be maintained and strengthened to ensure the states cannot use unemployment benefits for administrative funding or other purposes.

[313] Mr. Chairman, in closing, let me say that this committee, I believe, will have the ultimate responsibility for ensuring that the United States Employment Security Program continues to fulfill its mission and remain focused on the needs of the people.

[314] The passage of H.R.3684 will enhance the employment security program and allow states to individualize their own unemployment compensation programs to meet the needs of their own residents.

[315] With that, Mr. Chairman, I want to again thank you for your offer to address the committee, and I'm available to answer questions that you may have.

[316] CHAIR SHAW: Thank you, Mr. Jamerson for a very fine statement.

[317] Dr. Norwood?

[318] DR. NORWOOD: Thank you, Mr. Chairman.

[319] As you all know, I spent three years chairing the Advisory Council on Unemployment Compensation, having been appointed by both a Republican and Democratic President; and I've also served more than 13 years as Commissioner of Labor Statistics, with the responsibility for the country's federal/state labor market information system.

[320] The UI program is now more than 60 years old, is one of the most important examples of effective cooperation between two levels of government with shared responsibility.

[321] Although the overall unemployment rate for the country as a whole is relatively low, and job growth remains quite strong, more than 20 states still have rates higher than the national average.

[322] We know also that the proportionate total unemployed who receive unemployment benefits has fallen over the last several decades.

[323] The solvency of the state UI trust funds must remain a matter of real concern. If the unemployment insurance program is to meet its twin objectives to promote economic stability and to provide temporary assistance to workers with job detachment, who lose their jobs through no fault of their own, it is important that state accumulate reserves during periods of economic health that are sufficient to pay benefits during economic recessions.

[324] By the end of last year, state trust fund reserves were only about 80 percent of the levels they were at just before the last recession. Instead of building up trust fund reserves during these current good times, last year alone, 16 states reduced unemployment insurance taxes.

[325] It is clear that the states have important responsibilities and powers in the administration of the UI program, and I believe they should continue to have them. However, our research demonstrated that increasing competitive pressures on the states have at times caused a tightening of eligibility standards, resulting in a reduction in coverage.

[326] These conditions have caused a race to the bottom, among some states, affecting especially trust fund solvency and the treatment of low-wage workers.

[327] Of course, some states have maintained a sensible degree of forward funding, but some states have not. In those states which do not, one extremely important purpose of the UI program -- that provision of purchasing power during economic downturns -- just does not work.

[328] State trust funds must be adequately funded in good times

[329] Our research also found that competitive pressures among the states to attract business could lead to a continued decline in the proportion of workers that receive benefits, disproportionately affecting low-wage workers.

[330] Those working part-time are especially hard hit. I believe that it is important to ensure that a low-wage worker not be required to work more hours to qualify for benefits than a higher-waged worker.

[331] H.R.3697 deals with this issue, but H.R.3684 does not.

[332] Finally, as I'm sure you are aware, Mr. Chairman, I have a very real interest in any action that could affect the federal/state statistical system. I'm pleased to see that H.R.3697 takes note of the importance of labor market information; but I am concerned about the effect of the proposed change in the manner in which these statistical programs are funded.

[333] I believe that this change could damage most of the most important national and state economic intelligence that the country produces. I could review all the programs, but I won't do that now. It's sufficient to say that these data are extremely important.

[334] I'm concerned that H.R.3684 makes the appropriation of much of the funding, apart from whatever comes out of the 0.2 percent setaside, to administer the important state activities to produce state and national data, dependent on the legislatures in each of the states in other jurisdictions.

[335] We should not put programs such as this in jeopardy, by making them dependent on the likelihood that 53 different jurisdictions, would each appropriate the funds required to maintain the quality and consistency of the national data.

[336] If they do not -- and the history of this nation's statistical systems suggest that this is a very real possibility -- the country's entire system of labor market statistics would suffer.

[337] Some state data would be inconsistent with those in other states, producing national data of poor quality. Indeed, the federal government might be forced to mount new, national surveys, which would inevitably increase respondent burden as well as cost.

[338] I urge you to reconsider the bill's treatment of the

[339] Mr. Chairman, I appreciate this opportunity to be here and I'd be glad to try to answer any questions.

[340] CHAIR SHAW: Thank you, Dr. Norwood.

[341] As some of our regular attendees here know, those buzzers mean that we've got to go down and vote; and there's two votes on the Floor.

[342] I hope all of our witnesses on this panel, and the next panel, can stay. The members will be gone for approximately 15 minutes, so, we will stand in recess until that time.

[343] [Recess.]

[344] CHAIR SHAW: All right, if everybody could find their seats, we'll resume the hearing.

[345] Mr. Levin, you may inquire.

[346] MR. LEVIN: An interesting panel. I think there's basic agreement we want to try to reduce paperwork where we can. We don't want employers paying unnecessary taxes. Hopefully we can have an open dialogue on where we go from here without too many pre-set positions.

[347] The one thing that would be helpful as we get the facts is if we get a common understanding of the facts.

