[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]



 
                THE UNEMPLOYMENT COMPENSATION ASPECTS OF
               THE U.S. DEPARTMENT OF LABOR FY2007 BUDGET

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 4, 2006

                               __________

                           Serial No. 109-71

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    SUBCOMMITTEE ON HUMAN RESOURCES

                   WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut        JIM MCDERMOTT, Washington
BOB BEAUPREZ, Colorado               BENJAMIN L. CARDIN, Maryland
MELISSA A. HART, Pennsylvania        FORTNEY PETE STARK, California
JIM MCCRERY, Louisiana               XAVIER BECERRA, California
DAVE CAMP, Michigan                  RAHM EMANUEL, Illinois
PHIL ENGLISH, Pennsylvania
DEVIN NUNES, California

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 13, 2006, and Revised Advisory of April 24, 
  2006, announcing the hearing...................................     2

                               WITNESSES

U.S. Department of Labor, Employment and Training Administration, 
  Hon. Mason Bishop..............................................     9

                                 ______

U.S. Government Accountability Office, Sigurd Nilsen, Ph.D.......    25
National Association of State Workforce Agencies, Roosevelt 
  Halley, Columbia, South Carolina...............................    35
American Federation of State, County, and Municipal Employees, 
  Greg Devereux, Seattle, Washington.............................    39
American Institute for Full Employment, Wayne Brough, Ph.D., 
  Adjunct Scholar................................................    44
Institute for International Economics, Howard Rosen..............    46
Heritage Foundation, Center for International Trade and 
  Economics, Tim Kane, Ph.D......................................    57

                       SUBMISSIONS FOR THE RECORD

Devereux, Greg, Washington State Federation of Employees, 
  Olympia, WA, statement.........................................    81
Oxfeld, Eric J., Strategic Services on Unemployment and Workers' 
  Compensation, statement........................................    82
Samuel, William, American Federation of Labor and Congress of 
  Industrial Organizations, statement............................    89


                     THE UNEMPLOYMENT COMPENSATION
                     ASPECTS OF THE U.S. DEPARTMENT
                         OF LABOR FY2007 BUDGET

                              ----------                              


                         THURSDAY, MAY 4, 2006

             U.S. House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
room B-318, Rayburn House Office Building, Hon. Wally Herger 
(Chairman of the Subcommittee) presiding.
    [The advisory and revised advisory announcing the hearing 
follow:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
April 13, 2006
No. HR-8

                      Herger Announces Hearing on

                  Unemployment Compensation Aspects of

            U.S. Department of Labor Fiscal Year 2007 Budget

    Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human 
Resources of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the U.S. Department of Labor (DOL) 
budget for fiscal year 2007. The hearing will take place on Wednesday, 
May 3, 2006, in B-318 Rayburn House Office Building, beginning at 2:00 
p.m.
      
    Oral testimony at this hearing will be from both invited and public 
witnesses. Invited witnesses will include a representative from the 
DOL. Any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Subcommittee and for possible inclusion in the printed record of the 
hearing.
      

BACKGROUND:

      
    The Unemployment Compensation (UC) program provides benefits to 
unemployed workers who have a history of employment. Within a broad 
Federal framework, each State designs its own benefit program and 
imposes taxes on employers to pay for regular unemployment benefits. A 
Federal tax also is imposed on employers to fund the Federal 
responsibilities under the system, including certain administrative 
expenses, loans to States, and the Federal half of extended 
unemployment benefit costs for certain workers. Taxes collected are 
kept in Federal trust funds that are part of the unified Federal 
budget. During calendar year 2005, $33 billion in unemployment benefits 
was paid to nearly 8 million eligible workers.
      
    The DOL budget for fiscal year 2007 includes a number of proposals 
designed to strengthen the integrity and otherwise improve the 
operation of the UC system. Proposals included in the budget would 
increase the use of eligibility reviews, better prevent and recover 
overpayments, speed returns-to-work of unemployment beneficiaries, 
improve tax collection, and extend the 0.2 percent Federal Unemployment 
Tax Act (``FUTA'') surtax.
      
    In announcing the hearing, Chairman Herger stated: ``The 
President's budget includes a number of proposals designed to improve 
the efficiency and effectiveness of the unemployment compensation 
system in paying benefits and helping laid off workers get back on the 
job. The Subcommittee also wants to make this system work better for 
States, employers, and especially unemployed workers. I look forward to 
hearing from the Administration and others about proposals included in 
President's budget designed to do just that.''
      

FOCUS OF THE HEARING:

      
    The focus of the hearing will be on unemployment-related issues in 
the DOL fiscal year 2007 budget.
      

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

      
    Requests to be heard at the hearing must be made by telephone to 
Michael Morrow or Kevin Herms at (202) 225-1721 no later than the close 
of business Wednesday, April 26, 2006. The telephone request should be 
followed by a formal written request faxed to Allison Giles, Chief of 
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515, at (202) 225-
2610. The staff of the Committee will notify by telephone those 
scheduled to appear as soon as possible after the filing deadline. Any 
questions concerning a scheduled appearance should be directed to the 
Committee staff at (202) 225-1721.
      
    In view of the limited time available to hear witnesses, the 
Committee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing in lieu of a personal appearance. All persons requesting to be 
heard, whether they are scheduled for oral testimony or not, will be 
notified as soon as possible after the filing deadline.
      
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.
      
    In order to assure the most productive use of the limited amount of 
time available to question witnesses, all witnesses scheduled to appear 
before the Committee are required to submit 200 copies, along with an 
IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, of 
their prepared statement for review by Members prior to the hearing. 
Testimony should arrive at the Subcommittee office, B-318 Rayburn House 
Office Building, no later than close of business on Monday, May 1, 
2006. The 200 copies can be delivered to the Subcommittee staff in one 
of two ways: (1) Government agency employees can deliver their copies 
to B-318 Rayburn House Office Building in an open and searchable box, 
but must carry with them their respective government issued 
identification to show the U.S. Capitol Police, or (2) for non-
government officials, the copies must be sent to the new Congressional 
Courier Acceptance Site at the location of 2nd and D Streets, N.E., at 
least 48 hours prior to the hearing date. Please ensure that you have 
the address of the Subcommittee, B-318 Rayburn House Office Building, 
on your package, and contact the staff of the Subcommittee at (202) 
225-1025 of its impending arrival. Due to new House mailing procedures, 
please avoid using mail couriers such as the U.S. Postal Service, UPS, 
and FedEx. When a couriered item arrives at this facility, it will be 
opened, screened, and then delivered to the Committee office, within 
one of the following two time frames: (1) expected or confirmed 
deliveries will be delivered in approximately 2 to 3 hours, and (2) 
unexpected items, or items not approved by the Committee office, will 
be delivered the morning of the next business day. The U.S. Capitol 
Police will refuse all non-governmental courier deliveries to all House 
Office Buildings.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``109th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing 
for which you would like to submit, and click on the link entitled, 
``Click here to provide a submission for the record.'' Once you have 
followed the online instructions, completing all informational forms 
and clicking ``submit'' on the final page, an email will be sent to the 
address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Wednesday, 
May 17, 2006. Finally, please note that due to the change in House mail 
policy, the U.S. Capitol Police will refuse sealed-package deliveries 
to all House Office Buildings. Those filing written statements who wish 
to have their statements distributed to the press and interested public 
at the hearing can follow the same procedure listed above for those who 
are testifying and making an oral presentation. For questions, or if 
you encounter technical problems, please call (202) 225-1721.

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

                  * * * CHANGE IN DATE AND TIME * * *

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
April 24, 2006
No. HR-8 Revised

                 Change in Date and Time for Hearing on

                  Unemployment Compensation Aspects of

            U.S. Department of Labor Fiscal Year 2007 Budget

    Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human 
Resources of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on the unemployment compensation aspects of U.S. 
Department of Labor Fiscal Year 2007 Budget, previously scheduled for 
2:00 p.m. on Wednesday, May 3, 2006, in room B-318 Rayburn House Office 
Building, will now be held on Thursday, May 4, 2006, at 10:00 a.m.
      
    All other details for the hearing remain the same. (See Human 
Resources Advisory No. HR-8, dated April 13, 2006).

                                 

    Chairman HERGER. Good morning, and welcome to today's 
hearing on the President's budget proposals for the U.S. 
Department of Labor (DOL) for Fiscal Year (FY) 2007. The 
economy grew a robust 4.8 percent in the first quarter of 2006. 
That is the fastest growth since the third quarter of 2003 and 
the 18th consecutive quarter of growth. Since the 2003 tax 
cuts, economic growth has averaged a strong 3.9 percent. With 
that growth, the economy has created millions of jobs. During 
the last year, the economy created an average of 174,000 jobs 
each month, which is expected to continue in tomorrow's job 
report for April. Since August 2003, we have seen a total of 
5.2 million jobs. The unemployment rate is a very low 4.7 
percent, the lowest since July 2001 and below the average of 
the 1960s, 1970s, 1980s, and 1990s.
    Still, despite the sharp drop in the number of unemployed 
Americans in recent years, too many Americans remain 
unemployed. We owe it to all workers to examine what we can do 
to better connect unemployed workers with jobs to stimulate 
even more growth and job creation. We also owe it to taxpayers 
to ensure unemployment benefit payments are correct. The Office 
of Management and Budget estimates that more than $3 billion in 
unemployment benefits were incorrectly paid in 2005. There is 
plenty of work to be done in that area as well. The President's 
DOL budget proposals under our jurisdiction have two purposes. 
First, to promote better program integrity when it comes to 
collecting unemployment taxes and paying unemployment benefits. 
Second, and more importantly, to help workers get back on the 
job quickly.
    This Subcommittee has explored the issue of improper 
unemployment benefit taxes and payments before and acted. In 
2002, we provided States a record infusion of Federal funds 
they could use to improve unemployment benefit program 
integrity, among other purposes. In 2004, we passed the State 
Unemployment Tax Act (SUTA) Dumping Prevention Act (P.L. 108-
295) meant to ensure employers who lay off more workers pay 
their fair share of unemployment taxes. That law also gave 
States access to the National Directory of New Hires (NDNH) so 
they could ensure unemployment benefits end when workers go 
back to work. Earlier this year, we heard from the Government 
Accountability Office (GAO) about their research, which showed 
that workers who collect unemployment benefits stay unemployed 
more than twice as long as those who don't collect benefits. I 
was pleased to note bipartisan agreement on that hearing on the 
need to help unemployed workers quickly return to work. That 
background will be on our minds today as we learn more about 
the Administration's FY2007 budget proposals. After hearing 
from the DOL, we will hear from a variety of witnesses 
representing GAO, the States, Government employees, think 
tanks, and other interested parties. They will provide more 
context about the DOL budget proposals. I am pleased to note 
that every group that requested to testify at this hearing will 
appear before us today. We look forward to the testimony of all 
our witnesses. Mr. McDermott, would you care to make a 
statement?

    [The opening statement of Chairman Herger follows:]

Opening Statement of The Honorable Wally Herger, Chairman, Subcommittee 
on Human Resources, and a Representative in Congress from the State of 
                               California

    Good morning and welcome to today's hearing on the President's 
budget proposals for U.S. Department of Labor for fiscal year 2007.
    The economy grew a robust 4.8 percent in the first quarter of 2006. 
That's the fastest growth since the third quarter of 2003, and the 18th 
consecutive quarter of growth. Since the 2003 tax cuts, economic growth 
has averaged a strong 3.9 percent.
    With that growth, the economy has created millions of jobs. During 
the last year, the economy created an average of 174,000 jobs each 
month, which is expected to continue in tomorrow's jobs report for 
April. Since August 2003, we have seen a total of 5.2 million jobs. The 
unemployment rate is a very low 4.7 percent, the lowest since July 2001 
and below the average of the 1960s, 1970s, 1980s and 1990s.
    Still, despite the sharp drop in the number of unemployed Americans 
in recent years, too many Americans remain unemployed. We owe it to all 
workers to examine what we can do to better connect unemployed workers 
with jobs to stimulate even more growth and job creation.
    We also owe it to taxpayers to ensure unemployment benefit payments 
are correct. The Office of Management and Budget estimates that more 
than $3 billion in unemployment benefits were incorrectly paid in 2005, 
so there is plenty of work to be done in that area, too.
    The President's budget proposals under our jurisdiction have two 
purposes. First, to promote better program integrity when it comes to 
collecting unemployment taxes and paying unemployment benefits. Second, 
and more importantly, to help workers get back on the job quickly.
    This Subcommittee has explored the issue of improper unemployment 
benefit taxes and payments before, and acted. In 2002, we provided 
states a record infusion of federal funds they could use to improve 
unemployment benefit program integrity, among other purposes.
    In 2004, we passed the SUTA Dumping Prevention Act, meant to ensure 
employers who lay off more workers pay their fair share of unemployment 
taxes. That law also gave states access to the National Directory of 
New Hires so they could ensure unemployment benefits end when workers 
go back to work.
    Earlier this year, we heard from the Government Accountability 
Office about their research showing that workers who collect 
unemployment benefits stay unemployed more than twice as long as those 
who don't collect benefits. I was pleased to note bipartisan agreement 
at that hearing on the need to help unemployed workers quickly return 
to work. That background will be on our minds today as we learn more 
about the Administration's fiscal year 2007 budget proposals.
    After hearing from the Department of Labor, we will hear from a 
variety of witnesses representing GAO, the states, government 
employees, think tanks, and other interested parties. They will provide 
more context about the DOL budget proposals.
    I am pleased to note that every group that requested to testify at 
this hearing will appear before us today. We look forward to the 
testimony of all our witnesses.

                                 

    Mr. MCDERMOTT. Thank you, Mr. Chairman. I think when you 
come to one of these hearings, it is always interesting to have 
Mr. Herger and I present our view of the world because you get 
two different views of what is going on. I think, as we convene 
this morning, it is fair to say that we know two things for 
certain. The American economy is changing, and the Federal 
Government is not changing fast enough to meet the needs of the 
people of this country. Now, not long ago, economic growth and 
job security across the American landscape seemed 
understandable and predictable by a vast majority of workers, 
whether it be blue collar or white collar or whatever. But 
those days, really, are gone. Technological change and an 
increasing interconnected world have expanded the opportunities 
for some and dramatically increased uncertainty for others. Now 
in this new national workplace, support programs should do more 
than enable workers to upgrade their skills and help them 
transition from one job to the next when they must. The 
statistics make clear that our concerns are warranted and real 
action is essential if we are to serve the American people. On 
that point, Mr. Herger and I agree.
    Job security is declining precipitously for certain 
segments of the population, especially men in their 40s and 
50s. According to the Bureau of Labor Statistics (BLS) from the 
DOL, the median tenure for the current employment of men age 45 
to 54 has dropped from 12.8 years on a job in 1983 to 9.6 years 
on a job in 2004. That is a 25 percent decrease. For men ages 
55 to 64, it is even worse. The median employment tenure has 
declined 33 percent over the same period. In short, these 
workers are much more likely to change jobs than their 
counterparts of 20 years ago. Some of what you are seeing here 
today or hearing today is a reflection of what has happened to 
the job market. Some job changes are voluntary, of course. But 
many are not. Hardships like factory closings, corporate 
downsizing, technology are forcing painful changes upon our 
workers. The transitions can be difficult and stressful, even 
for displaced workers who find new employment. For example, 
according to a biannual BLS report again--that is DOL--5.3 
million Americans were laid off jobs they held for more than 3 
years between the years 2001 and 2003. Even as recently as the 
last 4 or 5 years, you are still getting a clear majority of 
those reemployed lost wages compared to their prior job. They 
went to a job making less money.
    The reality is that over one-third of these workers lost 20 
percent or more of their prior earnings. They are taking a 20 
percent drop. Furthermore, low-income workers experience much 
wider income swings today compared to 20 years ago. More and 
more vulnerable families are being brought to the brink of 
financial ruin. That is where we are, and here is what we are 
doing about it. Now I commend the Administration for suggesting 
ways in which the integrity of the Unemployment Insurance (UI) 
Program can be strengthened, even as I question how these 
particular proposals would be implemented. It is one of 
America's most valuable programs, and it is important to 
prevent overpayments and fraud, whether committed by 
individuals or by employers. We should, however, I think 
attempt to hold individuals harmless when small or modest 
errors occur through no fault of their own and equally address 
the issue of UI underpayments. The challenge we have to address 
is to improve the UI Program overall.
    Benefit levels in some States are entirely too low to serve 
the purpose of the program or to meet the needs of people. Give 
somebody $221 a month, as some States do, is simply not an 
adequate replacement of the finances that they had when they 
had a job. In many States, the maximum weekly unemployment 
benefit is enough to buy a few tanks of gasoline, which is 
going up, forcing workers to choose between putting food on the 
table and conducting a meaningful job search using their car. 
Furthermore, today's economy relies more and more on part-time 
employees who are frequently denied unemployment benefits when 
they lose their jobs. Finally, we have got to put some teeth 
into efforts to ensure that employers are paying their fair 
share. Why does the Administration oppose efforts to crack down 
on employers who misclassify their employees as contract 
workers for the purposes of avoiding of paying unemployment 
taxes? Even if we address all of these issues, we have to 
recognize that the UI Program is not enough to meet the 
challenges that a globalized economy presents. Currently, there 
are two Federal programs that constitute the bulk of our first 
response capability.
    The Employment Services (ES) Program aims to match job 
seekers with current employment opportunities, and the 
Workforce Investment Act (WIA) (P.L. 105-220) provides job 
training and placement services through local One-Stop Centers. 
We have them in Seattle, and I visited them. At a minimum, I 
can't understand why the Administration defends its policy to 
continually decrease funding for these programs to the tune of 
$2.2 billion at a time when businesses and workers they rely 
upon are challenged most. The ES Program enjoys wide support 
within the business community because it links employers with 
workers that possess skill sets that they are looking for. The 
Federal Government has made a positive difference in the lives 
of countless Americans through these programs, and we can and 
should do more. Congress can help some displaced workers by 
making it easier for them to move to new jobs. Congress could 
develop a means by which labor policy provides a cushion for 
workers transitioning into new jobs and improves economic 
security for workers and families experiencing the turbulence 
of a fast-moving economy. In addition, Congress could implement 
economic tax and education policies that reflect the 21st 
century economy and create family wage job opportunities in the 
future. In Washington State, we used to have unemployment that 
dealt with loggers and fishermen and airplane employees, all of 
whom during certain periods of the year knew they weren't going 
to be working. You don't work in the woods in the snow. You 
don't fish when fish is out of season. You have an unemployment 
program. That is not what we have today. Regrettably, I believe 
the Congress is not doing enough to help the American worker. 
This Nation was founded on the principle that hard work 
produces results, and it is our responsibility to recognize the 
new economic reality and pass progressive legislation that 
safeguards the American dream. Unemployment insurance came into 
being in this country in 1935, when there was nothing for a 
worker who lost, and we had the major Depression. It has been 
adjusted some over the years. But the 21st century, hard work 
still ought to mean economic security and upward mobility for 
the American people, and I look forward to hearing today from 
today's witnesses and finding out what is ahead for this 
Committee. Thank you, Mr. Chairman.
    Chairman HERGER. Thank you, Mr. McDermott. Before we move 
on to our testimony today, I want to remind our witnesses to 
limit their oral statements to 5 minutes. However, without 
objection, all of the written testimony will be made a part of 
the permanent record. To start the hearing today, we will hear 
from the DOL budget proposals from the Honorable Mason Bishop, 
Deputy Assistant Secretary in the Employment and Training 
Administration at the DOL. Mr. Bishop?

   STATEMENT OF THE HONORABLE MASON BISHOP, DEPUTY ASSISTANT 
    SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S. 
                      DEPARTMENT OF LABOR

    Mr. BISHOP. Thank you, Mr. Chairman and distinguished 
Members of the Subcommittee. I am pleased to have the 
opportunity to testify before you today relating to the 
President's FY2007 budget request as it does relate to the UI 
Program. The Administration is committed to improving the 
benefit payment and tax integrity of the Federal-State UI 
system. Although States put much effort into preventing, 
detecting, and recovering improper benefit payments, they are 
still too high. In FY2005, an estimated $3 billion in UI 
benefits were paid in error. We project that a little more than 
half of this amount, or about $1.6 billion, is attributable to 
causes that States can detect in the course of normal program 
operations and potentially recover. While access to new 
databases and automated data matches have improved States' 
ability to identify potential improper payments quickly, 
investigations required to establish payments as improper and 
collection efforts are very labor intensive.
    Thanks to the efforts of this Subcommittee, loopholes in 
many of the State UI laws that had permitted some employers to 
pay less than their fair share of State unemployment taxes were 
closed when Congress enacted the SUTA Dumping Prevention Act of 
2004. Investigating potential cases of SUTA dumping is time-
consuming, and the legal costs associated with prosecution of 
these cases is quite high. However, no new Federal funds were 
provided to States to enforce their new SUTA dumping statutes. 
The department has developed a set of legislative proposals 
that will help States obtain new tools and resources to combat 
improper benefit payments and employer tax evasion. These 
proposals will, first, allow States to use up to 5 percent of 
all recovered improper payments for additional Benefit Payment 
Control activities. Second, allow States to use up to 5 percent 
of tax payments recovered as a result of employer fraud or tax 
evasion, such as SUTA dumping, for additional tax integrity 
activities. Third, we would require States to impose at least a 
15 percent penalty on improper payments due to claimant fraud 
and to use any fines collected for additional Benefit Payment 
Control activities.
    Next we would allow States to permit collection agencies to 
retain up to 25 percent of hard to collect fraud payments and 
delinquent employer taxes they recovered. We would also provide 
an incentive for employers to respond to requests for 
information more timely and completely. Employers accounts 
would be charged when they cause improper payments. This would 
be required only if the improper payment were due to the 
failure of the employer to provide timely or accurate 
information and if the employer had established a pattern of 
failing to respond on a timely basis or adequately to such 
requests. Next we would require all employers to report a start 
work date to the State Directory of New Hires to improve 
improper payment detection and better target investigations. 
Finally, our proposal would authorize the U.S. Department of 
Treasury to intercept Federal income tax refunds to recover 
improper payments of UI benefits and certain unpaid employer 
taxes. Together, these seven legislative proposals would reduce 
improper payments and increase improper payment recoveries and 
delinquent tax collections by an estimated $2.36 billion over 5 
years and $5.4 billion over 10 years.
    Our proposal also includes a provision that will give 
States the opportunity to test changes in the UI Program 
designed to better serve the 21st century economy and the 
workforce. It authorizes the Secretary of Labor to waive 
certain Federal requirements at States' request to permit them 
to run demonstration projects that would accelerate the 
reemployment of claimants or improve the effectiveness of the 
State in carrying out UI administrative activities. The 
legislative proposals I just described would give States access 
to additional funds in the long term. The department's request 
for FY2007 appropriations include a modest increase of $40 
million to give States additional resources right away to 
expand certain improper payment reduction efforts. 
Specifically, we request $10 million to prevent and detect 
fraudulent UI claims filed using personal information stolen 
from unsuspecting workers. We also propose $30 million to 
expand the Reemployment and Eligibility Assessment initiative, 
which ensure eligibility requirements are met by UI 
beneficiaries and offers personalized assistance with work 
search plans and other services through One-Stop Career Centers 
Nation wide. These proposals would pay for themselves in 
reduced benefit payment outlays, and we estimate over $225 
million in savings. In conclusion, I do thank the Chairman and 
the Subcommittee for allowing me to come testify and would be 
willing to answer any questions the Subcommittee might have. 
Thank you.

    [The prepared statement of Mr. Bishop follows:]

 Statement of The Honorable Mason Bishop, Deputy Assistant Secretary, 
    Employment and Training Administration, U.S. Department of Labor

    Good morning. Chairman Herger, Ranking Member McDermott and 
distinguished members of the Subcommittee, thank you for this 
opportunity to discuss the President's Fiscal Year (FY) 2007 Budget 
proposals related to Unemployment Insurance (UI).
    The Administration is committed to improving the benefit payment 
and tax integrity of the federal-state UI system and has developed a 
set of legislative proposals for your consideration that will give 
states new tools and resources to combat improper benefit payments and 
evasion of employer taxes. Reducing improper payments is an important 
component of the President's Management Agenda, and the Department of 
Labor (the Department) is committed to aggressively implementing this 
agenda to improve the results our programs deliver for taxpayers.
    Although states put much effort into preventing, detecting, and 
recovering improper benefit payments, the number of such payments is 
still too high. This is a major concern for Secretary Chao and the 
Department. In FY 2005, an estimated $3 billion in UI benefits were 
paid in error. We project that a little more than half of this amount, 
$1.6 billion, is attributable to causes that states can detect in the 
course of normal program operations and potentially recover. However, 
to date, states have been successful in detecting only 59% of these 
estimated payments. Further, only about half of the improper payments 
detected are subsequently collected. While access to new databases and 
automated data matches have improved states' ability to identify 
potential improper payments quickly, investigations required to 
establish payments as improper and collection efforts are still quite 
staff and time intensive. The Department is continuing to work with the 
states to find better and more efficient ways to reduce improper 
payments.
    Thanks to your leadership, Chairman Herger and Ranking Member 
McDermott, and the bipartisan efforts of this Subcommittee and the 
Congress, loopholes in many state UI laws that had permitted some 
employers to pay less than their fair share of state unemployment taxes 
were closed when Congress enacted the SUTA Dumping Prevention Act of 
2004 (Public Law 108-295). I am pleased to report that all states--
except Alaska--have enacted state statutes to combat SUTA (state 
unemployment tax act) dumping. However, enforcement of the law is still 
essential. As Carl Camden of Kelly Services noted in last year's 
hearing on implementing this legislation ``You can have the tightest 
laws on the books and the slickest detection tools in place . . . it's 
all meaningless if you drop the ball with enforcement.'' As states have 
begun implementing their SUTA dumping laws, it has become clear that 
these practices have been widespread and costly to state unemployment 
funds. Prior to implementation of SUTA dumping legislation, Michigan 
estimated it was losing between $62 and $95 million annually in state 
unemployment taxes because of this practice. In addition, as of April 
2005, North Carolina showed just over $18 million lost due to SUTA 
dumping. However, investigating potential cases of SUTA dumping is time 
consuming, and the legal costs associated with prosecution of these 
cases are quite high. No new Federal funds were provided to states to 
enforce their new SUTA dumping statutes.

Legislative Proposals
    The Department believes that it is in many states' self-interest to 
devote additional resources to prevention, detection, and recovery of 
improper benefit payments and to enforcement of SUTA dumping laws. And 
the Department is committed to helping States obtain new tools and 
resources to help reduce fraud and benefit overpayments, as recommended 
in a recent Program Assessment Rating Tool review of the UI program. To 
this end, the Department has developed a set of legislative proposals 
that will give states access to additional resources to combat improper 
payment and employer tax evasion.
    Allow States to Use a Percentage of All Recovered Improper Payments 
for Benefit Payment Control (BPC) Activities. Under current Federal 
law, all improper payments collected by a state must be deposited in 
the state's unemployment fund where they may be used only for the 
payment of UI benefits.
    We propose to amend Federal law to permit states to use up to 5% of 
all improper payments recovered to augment administrative funding for 
BPC activities. This 5% would be deposited in a special state fund 
where it could be used only for this purpose.
    This amendment would reduce improper payments and increase improper 
payment recoveries by an estimated $86 million over five years and $236 
million over ten years.
    Allow States to Use a Percentage of Certain Tax Payments for Tax 
Integrity Activities. Under current Federal law, all taxes collected by 
a state must be deposited in the state's unemployment fund where they 
may be used only for the payment of UI benefits.
    We propose to amend Federal law to permit states to use up to 5% of 
tax payments recovered following a state investigation and assessment 
of taxes owed due to employer fraud or tax evasion such as SUTA dumping 
for additional UI tax enforcement activities. This 5% would be 
deposited in a special state fund and would be used only for this 
purpose.
    This amendment would increase recoveries of unpaid taxes by an 
estimated $13 million over five years and $19 million over ten years.
    Require States to Impose at Least a 15% Penalty on Fraud Improper 
Payments. Currently, all states impose penalties on employers who are 
delinquent in paying contributions. It makes sense to require all 
states to impose a similar fine whenever it determines an individual 
has defrauded the system. The Department's Office of Inspector General 
(OIG) has devoted considerable resources to uncovering UI fraud; these 
investigations suggest that UI fraud schemes are more complex, costly, 
and far reaching than in the past.
    Individuals who commit UI fraud--a very small percent of all 
beneficiaries--are sometimes required to do nothing more than repay the 
amount received fraudulently. While a limited disqualification from 
future benefits may be imposed, this sanction is meaningless if the 
individual goes back to work and remains employed. Although state laws 
provide for criminal penalties, cases are rarely prosecuted due to the 
relatively low dollar amounts involved and the high cost of 
prosecution.
    Under our proposal, the Social Security Act would be amended to 
require states to impose a penalty of not less than 15% on improper 
payments that are due to fraud and to deposit any fines collected in a 
special state fund, from which they may be withdrawn onlyfor BPC 
activities. The proposal is limited to improper payments due to fraud 
to ensure that penalties will be required only when there was intent to 
deceive on the part of the beneficiary.
    This amendment would reduce improper payments and increase improper 
payment recoveries by an estimated $314 million over five years and 
$855 million over ten years.
    Allow States to Permit Collection Agencies to Retain a Percentage 
of Fraud Improper Payments and Delinquent Employer Taxes Recovered. 
Several states have explored using private collection agencies to 
collect certain improper payments or delinquent employer taxes. One of 
the problems states have encountered is finding a way to pay the 
private agency's costs of collection, which can be up to 25% of the 
amount collected. Federal law would be amended to permit up to 25% of 
any amount collected by the collection agency on fraud improper 
payments or delinquent taxes to be retained by that agency. This would 
be permitted only when the State UI agency has (1) made its own 
collection efforts and (2) declared the amount uncollectible. Thus, the 
proposal only applies to hard-to-collect debt that would not otherwise 
be collected.
    This amendment would increase recoveries of improper payments and 
delinquent taxes by an estimated $126 million over five years and $341 
million over ten years.
    In addition, our budget includes legislative proposals that would 
support the Department's integrity activities by providing states with 
new tools to more effectively prevent, identify, and recover improper 
payments and delinquent taxes.
    Prohibit States from Non-Charging Employers When Improper Payments 
Occur Due to Employer Fault. Our budget proposal also includes an 
amendment that would reduce one of the most common reasons for improper 
payment--an erroneous initial determination of eligibility--by 
providing employers with an additional incentive to respond to state 
requests for separation information.
    Employers sometimes fail to respond or provide incomplete or late 
responses to requests for information related to reasons their former 
employees were separated from employment. When this happens, payments 
may be issued based on the beneficiary's statement and ``charged'' to 
the employer's experience rating account, which may later cause his/her 
tax rate to increase. The employer may appeal after benefits have been 
paid and provide information at an appeal hearing that results in 
benefits being denied retroactively. The benefits already paid are 
established as improper payments, and in many states, the employer's 
account is relieved of those benefit charges. If the employer had 
responded fully and timely, the improper payment would have been 
avoided as well as the administrative costs connected with appeals and 
establishment and recovery of improper payments. States tell us they 
believe that some employers are not as conscientious as they should be 
in meeting deadlines for providing information about reasons for 
separation, and routinely file appeals at which information is provided 
that results in their being relieved of charges for benefits already 
paid.
    To provide an incentive for more timely and complete responses, 
Federal law would be amended to prohibit relief from charging when the 
employer or its agent is at fault, even if the improper payment is 
eventually recovered. The prohibition would only apply if the improper 
payment was due to the failure of the employer to provide timely or 
accurate information and if the employer had established a pattern of 
failing to respond on a timely basis or adequately to such requests.
    This amendment would reduce improper payments by an estimated $84 
million over five years and $233 million over ten years.
    Require Employers to Report ``Start Work Date'' to the State 
Directory of New Hires. The SUTA Dumping Prevention Act granted state 
UI agencies access to the National Directory of New Hires, which 
allowed states access to a wider universe of hires, including those by 
Federal agencies and multi-state employers who may report all new hires 
to a single state. Access to these data has proved to be extremely 
valuable. States matching UI payment files with the national directory 
have seen a significant increase in the number of improper payments 
identified compared to the number identified using their own state new 
hire directories. As you may know, individuals who are working and 
receiving UI benefits concurrently are the single largest cause of 
improper UI payments.
    However, these data could be even more effective for UI payment 
integrity if all employers report the date when an individual started 
work. When the start work date is not provided to the directory, states 
must contact employers to get this information--a time consuming and 
costly process. In some cases, investigations may not be pursued 
because of the lack of the start date in the directory. The 
Department's OIG has recommended amendments to Federal law to require 
employers to report a new hire's first day of earnings.
    For this reason, we propose to amend Federal law to require that 
the date the individual starts work be reported by all employers to the 
applicable state directories of new hires, which in turn will report 
this information to the National Directory of New Hires. This amendment 
would reduce improper payments and increase improper payment recoveries 
by an estimated $60 million over five years and $167 million over ten 
years.
    Authorize the U.S. Department of the Treasury to Intercept Federal 
Income Tax Refunds for Certain UI Purposes. The Administration's FY 
2005 and FY 2006 budgets included legislative proposals authorizing the 
U.S. Department of the Treasury to recover improper payments of UI 
benefits through offset from an individual's Federal income tax refunds 
via the Treasury Offset Program (TOP)--a government-wide debt matching 
and payment offset system that matches delinquent debts owed to various 
government agencies to Federal income tax refunds. This year's proposal 
is expanded to also authorize the collection of certain unpaid employer 
taxes using TOP.
    Both the National Governor's Association and the National 
Association of State Workforce Agencies passed resolutions encouraging 
the use of the TOP system for recovering these debts.
    This amendment would increase recoveries of benefit improper 
payments and delinquent taxes by an estimated $1.677 billion over five 
years and $3.55 billion over ten years, thereby contributing to state 
UI trust fund solvency and lower employer taxes.
    Together, these seven legislative proposals would reduce improper 
payments and increase improper payment recoveries and delinquent tax 
collections by an estimated $2.360 billion over 5 years and $5.401 
billion over 10 years. We are pleased that the FY 2007 Budget 
Resolution passed by the Senate and the Budget Resolution passed by the 
House Budget Committee both include our UI integrity proposal and are 
hopeful Congress will enact this legislation before the 109th Congress 
adjourns.
    The FY 2007 budget also includes a legislative proposal that will 
give states the opportunity to demonstrate innovative initiatives to 
better serve the 21st century economy and workforce. The UI program was 
designed over 70 years ago when our economy and workforce were quite 
different than they are today. While the program has served our 
nation's workers and economy well, we should be open to exploring 
innovations that could improve its performance in the future.
    Permit States to Request Waivers of Certain Federal Requirements. 
Certain requirements of Federal law may limit states' flexibility in 
establishing new ways to help beneficiaries become reemployed quickly 
or undertake other innovations to improve the administration of the UI 
program. This new proposal would authorize the Secretary of Labor to 
waive certain Federal requirements at states' request to permit them to 
run demonstration projects that would accelerate the reemployment of 
claimants or improve program administration. It is important to note 
that the Department could not grant a waiver if it would limit the 
state's ability to promptly determine and pay benefits to eligible 
workers or deny due process of the law. The demonstration would also 
have to be cost neutral with respect to the effect on the state 
unemployment fund. The proposal would permit states to experiment with 
program design in ways that may benefit unemployed workers and provide 
important experience and information for the federal-state UI system. 
We would welcome the opportunity to work with you on demonstrations 
that spur innovation and flexibility in the UI program.

Appropriations Requests
    The legislative proposals I just described would give states access 
to additional funds in the long term. However, following enactment at 
the Federal level, state legislation will be required before certain 
proposals related to new resources can be implemented. Thus, there 
would be some delay before theses funds would be available. The 
Department's request for FY 2007 appropriations includes increased 
funding for state UI operations to reduce improper payments and speed 
the reemployment of UI beneficiaries. This modest increase of $40 
million would give states additional resources right away, in FY 2007, 
to expand certain improper payment reduction efforts.
    Each of the increases proposed for FY 2007 would more than pay for 
itself in reduced benefit payment outlays from state unemployment 
funds. I hope that you will communicate your support for the 
initiatives described below to the Committee on Appropriations.
    Combat Identity Theft. Also in support of UI payment integrity, the 
FY 2007 budget requests an appropriation of $10 million to prevent and 
detect fraudulent UI claims filed using personal information stolen 
from unsuspecting workers. Most UI claims are now filed by telephone or 
the Internet, making the UI program convenient for unemployed workers 
to access and more efficient to administer. However, telephone and 
electronic access create new opportunities for schemes to obtain 
benefits fraudulently. The Department's OIG documented identity theft 
schemes in the UI program as a top management challenge. At the core of 
the OIG's concerns is that identity theft is now conducted by 
``nontraditional organized crime groups'' that result in more 
sophisticated fraud schemes than previously seen within the UI program. 
The OIG reported that two schemes, one involving four states, were 
responsible for over $11 million lost to the unemployment trust fund. 
Based on available data, we estimate that the nationwide incidence of 
identity theft improper payments is approximately $313 million a year 
out of benefit outlays totaling $32 billion a year.
    The $10 million request for FY 2007 would be used to deploy a suite 
of safety checks that include automated address verifications, 
electronic screens to detect ``at risk'' claims, staff training to 
detect the warning signs that are indicative of fraud, increased 
investigative staffing, and enhanced employer outreach efforts. The 
requested funds for identity theft prevention and detection would 
enable states to staff positions to promptly examine and reconcile 
discrepancies in individuals' personal identifiers before first 
payments are made. The proposed safeguards would more than pay for 
themselves, as these activities are expected to prevent an estimated 
$77 million in improper payments. We think this is a good investment of 
scarce taxpayer resources.
    Ensuring Continued Eligibility and Promoting Reemployment. Another 
key element to improving UI payment integrity is ensuring that UI 
beneficiaries meet requirements for continued eligibility. In general, 
beneficiaries must be able to work, be available to work, and actively 
seek work to remain eligible. Facilitating reemployment of UI 
beneficiaries is also a priority for the UI program. The best way to 
help UI beneficiaries is to help them find good jobs quickly. We have 
developed an initiative that supports both of these objectives.
    Last year, the Department provided funds to 20 states and the 
District of Columbia to provide Reemployment and Eligibility 
Assessments, or REAs, to UI beneficiaries. A number of independent 
studies found that attention to eligibility and reemployment service 
needs assessments resulted in relatively shorter claims duration for 
beneficiaries by speeding reemployment and reducing improper payments. 
The REAs strengthen the integrity of the UI program by assuring 
eligibility requirements are met and offering personalized assistance 
with work search plans and other services through One-Stop Career 
Centers. In the FY 2007 budget, we request an appropriation of $30 
million to expand the REA initiative to additional states for reviewing 
beneficiary eligibility and providing job search assistance in person. 
We estimate that this $30 million expansion of current REA efforts 
would reap as much as $151 million in savings to state unemployment 
funds.

Conclusion
    Thank you for the opportunity to present initiatives that we 
believe will improve the benefit payment and tax integrity of our 
nation's UI program and promote innovations that can make it more 
responsive to the demands of our 21st century economy and workforce. We 
look forward to working with the Subcommittee on these issues. I will 
be glad to respond to any questions you may have.

                                 