[348] It was mentioned that the administration request would under- fund the needs. I think the facts are that the appropriations for several years did not meet the administration's request; therefore, the administration reduced its request.

[349] Also, the reference -- I think of Mr. Cupp -- about the employment services, the under-funding -- there's been a big argument here about the funding of the employment service. I think you need to study the history of that.

[350] Indeed, at one point, there was a proposal in previous administrations to abolish the employment service, but let me just ask -- and I want it to be as constructive as possible, but you mentioned, Mr. Jamerson, about the need to individualize to meet the needs of our citizens.

[351] With the Welfare Reform Bill, as we finally worked it out, there was flexibility within the states, but within some pretty clear parameters -- requirements to meet health needs, day care needs, a maintenance of effort provision -- we worked it out.

[352] Now I think each of these programs have its own characteristic, but individuality is one thing; and meeting responsibilities is something else. Unemployment in one state affects another. Indeed, unemployment in one state calls upon the federal government and other states to help out.

[353] The three of you come from states that in terms of certain markers are way below the norm. The question is, how much individuality to we want? For example, recipiency rates -- that's the percentage of the unemployed who received benefits. New Hampshire, you compare with my state of Michigan. New Hampshire is far less than even half the recipiency rate of Michigan. You're near the bottom. Florida isn't much better.

[354] You're half of the -- no, you're better than half, but you're 20 points -- percentage points -- below Michigan. Ohio's a bit better on recipiency rates, but when it comes to solvency, you're -- I think, Mr. Cupp -- in pretty bad shape. Aren't you?

[355] This chart shows you're at 0.63 percent. You'd have six- tenths of a year -- I think that's what it means. You'd have 63-100th of a year. I think these are accurate figures. In terms of replacement rights, the percentage of wages that are replaced, Ohio and New Hampshire are very low.

[356] Now, I want us to take a fresh look at this, but I think, we want some flexibility for the states, but isn't there also a level of responsibility incumbent on the states?

[357] All three of you.

[358] MR. CUPP: Mr. Chairman, Mr. Levin, in terms of the solvency issue, it seems to me that the benefit issue is really a little different issue in regards to this bill in terms of my testimony; because states have historically set their benefit levels, and this bill wouldn't change that.

[359] In terms of solvency -- and I don't know what chart you're looking at.

[360] MR. LEVIN: This is from the Unemployment Insurance Service. It's the calendar year 1997, and it has Ohio at 0.63. You're about tenth from the bottom.

[361] MR. CUPP: We have $2 billion surplus; and we have -- in terms of our rate structure -- we have automatic triggers that go into effect when there isn't a sufficient safe level in our fund. This was agreed to by the legislature, by business and labor interests years ago.

[362] And so when there is a need to replace the fund, or to add additional money to it, the increased rates automatically trigger and the money will go into the system. We believe we do have a sufficient safe level.

[363] MR. LEVIN: I mean, there can be agreement in the state -- that's part of the dilemma of one proposal, it would let every state set its solvency rate; and it's interesting -- here, New Hampshire has a much higher solvency strength. In fact, it's more than three times Ohio.

[364] What that means is that, essentially, every state sets its own solvency rate, and when it gets into trouble, you come looking here. I think that's what it means.

[365] We've been through the pain of regional recessions. Each of you should understand that. Surely you should from Ohio. I think Florida, which came later -- we had immense difficulty responding to that, because only a number of states were impacted. We had to convince the majority of states to "cough up" their taxpayers to pick up, through appropriations, the funding so that there would be loans available so that there would be extended benefits.

[366] So -- and I'll finish, Mr. Chairman -- I think we need very much to take a fresh look; but we've got to look at the blend -- and I'll finish.

[367] If you look, Mr. -- you talked about what you're getting now in FUTA return -- 38 percent. In 1992, Ohio got 188 percent. New Hampshire got 154 percent. Florida got 205 percent. You got double what you paid in because of the recession.

[368] I think we ought to dig out what the figures were for 1983 and '84 in Michigan and Ohio and states that were impacted -- what we got back compared to what we paid in. The recession of '83, '84, '85 was much more severe.

[369] Our proposal will increase the returns to the state for FUTA. That should happen. But there is an insurance principle that has to be built in here.

[370] CHAIR SHAW: In looking at the chart that you've been referring to, it's not a snapshot, it's a chart that goes back during the last recession.

[371] Mr. Weisenburger, are you familiar with this, and would you like to comment?

[372] MR. WEISENBURGER: Yes, I am.

[373] The chart that covers the '91-'93 recession includes about $28 billion under the Emergency Unemployment Compensation Act, which was a 100 percent, federally funded extension of unemployment benefits, because the extended benefit program that the states run did not work. So this was not a return of FUTA dollars to the states, as the department said, $16 billion of that came from federal, general revenue.

[374] The balance in the UCR account was literally stolen from

[375] CHAIR SHAW: That just throws these figures out there. They have no application. But what I would like to do is have our staff come up with a year-by-year chart to chart these amounts for these states so we can really take a close look at it; and take out that special appropriation that was made at that time, so we do have honest figures to look for, then we can go back and look at it, because it's something that we should be concerned about.