    Chairman HERGER. Thank you, Mr. Bishop. The gentleman from 
Louisiana, Mr. McCrery, to inquire.
    Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Bishop, I noticed 
in the Administration's budget proposal that you propose to 
extend the 0.2 percent FUTA surtax. As you know, that was 
created a number of years ago as a temporary surtax. Why does 
the Administration think it is necessary to continue that 
temporary surtax?
    Mr. BISHOP. Well, as you know, we looked at that surtax a 
few years back in terms of reform----
    Mr. MCCRERY. Right.
    Mr. BISHOP. --and I think that we would continue to want to 
tie that to reform efforts. At this point, the Office of 
Management and Budget made a decision that they wanted to 
recommend to Congress to continue that surtax in order to 
assure that there were moneys in the Federal unemployment trust 
fund to conduct the kinds of activities we need to do.
    Mr. MCCRERY. Well, what is the balance on the trust fund 
now?
    Mr. BISHOP. Do you know the latest balance? Thirty billion? 
I will have to get that.
    Mr. MCCRERY. It is about $30 billion, isn't it?
    Mr. BISHOP. Thirty billion roughly, I believe. Yes.
    Mr. MCCRERY. How much do we spend in a typical year from 
the trust fund?
    Mr. BISHOP. Well, our appropriation for State 
administrative activities is roughly $2.7 billion to $2.8 
billion. Then there obviously are loans that some States have. 
We don't have many States that have loans at this time. As you 
know, when we run into recessionary times, which we did about 4 
years ago, often the trust fund can go down quite a bit, and 
with redact distributions and other things. We do believe in 
having a healthy trust fund level. But again, you know, it is a 
really a balancing act that Congress and the Administration 
have to discuss, and we can continue to discuss that with you 
if you like.
    Mr. MCCRERY. I hope we do. It sounds to me, Mr. Chairman, 
like the Administration is really holding on to that surtax as 
some sugar to include in a future reform proposal, which is 
fine. But in the past few years, actually, the Administration 
has had a proposal for reform, which basically dealt with 
moving to the States much of the responsibility for collection 
and distribution of administrative taxes and costs. What has 
happened to those proposals? Are you looking at polishing those 
and bringing them back to us? Or what is the status?
    Mr. BISHOP. Well, again, we would be more than willing to 
talk to Congress at any time around administrative funding 
reform. We have not specifically proposed that in the FY2007 
budget. Instead, we have proposed the UI waiver proposal that 
we believe would give States--while they wouldn't, under our 
waiver proposal, specifically be able to do administrative 
funding reform, they would be able to ask for waivers that 
might help speed the reemployment of claimants or other 
administrative efficiencies they might be able to find in their 
laws. We have felt that through waiver authority, it may 
demonstrate that States can operate these programs in different 
ways that better connect to the 21st century rather than the 
20th century when the law was originally created back in the 
1930s. While we don't have a specific proposal for 
administrative funding reform, if Congress would like to engage 
in that discussion, we would be more than willing to do so. But 
at this point, we have proposed the UI waiver authority so we 
can at least get the ball rolling and start showing that, 
indeed, States probably can make more sense of the program as 
it is currently constituted.
    Mr. MCCRERY. Okay. Well, thanks. We look forward to working 
with you to reform the system, and I appreciate your somewhat 
frank answer to the question. I yield back, Mr. Chairman.
    Chairman HERGER. I thank the gentleman. The gentleman from 
Washington, Mr. McDermott, to inquire.
    Mr. MCDERMOTT. Mr. Bishop, witnesses on the next panel will 
testify that Federal funding for the administration of UI has 
failed to keep pace with inflation. Do you agree with that?
    Mr. BISHOP. I agree that we are in a tight budget cycle and 
that often there are many competing priorities.
    Mr. MCDERMOTT. Do you agree that they have failed to keep 
up with inflation?
    Mr. BISHOP. I don't have evidence of that.
    Mr. MCDERMOTT. You don't have any evidence of that. You 
disagree with that?
    Mr. BISHOP. I don't have--I don't have evidence. I 
disagree----
    Mr. MCDERMOTT. We have a fundamental disagreement about 
whether----
    Mr. BISHOP. The States get adequate funding in order to 
operate their State UI programs currently.
    Mr. MCDERMOTT. By your definition. You say it is a 
statement you are making. They get adequate money?
    Mr. BISHOP. They are all able to run their UI systems with 
the moneys they receive currently.
    Mr. MCDERMOTT. But is it possible, if you are not keeping 
up with inflation and don't have enough people and whatever, 
that you then let some things slide through because you just 
don't have enough people to look at the data?
    Mr. BISHOP. Well, it is just like any program. When you are 
managing programs at the Federal, State, or local level, any 
programs, you have competing priorities, and you have to take 
the moneys you have and deal with the competing priorities you 
have. Many of the competing priorities in the program, 
obviously, are benefit timeliness, payment accuracy, 
overpayments, and the like. They have to take the 
administrative moneys they receive and meet those competing 
priorities.
    Mr. MCDERMOTT. Do the best they can with it.
    Mr. BISHOP. Sure.
    Mr. MCDERMOTT. That is okay. I understand that. If there is 
a problem, then the next question I have is I see your proposal 
to seize the Federal tax refunds from individuals who have 
received overpayments.
    Mr. BISHOP. Yes.
    Mr. MCDERMOTT. Does it make any distinction between whose 
fault it is?
    Mr. BISHOP. It does. Yes, it does. There are actually a 
number of different kinds of overpayments, and there are some 
overpayments that are not the fault of the individual. 
Typically, the way it operates is when overpayments are not the 
fault of the individual, then the States do not establish 
overpayment recoveries in those cases. The only overpayments 
that would go to the Internal Revenue Service (IRS) are those 
that are at the fault of the claimant that have been 
established by the State, due process is provided to the 
claimant, and then that goes to the IRS for that collection.
    Mr. MCDERMOTT. You are not going to take innocent mistakes?
    Mr. BISHOP. No, we would not. Our proposal provides for due 
process----
    Mr. MCDERMOTT. We haven't seen the legislative language. 
That is why I am saying----
    Mr. BISHOP. Yes.
    Mr. MCDERMOTT. You know, I am operating in the dark here as 
to what you really want to do, and I get worried when I am 
operating in the dark with you guys.
    Mr. BISHOP. Well, we apologize for that. We have just 
finished up our legislative language, and you will have it 
today.
    Mr. MCDERMOTT. Your statement is that it will not be 
applied to somebody where there is an innocent mistake?
    Mr. BISHOP. That is correct.
    Mr. MCDERMOTT. Okay. Now if the Administration is 
interested in helping the UI recipients, it seems to me it is 
questionable why you would allow annual funding for the 
employment-related services to decline by $1.4 billion since 
2002. What is your justification for cutting the money in a 
program which seems to be working? I mean, unemployment is down 
and everything. Why would you go in and cut the money?
    Mr. BISHOP. Which? I am sorry. I am not sure what you are 
referencing when you say we cut $1.4 billion.
    Mr. MCDERMOTT. In the cuts in the WIA and the ES Program, 
CRS says you cut $1.4 billion from 2002.
    Mr. BISHOP. Well, first of all, the Employment Service 
Program has gone down. There was a cut last year of roughly $60 
million. Thirty million dollars in the basic employment service 
and then the elimination of the reemployment service grants. 
Let me just walk you through----
    Mr. MCDERMOTT. But $60 million----
    Mr. BISHOP. Sixty million in the ES.
    Mr. MCDERMOTT. --is not $1.4 billion.
    Mr. BISHOP. Well, I would have to see where CRS is coming 
up with the $1.4 billion target. They may be including our 
proposed 2007 budget for the WIA because I am not sure where 
$1.4 billion would be coming from. But let me just quickly 
explain what the situation is. Right now, essentially, I hate 
to admit, but in this country we fund two workforce investment 
systems. We fund a State-based employment service system and a 
locally based WIA system. The labor exchange services 
authorized under the Wagner-Peyser Act (P.L. 73-30) for the ES 
are the exact same services that are authorized by the WIA, and 
they are called ``core services.'' We essentially are funding 
duplicative and inefficient administrative bureaucracies in the 
States and local communities. In fact, we are only training 
200,000 people with $4 billion in this country right now. Given 
the public policy priority we have as a result of our need to 
be competitive in a global economy, where we need to give 
people better access to post secondary training activities and 
we are only graduating 200,000 in a program with $4 billion, we 
think that we can do a lot better. We have proposed the 
consolidation of these programs into one. We can still, even 
with the President's FY2007 budget request for WIA, more than 
triple the number of workers trained because so much of the 
moneys are going to administrative overhead and bureaucracy and 
competing bureaucracies out there.
    Mr. MCDERMOTT. It is your testimony that there will be no 
reduction in services by taking that money out and making one 
program out of it?
    Mr. BISHOP. That is my testimony because right now----
    Mr. MCDERMOTT. That legislative language is before the 
Congress?
    Mr. BISHOP. Yes, it is. Right now, out of that $4 billion, 
as States report to us, about $1.2 billion to $1.5 billion of 
that goes to administrative infrastructure. We are only 
training, exiting 200,000 people in training right now under 
the WIA. Again, the services authorized under the Wagner-Peyser 
Act and the services authorized under the WIA are the exact 
same services. You have got State-based ES, locally based WIA 
services. The One-Stop Career Centers you reference? I can show 
you One-stop Career Centers all over the country where you have 
got a One-Stop in one community and an employment service 
office in the exact same community competing for business. Even 
where they have brought them together in the same building, I 
can show you buildings where you go to one side, and it is the 
employment service. You go to the other side, it is the WIA. 
When you ask them who goes where, you get this sort of mumbled 
jumbled, ``Well, if you are this guy or that guy or that,'' and 
you can't even explain it. We are not doing any favors to 
workers in this country by continuing to operate the programs 
as we are. They are inefficient. They are administratively 
burdensome. There is lots of overhead. We can do a lot better, 
and that is what we have proposed.
    Mr. MCDERMOTT. Well, you are making a heavy charge, and we 
will have some people here from the States, and we will ask 
them about it. Thank you.
    Mr. BISHOP. Sure.
    Chairman HERGER. I thank the gentleman. The gentleman from 
Colorado, Mr. Beauprez, to inquire.
    Mr. BEAUPREZ. Thank you, Mr. Chairman. Thank you, Mr. 
Bishop, for being with us today. I applaud your efforts to try 
to make the program better. One of the places that I am sure 
concerns you, I take it, from your testimony is the overpayment 
issue. Nine percent of total benefits paid out is, I think, 
excessive by almost anybody's definition. It would seem to me 
that technology today probably offers some hope for improvement 
in that overpayment problem, $3 billion. Tell me, where is the 
hope? How can we get our arms around this, I hope, quickly?
    Mr. BISHOP. Well, first, technology has been wonderful just 
in its opportunity to allow people to apply for UI. Most 
people, often we get asked, ``Where are the unemployment 
offices?'' There really aren't any anymore. Because of the 
Internet and telephone technology and other technologies, 
people now can apply in a much more easier, customer-service 
focused fashion. Where technology has helped us on the 
overpayment side are with things like better--many States now 
have agreements with the Social Security Administration, where 
we are using technology to cross match Social Security numbers. 
So that if somebody falsely grabbed a Social Security number 
and applied for UI benefits, we can start to find out now that 
that is a fraudulently obtained Social Security number. That is 
one major example. Also, the access to not only State Directory 
of New Hires, but Congress gave the workforce agencies access 
to the NDNH to assure that one of the biggest reasons for 
overpayments are people who go back to work, but then maybe 
collect an extra week or two, even though they have gone back 
to work. Well, now we have access to the NDNH, the States do. 
As a result of that, the ability to make that technological 
connection, we know when people are going back to work, and 
then we can set up an overpayment collection if we need to do 
so in those kinds of cases. Those are two big examples of how 
we----
    Mr. BEAUPREZ. We have got a legitimate--well, not 
legitimate. We have got an overpayment problem to people who at 
least are legitimately supposed to here and working, but we 
have also got a payment problem to people who aren't even 
supposed to be legally working here?
    Mr. BISHOP. No, no, no. There are reasons why--there are 
particular reasons whey there are overpayments. Probably the 
largest reason for an overpayment that is the fault of the 
claimant is the claimant going back to work, but yet continuing 
to make a claim even though that individual has gone back to 
work.
    Mr. BEAUPREZ. I understand that.
    Mr. BISHOP. If you are an undocumented worker or illegal 
immigrant, whatever you want to call it----
    Mr. BEAUPREZ. Illegal.
    Mr. BISHOP. --you are not allowed to work in the country. 
Therefore, you are not allowed to collect UI. However, there 
are cases, whether individuals here illegally or legally, where 
maybe they fraudulently obtain a Social Security number.
    Mr. BEAUPREZ. Right.
    Mr. BISHOP. They need that Social Security number in order 
to apply for UI. We now are in the process of connecting all 
States to be able to cross match with the Social Security 
Administration to assure that Social Security numbers are not 
being fraudulently obtained and used for UI purposes. We 
started a pilot in two States. That was resoundingly 
successful. Now we are in the process of rolling that out to 
every State.
    Mr. BEAUPREZ. Let me ask you then, one of the biggest 
questions I get asked by employers who would like to comply 
with the law that says you have to hire only legal workers is 
that they don't have access to a good system to verify that 
their Social Security numbers they are being given are 
accurate. Will that possibility exist in the very near future?
    Mr. BISHOP. Congressman, I can't answer that question. That 
is not within the realm of my discussion here on UI. That may 
be Homeland Security or another agency could help with that or 
another part of DOL. But I just don't have information on 
whether that is available or not.
    Mr. BEAUPREZ. Well, let me stay on point then. We have got 
an overpayment problem. Do we also have a problem of some 
percentage of absolutely false, erroneous payments?
    Mr. BISHOP. Yes.
    Mr. BEAUPREZ. Do we know what that number is?
    Mr. BISHOP. We do. Like I said, let me give you kind of a 
quick breakdown, sort of a three broad category breakdown, the 
way we do it. We have what are called nonfraud recoverable 
overpayments, which are overpayments in the absence of fraud or 
abuse, but they are recoverable. That is about $1.4 billion. 
Then we have what are called the nonfraud not recoverable, 
where there was an absence of fraud or abuse, and the State 
does not choose to recover it. This gets to what Congressman 
McDermott was asking. Those are cases where an employer may 
have overstated quarterly wages, and so the recipient received 
more than he or she should have, and it wasn't their fault. 
Therefore, the State typically won't collect those back. That 
is about $722 million. Then we do have fraudulent overpayments, 
and that is about $811 million last year. That is kind of the 
three broad. Clearly, the first and third are the ones we 
really want to go after.
    Mr. BEAUPREZ. Aggregated together, about $3 billion?
    Mr. BISHOP. About $3 billion. That is correct.
    Mr. BEAUPREZ. Thank you. I yield back, Mr. Chairman.
    Chairman HERGER. Thank you. The gentleman from California, 
Mr. Becerra, to inquire.
    Mr. BECERRA. Thank you, Mr. Chairman. Thank you, Mr. 
Bishop, for being here with us. Let me ask a couple of 
questions going back to a point that was raised by the 
gentleman from Washington, Mr. McDermott, on the tax refund 
offset that the Administration is proposing. If you grant the 
authority to seize some of these refunds that individuals 
receive for taxes paid for the purpose of collecting 
overpayments in unemployment that was given to the individuals, 
did I hear you say to Mr. McDermott that it would not include 
the seizing of refunds from those individuals where the 
overpayment that the individual received was as a result of 
innocent error?
    Mr. BISHOP. That is correct. In other words, the reason is, 
Congressman, because the State in those situations would not 
set an overpayment recovery in the first place. In other words, 
if, like I mentioned in my second piece here, if it was due to, 
say, the employer had overstated the quarterly wages and so, 
therefore, the recipient received more than he or she should 
have, the State won't set up an overpayment recovery in that 
case. Therefore, there would be nothing to then send to the 
IRS.
    Mr. BECERRA. Tell me if there are any examples that you can 
think of where an individual would have received an overpayment 
in UI that was due not to the individual's intention to defraud 
the Government, but where the refund, the tax refund that that 
individual may receive would still be subject to seizure? Is 
there any example?
    Mr. BISHOP. I can't think of an example where that would 
happen.
    Mr. BECERRA. Okay. So long as the individual who received 
the UI overpayment did not receive it as a result of any 
intentional fraud, that individual would not be subject to 
having his or her tax refund seized for the purpose of 
collecting the overpayment?
    Mr. BISHOP. That is correct. Then let me just again add 
that when an overpayment is established by the State, those 
recipients have due process rights. If they feel that that 
overpayment has been set inappropriately or incorrectly or 
that, they have the ability to appeal and go through a 
continual appeals process. That process would have to play 
itself out before any referral to the IRS would occur.
    Mr. BECERRA. Thank you for that response. With regard to 
enlisting debt collection agencies to recover overpayments and 
delinquent unemployment compensation (UC) taxes, do you have a 
sense of how much we would pay someone to collect moneys owed 
to the Government?
    Mr. BISHOP. I don't have a particular figure in my head. I 
think it would be similar to how other entities, Government 
sometimes allows private collection agencies to collect on 
behalf of other kinds of delinquent----
    Mr. BECERRA. I would be very interested, Mr. Chairman, to 
the point, to the degree that the agencies and the Federal 
department here could give us a response. I would be very 
interested to know where they head in this proposal. Because I 
have seen some proposals come forward from the Administration, 
where we would be paying debt collectors something in the order 
of 25 percent to over 50 percent of the amount that is due to 
the Government as a duty for that debt collection when we know 
that the Federal Government, through its own enforcement 
agencies, could do it for a lot less money. It is just a matter 
of making sure you have a force in place within the Government 
to do so. I would be very interested to see what we come up 
with. Because I don't want this to be soft debt collectors who 
go out there and make money on the taxpayers' dime simply 
because the Government made an error in not collecting or in 
overpaying. I would be very interested in getting that 
information.
    Mr. BISHOP. Okay.
    Mr. BECERRA. Thank you. Final question would be a little 
bit off the subject on the issue of the minimum wage. We have 
not seen an increase in the minimum wage in close to 10 years 
now. At this stage, at $5.15 an hour, the minimum wage is at 
its lowest point ever. Even if you make the minimum wage, for a 
full year's work--and over 2 million Americans today are 
working full time at the minimum wage--you are earning less, 
about two-thirds of what we consider to be poverty. You can't 
even meet the threshold of what we consider to be poverty 
working at the minimum wage. While there are 2 million people 
who receive at the full-time basis the minimum wage, you have 
another 10 million Americans who earn something between $5.15 
an hour, the minimum wage, to about $7 an hour. On top of that, 
if you include folks who make between $7 and $8 an hour, which 
is still a very, very modest wage, you are talking about 
another 8 million Americans who would fall into that category. 
Have there been any discussions within the DOL with the 
Secretary, Secretary Chao, about the need to try to increase 
the working wage for many millions of Americans who are right 
now earning the minimum wage at $5.15 an hour?
    Mr. BISHOP. We have a lot of conversations about helping 
increase wages, but let me tell you the context of the 
conversations we have. The context of the conversations we have 
are about the data that shows the gap that is emerging in our 
country between those that have post secondary educational 
attainment. That is not just 4-year degrees. It may be 2-year 
degrees, industry-recognized certifications, licenses, and so 
forth, apprenticeship programs. Those who do and those who do 
not. The concern we have is that if you look at that data, we 
have to, as a Government, our national policy has to be about 
trying to provide as much access to people as possible through 
various successful post secondary programs, specifically 
through community colleges often. That is the conversation we 
have. That is how people's wages are going to rise. Their wages 
are going to rise through the ability to connect to post 
secondary and to go into very well-paying jobs, whether they be 
skilled jobs like in skilled trades or whether it be 
professional jobs or the like. We have many, many individuals 
who, with better access to post secondary education and 
training, could get higher wages. That is the kind of 
conversation we have been having.
    Chairman HERGER. The gentleman's time has expired.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Chairman HERGER. The gentlelady from Pennsylvania, Ms. 
Hart, to inquire.
    Ms. HART. Thank you, Mr. Chairman. I want to touch on that 
issue before I jump into another question. I thought that was a 
very appropriate answer. A lot of the States have already 
addressed the minimum wage issue themselves. Notably, 
Washington State has a minimum wage of $7.63 an hour. It is 
interesting, if you look at unemployment rates and some of the 
States that actually have raised the minimum wage, and I don't 
think the news is good, depending on how high they go, if they 
are going over what the market might want to demand. But I 
think our goal is to certainly find more opportunities for 
people to get educated so that they will obviously earning more 
money. I wanted to make that point. I think it is important for 
the UI Program to provide for opportunities for people to 
become reemployed as quickly as possible. I mean, obviously, 
there are time limits and other things placed on the program on 
purpose because the goal is not for people to be unemployed for 
as long as they can be under the program. The goal is for them 
to have some sustenance while they are looking and until they 
find another job. I noticed in your testimony a proposal to 
allow for waivers for certain requirements in the unemployment 
program, different rules. Can you give us some examples----
    Mr. BISHOP. Sure.
    Ms. HART. --of unemployment waiver programs that some of 
the States could choose to operate if Congress actually makes 
this authority available to the States? I am interested in that 
and some of the things that you may be looking to learn from 
the types of waivers that we would grant.
    Mr. BISHOP. Yes, thank you, Congresswoman. First, our 
proposal for waivers would be in two broad areas. One, it would 
be waivers that would help facilitate more rapid reemployment, 
or the second would be methods of administration and more 
efficient ways to administer the program. Those are kind of the 
two broad areas. Frankly, our hope would be, just like when 
this kind of authority has been granted historically to States, 
that States would come up with things that we haven't even 
conceived of at this point. We have thought of particular 
instances where, through this waiver authority, there might be 
ways--for instance, there might be accounts that people would 
like to be able to, States may want to work with their folks to 
establish. I mean, part of the problem we have now is we have a 
black or white system. Either you are unemployed and you get a 
check, or you are employed and you don't. We can conceive of 
ideas that States may come up with sort of as the laboratories 
of democracy, which we like to say, whereby they may have ways 
to help people transition more easily from that sort of black 
or white kind of situation. Where they may want to set up 
accounts to help people use some of the money to get retrained 
while they are working or that maybe in certain cases they may 
want to do wage supplementation or other kinds of ideas. We are 
pretty much open to anything. We think that those are kind of 
the two broad areas. That within those two broad areas, there 
are things that the States would be creative about. I might add 
on the UI waiver authority that those waivers would not only 
come in from the Governor, but they would have to be approved 
by State legislature. There is that check there. It would be 
approved by the Secretary, and that they would be time-limited 
demonstration projects and that they would have to be cost 
neutral, and the States would have to provide a final 
evaluation or report on the results of the demonstration as 
well. Our hope is to use this to learn, to be able to come to 
Congress and make suggestions on improvements in the program 
because, as has been stated earlier, it was created in 1935, 
and we are now in 2006. The economies of those two eras are 
very, very different.
    Ms. HART. Thanks. Further on that, I know one of the goals 
that in years past was addressed very well was the change in 
welfare and the system.
    Mr. BISHOP. Yes.
    Ms. HART. Obviously, we saw it work really well and the 
States moving forward. Now we are looking at some changes in 
the medical liability system and how it has worked well in the 
State of California and how we really do need to implement that 
Nation wide. I think it is a great idea to give the States the 
freedom to do that for a lot of reasons. But obviously, they 
can see results more quickly. Certainly, it is a lot easier to 
get the support from the House and Senate here on the Federal 
level if we have seen some real positive results with the 
program. I think that is a great idea, and I am very 
supportive. Let us know what we can do to help that happen.
    Mr. BISHOP. Thank you. I appreciate that. Thank you.
    Ms. HART. I yield back, Mr. Chairman.
    Chairman HERGER. I thank the gentlelady. Mr. Bishop, the 
SUTA Dumping Prevention Act of 2004 requires States to 
strengthen their UC laws to better prevent SUTA dumping, which 
involves unemployment tax avoidance schemes by some employers. 
That act also requires Secretary Chao to submit a report to 
Congress by July 15th of this year, 2006, assessing State 
actions to comply with this law and recommending any additional 
congressional actions. First, how is the implementation of this 
law going? Second, when will we receive your official report?
    Mr. BISHOP. Well, I guess the easy answer is we will make 
sure we submit the official report by the date that Congress 
has mandated. I will turn to my staff behind me and remind them 
that they have got to make sure we get that report up here. But 
we think the SUTA dumping implementation has gone very, very 
well. We actually only have one State--unfortunately, we do 
still have one State outstanding that has not enacted their 
State SUTA dumping law. But all of the other States have 
complied. States have really begun the process of enforcing and 
looking after that. Right now, the States that piloted the SUTA 
dumping detection software found many cases of potential SUTA 
dumping. In Utah, they found 36 cases. Rhode Island, 21. In 
California, there was 419 cases of SUTA dumping. In Virginia, 
62. Now this pilot was before the full legislation was enacted 
by the Congress, but it gives you some idea of what we saw 
early on as a result of those States piloting it. We will 
continue to monitor that, and we will, again, make sure we get 
the report up to you in a timely manner.
    Chairman HERGER. Thank you. Could you tell us more about 
the outcomes in States that have started to match data in the 
NDNH with their State unemployment rolls? Are there savings 
that have already been found as a result of this?
    Mr. BISHOP. If I could, if I could follow up with you with 
the answers to those questions? It is still a bit early in 
terms of the access because the access to that national 
directory occurred through the SUTA dumping legislation. If I 
could, if I could forward you up some early results from that, 
we could do that as a follow-up.
    Chairman HERGER. That will be fine. Mr. Bishop, I want to 
thank you again for testifying.
    Mr. MCDERMOTT. Could I ask one clarifying question?
    Chairman HERGER. Quickly, yes.
    Mr. MCDERMOTT. We were presented with the text of this 
legislation just at the beginning of this hearing. I hadn't had 
a chance to look at it when I asked a previous question. I have 
looked at it now, and it authorizes the IRS to recap 
overpayments. But I don't see anything that says the States 
cannot seek overpayments and the IRS can't help them do that if 
the overpayment was not at the individual's fault. Now you 
state that the States won't go after people when it is not 
their fault. But the legislation does not state that. But it is 
your intention, what Mrs. Chao sent up here dated May 3, the 
intention of that is that the States cannot go against people 
if it is not their fault?
    Mr. BISHOP. That would be the intention. If the 
Subcommittee feels we need to work on language that makes that 
more clear, we would love to work with you on that.
    Mr. MCDERMOTT. I would hope you would look at section five.
    Mr. BISHOP. Okay.
    Mr. MCDERMOTT. Because that is the section where I looked 
for it, called ``Collection of Past Due,'' and I think that 
that is where you ought to work out some language so that it is 
clear.
    Mr. BISHOP. Okay. We will definitely do that.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    Chairman HERGER. You are welcome. Again, thank you very 
much, Mr. Bishop, for your testimony.
    Mr. BISHOP. Thank you, Mr. Chairman.
    Chairman HERGER. Would the next panel please have a seat at 
the table? On this panel, we will be hearing from Dr. Sigurd 
Nilsen, director of education, workforce, and income security 
issues at the GAO. Roosevelt Halley, president-elect of the 
National Association of State Workforce Agencies (NASWA). My 
Ranking Member, do you have a constituent of yours that you 
would like to introduce?
    Mr. MCDERMOTT. Mr. Chairman, I would like to introduce Mr. 
Devereux, who is executive director of the American Federation 
of State and County Municipal Employees (AFSCME) in Washington 
State and also I think vice president of the international. Is 
that correct?
    Mr. DEVEREUX. That is correct.
    Chairman HERGER. Thank you very much.
    Mr. MCDERMOTT. He represents the workers on the frontline, 
and so we look forward to hearing his thoughts today. Thank you 
for your courtesy.
    Chairman HERGER. You are welcome. Thank you. Good to have 
you with us.
    Mr. DEVEREUX. Thank you.
    Chairman HERGER. Dr. Wayne Brough, adjunct scholar at the 
American Institute for Full Employment. Howard Rosen, visiting 
fellow at the Institute for International Economics. Dr. Tim 
Kane, director of the Center for International Trade and 
Economics at the Heritage Foundation. Dr. Nilsen?

    STATEMENT OF SIGURD NILSEN, PH.D., DIRECTOR, EDUCATION, 
    WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Dr. NILSEN. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the Subcommittee, I am pleased to be here today to 
discuss the DOL's FY2007 budget request for the UI Program. I 
will focus on two areas. First, Labor's efforts to prevent 
improper benefit payments and, second, what is being done to 
help speed UI claimants' return to work. Regarding improper 
payments. Labor estimates that about $3.4 billion in UI 
overpayments occurred Nation wide in 2004, as you have heard 
already, including almost $2 billion that is attributable to UI 
claimants alone. These overpayments occur for a variety of 
reasons, including unreported or erroneously reported earnings 
in income, the most common cause, accounting for about 28 
percent of overpayments.
    In addition, some UI overpayments result from identity-
related violations. Labor estimates that approximately $313 
million in overpayments result from identity theft each year. 
Labor has introduced several initiatives to help States improve 
their ability to detect and prevent overpayments in the UI 
program. Most notably, Labor has initiated a pilot using the 
NDNH to identify and prevent overpayments by identifying UI 
claimants who may be working. In 2005, three States 
participated in the pilot. Five other States are now 
participating, and Labor says that by the end of this year, 
they will have 29 States participating in this program. Initial 
results show that the overpayment detections increased by 
between 40 percent and 114 percent as a result of the access to 
this directory of new hires. Labor has also funded States to 
exchange data with the Social Security Administration on a 
real-time basis, giving States the ability to verify UI 
claimants' identity and prevent most overpayments due to 
fraudulent or mistaken use of Social Security numbers.
    Labor's budget request includes $10 million to detect and 
prevent fraudulent UI benefit claims using personal information 
stolen from workers. Labor estimates that this could generate 
savings of at least $77 million. As we have heard, Labor has 
provided its legislative proposal, which appears to increase 
its focus on overpayments. The proposal will allow Treasury to 
intercept Federal income tax refunds to recover UI overpayments 
and allow States to use a small percentage of recovered 
overpayments to fund their Benefit Payment Control and program 
integrity activities. It was our understanding also that the 
proposal will contain provisions that will require States to 
charge employers a higher UI tax rate when claimants are 
overpaid, if it is determined that the overpayment was the 
employer's fault, such as when the employers fail to provide 
wage information to the State in a timely manner.
    Turning now to efforts to help speed UI claimants' return 
to work. We found that States make use of Federal UI program 
requirements to help connect claimants with reemployment 
services usually beginning at the time their initial claim is 
filed. States primarily target reemployment services to 
claimants identified through Federally required claimant 
profiling systems, a process that uses a statistical model to 
identify claimants who are most likely to exhaust their 
benefits before finding work. While claimants identified and 
referred to services through profiling can access the services 
available to all job seekers through the One-Stop system, 
participation in the services they are referred to is mandatory 
for profiled claimants. In 2005, Labor began awarding 
Reemployment and Eligibility Assessment Grants that focus on 
face-to-face eligibility interviews to ensure program 
compliance, coupled with referrals to reemployment services. 
For 2007, Labor has requested $30 million to continue this 
effort, and Labor estimates that this could be used to conduct 
interviews with about a half million claimants and save about 
$150 million by reducing the average duration of UI benefits.
    Despite efforts to link UI claimants to reemployment 
services, little data are available to gauge the extent to 
which these efforts are having the intended result. Few States 
go beyond the limited Federal reporting requirements to 
routinely track the extent to which UI claimants receive 
reemployment services. Fewer still monitor outcomes for UI 
claimants who receive these services. Labor has some 
initiatives that may begin to shed light on claimant outcomes, 
but these efforts may not go far enough. Labor has added a 
performance measure on the reemployment rate for their UI 
claimants. While Labor is evaluating the profiling process, it 
focuses exclusively on how well the models predict whether a 
claimant will exhaust UI benefits, not on whether the process 
results in shorter benefit durations or better employment 
outcomes for claimants. Finally, no additional funds have been 
requested in FY2007 specifically to conduct evaluations on 
profiling. Mr. Chairman, this completes my prepared statement. 
I would be happy to answer any questions you or Members of the 
Subcommittee may have.