[376] Dr. Norwood, I share your views on the importance of maintaining good data about the unemployment benefit for the states and other labor market information. How can we best make sure that the data is still available, if we do press ahead with H.R.3684?

[377] DR. NORWOOD: Well, I'm not sure. Because what your bill does, really, is to return to the states, for purposes of unemployment insurance -- the money. The 0.2 percent setaside is relatively small considering that it goes to the Secretary of Labor to do the whatever -- oversight; and I think that everybody agrees there should be at least some reporting to the federal government and the IRS and a variety of other programs.

[378] The Bureau of Labor Statistics gets about $53 million in the latest budget for the federal/state programs. All of that goes to the states. BLS is a passthrough. The Congress approves this, it goes into the BLS budget. BLS turns all of that money over to the states. It retains none of it.

[379] I don't see how, out of the 0.2 percent setaside the Secretary of Labor could possibly take $53 million out of about, what -- a hundred and twenty, did I hear -- and put it into statistics.

[380] Therefore, what would happen is that you'd have to go to every -- every state would have to go to its own legislature, and I can just tell you that what would happen is: Some states would approve and some wouldn't.

[381] CHAIR SHAW: Well, how much would it take?

[382] DR. NORWOOD: Well, for this year it's about $53 million, as I understand it, that the states get. I'm not -- I don't know what it would be next year or what it was last year, but this is something that's agreed to between the bureau and the states.

[383] But I think it's indicative of the kinds of problems that exist when you have a setaside. The other point is that that whole fund could go down, if the taxes are reduced, of course. As I pointed out, 16 states had reduced the tax.

[384] So, I'm very concerned about that. There is some confusion, I think, because it comes in -- the labor market programs come in in several places in the law; but the problem is the amount that is there; and it's indicative of what is happening, really, when you take a setaside of a fixed pot of money for some very good programs that exist.

[385] I mean, I recognize that statistical programs have to take their lumps with everybody else. We've done that. But I'm very worried about this, because I'm afraid that what it will do is increase the burden on respondents.

[386] CHAIR SHAW: Mr. Jamerson, how do you explain the slow return that the state of Florida gets on the unemployment taxes paid?

[387] MR. JAMERSON: Mr. Chairman and Mr. Levin, I think the slow return on the investment is again a factor -- and I'm learning this. My UI director is here with me -- based upon what I think this bill - - one of the things this bill attempts to address is the formula. The formula that currently exists is arcane; and perhaps needs to be revisited in some fashion.

[388] That's what I would expect part of your legislation would do, look at this formula for the recipiency rate. As I understand the recipiency rate, that's only one factor that's brought into the equation to determine the amounts. As far as Joe said, the EB -- as I understand the situation in Florida -- - won't be triggered by it.

[389] So, we would hope that as the discussion evolves around your legislation, your good legislation, there would be a way to look at this formula which I believe has outlived its usefulness, Mr. Chairman; and that's part of Florida's problem in getting what we call a fair share.

[390] CHAIR SHAW: Thank you.

[391] MR. LEVIN: Let me just take a few minutes, if I might, to finish this off?

[392] CHAIR SHAW: Go ahead.

[393] MR. LEVIN: Do you favor the improvement in the triggers in the bill that Mr. English, Mr. Rangel and I have proposed?

[394] MR. CUPP: I'm not that familiar, Mr. Levin.

[395] MR. WEISENBURGER: We believe that changes need to be made in the extended benefit program that allow the program to work in states that have a need to extend benefits.

[396] In New Hampshire, we just recently passed a total unemployment rate trigger on top of the trigger that doesn't work. We have not triggered onto extended benefits since February 1981. This year our legislature enacted what is in 3687.

[397] MR. LEVIN: Okay.

[398] MR. JAMERSON: I'm not that familiar, either, Mr. Levin.

[399] MR. LEVIN: Let me just say that -- I take it that's more or less, yes.

[400] You know, the problem is that your proposal has no improvement in the extended benefit program. There isn't one, except as the states would provide it, as I understand it.

[401] Let me just say something -- and Mr. Shaw, I think it would be good to look at these, at the figures, because we tried for years to improve the extended benefit program.

[402] It was -- those improvements were proposed by the people who were sponsoring Mr. Shaw's bill. We fought like the dickens to do that. We could not get the votes. I think it reflects, Mr. Jamerson your statement, "Too much power in the hands of the states and the program loses its national character and could lead to a race to the bottom."

[403] You know, if we could improve the trigger, Mr. Shaw --

[404] CHAIR SHAW: By the way, my bill does have the extended benefit provision in it.

[405] MR. LEVIN: With any improvement in the trigger?

[406] CHAIR SHAW: So, your characterization --

[407] MR. LEVIN: Is there any improvement in the trigger?

[408] CHAIR SHAW: It continues the way it is.