    [The prepared statement of Dr. Nilsen follows:]

Statement of Sigurd Nilsen, Ph.D., Director, Education, Workforce, and 
     Income Security Issues, U.S. Government Accountability Office

    Mr. Chairman and Members of the Subcommittee:
    I am pleased to be here today to assist you in your deliberations 
on Unemployment Insurance (UI) program performance issues as they 
relate to the Department of Labor's (Labor) $2.7 billion fiscal year 
2007 budget request for the UI program. My testimony will focus 
primarily on the results of our past work in UI benefit overpayment and 
reemployment services. The UI program has been a key component in 
ensuring the financial security of America's workforce for over 70 
years. The UI program is a federal-state partnership designed to 
partially replace lost earnings of individuals who become unemployed 
through no fault of their own and, which in turn, helps to stabilize 
the economy in times of economic downturn. In fiscal year 2004, the UI 
program covered about 129 million wage and salary workers and paid 
about $41 billion in benefits to nearly 9 million workers who had lost 
their jobs. Labor and states have a shared responsibility to enhance UI 
program performance by ensuring that only eligible individuals receive 
benefits while on the UI rolls and to foster reemployment. However, 
Labor's Office of Inspector General (OIG) and others have found that 
numerous aspects of the UI program may be vulnerable to fraud and to 
improper payments to claimants, and, despite the size and scope of this 
program, there has been little information at the national level to 
fully assess states' efforts to foster reemployment.
    Today, I will draw upon results of recent reports we have completed 
that provide information on UI program performance issues. In 
particular, I will discuss in relation to Labor's budget request (1) 
Labor's efforts to identify, estimate, and prevent improper benefit 
payments, and (2) what is being done at the state and federal levels to 
help speed UI claimants' return to work. To address the first question, 
we drew upon two of our recent studies. In the first study, we reviewed 
Labor guidance, data, and reports and interviewed Labor officials and 
groups involved in unemployment insurance.\1\ In the second study, 
which reviewed states' efforts to estimate improper payments on state-
administered federal programs, including UI, Food Stamps, Medicaid, and 
other programs, we primarily conducted surveys of state officials, 
interviewed federal and state officials, and reviewed performance and 
accountability reports and our prior reports.\2\ To address the second 
question, we drew upon the results of another of our previous study, 
where we had conducted telephone interviews with UI and workforce 
development officials in 50 states; sent a follow-up questionnaire to 
gather information on the strategies states use to collect data on UI 
claimants who receive reemployment services; interviewed state and 
local program officials during site visits in Georgia, Maryland, 
Michigan, and Washington; and interviewed Labor officials and other 
experts in the area of UI and reemployment services.\3\
---------------------------------------------------------------------------
    \1\ GAO, Unemployment Insurance: Increased Focus on Program 
Integrity Could Reduce Billions in Overpayments, GAO-02-697 
(Washington, D.C.: July 12, 2002).
    \2\ GAO, Improper Payments: Federal and State Coordination Needed 
to Report National Improper Payment Estimates on Federal Programs, GAO-
06-347 (Washington, D.C.: Apr. 14, 2006).
    \3\ GAO, Unemployment Insurance: Better Data Needed to Assess 
Reemployment Services to Claimants, GAO-05-413 (Washington, D.C.: June 
24, 2005).
---------------------------------------------------------------------------
    In summary, Labor estimates that about $3.4 billion in UI benefits 
was overpaid nationwide in calendar year 2004, but is taking actions to 
help states improve their ability to detect and prevent overpayments. 
Labor attributes a majority of overpayments to improper actions taken 
by claimants, although states and employers can also contribute to 
overpayments. Labor has introduced a number of initiatives to help 
states improve their ability to detect and prevent overpayments, 
including new computer matches with federal databases, a new core 
performance measure intended to provide states with added incentives 
for detecting and preventing overpayments, and additional funding for 
states' overpayment detection efforts. Labor's budget request for 
fiscal year 2007 includes funding to continue some of these efforts. As 
annual overpayments reach the billions, it will be important for 
federal and state stakeholders to take the necessary action to address 
the overpayment issue. Avoiding improper payments may do more to 
enhance program performance in the long term than detecting and 
collecting overpayments after they have occurred. To help UI claimants 
return to work quickly, states most often make use of federal UI 
program requirements to connect claimants with available services at 
various points in their claims. In addition, states provide targeted 
reemployment services to particular groups of UI claimants. The federal 
requirement of claimant profiling is typically the primary mechanism 
for targeting reemployment services to specific claimants. However, 
despite states' efforts to design systems that link UI claimants to 
reemployment services, few data are available to gauge the extent to 
which their efforts are having the intended result. Labor's current and 
planned initiatives may help fill the information gap, but they fall 
short of providing a comprehensive understanding of services and 
outcomes for UI claimants.
Background
    The UI program was established by Title III of the Social Security 
Act in 1935 and is a key component in ensuring the financial security 
of America's workforce. The program serves two primary objectives: (1) 
to temporarily replace a portion of earnings for workers who become 
unemployed through no fault of their own and (2) to help stabilize the 
economy during recessions by providing an infusion of consumer dollars 
into the economy. UI is made up of 53 state-administered programs that 
are subject to broad federal guidelines and oversight. In fiscal year 
2004, these programs covered about 129 million wage and salary workers 
and paid benefits totaling $41.3 billion to about 8.8 million workers.
    Federal law provides minimum guidelines for state programs and 
authorizes grants to states for program administration. States design 
their own programs, within the guidelines of federal law, and determine 
key elements of these programs, including who is eligible to receive 
state UI benefits, how much they receive, and the amount of taxes that 
employers must pay to help provide these benefits.\4\ State 
unemployment tax revenues are held in trust by the federal government 
and are used by the states to pay for regular weekly UI benefits, which 
typically can be received for up to 26 weeks.
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    \4\ In accordance with federal law, all state UI systems are 
experience rated so that employers' contribution rates vary on the 
basis of their experience with unemployment. In practice, this 
typically means that an employer who lays off many workers that claim 
unemployment insurance benefits will pay more in taxes than an employer 
that lays off fewer workers.
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    To receive UI benefits, an unemployed worker must file a claim and 
satisfy the eligibility requirements of the state in which the worker's 
wages were paid. Generally, states require that workers must have a 
minimum amount of wages and employment over a defined base period, 
typically about a year before becoming unemployed, and have not already 
exhausted the maximum amount of benefits or benefit weeks to which they 
would be entitled because of other recent unemployment. In addition 
workers must have become unemployed for reasons other than quitting a 
job or being fired for work-related misconduct, and be able and 
available to work. In order to demonstrate that they are able to work 
and available for work and are still unemployed, claimants must submit 
a certification of continuing eligibility--by mail, telephone, or 
Internet, depending on the state--throughout the benefit period. This 
practice is usually done weekly or biweekly. States may continue to 
monitor claimant eligibility through an eligibility review program, in 
which certain claimants are periodically contacted to review their 
eligibility for benefits, work search activities, and reemployment 
needs.

UI Performance Measurement
    Labor has the responsibility under Title III of the Social Security 
Act for ensuring that states operate effective and efficient UI 
programs. Various provisions of federal law require that certain UI 
activities be performed promptly and accurately. Section 303(a)(1) of 
the Social Security Act requires, as a condition of a state's receiving 
UI administrative grants, ``such methods of administration . . . as are 
found by the Secretary of Labor to be reasonably calculated to insure 
full payment of unemployment compensation when due.'' Labor uses 
various administrative data to provide information on the functioning 
of all UI program activities. Labor divides the measures into two 
categories: core measures, which entail oversight on key performance 
areas representative of the UI program, and management information 
measures, which facilitate the analysis of performance and to assist in 
planning corrective activities when necessary.
    One of Labor's performance measurement efforts is the Benefit 
Accuracy Measurement (BAM) program, which is designed to determine the 
accuracy of paid and denied claims in the UI program. It does this by 
reconstructing the UI claims process from samples of weekly payments 
and denied claims using data verified by trained investigators. For 
claims that were overpaid, underpaid, or improperly denied, the BAM 
program determines the cause of and the party responsible for the 
error, the point in the UI claims process at which the error was 
detected, and actions taken by the agency and employers prior to the 
error. For erroneously paid claims, the BAM program determines the 
amount of benefits the claimants should have received, which becomes 
the basis for subsequent recovery efforts. BAM provides two rates of 
improper payments. The first, the Annual Report Overpayment Rate, 
includes estimates of nearly every divergence from what state law and 
policy dictate the payment should have been. The second rate, the 
Operational Overpayment Rate, includes only recoverable overpayments 
states are most likely to detect through ordinary overpayment detection 
and recovery procedures. Operational overpayments are the most likely 
to be detected and established for eventual recovery and return to the 
UI Trust Fund.

Reemployment Services
    Since UI was established, there have been two major changes in the 
nation's workforce development system that have directly affected 
states' UI programs. Specifically, in November 1993, Congress enacted 
legislation amending the Social Security Act to require that each state 
establish a Worker Profiling and Reemployment Services (WPRS) system 
and implement a process typically referred to as claimant profiling. 
The claimant profiling process uses a statistical model or 
characteristics screen to identify claimants who are likely to exhaust 
their UI benefits before finding work. Claimants identified through 
this process are then referred to reemployment services while they are 
still early in their claim. For profiled claimants, participation in 
designated reemployment services becomes an additional requirement for 
continuing eligibility for UI benefits. The second major change was the 
enactment of the Workforce Investment Act of 1998, which requires 
states and localities to bring together about 17 federally funded 
employment and training services into a single system--the one-stop 
system. State UI programs are mandatory partners in the one-stop 
system. Another mandatory partner is the federal Employment Service, 
established by the Wagner-Peyser Act in 1933 to link job seekers with 
job opportunities. The Employment Service (ES) has historically been 
collocated with state UI offices to facilitate UI claimants' access to 
federally funded labor exchanges, job search assistance, job referral, 
placement assistance, assessment, counseling, and testing.

Labor's 2007 Budget Request
    For UI, Labor's fiscal year 2007 budget includes a request for $2.7 
billion. This amount is about $101 million higher than the fiscal year 
2006 enacted level. This request, according to Labor's budget overview, 
funds projected workloads and includes several UI program increases. 
First, Labor is proposing a $30 million increase in fiscal year 2007 
for the amount available to states to conduct reemployment and 
eligibility reviews. Labor notes that the reviews--which entail in-
person interviews with claimants at one-stop centers--can reduce 
overpayments as well as speed reemployment. Second, Labor is proposing 
a $10 million UI program increase to prevent and detect fraudulent 
claims due to identify theft. Labor proposes to use the new funding for 
staff to investigate and reconcile potential identity theft identified 
through data cross-matching.
    More than $3.4 Billion in Overpayments Estimated in 2004, but Labor 
is Taking Some Actions to Enhance Program Integrity
    Labor estimates that about $3.4 billion in UI benefits was overpaid 
nationwide in calendar year 2004, but is taking actions to help states 
improve their ability to detect and prevent overpayments. According to 
Labor's Benefit Accuracy Measurement program, in 2004 (the most recent 
year for which we could obtain specific data) claimants were 
responsible for a majority of the overpayments. Claimants may fail to 
report their work as required, or may use Social Security numbers (SSN) 
that did not exist or that belonged to other individuals to 
fraudulently obtain UI benefits, resulting in overpayments. State 
agencies may also contribute to overpayments if they fail to properly 
record eligibility information. In addition, employers may contribute 
to UI overpayments if they fail to report required information to 
states in a timely manner. Labor has introduced a number of initiatives 
to help states improve their ability to detect and prevent 
overpayments, including new computer matches with federal databases, a 
new core performance measure intended to provide states with added 
incentives for detecting and preventing overpayments, and additional 
funding for states' overpayment detection efforts. Labor's budget 
request for fiscal year 2007 includes funding to continue some of these 
efforts.

The Majority of Overpayments Are Attributable to Claimants
    Of the $3.4 billion in overpayments identified nationwide by the 
BAM program in calendar year 2004,\5\ almost $2 billion (58 percent) 
was attributable to UI claimants alone, while state agency errors and 
employers were responsible for overpayments by others (see fig. 1). 
With respect to claimants, overpayments may occur because individuals 
work while receiving benefits, fail to register with employment 
services (as required in most states), fail to look for a new job, or 
misrepresent their identity. In calendar year 2004, the most common 
cause of overpayments was unreported or erroneously reported earnings 
and income, accounting for almost 28 percent of overpayments in that 
year. The second-leading cause of overpayments--constituting 21 percent 
of all overpayments--was payments to individuals who are not entitled 
to UI benefits because of the circumstances under which they became 
unemployed (separation issues). Other sources of overpayments were 
attributable to individuals who failed to look for work (16 percent) 
and individuals who did not register for employment services (10 
percent). Federal and state officials have reported that some types of 
overpayments are more difficult to detect than others. For example, in 
a prior report, some officials told us that it could be difficult for 
states to accurately determine, in a cost-effective manner, if a 
claimant was actively searching for work (an eligibility requirement in 
some states).
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    \5\ Of this amount, Labor officials told us that the states could 
have potentially detected and recovered $1.8 billion, or about 53 
percent of the total overpayments it estimated occurred, using current 
procedures.

    Figure 1: Responsibility for UI Overpayments (Calendar Year 2004)
    [GRAPHIC] [TIFF OMITTED] T1492A.001
    
    Note: Percentages do not add to 100 percent because of rounding.

    Other sources of overpayments include state agency errors and 
inaccurate or untimely information provided by employers. Labor's BAM 
program shows that state agency errors, such as failing to properly 
record important eligibility information such as wages, accounted for 
about 15 percent of all estimated overpayments in 2004. Employers 
accounted for about 6 percent of the total estimated overpayments in 
2004. Employers and their agents do not always comply in a timely 
manner with state requests for information needed to determine a 
claimant's eligibility for benefits. For example, one Labor OIG audit 
found that $17 million in overpayments occurred in four states because 
employers did not respond to the states' request for wage information. 
Our work suggests that employers may resist requests to fill out 
paperwork from states because they view the process as time-consuming 
and cumbersome. In addition, because employers are unlikely to 
experience an immediate increase in the UI taxes they pay to the state 
as a direct result of overpayments, they do not see the benefit in 
complying with states' requests for wage data in a timely manner.
    Our prior work and work by Labor's OIG also shows that some UI 
overpayments result from identity-related violations. For example, our 
prior work shows that in 2001, Labor identified about $1.4 million in 
UI overpayments resulting from Social Security violations.\6\ Labor 
determined these overpayments to be the result of fraud. More recently, 
in its fiscal year 2007 budget justification, Labor estimated that 
approximately $313 million in overpayments results from identity theft 
each year. Labor's OIG has documented identity theft schemes as a major 
management challenge. For example, in its semiannual report to 
Congress, the OIG reported on a case in which individuals used more 
than 200 stolen identities to file 222 UI claims and obtain more than 
$693,000 in UI benefits from February 2001 through February 2005.\7\
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    \6\ GAO, Unemployment Insurance: Increased Focus on Program 
Integrity Could Reduce Billions in Overpayments, GAO-02-697 
(Washington, D.C.: July 12, 2002).
    \7\ Department of Labor, Office of Inspector General, Semiannual 
Report to the Congress, April 1, 2005--September 30, 2005, Vol. 54.
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Labor is Taking Actions to Help States Detect and Prevent Overpayments
    Labor has introduced several initiatives to help states improve 
their ability to detect and prevent overpayments in the UI program. 
First, Labor has initiated a pilot using the National Directory of New 
Hires (NDNH) to further assist in identifying and preventing improper 
payments, including overpayments. The NDNH is a database, maintained by 
the Department of Health and Human Services' Office of Child Support 
Enforcement, that contains information on all newly hired employees, 
quarterly wage reports for all employees, and UI claims nationwide. The 
NDNH enhances states' ability to detect unreported work violations by 
UI claimants working in other states or for certain employers that 
operate in multiple states. In addition, the NDNH can help improve the 
accuracy of Labor's error estimates. Information from the NDNH cross-
match can be readily integrated into Labor's BAM program by cross-
matching the SSNs of the claimants against the NDNH. In fiscal year 
2005, three states (Texas, Utah, and Virginia) participated in the 
pilot. According to Labor, initial results of the pilot show that 
overpayment detections increased 114 percent in Texas, 41 percent in 
Utah, and 73 percent in Virginia. The Texas Workforce Commission also 
reported that using the national cross-match in combination with the 
existing statewide cross-match helped detect 50 percent more cases of 
potential fraud in one quarter than it would have detected otherwise. 
In addition, on the basis of its NDNH pilot results, Labor reported in 
its fiscal year 2005 performance and accountability report that a 
substantial amount of additional overpayments could be detected using 
the database. Labor reported that it is moving ahead with full 
implementation of the NDNH cross-match with 5 states (Connecticut, 
Texas, Utah, Virginia, and Washington), and expects 29 states to use 
the NDNH by the end of fiscal year 2006.
    In addition to its NDNH pilot, Labor is also pursuing the use of 
other data sources to improve UI program integrity. In particular, 
Labor continues to promote states' data sharing with other agencies, 
such as the Social Security Administration (SSA), to identify and 
prevent overpayments. According to Labor's fiscal year 2005 performance 
and accountability report, the department has funded states to exchange 
data with SSA on a real-time basis, giving states the ability to verify 
claimants' identity and prevent most overpayments due to fraudulent or 
mistaken use of SSNs. Labor's fiscal year 2007 budget request includes 
$10 million in funding to detect and prevent fraudulent UI benefit 
claims that use personal information stolen from workers. Labor 
estimates that the requested funds could generate savings of at least 
$77 million to the UI Trust Fund by preventing erroneous payments 
caused by the use of stolen identities.
    Along with efforts to enhance states' use of data sharing to detect 
and prevent overpayments, Labor has taken other steps to enhance UI 
program integrity, including the development of a new core performance 
measure for overpayment detection at the state level. More 
specifically, Labor has announced that states will be given an 
additional incentive to prevent and detect overpayments by implementing 
core measures in states' performance budget plans based on the level of 
overpayments the states have detected. While Labor has established 
overpayment detection as one of its core measures, it has not yet 
specified the level of performance that states will be required to meet 
under this measure. In addition, Labor's fiscal year 2006 budget 
request contained a legislative proposal designed to give states the 
means to obtain funding for program integrity activities, including 
additional staff to enhance recoveries and prevent overpayments. 
Moreover, to reduce overpayments, Labor awarded Reemployment and 
Eligibility Assessments grants to 21 states during fiscal year 2005. 
The grants have been used to conduct in-person claimant interviews to 
assess claimants' continued eligibility for benefits and to ensure that 
individuals understand that they must stop claiming benefits upon their 
return to work.\8\ Labor's fiscal year 2007 budget request includes $30 
million in additional funding to continue this effort. Labor estimates 
that these funds could be used to conduct an additional 539,000 
interviews and could save the UI Trust Fund as much as $151 million by 
reducing the average duration of UI benefits for claimants who are 
interviewed.
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    \8\ These interviews would also promote use of reemployment 
services available in One-Stop Career Centers to assist claimants to 
become reemployed more quickly.
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    In addition to the initiatives contained in its budget request, 
Labor plans to submit a legislative proposal in the near future that 
includes several initiatives to further help states detect and recover 
overpayments.\9\ Among other things, this proposal may include 
suggestions to allow the Department of the Treasury to garnish federal 
income tax refunds to recover UI overpayments as a means of improving 
overpayment recoveries. The proposal may also allow states to use a 
small percentage of recovered overpayments to fund their benefit 
payment control and program integrity activities as an incentive to 
focus their efforts on those activities. In addition, the proposal may 
seek to provide employers with a stronger incentive to inform the state 
when inappropriate UI claims are made. More specifically, the proposal 
could require states to charge employers a higher UI tax rate when 
claimants are overpaid, if it is determined that the overpayment was 
the employer's fault (such as when an employer fails to provide wage 
information to the state in a timely manner). Such additional charges 
could lead to an increase in the UI tax rate for affected employers.
---------------------------------------------------------------------------
    \9\ According to Labor, this proposal will be similar to the 2005 
legislative proposal (the Unemployment Compensation Program Integrity 
Act of 2005).
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States Make Use of Federal Requirements to Help Speed Reemployment of 
        UI Claimants, but Knowing More about Outcomes Could Enhance 
        Program Performance
    In our review of states' efforts to help UI claimants quickly 
return to work, we found that states most often make use of federal UI 
program requirements to help connect claimants with reemployment 
services at various points in their claims, usually beginning at the 
time their initial claim is filed. All federally approved state UI 
programs must include able-to-work and available-for-work requirements 
that claimants must meet in order to receive benefits. In many states, 
these requirements also serve to link claimants to reemployment 
opportunities and services. In addition, states provide targeted 
reemployment services to particular groups of UI claimants. The federal 
requirement of claimant profiling is typically the primary mechanism 
for targeting reemployment services to specific claimants. Despite 
states' efforts to design systems that link UI claimants to 
reemployment services, few data are available to gauge the extent to 
which their efforts are having the intended result. Moreover, Labor's 
fiscal year 2007 budget request does not include funding specifically 
designated for conducting evaluations of federally required efforts to 
target reemployment services.

States Use Compliance with Work Requirements and Target Services to 
        Particular Groups of Claimants to Help Speed Reemployment
    Although all UI claimants can access the range of reemployment 
services through the one-stop system at any time, UI program 
requirements often provide the context for states' efforts to link 
claimants to reemployment services. Specifically, all federally 
approved state UI programs require that claimants be able and available 
to work. To meet these conditions, 44 states require that UI claimants 
register with the state's labor exchange--that is, job-matching 
services provided through the Wagner-Peyser-funded Employment Service--
in order to be eligible for UI benefits. In addition, 49 states impose 
a work search requirement as a condition for continuing UI eligibility, 
and claimants must document that they are meeting their state's work 
search requirement in a number of ways. Most commonly, claimants are 
required to keep a log of work search activities that may be subject to 
review, or they must certify that they are able and available to work 
through the process of filing for a continuing claim.
    These work registration and work search requirements often serve to 
link claimants to reemployment services. The process of registering for 
work with the state's labor exchange, for example, may bring claimants 
into an Employment Service office or one-stop center where reemployment 
services are delivered.
    Some states also use their processes for monitoring compliance with 
the work search requirement to direct claimants to reemployment 
services. Officials in 39 of the 49 states that require claimants to 
actively seek employment told us that telephone or in-person interviews 
with claimants may be used to monitor compliance with this requirement. 
In over two-thirds of these states, officials told us that some 
information on job search strategies or reemployment services is 
provided during the interview.
    States also engage some claimants in reemployment services directly 
through programs that identify certain groups for more targeted 
assistance. States primarily target reemployment services to claimants 
identified through federally required claimant-profiling systems--a 
process that uses a statistical model or characteristics screen to 
identify claimants who are most likely to exhaust their UI benefits 
before finding work. While claimants identified and referred to 
services through profiling can access the services available to all job 
seekers through the one-stop system, participation in the services they 
are referred to--most often orientation and assessment services--is 
mandatory for profiled claimants. In addition, many officials told us 
that the services profiled claimants received depended on their 
individual needs following an assessment, the development of an 
individual plan, or the guidance of staff at a one-stop center. While 
failure to report to required reemployment services can result in 
benefits being denied, states vary in the conditions that prompt 
denying benefits.
    Maryland, for example, targets reemployment services to profiled 
claimants through its Early Intervention program. This program, which 
began in 1994, offers an interactive, 2-day workshop, addressing self-
assessment, job search resources, resume writing and interviewing 
skills, and other community resources available to job seekers. 
Profiled claimants selected for the workshop who fail to attend are 
given one opportunity to reschedule; after that, their failure to 
participate is reported to the UI program and their benefits may be 
suspended. When claimants complete the workshop, they are registered 
with the Maryland Job Service, they receive an individual employment 
plan, and the workshop facilitator may refer them to additional 
services. Officials told us that although they currently do not have 
data to show the impact of this program, they have received very 
positive feedback about the quality and effectiveness of the workshops.
    Some states have developed additional methods to target 
reemployment services to particular groups of UI claimants. For 
example, one-stop staff in Washington have the ability to identify 
various subgroups of claimants using a tracking device called the 
Claimant Progress Tool. Officials told us that one-stop staff typically 
use this tool to identify claimants who are about 100 days into their 
claim, and then contact them for targeted job search assistance and job 
referrals. This process was developed to help the state achieve a goal 
of reducing the portion of its UI benefits that unemployed workers 
claim. Georgia's state-funded Claimant Assistance Program identifies 
claimants who are seen to be ready for employment and requires them to 
participate in the same services required of profiled claimants. This 
program is designed to help the state achieve its goal of generating 
savings for the UI Trust Fund.
    During fiscal years 2001 through 2005, states often made use of 
Labor's Reemployment Services Grants--totaling $35 million per year--to 
fund some of the targeted services. Officials in the majority of the 
states we interviewed told us their states had used the Reemployment 
Services Grant funds to hire staff to provide reemployment services to 
UI claimants. For example, Maryland state officials said they used 
their funds to hire staff for the Early Intervention program, enabling 
them to run more workshops in areas that needed them and to make 
further improvements in the program. Some states also used these grants 
to direct reemployment services to claimants beyond those who have been 
profiled and to support other enhancements in the provision of 
reemployment services to claimants. For example, Washington state 
officials told us they used funds from these grants to support the 
development of the Claimant Progress Tool. Beginning in fiscal year 
2005, Labor began shifting its focus away from these grants that funded 
direct reemployment services for UI claimants toward the Reemployment 
and Eligibility Assessment Grants. These new grants focus states' 
efforts on providing face-to-face eligibility interviews with claimants 
as a way to ensure compliance with work search requirements. As part of 
these interviews, eligibility workers may refer claimants to 
reemployment services funded by Employment Services, the Workforce 
Investment Act (WIA), or the Trade Adjustment Assistance (TAA) program.