[409] Our bill attacks the administrative problem, which I think you would admit is a nightmare, and is a damn waste of money.

[410] MR. LEVIN: I think there are real problems. I don't think you want to destroy the partnership in doing so.

[411] All I can say is, if there had been an ample trigger mechanism, these figures of $205 million for Florida in '92, $154 million and $188 would have been probably more or less the same. Except, instead of the money coming from the general Treasury, Mr. Weisenburger, they would have come from the unemployment fund.

[412] So, we'll take a look at these figures, but if there had been an appropriate trigger that some of us had fought for for years, I'm not sure you would have received much more in '92 than you paid in, because you would have triggered.

[413] So you ought to be in here fighting to change and improve the trigger mechanism -- that's what you should be doing -- in addition to straightening out the administrative programs.

[414] [Pause.]

[415] CHAIR SHAW: Are you through?

[416] [Laughter.]

[417] CHAIR SHAW: Okay, I would like to -- perhaps some day you will share with me these figures that are fed to you by the administration.

[418] MR. LEVIN: They weren't fed by them.

[419] CHAIR SHAW: Well, I didn't get them. I don't know where you got them.

[420] MR. LEVIN: They're published figures. I mean, they're not fed to me by anybody. I just read them.

[421] CHAIR SHAW: You just pull them out of the air, I guess.

[422] Okay, lady and gentlemen, I appreciate your testimony.

[423] Now we will bring our final panel, Mr. William Petz, Jr., manager of Payroll and Unemployment Taxes, USX Corporation in Pittsburgh, Pennsylvania; Mr. John P. Davidson, staff attorney, Chrysler Corporation, Auburn Hills, Michigan; and Marc Baldwin, who's assistant director, Public Policy Department of the American Federation of Labor and Congress Industrial Organizations.

[424] [Laughter.]

[425] CHAIR SHAW: Excuse me for laughing, but it's interesting to note that two chairs down, the man from labor sits.

[426] [Laughter.]

[427] MR. BALDWIN: I'll move over, but they've got to come my way.

[428] CHAIR SHAW: Well, we might have a stand off.

[429] [Laughter.]

[430] MR. LEVIN: Actually there are good relationships between them. Why don't you sit in-between them?

[431] MR. BALDWIN: I used to work for UAW, I should note, proud partnership of Chrysler.

[432] CHAIR SHAW: Mr. Petz?

[433] MR. PETZ: Thank you, Mr. Chairman.

[434] CHAIR SHAW: Again, I have all of your full statements, which will be made a part of the record.

[435] MR. PETZ: Good afternoon to you, Mr. Chairman and Mr. Levin. Again, my name is William Petz, Jr. I'm manager of the payroll and unemployment compensation taxes for USX Corporation, a major worldwide producer of steel products, energy and oil and gas, headquartered in Pittsburgh, Pennsylvania.

[436] I thank you for the invitation to speak today in support of H.R. 3684, the Employment Security Financing Act of '98. USX would like to take this opportunity to commend Chairman Archer, and especially you, Mr. Chairman and co- sponsors for this historic step in advancing the reform of the federal unemployment tax administration finance process.

[437] Over the years, USX has been at the forefront in supporting a sound and efficiently-run, state UC program. Our company believes that H.R.3684 will bring those characteristics back to the program.

[438] As you know, state UC administrative expenses are funded solely by FUTA dollars, and the funding level must be such that claim processing and job search services for the unemployed individual are not jeopardized by under-funding of Congress.

[439] However, in recent years, Congress has funded less than 100 percent of the state UC administration costs. This has resulted in a serious deterioration in service for employers, unemployed workers eligible for benefits, and other job seekers.

[440] Annual FUTA payments by employers total nearly $6 billion, but Congress has been appropriating only about 60 percent or $3.5 billion. This lack of sufficient funding has forced the state UC agencies to cut critical services that affect the unemployed worker such as work search and counseling. It has also decreased the state's ability to monitor and prevent fraudulent UC payments.

[441] In addition, various states have taken it upon themselves to fill the deficiency in funding by Congress to enact over $200 million in supplemental state payroll taxes on business.

[442] In effect, USX and other employers are paying for UC administration costs via three forms: FUTA tax, through state supplemental payroll taxes, and through inflated state UC tax rates by longer benefit durations. This is particularly frustrating for employers, given that the FUTA trust fund accounts contain over $19 billion at the end of fiscal year '97, that was primarily being used to offset general spending by Congress.

[443] H.R.3684 will end that counterproductive over-collection of more than $2 billion a year in FUTA taxes. It will assign the responsibility for the collection, reporting and appropriation of FUTA tax to the states.

[444] USX believes that with additional administrative financing, the states will be encouraged to run a more efficient UC benefit and employment service program for the unemployed individual, without taking anything away from current claimant rights and privileges, or veterans or LMI statistics.

[445] USX strongly supports H.R.3684 for the following reasons: Sufficient funding for administration of state UC programs will be provided. The FUTA surtax of 0.2 percent will be repealed after the year 2003.

[446] An example of how it effects an employer, USX currently

[447] H.R.3684 will eliminate the need for that $200 million of state supplemental taxes. It will also promote lower state UC spending in taxes, because each state will become the tax collector, the appropriator and the overseer of how the employer's FUTA tax is used.

[448] The bill will eliminate the duplication and collection of reporting of UC taxes. It is estimated to save employers most of the $100 million, which is annually being paid to the U.S. Treasury out of FUTA administrative funds for these services.

[449] Finally, H.R.3684 will codify the quarterly payment of FUTA and state UC taxes.

[450] USX does not support the administration's fiscal year '99 proposal to pay and support FUTA and state UC taxes, monthly -- what is nothing more than a gimmick that does not actually raise any new revenue.

[451] More importantly, if the administration's proposal were enacted, it would triple the reporting for USX. Presently it costs about $7,000 for us to make our reports and deposits of FUTA tax and state UC taxes. It would triple that burden to around $21,000. It would also place another unfunded mandate on employers and states.

[452] In summary, USX supports H.R.3684 because it finally addresses the problem of under-funded administrative financing for state UC programs. It will allow each state to control its own UC program, with sufficient funds being provided to pay out UC benefits to the jobless, and deliver needed work search assistance to unemployed individuals, while maintaining the program's integrity.

[453] It is definitely a win, win, win proposition for employers, the jobless and state UC agencies. Employer FUTA dollars will be used as they were intended.

[454] This, Mr. Chairman, ends my prepared remarks.

[455] CHAIR SHAW: Thank you.

[456] Mr. Davidson:

[457] MR. DAVIDSON: Thank you, Mr. Chairman, Mr. Levin. I appreciate the invitation to address you this afternoon on H.R.3684.

[458] As an opening comment, I want to say that Chrysler strongly supports an efficiently run employment security system throughout the country. While supporting this system, we also recognize the need for individuality among the states, as they all have their special circumstances to be addressed.

[459] A FUTA tax, which is the subject of 3684, is the issue being addressed here today. This tax is dedicated to financing the administration of the employment security system, and creates a reserve for the payment of the federal share of our extended benefits. Employers pay approximately $6 billion a year in FUTA taxes.

[460] Throughout the years, I have seen many state employment security agencies struggle to deliver the service because they do not have the funds available. Being one of the large customers of the state agencies, we are concerned about these reductions.

[461] The reduced funding has left the states with the following alternatives: One, either supplement the administrative funds through their state, general revenues; number two, assess a special state tax, slowly, for the supplementation of the available funds; or three, cut services by closing branch offices or diverting available resources to other functions.

[462] States should not be confronted with such choices. The

[463] We also rely on the unemployment insurance agencies to pay benefits in a timely and accurate manner to eligible employees. It is troubling that our employees are unable to receive the services while employers continue to provide adequate revenue through the FUTA taxes.

[464] Perhaps the greatest concern is the loss of program integrity. Based on USDOL quality reports, error rates of 10 to 15 percent are not unusual. In 1997, nearly $20 billion were paid in unemployment benefits. That means, assuming a ten percent error rate, nearly $200 million were paid incorrectly.

[465] That is money employers have paid, and entrusted to the states, to properly administer. Unfortunately, most of the money paid in error is never recovered; and the trust fund and the employers suffer from that loss.

[466] The biggest change that has taken place under the guise of efficiency is the use of automated systems for applying and certifying for benefits. While this is good, administratively, it adds to the decline in program integrity.

[467] Let me illustrate with a couple of scenarios that we have encountered.

[468] When states started allowing claims by mail, we actually had a former employee certifying for and receiving benefits while he was in prison. Another situation that we have uncovered where improper benefits were paid is when a person is hospitalized. With phone certification, an individual can call from his hospital bed. How can these claims be caught?

[469] Don't misunderstand. I am not advocating returning to the old days when people were lined up around the block, waiting up to six hours to be serviced. Instead, I'm advocating more funds for the audit and the policing functions at the state agencies.

[470] Improper benefits are a direct cost to employers, since they are charged to the state's experience-rated trust funds.

[471] How does this address the needs for H.R.3684? Where states have adequate funding to administer the program, they can staff the agencies to improve the integrity and the services provided. The squeeze caused by the reduction in funding has forced states to seek approximately $200 million, per year, from other sources; notwithstanding the fact that there is $2 billion in surplus FUTA being collected.

[472] The main feature of H.R.3684 is the establishment of the state's specific accounts for the deposit of FUTA revenues. It will go up to the state -- will be up to the state legislators to appropriate the funds needed for proper administration of their system. The funds will still be held by the U.S. Treasury, as are the benefit trust funds.

[473] A second feature is the collection of the FUTA by the states. This would eliminate the need for the employers to file two tax returns each quarter. It would also eliminate the collection expense currently charged by the IRS, while increasing the integrity of the tax collection.