Little Information Exists to Assess whether States' Efforts Are 
        Achieving the Intended Outcomes
    Despite states' efforts to design systems that link UI claimants to 
reemployment services, little is known about the extent to which 
claimants receive reemployment services or about the outcomes they 
achieve. Although states must meet a number of federal reporting 
requirements for their UI and employment and training programs, 
including reporting on the outcomes of profiled claimants, none of 
these reports provide a complete picture of the services received or 
the outcomes obtained by UI claimants. Labor only recently began to 
require that states provide information on the reemployment outcomes of 
UI claimants, and the ongoing evaluations of claimant profiling are 
limited.
    States must track and report annually on several performance 
measures considered key indicators of UI program performance, but these 
measures largely focus on benefit and tax accuracy, quality, and 
timeliness. In addition, states must also report to Labor on their 
claimant-profiling process, but information in these reports represent 
only a portion of all UI claimants the state has served, a proportion 
that can vary from place to place and from month to month depending on 
available resources.
    UI claimants may access other federally funded reemployment 
assistance through the Wagner-Peyser Employment Service, WIA Adult or 
Dislocated Worker programs, and, if they are laid off because of trade, 
the Trade Adjustment Assistance program. To monitor the performance of 
these programs, Labor requires states to meet a number of reporting 
requirements, but these reports are submitted on a program-by-program 
basis, and none provide a complete picture of the services received or 
the outcomes obtained by all UI claimants.
    Having data that show the degree to which reemployment services are 
reaching UI claimants is key to good program management and provides a 
first step toward understanding the impact of these programs. However, 
knowing how many claimants may be accessing reemployment services and 
the type of outcomes they may be achieving has proven difficult for 
state and local officials. We found that only 14 states go beyond the 
federal reporting requirements to routinely track the extent to which 
UI claimants receive services from the broad array of federally funded 
programs that are designed to assist them, and only 6 states routinely 
monitor outcomes for UI claimants who receive reemployment services. 
States most often told us that tracking claimant services across 
multiple programs was made difficult by the fact that reemployment 
services and UI claimant data were maintained in separate data 
systems--systems that were either incompatible or difficult to link.
    Labor has some initiatives that may begin to shed light on claimant 
outcomes, but these efforts may not go far enough. Labor recently 
modified its UI performance measures to require states to track a 
reemployment rate for their UI claimants--defined as the percentage of 
UI claimants who are reemployed within the quarter following their 
first UI payment. This change will help focus efforts on speeding 
reemployment and will improve the understanding of how many UI 
claimants are quickly reemployed nationwide, but it will not allow for 
an assessment of the outcomes of claimants who access reemployment 
services compared to those who do not. Furthermore, states must meet 
federal requirements to target reemployment services using the 
claimant-profiling process, but little is known about the effectiveness 
of their efforts. Labor funded an evaluation of the claimant profiling 
system in 8 states beginning in 1996, including an assessment of UI 
benefit duration, employment, and earnings. The current evaluation of 
the profiling process focuses exclusively on how well the models are 
able to predict whether a claimant will exhaust UI benefits, not on 
whether the process results in shorter benefit duration or better 
employment outcomes for claimants. Budget authority to conduct the 
current evaluation expires at the end of fiscal year 2006, and no 
additional funds have been requested in the fiscal year 2007 budget 
specifically to conduct further evaluations on profiling.
    Labor is also developing a system to consolidate performance 
reporting for Labor's Employment and Training Administration (ETA) 
programs. This system--ETA's Management Information and Longitudinal 
Evaluation (EMILE) system--would consolidate reporting across a range 
of Labor programs including WIA, Employment Service, and TAA. Current 
plans do not include incorporating UI reporting into EMILE. Last year, 
we recommended that Labor work with states to explore the feasibility 
of collecting more comprehensive information on UI claimants' services 
and outcomes. Although Labor generally agreed with our findings, Labor 
commented that current and planned data collection efforts would 
provide sufficient information to policy makers. While Labor's new 
initiatives, in combination with current reporting requirements, will 
provide valuable information on the reemployment activities of some UI 
claimants, these efforts will not allow for a comprehensive, nationwide 
understanding of claimants' participation in the broad range of 
reemployment services designed to assist them. Furthermore, these 
efforts will not move states in the direction of having the data they 
need to better manage their systems.

Concluding Observations
    UI's size and importance make it critical that the program is 
performing at a peak level. With annual overpayments reaching the 
billions, it will be important for federal and state stakeholders to 
take the necessary action to address this issue. Labor's current 
initiatives and its proposed action contained in the fiscal year 2007 
budget request could help, but work remains. In the long run, program 
performance can be enhanced by avoiding improper payments rather than 
trying to detect and collect them. Labor's initiatives to help states 
detect and prevent overpayments represent a positive step toward 
improving UI program integrity. In particular, Labor's initiative to 
promote states' use of the NDNH database and its continued effort to 
encourage states' use of SSA's data for verifying the identity of 
claimants appear promising. However, to maximize the effectiveness of 
these initiatives, it is important for as many states as possible to 
participate. In addition, while Labor's development of a new core 
performance measure on payment accuracy has the potential to facilitate 
states' focus on detecting and preventing overpayments, it is premature 
to evaluate the effectiveness of this effort. Moreover, although Labor 
continues to fund grants for states to conduct in-person reemployment 
and eligibility assessments, more time is needed to fully assess how 
effective these initiatives will ultimately be. Finally, while Labor's 
June 2005 legislative proposal to charge employers for UI payments to 
ineligible individuals could result in UI tax rate increases for those 
employers, such a change merits further consideration.
    To help claimants get the reemployment services they need, states 
have often designed their processes to make use of federal UI program 
requirements in linking claimants with services. However, knowing 
whether their efforts are actually resulting in better employment 
outcomes and reduced UI benefit payments has proven difficult for 
federal, state, and local officials. Findings from evaluations are 
limited, and most states lack much of this information, arguably 
critical for good program management--often because data reside in 
separate systems that cannot be easily linked. In the new environment 
created under the Workforce Investment Act, where claimants may be 
served by a range of programs that go beyond UI and ES, it becomes 
increasingly important to find new ways to link program data across a 
broader range of programs. Doing so is an essential step in 
understanding what's working and what's not. Labor's current and 
planned initiatives may help fill the information gap, but they fall 
short of providing a comprehensive understanding of services and 
outcomes for UI claimants.
    Mr. Chairman, this completes my prepared statement. I would be 
happy to respond to any questions you or other members of the 
subcommittee may have at this time.

                                 

    Chairman HERGER. Thank you, Dr. Nilsen. Mr. Halley?

   STATEMENT OF ROOSEVELT HALLEY, PRESIDENT-ELECT, NATIONAL 
   ASSOCIATION OF STATE WORKFORCE AGENCIES, COLUMBIA, SOUTH 
                            CAROLINA

    Mr. HALLEY. Good morning, Chairman Herger, Ranking Member 
McDermott, and Members of the Subcommittee. On behalf of the 
National Association of State Workforce Agencies, I thank the 
Subcommittee for the opportunity to comment on the President's 
FY2007 budget as it relates to the UI system. Mr. Chairman, 
NASWA supports initiatives by the Federal Government to improve 
the administrative efficiency, integrity, and overall 
performance of our Nation's Federal-State UI system. However, 
Federal grants to States for the administration of UI programs 
are inadequate. Without sufficient Federal funding, NASWA 
believes proposals to improve the UI system will not have the 
desired positive effect on performance. NASWA submitted 
testimony recently to the Subcommittee on States' extensive use 
of technology to increase program efficiency. It highlighted 
improvements to customer service and barriers to full 
modernization due to Federal underfunding.
    States are more efficient at operating their UI programs 
today than they have ever been. But further improvements in 
program integrity and productivity are increasingly difficult 
to attain. Additional UI system appropriations for 
administrative funding are necessary for further UI system 
improvement. The remainder of my statement focuses on selected 
proposals of the Administration's FY2007 budget. NASWA's full 
statement on the FY2007 budget has been submitted for the 
hearing record. With substantial balances in the Federal 
accounts of the UI trust fund, NASWA believes there are 
sufficient funds available to support States' UI operations 
without extending the Federal Unemployment Tax Act 0.2 percent 
surtax beyond 2007 as proposed by the Administration. NASWA 
supports the Administration's proposal that would authorize the 
U.S. Treasury Department to recover UI benefit overpayments and 
certain delinquent UI taxes from Federal income tax refunds. 
NASWA supports the Administration's proposal that would require 
employers to include a ``start work'' date on new hire reports 
to help identify persons who have gone back to work, but 
continue to claim benefits.
    NASWA recommends modifying the Administration's proposal 
that would prohibit States from not charging employers for 
overpayments due to their inadequate or untimely response to 
requests for information. NASWA recommends requiring States to 
treat employers no longer as interested parties if they respond 
inadequately or untimely and to require charging these 
employers even if an appeal denies UI benefits to claimants. 
This modified proposal would provide employers a strong 
incentive to respond to State requests for information on UI 
separation issues. The Administration includes proposals that 
would permit States to use up to 5 percent of UI overpayment 
recoveries to augment their Benefit Payment Control 
administrative funding and up to 5 percent of State 
unemployment tax, or so-called SUTA dumping collections, to 
augment funds aimed at reducing employer tax evasion and fraud.
    NASWA is concerned about the potential precedent this would 
authorize by allowing State-collected UI revenues to be used 
for purposes other than the payment of benefits. Despite this 
concern, NASWA would support these proposals if funds collected 
are limited to Benefit Payment Control and activities to combat 
employer evasion and fraud. NASWA believes the Administration's 
proposed minimum 15 percent penalty assessment on overpayments 
due to claimant fraud is too low. Many States already have 
implemented larger penalties for UI fraud. NASWA recommends 
modifying this proposal by raising the penalty to at least 25 
percent and also applying it to employer fraud. We agree States 
should penalize individuals for wrongfully receiving UI 
benefits and also believe States should require an identical 
penalty of 25 percent on employer underpayments of taxes due to 
employer tax evasion and fraud. NASWA supports the 
Administration's request of $30 million to expand Reemployment 
and Eligibility Assessments. However, NASWA is concerned about 
the recent elimination of the $35 million reemployment service 
grants to the States in FY2006. This cut and continued 
underfunding of ES hamper States' ability to help unemployed 
workers return to work quickly. Mr. Chairman, we look forward 
to working with the Subcommittee on this vital Federal-State 
program.

    [The prepared statement of Mr. Halley follows:]

Statement of Roosevelt Halley, President-Elect, National Association of 
           State Workforce Agencies, Columbia, South Carolina

    Mr. Chairman and Members of the Subcommittee thank you for the 
opportunity to comment on the President's FY 2007 Budget. The National 
Association of State Workforce Agencies (NASWA) respectfully submits 
this testimony for the record.
    The mission of NASWA is to serve as an advocate for state workforce 
programs and policies, a liaison to federal workforce system partners, 
and a forum for the exchange of information and practices. Our 
organization was founded in 1937. Since 1973, it has been a private, 
non-profit corporation financed by annual dues from member state 
agencies. NASWA members are the administrators of the Unemployment 
Insurance (UI) and Employment Service (ES) programs, and other 
workforce investment programs.
    NASWA supports initiatives by the Administration and Congress to 
improve the administrative efficiency, integrity and overall 
performance of our nation's UI system. This statement in large part is 
an endorsement of many of the Administration's UI proposals included as 
part of its FY 2007 Budget and reflects NASWA's longstanding and 
ongoing work with U.S. Department of Labor (USDOL) to improve the UI 
system. However, NASWA believes proposals to improve the UI system will 
not have their desired positive effect on performance without a 
sufficient commitment by Congress and the Administration to appropriate 
necessary funding for the program's administration. NASWA believes 
improvements to the UI system and UI system administrative funding are 
inseparable and encourages the Subcommittee to consider both as it 
pursues improvements.

PROMOTING UI PAYMENTS AND TAX INTEGRITY
    NASWA formed an eight-state (AL, CA, GA, IL, MI, NJ, OK, and TX) 
workgroup to review and work with the USDOL on its Unemployment 
Compensation Program Integrity Act of 2005. The NASWA workgroup agrees 
amendments to federal law that would help states reduce overpayments of 
UI benefits and increase collections of overpayments and taxes are 
needed. However, the workgroup is concerned with the precedent set by 
several of the proposals to permit use of state unemployment funds for 
administration in lieu of federal administrative grants. Spending state 
unemployment tax revenues on administrative costs, instead of benefits 
exclusively, would further undermine the federal commitment to funding 
UI administration.
    USDOL's proposal would permit states to use up to five percent of 
UI overpayment recoveries to augment their benefit-payment-control 
administrative funding. USDOL also proposes permitting states to use up 
to five percent of State Unemployment Tax Act (SUTA) dumping 
collections to augment funds aimed at reducing employer tax evasion and 
fraud. NASWA recommends the use of funds collected under these programs 
be limited to benefit-payment-control and employer tax evasion and 
fraud activities. NASWA is concerned about the precedent these two 
proposals set by modifying the standard that state trust funds be used 
only for the payment of benefits.
    USDOL's proposal to require states impose at least a 15 percent 
penalty on benefits individuals obtain by defrauding the UI system is 
problematic because some state laws do not permit collection of a 
penalty until the benefit overpayment is collected. The USDOL proposal 
would require penalties be collected first. The collected penalties 
would be used only for benefit payment control and tax enforcement 
activities. Further, NASWA believes the proposed 15 percent penalty is 
too low. Many states already have implemented larger penalties for UI 
fraud. NASWA recommends modifying this proposal by raising the penalty 
to at least 25 percent and also, applying it to employer fraud. We 
agree states should penalize individuals for wrongfully receiving UI 
benefits, but also believe states should require an identical penalty 
of 25 percent on employer underpayments of taxes because of employer 
tax evasion and fraud.
    NASWA supports USDOL's proposal that would authorize the U.S. 
Treasury Department to recover UI benefit overpayments and certain 
delinquent UI taxes from federal income tax funds. NASWA also supports 
the USDOL proposal that would allow states to make individuals liable 
for the processing fee and give states discretion to the U.S. Treasury 
to recover the debt.
    NASWA supports USDOL's proposal that would require employers to 
include a ``start work'' date on new hire reports to help identify 
persons who have gone back to work, but continue to claim benefits. 
NASWA believes this requirement will help states accurately identify 
when an individual has begun employment, but still is claiming UI 
benefits, and identify overpayments for recovery.
    NASWA supports USDOL's request of $10 million to prevent and detect 
fraudulent unemployment benefit claims filed using personal information 
stolen from unsuspecting workers.

PROMOTING RE-EMPLOYMENT
    NASWA supports USDOL's request of $30 million to expand re-
employment and eligibility assessments (REAs) used to review UI 
beneficiaries' need for re-employment services and their continuing 
eligibility for benefits through in-person interviews in one-stop 
career centers. However, we must point out the disparity between this 
$30 million request by USDOL and recent elimination of the $35 million 
Re-Employment Services (RES) grants to states in FY 2006. The 
elimination of RES combined with a $30 million cut to the Employment 
Service (ES) program totals an eight-percent reduction to services used 
to help accelerate unemployed workers transition back to work. The 
Administration proposes an additional 4 percent cut to the ES program 
in FY 2007.
    NASWA supports the proposed Government Performance and Results Act 
(GPRA) goals for reemployment and UI Performs Core reemployment measure 
to assess UI reemployment services and outcomes. The GPRA goal proposed 
for reemployment requires states to compile data on those individuals 
receiving UI benefits for this measure. The measurement indicates if a 
person who received UI benefits in one quarter has earned wages 
reported in the subsequent quarter. States would submit data for the 
most recent four quarters in March 2006 and these data would be used to 
establish a baseline and set performance targets for FY 2007. USDOL 
also would use this GPRA outcome as a state-specific measure for UI 
Performs. This reemployment measure is one of the core measures states 
must meet or provide corrective action plans to meet or exceed the goal 
the following fiscal year.
    NASWA is concerned USDOL's recent decision to dismantle America's 
Job Bank (AJB) system will lengthen the duration it takes employers to 
find qualified workers and job seekers to find jobs. AJB complements 
other resources available in the private sector. The Employment and 
Training Administration (ETA) has assured states it will try to resolve 
their concerns. NASWA plans to work with these states to assist them 
and ETA in resolving these concerns.
    NASWA supports USDOL's proposal that would permit waivers of 
certain federal requirements allowing states to experiment with 
innovative projects aimed at early re-employment of UI beneficiaries. 
NASWA supports this proposal because it allows opportunities for state 
flexibility in providing re-employment services. We look forward to 
working with the USDOL on this concept.

OTHER UI PROPOSALS IN USDOL'S FY 2007 BUDGET
    NASWA does not support USDOL's proposal that would permit states to 
allow collection agencies to keep up to 25 percent of the amount 
collected on ``uncollectible'' fraud overpayments or delinquent taxes. 
NASWA recommends this collection tool be available as an option under 
the recovered overpayments proposal and under the fraud penalty 
proposal if states have exhausted efficient state means to collect the 
outstanding debt.
    NASWA recommends modification of USDOL's proposal that would 
prohibit states from non-charging benefit costs to employers if an 
overpayment is due to an employer's pattern of inadequate or untimely 
responses to requests for information made by the state. NASWA 
recommends modifying this proposal by requiring states to treat 
employers as no longer an ``interested party'' if they respond 
inadequately or untimely to separation notices and require charging of 
these employers even if an appeal denies UI benefits to a claimant. We 
believe this modified proposal provides an employer incentive to 
respond to state requests for information on UI separation issues. It 
would reduce state administrative collection costs by limiting 
overpayments and all employers would not have to share the costs born 
by employers who respond inadequately or untimely to state requests for 
information. NASWA also recommends additional state administrative 
funding to help implement this proposal.
    NASWA supports USDOL's proposal that would permit states to use 
compensating balances and interest earned on clearing account balances 
to pay associated banking costs. States use a variety of other banking 
services, including the maintenance of lock boxes and aggressive 
clearance schedules, which can speed the transfer of tax deposits to 
the trust fund, but cost more than basic banking services. To pay the 
cost of these additional services, some states hold a balance in the 
clearing account to generate enough interest to pay the costs of the 
services. USDOL has said this is inconsistent with the ``immediate 
deposit'' and ``withdrawal'' requirements of federal UI law. These 
``compensating balance'' arrangements permit states to pay for state-
of-the-art banking services that speed the deposit of taxes in the 
trust fund that they would be unable to afford otherwise. As some 
states already use this practice, an amendment would authorize an 
ongoing and effective practice.
    NASWA supports USDOL's proposal that would require state UI 
agencies to disclose information to child support enforcement agencies 
about UI claimants owing support to custodial parents and to deduct 
such obligations from UI benefits. We understand this proposal will 
clarify federal UI law.
    USDOL's proposal would amend the Advisory Council on Unemployment 
Compensation (ACUC) provision to permit, rather than require, the 
Secretary of Labor to convene periodically a council. The proposal also 
would reduce council size to nine. NASWA believes another ACUC is not 
needed now and supports granting the Secretary of Labor the flexibility 
to convene a council when necessary. We look forward to working with 
the Secretary, and employer and worker groups, to improve this system 
on an ongoing basis.
    NASWA supports USDOL's proposal to repeal a provision denying 
unemployment compensation to certain federal workers performing federal 
service under contract. Even though this is a federal program, as a 
general rule, we believe nearly all employees should be covered under 
UI as the states' do under state law.

THE FUTA 0.2 PERCENT SURTAX
    In the U.S. Department of Treasury budget, the Administration 
proposed extending the Federal Unemployment Tax Act (FUTA) 0.2 percent 
surtax for five years beyond 2007. In the past, NASWA has testified in 
favor of repealing this surtax as an unwarranted burden on employment. 
NASWA believes the revenue collected by this surtax currently is 
unjustifiable to meet the nearly nonexistent demand for federal loans 
to states with trust fund balances insufficient to cover benefits. 
Moreover, NASWA notes the National Governors Association not only 
supports the repeal of this surtax, but also supports substantially 
lowering the unnecessarily high balances in the loan account (Federal 
Unemployment Account) and using these funds to shore up other parts of 
the system, such as grants to states for administration of unemployment 
insurance, employment services, and labor market information, and 
information technology and performance investments.

UI ADMINISTRATIVE FUNDING CONCERNS
    Secretary of Labor Elaine Chao testified recently before the House 
Labor, Health and Human Services and Education Appropriations 
Subcommittee and stressed her desire to improve the financial integrity 
of the UI system. NASWA supports this goal, but states are finding it 
increasingly difficult to accomplish. We believe grants to states for 
the administration of state UI programs are inadequate since USDOL's 
resource justification model (RJM) demonstrates states need more UI 
administrative funding than what is appropriated and allocated. 
Although it is true states are more efficient at operating their UI 
programs today than they were ten years ago, further improvements in 
program integrity and productivity are increasingly difficult to 
attain.
    We are concerned future policies might impose financial penalties 
on states for failing to meet performance standards, further eroding 
states' ability to administer UI. Rising personnel and service costs 
without corresponding increases to federal appropriations are forcing 
states to cut staffing levels, reduce integrity efforts, delay 
technology upgrades, and seek other funding sources. With the federal 
account balances in the UI Trust Fund projected to be $3.4 billion for 
the Employment Security Administration Account (ESAA), $16.6 billion 
for the Extended Benefit Account (EUCA), and $14.2 billion for the loan 
account (FUA) at the end of FY 2007, NASWA believes there are 
sufficient funds to support UI administrative operations without 
imposing additional state taxes to supplement the lack of adequate 
federal administrative funding.
    Mr. Chairman, thank you for the opportunity to testify today. NASWA 
looks forward to working with you and your colleagues and USDOL on this 
vital federal-state program.

                                 

    Chairman HERGER. Thank you, Mr. HALLEY. Mr. Devereux to 
testify.