[474] Then there is the notorious 0.2 percent temporary tax. This amounts to an unnecessary $1.5 billion per year of employer payroll taxes. The purpose of this tax was to repay a loan for emergency benefits in the mid-1970s. This loan was repaid in 1987. There is no need for that tax to be continued at this time, much less through the year 2007. H.R.3684 will repeal this tax in 2004.

[475] I'm not going to lengthen this testimony to discuss the rest of the bill, others will be doing that. I'm here to say that we support this bill and hope the committee and other members of Congress will support its passage.

[476] Mr. Chairman, thank you for your time.

[477] CHAIR SHAW: Thank you, Mr. Davidson. I'd like to make one correction in your testimony. I hate to do it, but the math was incorrect.

[478] Ten percent of $20 billion is $2 billion, not $200 million.

[479] MR. DAVIDSON: I'll accept that correction.

[480] [Laughter.]

[481] MR. DAVIDSON: I think that just highlights the problem further.

[482] CHAIR SHAW: Mr. Baldwin?

[483] MR. BALDWIN: Thank you, Mr. Chairman and members of the subcommittee for the opportunity to present our views this evening. I submitted a statement for the record, so I'll briefly review the key issues in that.

[484] Our UI system is a program of roughly thirds. About one- third of the unemployed receive benefits; one-third of their lost wages are replaced; and one-third of those who enter the system exhaust their benefits before finding a new job.

[485] The record of state programs fall short of the goals of the UI system in the new economy. The road to a one-third system is not traveled because governors or state agencies want to restrict access, or because state agencies are poor administrators. The one- third system emerges precisely because of the de-centralized structure of the benefit side of the program, which devolution advocates mistakenly would expand.

[486] Because states face competitive pressures from their neighbors, they have strong incentives to limit benefits in the name of business climate. Whatever we may think of the ultimate effectiveness of this economic development model; the fact that benefit recipiency rates have fallen from 75 percent to 35 percent over the last 20 years is directly related to interstate competition and this downward pressure.

[487] H.R.3684 and the other devolution proposals would subject additional elements of the UI program to this pressure, limiting the national effectiveness of the program. Instead of following established social insurance principles like pooled risk and a broad revenue base, devolution proposals force individual states to rely almost entirely on their own funding bases.

[488] This isolation, combined with interstate competition provides an incentive to under-invest in the nation's re- employment system, promoting privatization and shifting funds from administration to benefits.

[489] Clearly, by maintaining FUTA funds in the unified budget, the current system also contains incentives that encourage under- investment -- in this case, in pursuit of a balanced, federal budget. But devolution cures this structural problem by creating more severe structural problems.

[490] The concern about federal trust funds being unreal, or not fiduciarily sound -- as was mentioned this morning -- to me is only heightened by a proposal to create 50 such state- based funds.

[491] H.R.3684 dismantles the current system of pooled risk and reduces funding by one-fourth, putting state programs in jeopardy during recessions. In an attempt to re-build the current broad sharing of risk, the proposal suggests two small funds: a revolving loan fund; and a small state fund.

[492] Our written testimony details the administrative

[493] H.R.3697, introduced by Congressmen, Levin and English of this subcommittee, propose reform which is in keeping with these fundamental principles. It provides incentive funds for states which choose to address administrative problems, facing temporary and contingent workers. It provides an increase in administrative funds, generally.

[494] It establishes a solvency measure, linked again to incentive funds, and it creates an extended benefit trigger which will work, unlike the current measure, which has resulted in congressional emergency action, when the EB system failed to trigger on, despite high unemployment. These reforms are overdue and should be passed, as a first step, toward longer-ranged solutions.

[495] Although we see the devolution proposals as a dangerous rejection of the principles which should govern insurance programs; we're also aware of the perils caused by the current situation. Both the administration of the program and the benefits side of the program are in need of reform.

[496] On administration, the devolution proposal seeks to address the level of funding to states by altering both the level and the distribution of funding. A dialogue should promote solutions which combine the best outcomes, both for levels and for distribution along the following lines:

[497] Administrative funding to be expanded, while maintaining national risk pooling and federal stakeholder commitments. The distribution of funding among the states should more accurately reflect the cost of an effective system in each state and actual state expenditures.

[498] Finally, the counter-cyclical impact of the system should be improved through extended benefit reform and solvency measures.

[499] H.R.3697 and H.R.3684 should provoke a broad debate about stable financing for a system that meets the three goals of unemployment insurance, as outlined in our testimony. Reforms based on devolution only highlight inequities among the states, and rejects sound principles for organizing social insurance.

[500] Instead, we look forward to a dialogue around expanded funding and an improved formula for distributing funds on the basis of need, and counter-cyclical reforms.

[501] Thank you.

[502] CHAIR SHAW: Mr. Levin?

[503] MR. LEVIN: It's late, I'll be brief.

[504] I agree with you completely about the monthly. I don't think it's part of our proposal. It's a budget proposal. I don't think it will happen.

[505] I also agree about the under-funding to the administrative budget, and we tried to handle that.

[506] I would simply urge -- you come from a very responsible corporation -- what we tried to proceed, not kind of automatically choosing up sides here or getting caught in labels, but tried to look at what the problem is.

[507] I think one of the problems with the proposal of the majority, at this point, is, if you don't have a substantial sharing of the risk, it can affect the administrative provisions as well as the other side of it.

[508] I think you have more employees in states with high recipient rates than low. To some extent, the administrative formula today reflects how many people these states are servicing. I would think you'd want to keep some reflection of that.

[509] Also, you have I think, an unusual or beyond average proportion of your employees in states that have had a very cyclical past. If you don't have some sharing of the risk, you're going to have some real problems. I don't think the automation is the result of a shortage of administrative funds.

[510] I think the history -- for example, Michigan is something else. That went into effect, I think, when there was a much larger receipt of administrative funds. The present proposal on the employment service side in Michigan is to abolish it and to do things by machine -- employment placement.

[511] So, I would hope that we can take, Mr. Chairman, a look at this -- at the administrative problems. The extended benefit program needs to be looked at. The last thing we want to do is to maintain the status quo, I would hope, which your proposal does.

[512] So, this isn't going to happen this year, we've got some time.

[513] CHAIR SHAW: Whose proposal maintains the status quo?

[514] MR. LEVIN: On extended benefit? Yours does.

[515] CHAIR SHAW: Oh, on extended benefit.

[516] MR. LEVIN: I would hope that we could sit down and have a true dialogue about looking at the unemployment system in an age which is very different than when it was formed, but I do think that reflective shifting to the states, at a time when there isn't only globalization, internationally; there's globalization, nationally. That's something we really need to look at, and I hope we can all do it together.

[517] I don't know, Mr. Davidson, Mr. Petz or Mr. Baldwin, whether you want to comment or not.

[518] MR. DAVIDSON: Mr. Chairman, if I might respond, briefly?

[519] CHAIR SHAW: Please.

[520] MR. DAVIDSON: Mr. Levin, I don't want my comments with regard to automation to sound like that. I disapprove of that. I do agree that it is a good thing to have.

[521] The concern that I had that I tried to address is that because of the automation, the integrity of the program is suffering. And because it is suffering, it needs a tighter leashing, or auditing or control within the state agencies.

[522] Unfortunately, the insufficient revenues prevents them from doing that. This is the point I was trying to get to.

[523] MR. LEVIN: I would just say that I think we have to -- I worry about the quality of the system. In fact, one of my objections to what's been proposed in Michigan in terms of the abolition of employment services is that I think people -- you're never sure who's looking for work.

[524] So, let's not argue that -- discuss it, but, I just hope all the focus isn't on the 0.2 percent. We've debated that off and on, and all proposals continue it until 2003; and I understand the resistance to it, but let's also focus on the larger needs of tailoring an unemployment system in this age where more and more dislocation is not temporary, but permanent.

[525] Where we need to be sure that people -- like we reformed the welfare system, if they're going to be laid off, in more cases than it was true 20 years ago, permanently -- are trained and re- trained to go back and take another job.

[526] Thank you, Mr. Chair.

[527] CHAIR SHAW: Let me -- we've brought up reforming the welfare system, and I think that somewhere during this debate I have to remind you, Mr. Levin, that all through this debate on welfare reform, "race to the bottom" was used over and over and over. "Lack of confidence in the state" was expressed over and over and over. All of this came from your side of the aisle, much of it from you.

[528] MR. LEVIN: No, no, no. You never heard me once say that.

[529] CHAIR SHAW: I never heard you say that --

[530] MR. LEVIN: About "race to the bottom." I never use that term.

[531] CHAIR SHAW: Well, you're the only one over there that didn't.

[532] MR. LEVIN: I never.

[533] CHAIR SHAW: But anyway, we had confidence in the states. I have confidence in the states. The three gentlemen representing states here today, I have ultimate confidence in them; and I have a total lack of confidence in the present system and the way it's being administered.

[534] There is no question in my mind tax on employment is the most regressive tax you can have, and I'm sure all of us will agree to that, business and labor; and this is part of the compensation of the people you represent in labor unions, it's a question of we -- this is a tax on their employment.

[535] Now the fact that the employer pays it makes no

[536] Nobody's going to say a program where there ain't no money in it is actuarially sound. It's an IOU from the taxpayers that they're going to have to come up -- cough up with the money on the future budgets, future congresses and future administrations.

[537] There's a recession out there. I know that. You know that. We all know that. There are going to be times when that so-called "stealth" surplus is depleted and comes down to zero; but that's just simply a book entry, because it's going to be taxed against the taxpayers of the day of the recession. We know that.

[538] There is no surplus. It is a fraud. It is a total fraud, and I think the quicker we face up to that -- and I think the 0.2 percent is a very, very valid issue. A temporary tax is a temporary tax, and it should become a permanent tax. To make things even worse, it's kept as a permanent tax in order to make it look like we're balancing the budget.

[539] I do have one question that I'd like to ask you, Mr. Baldwin. As I read you testimony, on page two you discuss various ways that states have narrowed eligibility for benefits, which you oppose -- and I can understand that.