  STATEMENT OF GREG DEVEREUX, EXECUTIVE DIRECTOR, COUNCIL 28, 
AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES, 
                      SEATTLE, WASHINGTON

    Mr. DEVEREUX. Good morning, Chairman Herger, Ranking Member 
McDermott, and other Members of the Committee. For the record, 
I am Greg Devereux, the executive director of the Washington 
Federation of State Employees, Council 28 of AFSCME. I am 
testifying on behalf of AFSCME's 1.4 million members, including 
the many thousands in the employment security system across the 
State. In my State, we represent 2,400 of these workers. I 
appreciate being here and ask that my written statement be made 
part of the record.
    Chairman HERGER. Without objection.
    Mr. DEVEREUX. We believe the Labor Department's FY2007 
budget is penny wise and pound foolish. It will further 
undermine the UI work test by impairing the ability of UI 
claimants to receive in person reemployment services and help 
finding employment. As you know, UI claimants must register for 
work with State ES offices. Like UI, the ES is State 
administered and financed with revenue from the Federal 
unemployment trust fund. The ES is a free Nation-wide public 
labor exchange, offering such services as job search 
assistance, referral of workers to job openings, screening of 
job applicants for employers, career counseling, skills 
assessment, and resume writing assistance. State ES offices are 
a major provider of labor exchange and reemployment services 
for UI claimants. Nation wide, in 2004, 40 percent of the 14 
million job seekers who registered with ES offices were UI 
claimants. In Washington State, it was 49 percent. Seventy-nine 
percent of them received staff assistance, and over half were 
referred to employment. Numerous analyses have documented the 
cost effectiveness of the ES labor exchange services. For 
example, in a 2002 paper, researcher Lou Jacobson found public 
labor exchange services spend only about $330 per job 
placement.
    Reemployment services also speed up return to work. In 
2000, DOL estimated that every dollar spent on reemployment 
services for UI claimants produces two dollars of trust fund 
savings. Despite this, DOL proposes a $34 million cut in State 
employment service grants after last year's $58 million cut. 
This would be very destructive to employment security. If 
absorbed entirely by staff reductions, at least 1,500 State 
workers would have to be laid off, and in-person services in 
many rural areas would have to be eliminated. However, the 
damage is actually much worse because the cuts come on top of 
decades of financial neglect. The FY2007 request is actually 
$88.6 million less than the 1985 appropriation. To match the 
1985 appropriation in value, the Administration would have to 
ask for $1.4 billion. In addition, DOL proposes to end the 
employment service as part of a strategy to aggressively 
decentralize workforce programs. Its block grant plan and 
career advancement accounts treat the unique role of the ES in 
relation to the UI system almost as an afterthought. The 
Administration also plans to end the Nation's job bank service. 
America's job bank is now the largest electronic listing of job 
openings in the world and is an important tool for local ES and 
other workforce labor exchange activities in Washington State 
and elsewhere. It is invaluable.
    Finally, I also want to mention our concern with the 
failure to provide adequate funding for State UI operations. 
Strengthening reemployment services and providing adequate 
administrative funding is a better solution to benefit 
overpayments and collecting delinquent employer taxes than 
DOL's approach. Most UI overpayments occur when someone works 
and collects UI at the same time. Reliance on automated UI 
filing and work certification makes such fraud far easier. 
Earlier in-person contact by ES staff would reduce overpayments 
while also providing workers with valuable job search 
assistance. In addition, we oppose using private collection 
agencies to recover overpayments and delinquent taxes. We are 
particularly concerned about the privacy of both worker and 
employer data and the reputation of this industry to engage in 
harassing, threatening, and illegal actions, even when the Fair 
Debt Collection Practices Act (P.L. 104-208) applies. I want to 
thank you again very much for giving me the opportunity to 
testify today. I would be pleased to answer any questions you 
might have. Thank you.

    [The prepared statement of Mr. Devereux follows:]

 Statement of Greg Devereux, Executive Director, Council 28, American 
    Federation of State, County, and Municipal Employees, Seattle, 
                               Washington

    Good morning, Mr. Chairman and members of the Subcommittee. My name 
is Greg Devereux, and I am Executive Director of Council 28 of the 
American Federation of State, County and Municipal Employees (AFSCME) 
in the State of Washington.
    I am testifying today on behalf of the 1.4 million AFSCME members 
who work in state and local government, health care, and nonprofit 
organizations across the country, including many thousands in the 
employment security system. We appreciate the opportunity to present 
our views on the Department of Labor's (DOL) budget request for 2007.
    My testimony today will focus primarily on the implications of the 
DOL budget on the reemployment of unemployment insurance (UI) 
claimants. In brief, we believe that the budget request will further 
undermine administration of the UI work test and impair the ability of 
unemployment insurance claimants to receive reemployment services and 
find employment as soon as possible.
    As you know, the employment security system is the product of a 
political agreement struck among business, labor and the government in 
the 1930s. Employers would pay taxes into state and federal trust 
funds, jobless workers would receive unemployment benefits and meet a 
``work test'' by looking for work, and the federal government would 
provide the states with the funds to operate the system.
    Workers receiving state unemployment benefits are required to 
register for work with state Employment Service (ES) offices which are 
authorized under the Wagner-Peyser Act and financed with revenue from 
the Federal Unemployment Trust Fund (FUTA). While both programs are 
administered by the state employment security agencies, at various 
times state UI and ES employees have worked separately in the same or 
different locations. They also have been cross-trained to perform both 
functions so that they could be shifted from one responsibility to the 
other as economic conditions changed.
    Two developments over the last 10 years have influenced the 
connections between the state UI and ES operations. With the shift to 
electronic and telephone claims for benefits, the states have 
centralized UI benefit processing functions and set up call centers, 
thus for the most part ending in-person filings and simultaneous in-
person registration for work with the employment service. Second, the 
Workforce Investment Act (WIA) now requires that employment service 
operations be offered as part of local one-stop systems. In many states 
the ES is the backbone of these locally governed systems, thus adding a 
local mission and orientation to this state agency program.
    The state ES offices are a major provider of labor exchange and 
reemployment services for UI claimants. Nationwide, in Program Year 
(PY) 2004, 40% of the 14 million job seekers registered with ES offices 
were unemployment insurance claimants. The number in Washington State 
was even higher: 49% of 381,582 registered jobseekers were UI 
claimants, and 79% of them received staff-assisted services while over 
half were referred to employment.
    Numerous analyses have documented the cost effectiveness of the 
labor exchange services and their effectiveness in reducing outlays 
from the UI Trust Fund. According to a 2003 U.S. General Accounting 
Office report, in FY 2002 the ES was the employment and training 
program serving the largest number of workers (seven times the next 
largest number of participants) while ranking eighth in funding. Based 
simply on the number of people registered by the PY 2004 appropriation, 
the ES spent $56 federal dollars on each person served. In a 2002 paper 
entitled ``Evaluation of Public Labor Exchange (PLX) Services in a One-
Stop Environment: New Evidence from North Carolina,'' Lou Jacobson, a 
researcher at Westat, found that public labor exchange services spend 
about $330 per job placement. ``What is particularly remarkable,'' he 
states, ``is that virtually every rigorous analysis of PLXs (sic) 
indicates that they are highly cost effective.''
    Reemployment services also speed up return to work by UI claimants. 
In support of its FY 2001 budget request for $50 million for Wagner-
Peyser Reemployment Services Grants for UI claimants, a DOL fact sheet 
noted that $1 spent on reemployment services would produce $2 of UI 
Trust Fund savings. This estimate was based on previous experiments and 
analyses which also demonstrated the advantages of close cooperation 
between UI and ES operations.
    Yet despite this evidence, the Department of Labor proposes to cut 
spending for state employment service grants by $34 million in FY 2007. 
This reduction would come on top of last year's cut of $58 million, 
which included the elimination of the Wagner-Peyser reemployment 
services grants for UI claimants created in the FY 2001 budget. While 
DOL requests $30 million in UI funds for in-person reemployment and 
eligibility assessments of UI claimants, we anticipate that the 
emphasis of these grants will be on enforcement instead of reemployment 
services.
    The two-year cuts to the Employment Service are very destructive. 
If absorbed entirely by reductions in staff, we estimate that, based on 
the average cost per employee, at least 1,500 state workers would have 
to be laid off with in-person services in many rural areas eliminated.
    However, the damage is actually much worse because the cuts come on 
top of decades of financial neglect by the Congress and executive 
branch.
    Below are funding levels for State Employment Service allotments 
since 1985. As you can see, the $688,769,000 requested for FY 2007 is 
actually $88.6 million less than the 1985 appropriation. To match the 
1985 appropriation in value, the Administration's budget request would 
have to be $1.4 billion or more than twice as much.


                                Allotment to    Fiscal     Allotment to
          Fiscal Year              States        Year         States

1985                            $777,398,000  1997       761,735,000

1986                             758,135,000  1998       761,735,000

1987                             755,200,000  1999       761,735,000

1988                             738,029,000  2000       761,735,000

1989                             763,752,000  2001       761,735,000
                                                          (plus $35
                                                          million for UI
                                                          claimants)

1990                             779,039,000  2002       786,608,000
                                                          (plus $35
                                                          million for UI
                                                          claimants)

1991                             805,107,000  2003       756,784,000
                                                          (plus $35
                                                          million for UI
                                                          claimants)

1992                             821,608,000  2004       752,302,000
                                                          (plus $35
                                                          million for UI
                                                          claimants)

1993                             810,960,000  2005       746,301,000
                                                          (plus $34
                                                          million for UI
                                                          claimants)

1994                             832,856,000  2006       715,883,000 (-0-
                                                          )

1995                             838,912,000  2007       688,769,000 (-0-
                                                          )

1996                             761,735,000


    With this steady decline in resources in real terms, it should come 
as little surprise that services also have declined even though 
technology has added many efficiencies to the ES. For example, in 1995 
when the unemployment rate was 5.5%, the Employment Service registered 
18.3 million job seekers. By 2004, when the unemployment rate again was 
5.5%, it registered 14 million job seekers.
    In addition, the Administration has made policy proposals to repeal 
the Wagner-Peyser Act and end the Employment Service as part of an 
aggressive strategy to decentralize workforce programs. Its original 
WIA reauthorization plan would have block granted the ES with the WIA 
adult and dislocated worker program and transfered responsibility for 
the UI work test to the local workforce system. This year's budget 
proposes ending both ES and WIA and replacing them with a block grant 
to governors who would have to use 75% of the funds for job training 
and education vouchers, called ``career advancement accounts''. While 
both proposals would retain some funding for state labor exchange 
services, the amount would continue to decline and few, if any, 
requirements would exist.
    The cumulative effect of these proposals is to eliminate federal 
leadership and accountability and to weaken the core elements of the 
political agreement that has supported the UI/ES system over the years. 
The unique role of the Employment Service in relation to the 
unemployment insurance system is almost an afterthought in these 
``reform'' plans.
    Effective administration of the UI work test requires close 
cooperation between state UI and ES staff and adequate resources to 
ensure that UI claimants look for work and receive the assistance they 
need. Such cooperation will be even harder to achieve if administration 
of the work test is transferred from the state agency to locally 
administered programs which have to meet separate and locally oriented 
performance standards.
    Furthermore, repealing the Wagner-Peyser Act would end existing 
requirements that UI claimants receive reemployment services. This 
requirement is especially important as a companion to the worker 
profiling and reemployment service system for UI claimants that 
Congress approved in 1993. Under this program, UI claimants referred to 
reemployment services by UI agencies must participate as a condition of 
continuing eligibility for UI benefits. However, these services will 
not necessarily be available under the career advancement accounts 
proposal.
    The Administration also intends to end America's Job Bank (AJB) 
which is financed through the Employment Service. Without AJB, there 
would be no effective mechanism to comply with the Wagner-Peyser Act's 
longstanding requirement to ``maintain a system of clearing labor 
between the States''. AJB is now the largest electronic listing of job 
openings in the world and has links to the job banks of all the states 
and the web sites of private placement agencies and job postings of 
numerous corporations.
    AJB is a critical tool in supporting ES operations and other 
workforce labor exchange activities in Washington State and nationally. 
It played a critical role in the aftermath of Hurricanes Katrina and 
Rita in creating the Hurricane Recovery Job Connection Website when 
Louisiana's systems shut down entirely. DOL has suggested that the 
widespread development of internet sites such as Monster.com would be 
available, but we can think of no effective way private agencies and 
websites could even begin to replace the value provided by AJB. For 
example, it is not clear how requirements for federal contractors to 
list their job openings and for veterans to receive hiring preferences 
could be implemented without this universally available labor exchange 
tool.
    While my statement has focused on the implications of DOL's budget 
on reemployment services for UI claimants, I also want to address our 
concern with the failure to provide adequate funding for state UI 
operations. These functions include determining eligibility for and 
paying UI benefits to jobless workers, adjudicating claims, and 
collecting employer taxes.
    Appropriations for state UI operations have not been adjusted for 
inflation, including personnel and service costs, since 1995. While 
efficiencies have been achieved during that time, this situation, if 
allowed to continue, will lead to staff layoffs, reduced services to 
claimants and reduced integrity efforts.
    DOL has made a number of integrity proposals to recover benefit 
overpayments and improve tax collections. However, they are limited and 
rely in part on reinvesting recovered benefit overpayments and employer 
tax penalties in these administrative functions.
     In addition to having limited financial impact, the reinvestment 
approach would break down the historical structure of the UI system 
under which the federal government is responsible for administrative 
financing and state trust fund resources are used only for paying UI 
benefits. For this reason we oppose this policy.
    DOL's integrity proposals also do not fundamentally address the 
deterioration in UI administrative funding, which has reduced state 
recovery activities, and in ES funding, which has hampered state 
enforcement of the UI work test. Most UI overpayments occur when 
someone works and collects UI at the same time. Funding cuts have 
forced states to rely on internet or automated UI filing and 
certification of work which makes such fraud far easier. Early, in-
person contact by employment service staff would reduce overpayments in 
these cases. While the Administration's funding request for periodic 
eligibility reviews may be helpful, it is not the same as a sustained 
commitment to rebuilding the system and providing an adequate level of 
reemployment services.
    AFSCME also strongly opposes using state benefit trust fund money 
to pay private collection agencies to recover benefit overpayments. We 
believe it violates the merit system requirement of the unemployment 
insurance program. The civil service requirement was first enacted in 
the 1930s to protect the program from financial and political abuse 
much like the kind we increasingly are seeing today in government 
contracting in a variety of contexts. We also are concerned about the 
privacy of data for both workers and employers and the reputation of 
this industry to engage in harassing, threatening and illegal actions 
even when the Fair Debt Collection Practices Act applies.
    AFSCME believes the chronic financial neglect of the employment 
security system must be addressed. Our support for proposals to 
increase administrative funding and convert it to mandatory funding is 
longstanding. A mandatory financing structure would allow program 
activities to more accurately reflect increases in employers and 
fluctuations in UI claims. The Administration's request is a very poor 
substitute for the federal government fulfilling its responsibility to 
provide the necessary administrative funds. In the short term, Congress 
should at least follow the recommendation of the National Association 
of State Workforce Agencies and increase UI funding to $3.023 billion 
for UI administration, which is $283 million more than DOL has 
requested.
    In closing, Mr. Chairman, I want to thank you again for giving me 
the opportunity to testify today. I would be pleased to answer any 
questions you may have.

                                 

    Chairman HERGER. Thank you, Mr. Devereux. Dr. Brough to 
testify.

  STATEMENT OF WAYNE BROUGH, PH.D., ADJUNCT SCHOLAR, AMERICAN 
                 INSTITUTE FOR FULL EMPLOYMENT

    Dr. BROUGH. Thank you, Mr. Chairman and Members of the 
Committee. Thank you for the opportunity to testify today. My 
name is Wayne Brough. I am an adjunct scholar with the American 
Institute for Full Employment. The American Institute for Full 
Employment is a nonprofit public policy research and 
development center founded in 1994, with offices in Klamath 
Falls, Oregon, and Washington, D.C. The institute was founded 
with the goal of full employment, universal access to jobs with 
career potential for all who can work so they can avoid the 
many poverties of unemployment. The institute conducts leading 
research, studies best practices, and develops practical 
solutions in the areas of UI, workforce development, retirement 
income, and public assistance. Today, we encourage careful 
assessment of two issues. First is identifying and addressing 
areas where tax dollars may be wasted in the current program. 
The second is identifying and improving opportunities to help 
people find work while saving taxpayer dollars.
    On the first issue, State employment agencies, operating 
under DOL oversight, overpaid claimants by $3.4 billion 2004. 
This is 9.9 percent of all UI payments. Now not only does this 
waste scarce tax dollars, but a portion of these overpayments 
are passed on to workers through lower wages. In total, the 
effect is the overpayments affect employers, honest workers, 
and the overall productivity of the economy. I think the 
problem arises because of the focus on swift payments as a top 
priority of the agencies. This, I think, is a holdover from a 
time when the DOL placed more emphasis on timeliness than on 
efficacy of the programs or the stewardship of public funds. 
The DOL budget request includes efforts to prevent overpayments 
as well as collect past overpayments. These are worthy goals, 
and we encourage the DOL to improve this program.
    With respect to the second point, the helping unemployed 
find work more quickly and effectively, our research has shown 
that people operating the UI system are capable of improving 
the job search process. In Arizona, we found face-to-face 
eligibility interviews did accelerate reemployment. The program 
saved $10 in benefits for every dollar spent on interviews. 
However, the program was cut because of inadequate funding. The 
2007 budget request includes $30 million to expand the 
reemployment eligibility assessments. We applaud this effort 
because we know that this approach helps people get back to 
work, and it saves money. In another example, for 10 years, 
Oregon has experimented with subsidized wage program for low-
skilled UI claimants. The program was designed to help those 
likely to experience a long spell of unemployment to find work 
rapidly through subsidized jobs. The program was found to save 
more dollars than it cost while employing the most 
disadvantaged UI claimants and allowing them to find work.
    Reforming the system to promote faster rates of 
reemployment provide significant benefits to the workers and to 
the economy. Typical claimants receive less than half of their 
prior wage from UI and spent 3 months unemployed. Most have 
little savings, and these are depleted fairly rapidly. More 
than one-third exhaust their benefits before finding a job. 
Allowing States to experiment with work-oriented programs can 
alleviate the burden on claimants while promoting faster 
reemployment. We know worker-oriented programs help people and 
save tax money. This should be a thrust of future DOL efforts. 
Finally, we would like to comment on career advancement 
accounts. We found most people collecting UI would like to be 
reemployed promptly and at a good job. Providing the tools to 
find good work is more important than simply providing a check 
and saying we don't have high hopes of allowing you to find new 
employment. Integrating employment services and WIA funding and 
services provide the flexibility to each UI claimant to get the 
exact combination of support services that will provide the 
most benefits. This will improve cost effectiveness, as the 
unemployed weigh the cost and benefits of various options. 
Programs to assist the unemployed can be performed with 
improved outcomes and at lower cost. The key to achieving both 
of these benefits is to have a strong work orientation to the 
program, and we urge Congress to incorporate a pro-work 
attitude in its budget decisions. Thank you, and I would be 
glad to answer any questions.

    [The prepared statement of Dr. Brough follows:]

 Statement of Wayne Brough, Ph.D., Adjunct Scholar, American Institute 
                          for Full Employment

    Mr. Chairman and Members of the Committee, I am Wayne Brough, 
adjunct scholar with the American Institute of Full Employment. I am 
here today on behalf of the American Institute for Full Employment, a 
nonprofit public policy research and development center founded in 
1994, with offices in Klamath Falls, Oregon and Washington, D.C. The 
Institute was founded with the goal of Full Employment--universal 
access to jobs with career potential for all who can work, so they can 
avoid the many poverties of unemployment. The Institute conducts 
leading research, studies best practices, and develops practical 
solutions in the areas of unemployment insurance, workforce 
development, retirement income, and public assistance.
    The Institute applauds the Department of Labor for recognizing 
needed changes in the administration of programs to assist the 
unemployed. We encourage careful consideration of two issues: how tax 
money is being wasted, and the opportunity to help people find work 
while saving tax money.
    State unemployment insurance agencies, operating under DOL 
oversight, overpaid claimants $3.4 billion in 2004, the latest year for 
which data are available.\1\ Overpayments amounted to 9.9 percent of 
all UI payments. Employers across the country are taxed to fund these 
overpayments. A number of economic studies have concluded that some or 
all of these taxes are actually passed on to workers through lower 
wages, so the overpayments problem affects employers and honest workers 
alike.\2\ The problem arises, we believe, from an attitude that swift 
payments must be the top priority of the agencies, an attitude adopted 
in years past when payment timeliness was of greater concern to the 
Department of Labor than program effectiveness or stewardship of public 
funds. The department's budget request includes efforts to prevent 
overpayments, as well as to collect past overpayments, which are worthy 
goals.
---------------------------------------------------------------------------
    \1\ U.S. Department of Labor, ``UI Benefit Accuracy Measurement 
Report for CY 2004,'' downloaded from http://
workforcesecurity.doleta.gov/unemploy/bam/2004/bam-anrep.asp on April 
28, 2006.
    \2\ Anderson, Patricia and Bruce D. Meyer, ``The Effects of Firm 
Specific Taxes and Government Mandates with an Application to the U.S. 
Unemployment Insurance Program,'' Journal of Public Economics, Vol. 65 
(1997), pp. 119-145.
---------------------------------------------------------------------------
    Our research has found that the people who operate the UI system 
are capable of helping the unemployed find work more quickly and 
effectively. We learned that in Arizona, face-to-face eligibility 
review interviews helped accelerate reemployment.\3\ The program saved 
about ten dollars in benefits for every dollar spent on the interviews. 
However, the program was discontinued because of inadequate funding. As 
you know, money saved from benefits payments cannot be used to fund UI 
administration. Thus we have a program that helped the unemployed and 
saved money, but was terminated. We applaud the budget proposal's 
inclusion of $30 million to expand Re-employment and Eligibility 
Assessments. We know that this approach helps people get back to work 
and it saves money.
---------------------------------------------------------------------------
    \3\ Arizona Department of Economic Security, ``Reemployment 
Services Performance Report,'' December 23, 2002.
---------------------------------------------------------------------------
    In Oregon, for 10 years, that state experimented with a subsidized 
wage program for low-skilled UI recipients.\4\ The program helped 
people who were likely to experience a long spell of unemployment to 
find work rapidly through subsidized jobs. The program was funded by a 
state diversion tax and was found to save more dollars than it cost--
while helping the most disadvantaged UI recipients get work.
---------------------------------------------------------------------------
    \4\ William B. Conerly and John Courtney, ``Final Report on the 
JOBS Plus Program,'' American Institute for Full Employment, March 
2001.
---------------------------------------------------------------------------
    Reforming the current system to promote a faster rate of re-
employment would provide significant benefits to workers and the 
economy. Typically, claimants receive less than half of their prior 
wage from UI and spend over three months unemployed. Most of these 
workers have very little in savings, which are depleted rapidly. More 
than one-third of claimants exhaust their benefits before getting a 
job. Providing states the flexibility to experiment can alleviate the 
burdens imposed on claimants and promote greater re-employment. The 
Arizona model proved successful, and other states, such as Oregon, have 
developed more effective programs as well. Yet the current system 
discourages such experimentation in favor of a system that has changed 
little over time. We know that work-oriented programs help people and 
save tax money. This needs to be the thrust of future DOL efforts.
    Finally, let us comment on the proposal for Career Advancement 
Accounts. We applaud this change. We have found that most people 
collecting UI would like to get back to work promptly, at a good job. 
Providing them with the tools to find good work is more powerful than 
simply handing them a check and saying that we don't have high hopes 
for them finding work. Integrating Employment Service and Workforce 
Investment Act funding and services has the potential to help each UI 
claimant get the exact combination of support services that will 
provide that person the most benefit. It will improve cost 
effectiveness as the unemployed weigh the costs and potential benefits 
of various service options.
    The programs that assist unemployed people can be performed with 
improved outcomes and at lower cost. The key to achieving both benefits 
is to have a strong work orientation in the program. We urge Congress 
to incorporate a pro-work attitude into its budget decisions.

                                 

    Chairman HERGER. Thank you, Dr. Brough. Mr. Rosen to 
testify.

   STATEMENT OF HOWARD ROSEN, VISITING FELLOW, INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. ROSEN. Thank you very much, Mr. Chairman and Members of 
the Committee. I am also grateful for the opportunity to 
testify today on the Administration's budget request for UC. 
Before I begin my comments, I would like to respond to some of 
the earlier comments that were made that are very timely. This 
morning, the BLS announced that the productivity and the 
economy grew by 3.2 percent in the first quarter of 2006. I 
once time asked a Secretary of Labor did we have a productivity 
problem in this country? He said to me, ``Yes, you can never 
have enough productivity.'' Productivity is a great thing. But 
we have to remember that there is also a cost to productivity 
because, in the short term, employers may need fewer workers. 
Although we applaud the increase in productivity that is going 
on in the economy, it also puts pressure on the labor market.
    The Chairman also mentioned this morning that we have had 
an incredible rate of employment growth of about 2 million jobs 
per year, close to 2 million jobs per year. We now have data 
that dissect that number because that number is really just a 
net change in employment, and we can actually see how many jobs 
are actually created and how many are terminated. Snce I know 
that Members of Congress love numbers, let me just tell you 
that every day in this economy, we create 50,000 new jobs. But 
at the same time, 45,000 people are terminated in their jobs. 
Now the net is still positive, which is wonderful, and we need 
to do what we can to celebrate that. But we can't forget the 
fact that it is a net number and that actually people are 
losing their jobs even though we are creating jobs in the 
economy. The Administration's budget seems to focus almost 
exclusively on recovering UI payments made in error. Although I 
think it is important to address waste, fraud, and abuse in the 
program, I think the Administration's proposal make actually 
make it harder for eligible workers to receive assistance they 
so desperately need.
    At the same time, the Administration is proposing to reduce 
funding for ES, which could actually reduce in a decline in 
resources, making it more difficult for States to monitor 
compliance with UI eligibility requirements. In fact, I could 
argue that the declines in employment service spending over the 
last couple of years may actually be contributing to the 
increase in the amount of fraud going on in the system. The 
Administration's budget request ignores the program's serious 
long-term problems. Our Nation's UI system is seriously out of 
date with recent developments in the U.S. economy. Number one, 
yes, the unemployment rate has fallen. But the duration of 
unemployment has risen, which suggests that unemployment is 
becoming more permanent rather than temporary. Unemployment is 
increasingly due to structural, not cyclical factors. 
Recessions are getting shorter, and the time it takes for 
employment to recover is getting longer after each recession. 
State unemployment rates are converging, suggesting that 
unemployment is becoming due to national factors as opposed to 
State or regional factors. In this current day of technological 
change and globalization, no region or industry is immune from 
the labor market pressures. There is, as I have already 
suggested, considerable turnover in the U.S. labor market. On 
average, 30 million workers, or about one-quarter of the 
workforce, either lose their job, take a new job, or both each 
year. That is an incredible amount of turnover. That means one 
out of four people will change their jobs in any given year. 
Contrary to the conventional wisdom, much of this turnover is 
taking place in the service sector, not manufacturing.
    Looking at our current program, only a small fraction of 
unemployed workers actually receive UI. Approximately one-third 
of UI recipients exhaust their benefits before finding a new 
job. The current benefit level is $262, which is below the 
poverty rate for a family of three. It only replaces about one-
third of previous wages, well below the initial goal of the 
program of one-half. The automatic triggers for the extended 
benefit program are broken, making the program obsolete. My 
written statement goes into some detail about some reform 
proposals. I just want to highlight five right now. One, we 
need to expand the insurance risk pool by increasing the 
Federal role in financing and distributing UI benefits. Number 
two, we need to make the system more progressive by increasing 
the maximum taxable wage base and reducing the FUTA tax rate. 
Now we could actually remove the 0.2 surtax if we just kept the 
tax base up with inflation. The tax base has not been changed 
in over 20 years, and adjusting it would allow us to 
significantly reduce the tax rate. Improve the linkage to 
reemployment. This has been mentioned already a couple of times 
before. We actually have some experience with that in another 
Federal program called the Trade Adjustment Assistance (TAA) 
Program, where we have recently introduced wage insurance and a 
health care tax credit. Given the DOL's enthusiasm about 
linking to more reemployment programs, it is actually curious 
to me that they have been unimpressive in their implementation 
of these two new proposals. Number four, we need to improve the 
levels of the UI and make them relate to local market 
conditions, and we need to fix the triggers of the extended 
benefit program. Thank you very much.

    [The prepared statement of Mr. Rosen follows:]

Statement of Howard Rosen, Visiting Fellow, Institute for International 
                               Economics

    I am grateful for the opportunity to testify before the 
Subcommittee on the Administration's budget request for Unemployment 
Compensation. Unemployment Insurance (UI) is the centerpiece of our 
efforts to assist workers who lose their jobs at no fault of their own.
    In addition to providing income support to workers facing 
significant financial burden, recent research finds that the existence 
of an adequate unemployment insurance program can reduce worker anxiety 
and encourage more labor market flexibility, both of which are required 
in order to meet the challenges of technological change and 
globalization.
    The Administration's budget request focuses on recovering UI 
payments to workers made in error. Although it is important to address 
waste, fraud and abuse in the program, the Administration's proposals 
may actually make it harder for eligible workers to receive the 
assistance they so desperately need. At the same time, the 
Administration's proposal to eliminate funding for Employment Services 
and create a new block grant, results in a decline of resources, 
thereby making it more difficult for states to monitor compliance with 
UI eligibility requirements.
    The Administration's budget request ignores the program's serious 
long-term problems. Our nation's UI program is seriously out of date 
with recent developments in the U.S. labor market.
    There have been no major changes in the basic structure of 
Unemployment Insurance since it was established 70 years ago, despite 
significant changes in U.S. labor market conditions.

      Currently, only a small percentage of unemployed workers 
receive assistance under the program and the assistance is modest at 
best.
      There are vast differences in eligibility, benefit levels 
and tax rates between state unemployment insurance programs.
      The program no longer meets its initial goal of providing 
counter-cyclical stimulus during periods of economic slowdowns.
Changes in the U.S. labor market
    The U.S. labor market has undergone a significant transformation 
since unemployment insurance was established 70 years ago.

      Although the unemployment rate has recently been low and 
falling, the duration of unemployment has been rising, suggesting that 
unemployed tends to be more permanent than temporary.
      Unemployment is increasing due to structural rather than 
cyclical factors. With the exception of the early 1980s, recessions 
have become shorter, but the length of time it takes for employment to 
recover from the economic downturns has significantly increased.
      State unemployment rates are converging, suggesting that 
unemployment is due to national rather than state or regional factors. 
During the late 1970s and the 1980s a disproportionate share of the 
nation's unemployment was concentrated in the Northeast and Midwest--
regions with a high concentration of traditional industries, like 
autos, textiles and apparel and steel. One consequence of globalization 
is that no region or industry is now immune from increased domestic and 
foreign competition. Although there clearly remain differences in local 
labor market conditions, current pressures on the U.S. labor market are 
becoming more national in character. Local labor market conditions 
primarily affect the costs associated with job loss and the prospects 
for re-employment, they do not necessarily protect workers from job 
loss.

    There is considerable turnover in U.S. employment.\1\ Between 1994 
and 2004, 30 percent, or approximately 30 million workers either lost 
their job, took a new job, or both, each year. Contrary to conventional 
wisdom, a disproportionate amount of this turnover occurred in the 
service sector, as opposed to the manufacturing sector.
---------------------------------------------------------------------------
    \1\ The Bureau of Labor Statistics and the Census Bureau have 
recently begun publishing establishment data on employment creation and 
termination.
---------------------------------------------------------------------------
    Between 1995 and 2004, approximately 18.3 million new jobs were 
created and 16.6 jobs were terminated on average each year.\2\ Job 
losses exceeded job gains by 20 percent in the manufacturing sector. 
The average annual number of job losses in the five service industries, 
i.e. transportation, communication and utilities, wholesale and retail 
trade, finance, insurance and real estate, and services, was 12\1/2\ 
million, almost 7 times the number of manufacturing job losses.
---------------------------------------------------------------------------
    \2\ By contrast, analyses based on changes in net employment would 
suggest that the economy created 17 million jobs over the 10-year 
period.
---------------------------------------------------------------------------
The Current Unemployment Insurance Program
    The original unemployment insurance program was designed to offset 
involuntary income losses during cyclical periods of temporary 
unemployment. By contrast, current labor market conditions suggest that 
workers face short-term transitional unemployment--as they move from 
job to job--and long-term structural unemployment. The existing 
unemployment insurance system provides inadequate assistance in both 
cases. Those workers who voluntarily leave one job in order to take 
another job are ineligible for unemployment insurance and assistance is 
inadequate for those workers who experience long-term unemployment.
    Underlining these macroeconomic changes to the U.S. labor market 
has been a shift from traditional employer-based full-time employment 
to contingent, part-time and/or self-employed. The shift to non-
traditional forms of employment raises additional problems for 
unemployment insurance. The current system is not able to cover 
contingent employment, self-employment, and part-time and low-wage 
employment.
    As a form of social insurance, UI has some important insurance 
principles built into it. Premiums are paid in advance through employer 
taxes of wages earned. Individual eligibility requires earnings 
(employment) above a state-specified minimum, and entry into 
unemployment must be through involuntary job loss (no voluntary quits 
or firings). With the covered earnings requirement, eligible workers 
are those with some labor force attachment, and continued receipt of 
benefits requires being able, available and actively seeking work.
Coverage
    Coverage is the only part of unemployment insurance that has been 
meaningfully reformed since the program was established. Over the 
years, various changes have widened the net of coverage to include 
almost all wage and salary workers, with the exception of agricultural 
and household workers. Self-employed workers remain not covered under 
the program.
    Under current law, workers must have worked 20 weeks in a calendar 
year, earning at least $1,500 in 2 quarters, in order to qualify for 
the minimum level of assistance under the program. Workers must also 
have had just cause for losing their jobs. Most state programs provide 
assistance only to those workers who lost their jobs through no fault 
of their own. Almost all states disqualify workers from receiving UI 
benefits due to voluntary job loss and refusal to take suitable work 
and discharge due to misconduct.
    The percent of the total civilian workforce covered by unemployment 
insurance has been trending upward and currently stands at 74 percent 
of the total workforce. Recent problems with coverage may be due to an 
increase in the number of self-employed workers.
    The percent of total unemployed workers receiving assistance, the 
recipiency rate, has also declined in recent years. Only a little more 
than a third of unemployed workers actually receive unemployment 
insurance.\3\
---------------------------------------------------------------------------
    \3\ Research funded by the Department of Labor suggests that the 
recent decline in the recipiency rate is likely due to changes in the 
industrial composition of employment and the way unemployment is 
measured. Others argue that the low level of assistance may discourage 
workers from participating in the program.
---------------------------------------------------------------------------
Duration of Benefits
    Individual states set their own minimum and maximum benefits 
amounts, as well as the number of weeks workers can receive assistance. 
Initially, the range of UI duration was 12 to 20 weeks. Currently, all 
states except two have a maximum duration of 26 weeks.\4\
---------------------------------------------------------------------------
    \4\ Washington and Massachusetts have a maximum duration of 30 
weeks.
---------------------------------------------------------------------------
    Over the last 30 years, the average duration for receiving 
unemployment insurance has ranged from a low of 13.2 weeks in 1989 to a 
high of 17.5 weeks in 1983 and has hovered around 15 weeks for most of 
the period.
    The percent of beneficiaries who have exhausted their benefits, 
e.g. have remained unemployed beyond the period for which they received 
unemployment insurance, has ranged from a low of 26.7 in 1978 and 1979 
to a high of 43.4 in 2003. On average, approximately one-third of UI 
recipients exhaust their benefits before finding new jobs.

Benefit Levels
    Almost all states set their maximum weekly benefits somewhere 
between $200 and $500, with the largest concentration of states falling 
between $300 and $400. (See Table 1.) Puerto Rico has the lowest 
maximum weekly benefit ($133). States with the highest maximum weekly 
benefits include Massachusetts ($528 to $778), Minnesota ($515), New 
Jersey ($503), Rhode Island ($477 to $596) and Washington ($496). The 
average weekly benefit in 2004 ranged from $106.50 in Puerto Rico to 
$351.35 in Massachusetts. The average weekly benefit for the entire 
country was $262.50.

                 Table 1--State Maximum Weekly Benefits
------------------------------------------------------------------------
              Maximum Weekly Benefit                  Number of States
------------------------------------------------------------------------
below $200                                                            1
------------------------------------------------------------------------
$200 to $300                                                         12
------------------------------------------------------------------------
$300 to $400                                                         26
------------------------------------------------------------------------
$400 to $500                                                         10
------------------------------------------------------------------------
above $500                                                            4
------------------------------------------------------------------------
Source: Employment and Training Administration, U.S. Department of
  Labor, Financial Handbook

    Table 2 presents the distribution of 2004 replacement ratios, the 
ratio of the average weekly benefit to average wages. The District of 
Columbia has the lowest replacement rate, less than a quarter of its 
average wage. Hawaii's UI program comes the closest to replacing almost 
half of the state's average weekly wage. Thirty-eight states have an 
average replacement rate of between one-third and one-half of their 
average weekly wages. The states with the lowest replacement ratios 
include Puerto Rico, Arizona, Alaska, Alabama, New York, Connecticut, 
Delaware, California, Missouri, Tennessee, Virginia, Mississippi, 
Maryland and Louisiana. The average replacement rate for the United 
States as a whole between 1975 and 2004 was 0.36 percent, far from the 
initial goal of 0.5 percent.

             Table 2--Distribution of the Replacement Ratio
------------------------------------------------------------------------
                                                      Number of States
------------------------------------------------------------------------
Less than 0.25                                                        1
------------------------------------------------------------------------
0.25 to 0.35                                                         20
------------------------------------------------------------------------
0.35 to 0.40                                                         18
------------------------------------------------------------------------
0.40 to 0.50                                                         14
------------------------------------------------------------------------
Source: Employment and Training Administration, U.S. Department of
  Labor, Financial Handbook

    A recent Congressional Budget Office report found that Unemployment 
Insurance constituted an important source of income for unemployment 
workers and their families. (See Box 1.)

Box 1
Summary of Conclusions
    Family Income of Unemployment Insurance Recipients

      UI benefits played a significant role in maintaining the 
family income of recipients who experienced a long-term spell of 
unemployment in 2001 or early 2002--particularly those who did not have 
other wage earners in their family. Before becoming unemployed, 
recipients' average family income was about $4,800 per month.\5\ When 
recipients lost their job, that income--excluding UI benefits--dropped 
by almost 60 percent. With UI benefits included, the income loss was 
about 40 percent.
---------------------------------------------------------------------------
    \5\ This testimony is based on Lori Kletzer and Howard Rosen, 
``Extreme Makeover: Reforming Unemployment Insurance to Better Meet the 
Needs of a 21 Century Workforce,'' draft, 2006. Howard Rosen also 
serves as Executive Director of the Trade Adjustment Assistance 
Coalition, a non-profit organization that advocates on behalf of 
workers, farmers, fishermen, firms and communities which face 
dislocations as a result of increased imports and international shifts 
in production.
---------------------------------------------------------------------------
      For sole earners in a family, the income loss was 
greater: almost 90 percent excluding UI benefits, or 65 percent 
including them. For such one-earner families, UI benefits represented 
two-thirds of their total income, compared with an average of about 20 
percent for families with more than one worker.
      Former UI recipients who did not find work soon after 
their benefits ended--people for whom federal extensions of UI benefits 
are intended--continued to incur substantial income losses. For the 40 
percent of long-term UI recipients who were not working three months 
after their benefits ended, average family income was about half of 
what it had been before they began receiving unemployment insurance. By 
comparison, for long-term UI recipients who were working three months 
after their benefits ended, income loss was less than 10 percent.

    U.S. Congress, Congressional Budget Office, ``Family Income of 
Unemployment Insurance Recipients,'' Washington, DC: 2005

Extended Benefit Programs
    From the outset, unemployment insurance has not been flexible 
enough to respond to the cyclical nature of unemployment. More than 40 
percent of unemployed workers exhaust their benefits before finding new 
jobs during recessions. To address this shortcoming, Congress enacted a 
temporary extension of unemployment insurance during the 1958 
recession. In 1970, Congress enacted a permanent Extended Benefit (EB) 
program with automatic triggers to provide assistance in a more orderly 
fashion. High rates of regular UI exhaustion, problems with the 
automatic triggers and political pressures have resulted in the need 
for subsequent Congressional action to respond to heightened levels and 
pro-longed duration of unemployment associated with periods of economic 
slowdown.
    Increases in the duration of unemployment during recessions have 
been the primary impetus for extending traditional unemployment 
insurance beyond its base period. In each economic slowdown since the 
1950s, the average duration of unemployment has continued to rise after 
the economy has begun rebounding.
    Extended benefits programs were designed to provide a counter-
cyclical stimulus to the economy. In order to achieve this goal, one 
would have expected the amount of spending on unemployment insurance to 
be inversely related to the economy's well being, i.e. outlays on 
unemployment insurance would be higher during economic slowdowns and 
lower during economic recoveries. This does not seem to have been the 
case.
    Most extended benefits were paid during the 1970s, when the 
extended benefit program was established, and during the 1980s, when 
the economy experienced a deep recession. (See Table 3.) There was a 
dramatic falloff in the amount of extended benefits paid during the 
subsequent 15 years. One explanation for this fall may be that the 
nature of recent economic slowdowns has changed, making the mechanisms 
that were initially designed to trigger extended benefits work less 
automatically.

            Table 3--Federal-States Extended Benefit Program
------------------------------------------------------------------------
                                      Total       Number of     Average
                                    Benefits        first       weekly
                                    Paid (in    payments (in    benefit
                                    billions)     millions)     amount
------------------------------------------------------------------------
1972-1979                         $8.6          13.0          $69
------------------------------------------------------------------------
1980s                             $7.5          7.0           $115
------------------------------------------------------------------------
1990s                             $0.8          0.7           $120
------------------------------------------------------------------------
2000-2004                         $0.7          0.2           $262
------------------------------------------------------------------------
Source: Employment and Training Administration, U.S. Department of
  Labor, Financial Handbook

    Inflexibility in the ``automatic'' triggers has made the program 
obsolete. As a result, Congress has occasionally extended unemployment 
insurance. (See Table 4.) Far more benefits have been paid under these 
temporary programs than under the standard extended benefit program, 
reflecting a major weakness in the standard extended benefit program.

              Table 4--Temporary Extended Benefit Programs
------------------------------------------------------------------------
                                                               Number of
                                                    Total       First
                                                  Benefits     Payments
                                                  Paid (in       (in
                                                 billions)    millions)
------------------------------------------------------------------------
1982-1985                        Federal        $9.6         7.7
                                  Supplemental
                                  Compensation
                                  Program
------------------------------------------------------------------------
1991-1994                        Emergency      $27.7        9.1
                                  Unemployment
                                  Compensation
                                  Program
------------------------------------------------------------------------
2002-2004                        Temporary      $23.2        7.8
                                  Extended
                                  Unemployment
                                  Compensation
                                  Program
------------------------------------------------------------------------
Source: Employment and Training Administration, U.S. Department of
  Labor, Financial Handbook

    The standard extended benefit program has accounted for a smaller 
share of assistance provided unemployed workers, while emergency 
extensions of unemployment insurance enacted by Congress have become 
more important. The nation's unemployment insurance program has become 
less automatic and more dependent on Congressional action in response 
to prolonged periods of economic slowdown.
    The degree to which extended benefits actually stimulate the 
economy during periods of slowdown is also questionable. The amount of 
extended benefits paid during the Temporary Extended Unemployment 
program between 2002 and 2004 was approximately $23 billion, less than 
3 percent of the change in personal consumption over that period. It is 
difficult to imagine how the existing unemployment insurance program, 
with its current benefit levels and duration, could provide serious 
stimulus to a $10+ trillion economy.

Financing Unemployment Insurance
    Unemployment insurance is financed by payroll taxes administered by 
federal and state governments. Revenue from the federal payroll tax is 
used to finance the costs incurred by both federal and state 
governments in administering the program. States are required to raise 
the necessary revenue to finance benefits paid to its unemployed. 
Federal and state governments share the costs of financing benefits 
under the automatic extended benefit program. Temporary extended 
unemployment insurance programs enacted by Congress have typically been 
financed by federal budgetary expenditures without any specific revenue 
offset.
    The federal tax to finance UI, established by the Federal 
Unemployment Tax Act (FUTA) is currently 6.2 percent on first $7,000 of 
annual salary by covered employers on behalf of covered employees. 
Employers must pay the tax on behalf of employees who are paid at least 
$1,500 during a calendar quarter. Employers in states with approved 
unemployment insurance programs--which currently include all 50 states, 
the District of Columbia, Puerto Rico and the Virgin Islands--receive a 
5.4 percent credit, making the effective tax rate 0.8 percent. In 1976, 
Congress passed a temporary 0.2 percent surtax to replenish the 
unemployment insurance trust fund. The surtax remains in place and is 
scheduled to expire on December 31, 2007.
    The taxable wage base has not been adjusted on a regular basis, 
thereby seriously eroding its real value. (see Figure 4.) The last time 
the federal taxable wage base was increased was in 1983, when it was 
set at $7,000. Had the taxable wage base been adjusted for inflation 
over the last 65 years, it would currently be approximately $45,000. At 
that level, the net federal tax rate, i.e. the tax rate minus the 
credit, would only have to be 0.125 percent in order to generate the 
same amount of revenue that is currently being collected. Although it 
is unrealistic to expect an adjustment of the taxable wage base of this 
magnitude anytime soon, any increase in the wage base to make up for 
the erosion in its real value over the last 2 decades could provide 
additional funding for providing assistance to workers in need as well 
as enable the federal government to reduce the FUTA tax rate.

    Figure 4
    Federal Taxable Wage Base
    Inflation adjusted
    [GRAPHIC] [TIFF OMITTED] T1492A.002
    
    Actual
    Source: Employment and Training Administration, U.S. Department of 
Labor, Financial Handbook and authors' estimates.

    Currently, federal taxes only finance 17 percent of the 
unemployment insurance program. The remaining 83 percent is financed 
through state taxes. Thirty-one states set their taxable wage base 
below $10,000, of which 11 states set their taxable wage base at 
$7,000, the same as the federal taxable wage base. Ten states set their 
taxable wage base above $20,000, approximately 3 times greater than the 
taxable wage base set by the federal government.
    There is substantial variance in tax rates set by states. (See 
Table 5.) Forty-one states have an average UI tax rate between 1 and 3 
percent of payroll. Average UI tax rates in the Virgin Islands, South 
Dakota and New Mexico are below 1 percent. By contrast, the Virgin 
Islands and New Mexico have relatively high taxable wage bases. Nine 
programs--California, Pennsylvania, New York, Illinois, Michigan, 
Massachusetts, Puerto Rico, Rhode Island and Connecticut--have the 
highest UI tax rates. The weighted average tax rate for the 53 states 
and territories is 2.8 percent.

                   Table 5--Average State UI Tax Rates
------------------------------------------------------------------------
  Average tax rate as a percent of taxable wages      Number of States
------------------------------------------------------------------------
Less than 1.00                                                        3
------------------------------------------------------------------------
1.00 to 1.99                                                         22
------------------------------------------------------------------------
2.00 to 2.99                                                         19
------------------------------------------------------------------------
Above 3.00                                                            9
------------------------------------------------------------------------
Source: Employment and Training Administration, U.S. Department of
  Labor, Financial Handbook.