[540] Later on page six, you argue that more extended benefits should be provided, half of which would come from state taxes through the use of a more generous trigger mechanism.

[541] Then on page seven, you talk about how states should use alternative base periods, allowing more individuals to qualify for unemployment benefits.

[542] Following through on your position on these proposals would result in more unemployment benefits being paid out.

[543] MR. BALDWIN: Correct.

[544] CHAIR SHAW: I think you understand that.

[545] Yet, later on page seven, you talk about the importance of establishing or reaching a solvency target, that is by building up large reserves in state benefits accounts to meet the needs of a recession.

[546] Now, how do you reconcile these competing goals, and

[547] MR. BALDWIN: Well, clearly, it might -- the extended benefit piece would be in the future. So you would have build-up between now and then to cover that. That's paid for in the administration -- in the Levin/English proposal.

[548] The administrative side of the alternative base period change is covered by the Levin/English proposal. That covers about six to eight percent of the unemployed; but it has a smaller price tag because they are not average employees, they're -- virtually by definition -- low-wage employees. So, their impact on the budget is actually smaller than that.

[549] In your own state, the state estimate was extremely low. I'm actually quoted in the Wall Street Journal questioning whether it's high enough.

[550] So, I'm acknowledging that these things will cost some money; but I believe we have a national commitment to the unemployment insurance system, not just the administrative side, but the benefit side. It's vital to the counter- cyclical capacity of the economy. It's vital to the income support for the individuals who lose their jobs, and increasingly, it is the gateway to re-employment services.

[551] It is no accident, in my mind, that the percentage of the unemployed receiving benefits and the durations are moving in opposite directions. Fewer people are getting benefits, and durations are climbing.

[552] Most people would say that benefit receipt would climb and duration would climb together, because they have this image that people sit around. On the contrary. People get into the UI system, and that is their gateway to re- employment services.

[553] So I actually think that the cost will be lower than a lot of folks would estimate.

[554] CHAIR SHAW: Mr. Baldwin, I recall vividly the hearings that we had on this when we were extending the benefits. At that time, Mr. Downey was chairman of this committee, and I don't recall whether I was the ranking Republican member or just one of the members of this committee; but from all the statistics that we saw, the people went back to work about the time the benefits ran out. I mean, this was clearly a trend.

[555] To have more generous benefits would appear -- or a

[556] Now surely you'll certainly -- maybe without enthusiasm, but -- agree with me that people tend to look harder for jobs, and tend to go back to work toward the end of the benefit period.

[557] MR. BALDWIN: That's correct.

[558] The operative question, though is, will they find them? In fact, because one-third of the unemployed actually exhaust benefits, that suggests that there must be something else going on in the system that extends their durations, whether they have continued to receive unemployment checks or not.

[559] CHAIR SHAW: But do you have any statistical data as to what happens to them when they fall off of the --

[560] MR. BALDWIN: There was a Department of Labor study on benefit exhaustees in the 1980s, yes, and I'm not sure what the answer is but I know that there is a known answer, at least in that setting.

[561] CHAIR SHAW: I'm sure we'll find out what they came up with back in the '80s.

[562] MR. BALDWIN: There's another explanation for the spike right before you exhaust; and that is, that you are looking for a job which replaces a higher percentage of your wages than what you're able to find.

[563] Closer to exhausting benefits, you give up, take the first job you can get. There's a lot of evidence of that in the displaced worker programs, which show that most people have to change jobs based on -- there may be some data in my study -- lose up to 20 percent of their income. I think there are some numbers to that effect in our testimony.

[564] CHAIR SHAW: Well, I think all of us should be outraged by the fact -- maybe for different reasons. Mr. Baldwin, you'd be outraged by the fact that these surpluses are building up and being used to balance the budget, because you feel there should be more generous benefits.

[565] Business on the other hand feels that their payroll taxes are being used for something for which it wasn't intended; and that is being used to balance the budget; and they're being taxed unfairly.

[566] I think back in the middle -- and I think what we have to remember here -- and don't lose sight of the fact that a payroll tax is part of the compensation for America's worker.

[567] The fact that at the bargaining table, if we can save those monies, save some administrative costs, that you will be looking for a greater share from the corporations because it will be showing in their income statement, and you have a great deal of interest in their income statement during the time of contract negotiations.

[568] So I think this is one thing -- one area where we can agree that we should be pushing together. Exactly where it's all going to shake out is another thing, but I think the present system, we all agree, is an absolute outrage.

[569] I want to thank all the witnesses -- all the three panels that we've had here today. I think we've all learned a great deal. I think that all of us are going to have to go back to the drawing boards to make some adjustment, but we do agree -- and it's fine to come away from here, even if you don't agree what road we're going to take -- that we're going to get out of this mess; and we're going to start, if not in this Congress, but in the next, that we'll get the job finished up in the next Congress.

[570] Thank you all very much. This hearing is adjourned.

[571] [Whereupon, at 6:47 p.m., the proceedings were adjourned.]