    The average tax rate for the nation was a little less than 2 
percent in 1975, before rising and finally peaking at 3.25 percent in 
1984. The average tax rate declined over the next 17 years, dropping to 
1.7 percent in 2001, before rebounding slightly between 2002 and 
2004.\6\
---------------------------------------------------------------------------
    \6\ In general, movements in the average total UI tax rates tend to 
reflect the business cycle, i.e. the rate tends to reach a trough 
during economic slowdowns and reach a peak during economic recoveries. 
This is most likely due to changes in the amount of taxable wages, 
which tends to be cyclical, rather than to actual changes in the tax 
rate legislated by each state.
---------------------------------------------------------------------------
Critique of Existing Unemployment Insurance Program
    Although the vast majority of American workers are currently 
covered by unemployment insurance, those groups of workers still not 
covered by the program, including self-employed workers, some 
agricultural and domestic workers, people who provide services for 
relatives, many health care providers, student interns, immigrant farm 
workers and all kinds of seasonal workers, are gaining prominence in 
the U.S. labor market.
    The percent of unemployed workers actually receiving assistance 
under unemployment insurance has been falling, at that the same time 
that coverage has been expanding.
    Employers are required to pay federal and state unemployment 
insurance tax on behalf of workers employed for at least 20 calendar 
weeks or who receive at least $1,500 or more during any calendar 
quarter. Coverage is determined by a worker's relationship with a 
single employer, not by the employee's own work experience. For 
example, a worker who changes jobs during a calendar year may not be 
covered by unemployment insurance, even though he or she may have 
worked more than 20 weeks during the year. This may not have been a 
problem 40 or 50 years ago, when worker turnover was low. Currently 
workers change jobs more frequently. In addition, workers are more 
likely to have multiple employers due to company reorganizations.
    Unemployment insurance does not cover workers who voluntary quit 
their jobs, regardless of the reason or those workers entering or re-
entering the labor market. As a result, workers who voluntarily leave 
their jobs in anticipation of a plant closing, women who decided to 
postpone returning to work after childbirth, and workers who leave 
their jobs in order to relocate with a spouse are all currently 
ineligibility for unemployment insurance program.
    As a result, the current unemployment insurance program provides 
assistance to only a small share of the unemployed.
    Program eligibility is only one hurdle for the unemployed: in most 
states, the level of assistance is extremely low. The current average 
weekly assistance under each of the state programs is $262.50--almost 
10 percent less than the weekly equivalent of the poverty rate for a 
family of 3 set by the U.S. Government.\7\
---------------------------------------------------------------------------
    \7\ Bureau of the Census, U.S. Department of Commerce, ``Incomes, 
Earnings and Poverty from the 2004 American Community Survey,'' 
Government Printing Office: Washington DC, August 2005. According to 
the report, the poverty rate in 2004 for a family of three, with one 
child under the age of 18 was $14,974.
---------------------------------------------------------------------------
    There is no evidence that higher benefit levels result in higher 
unemployment rates.
    Assistance under the program is limited to 26 weeks in almost all 
states. With the recent increase in the duration of unemployment, the 
maximum period workers can receive unemployment insurance has declined 
from twice to a little more than 1\1/2\ times the average duration of 
unemployment.
    The current unemployment insurance system is extremely regulated 
and rigid. Changes in coverage, eligibility and benefits must be 
legislated by individual states and must be consistent with federally 
mandated standards. This makes it extremely difficult for individual 
state programs to easily respond to changes in local labor market 
conditions and crisis situations.
    The Extended Benefit triggers are no longer automatic, as they were 
initially intended to be, thus undermining the overall effectiveness of 
the program, and making it virtually obsolete.
    Inadequacies in the extended benefit program have resulted in a 
need for Congress to periodically enact legislation to temporarily 
extend unemployment insurance benefits, thereby politicizing 
unemployment insurance. These temporary programs have proven to be 
clumsy, typically being enacted after millions have already exhausted 
their unemployment insurance. In addition, the sunset provisions are 
arbitrarily set and usually fall before employment has picked up.
    The current UI system has only a limited relationship with re-
employment. Workers receiving unemployment insurance are required to 
show that they are seeking employment by documenting job inquiries and 
interviews. There is no requirement on workers to undertake training. 
Even if workers wanted to enroll in training, limitation in federal 
funding would prevent them in doing so.\8\
---------------------------------------------------------------------------
    \8\ States are required to maintain an unemployment insurance 
system that meets federal standards in order to receive the offsetting 
FUTA tax credit. The provision of training and other employment 
services, like job search assistance, is left almost entirely up to the 
states, for which they receive some federal funding. As a result, the 
availability and quality of employment services varies by state.
---------------------------------------------------------------------------
    The current federal-state structure undermines the program's 
ability to pool risk, protecting any one state from incurring more than 
its share of costs associated with unemployment. The current program 
produces the exact opposite outcome, i.e. those states with less 
unemployed workers have lower costs and those states with more 
unemployed workers face higher costs.
    Individual states have been forced to revise their tax rates and 
minimum taxable wage bases in order to finance their unemployment 
insurance programs. By contrast, the federal government has not revised 
its tax rate or taxable wage base in more than 20 years. Adjusting for 
inflation alone, as many states have done, would have resulted in 
increasing the federal taxable wage base five-fold.
Extreme Makeover for Unemployment Insurance
    Recent calls for special unemployment insurance programs to assist 
the victims of hurricanes Katrina and Rita are the latest evidence that 
the current program is not flexible or adequate enough to our workers' 
needs in a timely fashion. Strict eligibility requirements and limited 
resources have restricted the ability of existing programs to provide 
meaningful assistance to people in need.
    In general, U.S. labor market programs have been designed to fight 
``the last battle,'' thereby limiting their ability to respond to new 
and changing labor market conditions. For example, Unemployment 
Insurance was established in 1935 in response to prolonged and large-
scale unemployment that was associated with the Great Depression, labor 
market conditions which have not occurred since then. Instead, over the 
last few decades, the labor market has been characterized by more 
limited periods of unemployment, experienced more widely throughout the 
economy. Fewer people may be experiencing unemployment, but for those 
who are, it is quite costly.
    In recent years the U.S. labor market has come under increased 
pressure from intensified domestic and international competition. This 
pressure has changed the nature of job turnover in the United States. 
Workers no longer just change jobs but often also change occupations 
throughout their working lives.
    The following are some recommendations for reforming the current 
Unemployment Insurance program:

    1. Increase the federal role in unemployment insurance

    The federal-state structure of unemployment insurance is a relic of 
its 1935 establishment, and a Depression-era concern over the 
constitutionality of plans for the federal government to levy taxes for 
unemployment assistance. Although referred to as a partnership, states 
currently bear the overwhelming responsibility of financing and 
administering the unemployment insurance system. Changes in the labor 
market suggest that, at least substantively, unemployment insurance 
would better meet its stated objectives if the federal government 
played a more prominent role in this partnership.
    At one extreme, transforming unemployment insurance into a federal 
program would significantly reduce the current administrative burden 
being placed the states. There would be a single tax rate and maximum 
taxable wage base for the entire country. Like Social Security, the 
federal government would collect all unemployment insurance taxes. All 
workers, regardless of where they lived and worked, would be treated 
equally under this new federal program, thereby removing all the 
bureaucratic discrimination that currently exists. Workers would 
continue to apply for assistance at local offices and local officials 
would monitor eligibility requirements. The federal government would 
make payments directly to workers, removing the middle step of 
transferring funds to State agencies. These changes would result in 
substantial cost savings.
    The convergence of state unemployment rates suggests that 
unemployment is becoming a more national phenomenon, rather than a 
state or regional phenomenon. This provides another reason for moving 
toward a single national unemployment insurance system.
    As a federal program, it would much easier for the government to 
extend assistance during periods of prolonged economic slowdown, as 
well as provide assistance during periods of national emergency, like 
natural disasters and economic disruptions resulting from terrorist 
attacks.
    Most importantly, making unemployment insurance a single federal 
program would create a national risk pool, and thereby bring the 
program closer to achieving its original objective of being an 
insurance program.
    Reinventing UI as a federal program would have the following 
benefits:

      Bring unemployment insurance closer to serving as a true 
insurance program
      Remove the implicit discrimination by state in the amount 
of assistance
      Reduce administrative burden of tax collection and 
program administration
      Enable the program to be more flexible in responding to 
changes in national labor market conditions
      Make more resources available to workers undergoing a 
costly transition

    Opponents of this option argue that strengthening the federal role 
in unemployment insurance it will further increase the size of the 
federal government. The current system may help reduce the size of the 
federal government, but it is contributing to increasing the size of 
state governments.
    Regional variation in earnings/assistance could be maintained, with 
the federal role establishing a minimum percentage of wages replaced.

    2. Increase the maximum taxable wage base and reduce the FUTA tax 
rate

    Increasing tax taxable wage base would make the unemployment 
insurance payroll tax more progressive. By increasing the taxable wage 
base to $50,000, which is closer to the taxable wage base currently in 
place under Social Security, the tax rate could be significantly 
reduced yet still generate the same amount of revenue that is currently 
collected. A large reduction in the tax rate could result in 
significant job growth.

    3. Improve the linkage to re-employment by expanding assistance to 
include recent innovations in labor market policies, i.e. ``wage 
insurance'' and a health care tax credit

    In 2002 the Trade Adjustment Assistance (TAA) program was expanded 
to include ``wage insurance'' and a Health Care Tax Credit (HCTC). 
Under wage insurance, unemployed workers who find a job that pays less 
than their previous job are eligible to receive half of the difference 
between their new and old wages for up to 2 years, subject to a cap of 
$10,000. Wage insurance is specifically designed to encourage people to 
return to work sooner than they might have otherwise. In addition, it 
is hoped that the new employer will provide on-the-job training, which 
has proven to be the most effective form of training. Wage insurance is 
also a less expensive form of assistance than unemployment insurance. 
Under the refundable Health Care Tax Credit, eligible workers can 
receive 65 percent of the cost of their health insurance premium for up 
to 2 years. According to recipients, both programs have already proven 
to meet pressing needs of workers and their families.

    4. Enable individuals, and employers on behalf of individuals, to 
voluntarily contribute to unemployment insurance and receive coverage

    One of the difficulties in achieving universal coverage is that 
many of those workers who are currently not covered do not have 
traditional relationships with employers. In order to address this 
problem, individuals would be able to voluntarily contribute to the 
unemployment insurance program, as is currently the case under Social 
Security. With voluntary contributions, more workers would be eligible 
for assistance. Workers who leave their jobs voluntarily could receive 
assistance, as could the self-employed.
    It is easier to collect taxes and cover these workers than it is to 
provide them with assistance. Most importantly, there are problems with 
measuring ``job loss'' for many of these workers. It would also be 
difficult to determine the amount of assistance they should receive. 
One way to address these problems would be to encourage individuals to 
establish saving programs to help offset income losses.

    5. Tailor benefits to work experience and local labor market 
conditions

    Benefit levels would be set according to a formula based on work 
experience, i.e. number of contributions to the trust fund, wage 
history, local labor market conditions and reason for separation. In 
order to cover low-wage, part-time and part-year workers, eligibility 
would be based on hours worked and earnings levels, rather than 
exclusively on earnings levels. Workers losing their jobs in regions 
with poor labor market conditions might receive a higher level of 
assistance, and/or get assistance for longer periods of time. Workers 
leaving their jobs voluntarily might be eligible for less assistance 
than those workers who lose their jobs because of downsizing or plant-
closings.

    6. Explore consolidating tax collection and benefit payment with 
Social Security in order to seriously reduce administrative costs

    Federal and state governments currently maintain duplicate payment 
systems to administer Social Security and Unemployment Insurance. Both 
the federal and state governments collect taxes for Unemployment 
Insurance. Federal and state revenues are placed in a trust fund and 
the federal government transfers the funds back to the states. This 
cumbersome process could be replaced by having the federal government 
collect the tax and make payments, as is currently the practice under 
Social Security.
    The FUTA tax could be withheld from wages together with the Social 
Security tax.\9\ Employers and employees could both pay the FUTA tax, 
as is currently the practice with Social Security. The current practice 
of ``experience rating,'' which serves as a factor in calculating the 
employer's tax rate, would continue.

    \9\ Despite concern over future liquidity of its trust fund, the 
SSI program has served millions of Americans extremely well since its 
creation.

    7. Create a 401(k)-like saving program for workers, which they 
could use to supplement unemployment insurance. Employers and the 
---------------------------------------------------------------------------
government could match individual contributions.

    Encourage workers to establish a fund to help offset costs 
associated with unemployment and job change. Workers could make 
contributions to a fund, matched dollar-for-dollar by their employers 
and the federal government. Contributions would be tax deductible and 
any interest generated by the fund would be exempt from tax. 
Individuals would manage their own funds. Distributions from the fund 
to pay cover the costs for worker training, job search, job relocation 
and other expenses associated with unemployment and job change would be 
tax free. Self-employed, part-time and temporary workers could 
withdrawal funds to offset drops in income. All other distributions 
would be taxed as income. All funds remaining at age 57 would 
automatically become part of the worker's retirement savings.\10\
---------------------------------------------------------------------------
    \10\ For a more detailed description of this proposal see 
Feldstein, Martin, ``Rethinking Social Insurance,'' 2005, American 
Economic Review, Volume 95 Number 1, American Economic Association, 
March.
---------------------------------------------------------------------------
Conclusion
    Unemployment Insurance provides needed assistance to workers and 
their families during times of great financial hardship associated with 
job loss.
    The Administration's budget request for FY 2007 focuses on 
recouping payments considered to be made in error. While addressing 
waste, fraud and abuse in the program, the Administration's proposals 
may actually increase the administrative burden placed on states, as 
well as on workers, thereby making it more difficult for them to 
receive the assistance they so desperately need in a timely fashion.
    The Administration's budget request ignores the program's serious 
long-term problems. Our nation's Unemployment Insurance program is 
seriously out of date with recent developments in the U.S. labor 
market.
    American workers are currently facing considerable pressure due to 
continued technological change and intensified competition resulting 
from globalization. Despite significant changes in U.S. labor market 
conditions there have been no major changes in the basic structure of 
Unemployment Insurance since it was established 70 years ago. Reform of 
the nation's Unemployment Insurance programs is necessary in order to 
make it relevant to the labor market of the 21st century.

                                 

    Chairman HERGER. Thank you, Mr. Rosen. Dr. Kane to testify.

      STATEMENT OF TIM KANE, PH.D., DIRECTOR, CENTER FOR 
     INTERNATIONAL TRADE AND ECONOMICS, HERITAGE FOUNDATION

    Dr. KANE. Thanks very much, Mr. Chairman and Members, for 
this opportunity to testify. I am actually speaking on behalf 
of myself, not the Heritage Foundation, where I work. I have 
learned a lot there, but this is my own testimony. In fact, it 
is my first time, first opportunity to testify before Congress. 
My wife reminded me if I don't behave, it may be my last. I 
really do appreciate this. But because this is my first 
opportunity, I take what I say in these 5 minutes very 
seriously. It may be my last opportunity to have an influence 
on public policy. To set the context, I want to begin by 
emphasizing the strength of the U.S. economy. As an economist, 
having looked at this recession and recovery period, I think I 
share Mr. Greenspan and others' feelings that we live in an 
amazing economy. With an unemployment rate of 4.7 percent, 
lower than the last 3 decades, as you mentioned, Mr. Chairman, 
with the growth rate coming out at 4.8 percent, it is a real 
puzzle why there is so much concern and fear. I know there are 
some other explanations, but I think there have been plenty of 
folks in the policymaking community who are fanning the flames 
of fear right now of a bad economy when we have a good economy. 
That leads to repercussions and hostility sometimes to illegal 
immigrants or immigrants of any color, from any nation, any 
creed, and I think that is an unhealthy environment.
    We need to carefully consider creating fear where there 
shouldn't be fear, where there should be hope and promise. On 
the notion of turnover that was already emphasized this 
morning, the UI Program has a tremendous impact on that 
turnover, and I would like to emphasize job turnover. 
Industrial turnover is a good thing. We don't all want to be 
back in ancient times building pyramids. We want to have an 
economy where people move into new sectors. Job loss, job 
turnover, job gain--those are right, and we shouldn't 
characterize every time a person leaves a job as a termination 
because, mostly, those are voluntary. Mostly, in this economy, 
people choose to have, in this day and age, shorter work 
tenures rather than longer. It is not forced by duress. It is 
not forced by employers. With the nature of the strong economy 
in mind, let me turn briefly to the goals of the UI Program. 
The goal originally was to help people transition to another 
job, to actually help lower the unemployment rate. But what has 
happened--through international research and through national 
research--because we do have State diversity, we know that 
programs that provide more labor protectionism, longer 
replacement periods for income and higher replacement rates 
actually lead to higher unemployment rates. If you all want to 
get the lowest unemployment rate possible in this country, you 
might consider scrapping the program altogether or turning it 
back to the private sector. When we question why we have such a 
low savings rate in this country, you may think also that we 
have one of the highest insurance rates. Why would Americans 
need to save if they are already insured against everything by 
a paternalistic government?
    When you start thinking about ways to reform the system, 
consider allowing the States to reform it on their own, not to 
impose on them ways that you think is best. Let me propose one 
thing in particular because I won't have the opportunity to go 
through my entire written testimony. It often puzzles me why we 
have a strict 26-week limit on the UI program. I don't 
particularly understand why you pay someone when they have only 
been unemployed 3 weeks or 4 weeks. Why not start the program 
at 5 weeks or 8 weeks, when you know someone is in duress, and 
that would give you an opportunity to maybe pay them longer or 
maybe pay them more? This is perhaps exactly the thing that you 
should consider freeing the reins on the States to experiment 
with, rather than having one strict 26-week system. Because 
Nobel Prize economist Gary Becker has pointed out, the bulk of 
the payments go to those first 4 weeks, when people aren't in 
duress. I think your concern rightly is the folks that are 
still unemployed a half year into an unemployment spell.
    Let me close in the brief time I have with a few questions. 
One is just based on personal experience as an employer. I know 
that when we think smoking is bad, we tax cigarettes. We tax 
smokers. But when we think unemployment is a bad thing, why is 
the Congress taxing employers? It was very unnerving when I 
hired my first worker, and I was instantly hit with a tax to 
pay for unemployment when I was actually trying to be part of 
the solution, not part of the problem. I think that concludes 
my testimony, and I do appreciate the honor, sir, and would be 
happy to answer questions afterward.

    [The prepared statement of Mr. Kane follows:]

Statement of Tim Kane, Ph.D., Director, Center for International Trade 
                   and Economics, Heritage Foundation

    Mr. Chairman and other distinguished Members, I am honored to 
testify before you today.\1\ In my testimony, I would like to (1) 
emphasize the strong employment health of the current U.S. economy; (2) 
describe new research showing that overly generous unemployment 
insurance programs lead to higher levels of unemployment and slower 
economic growth due to the dynamic nature of labor markets; and (3) 
propose steps for reforming U.S. law on unemployment insurance.
---------------------------------------------------------------------------
    \1\ The Heritage Foundation is a public policy, research, and 
educational organization operating under Section 501(C)(3). It is 
privately supported, and receives no funds from any government at any 
level, nor does it perform any government or other contract work. The 
Heritage Foundation is the most broadly supported think tank in the 
United States. During 2005, it had more than 275,000 individual, 
foundation, and corporate supporters representing every state in the 
U.S. Its 2005 income came from the following sources:
    Individuals; 63%
    Foundations; 21%
    Corporations; 4%
    Investment Income; 9%
    Publication Sales and Other; 3%
    The top five corporate givers provided The Heritage Foundation with 
2% of its 2005 income. The Heritage Foundation's books are audited 
annually by the national accounting firm of Deloitte & Touche. A list 
of major donors is available from The Heritage Foundation upon request.
    Members of The Heritage Foundation staff testify as individuals 
discussing their own independent research. The views expressed are 
their own, and do not reflect an institutional position for The 
Heritage Foundation or its board of trustees.
---------------------------------------------------------------------------
The Nature of American Prosperity in this Decade
    As obvious is this may seem, every analysis of economic policy at 
the federal level in the United States must begin with a recognition of 
its comprehensive, record-setting strength. By almost every indicator, 
the American economy is prosperous.

      More Working Americans than Ever. In the latest 
Employment Situation report from the Labor Department, it is reported 
that there are 150.65 million Americans in the labor force, and 143.64 
million employed, both record highs.
      Very Low Unemployment. The rate of unemployment is just 
4.7 percent nationally. In most introductory economics courses, this is 
considered a rate that is below the natural rate of unemployment, and a 
sign of possible overheating. By any measure, it is a low rate, far 
below the average of the 1990s, which itself was a healthy decade 
economically.
      Growth in Output and Productivity continues to surge. The 
high growth rates in GDP every quarter since that attacks of 9/11 are a 
very powerful symbol of the resilience of the American economy. But a 
more important measure, as you know, is the high GDP per capita 
Americans enjoy. By comparison, U.S. GDP per capita is 20% or higher 
that equivalent income levels in nearly every other country in the 
world, particularly the advanced industrial economies of Europe, as 
well as Japan.

What are the Goals of Unemployment Insurance?
    Established in 1935 with the Social Security Act of 1935, and 
financed by a tax on worker's wages according to the Federal 
Unemployment Tax Act of 1939 (FUTA), the general goal of UI is to 
alleviate economic hardship caused by involuntary unemployment.
    The program is a complex blend of state and federal authority, 
funded at the federal level with a 6.2 percent tax (though all but 0.8 
percent is refunded) on the initial $7000 of each worker's wages, 
primarily used for administration. The state tax (SUTA) varies; some 
states use a high rate and low base (New York's is 4.2 percent on the 
first $8500), and others use a low rate and high base (Utah's is 0.5 
percent on the first $22,000). States collect roughly $20 billion per 
year in tax revenues, while the federal government collects roughly $7 
billion. During most years, total benefits paid out are $20 billion, 
but during the recent recessionary years, regular benefits paid 
amounted to over $40 billion per year.
    Specific goals of the program are to (1) provide income support, 
(2) help increase the job-search opportunities of UI recipients. The 
trade-offs of UI are (1) lengthening the duration of individual 
unemployment spells, (2) decreasing aggregate labor force utilization 
in the macro economy, which restricts aggregate supply and growth. 
Research over the years has found that the program is not effectively 
meeting its intended objectives to diminish unemployment levels or to 
enhance employment prospects. That should weigh heavily on the minds of 
policy-makers when they consider the budget for the program.
    If the goal is to minimize the unemployment rate, then UI is 
counter-productive. If the goal is to alleviate natural job-loss 
transitions, then it may be working well. But policy-makers should 
still question why only about half of qualifying citizens use the 
program, and what the equity considerations are. I think that offhand 
there are two very clear policy lessons from this basic data.

    1.  UI payments should made only to citizens in employment duress. 
That means that a qualifying test should be utilized, and screening 
should be done carefully.
    2.  More importantly, in my mind, Congress should restrict UI 
payment to citizens who have been jobless for more than 4 weeks. This 
could potentially allow the program to be extended by many months, 
while focusing payments on those truly in need.

Labor Protectionism and Unemployment
    The Summer 1997 issue of the Journal of Economic Perspectives 
published two articles discussing labor rigidity in Europe. Horst 
Siebert emphasized that the concert of rigid labor institutions in 
Europe was clearly driving higher unemployment rates there, emphasizing 
the tightening of policies during 1960s and 1970s. While he observed 
differences among European states, he concluded by focusing on one 
common feature: ``Job protection rules can be considered to be at the 
core of continental Europe's policy toward the unemployment problem: 
protecting those who have a job is reducing the incentives to create 
new jobs.'' A contrasting opinion was provided in Stephen Nickell's 
econometric overview, which reported, ``there is no evidence in our 
data that high labor standards overall have any impact on unemployment 
whatever.''
    Table 1 presents unemployment rate averages by decade for ten 
countries reported by BLS.

                                     Table 1. Unemployment Rates on the rise

                                         1960-1979              1980-2004               Change

USA                                5.5                    6.2                    0.8
Japan                              1.5                    3.3                    1.7
Netherlands                        4.6                    6.5                    1.9
Canada                             5.7                    8.5                    2.8
Sweden                             1.9                    5.1                    3.2
UK                                 3.6                    8.3                    4.7
Australia                          2.9                    7.7                    4.8
Italy                              3.5                    8.3                    4.8
Germany                            1.4                    7.2                    5.9
France                             2.8                    9.8                    7.0

Source: Author calculations using U.S. BLS data.

    To summarize, the old caricature that ``America is richer but less 
humane to its lower classes'' can be squared with some data up to 1980, 
when per capita GDP was higher in America but unemployment was too. 
However, post-1980 it is clear that America has continued its 
productivity leadership (with higher income distribution generally), 
while European countries suffer high unemployment rates. The ``humane'' 
policies of labor protectionism appear to have backfired, creating a 
less humane social arrangement.
    Nickell (1997) emphasized the diversity of European unemployment 
rate experiences (``from 1.8 percent in Switzerland to 19.7 percent in 
Spain'') and policies. Nickell's approach is a good one--he assembles 
macroeconomic performance data for 20 OECD countries, measured over two 
periods (1983--88 and 1989--94), and assembles an impressive array of 
labor policy measures, which he uses as explanatory variables. Nickell 
says at one point that ``roughly speaking, labor market institutions 
were the same'' in the 1960s and 1990s. He concludes that unemployment 
rates are dependent on some policies (e.g., generous unemployment 
benefits, high taxes, high minimum wages, and weak universal 
education), but not the conventional culprit: labor market rigidity.
    Nickell's assessment has changed in less than ten years, however, 
as expressed in his recent paper with Luca Nonziata and Wolfgang Ochel 
(2005). The authors find that ``changes in labor market institutions'' 
and rigidities since 1960 have indeed occurred, and these are the root 
causes, with employment protection accounting for 19 percent of the 
rise of unemployment. I think it is fair to say that the consensus view 
of economists today has evolved along the same lines.
    A deep new data set published by the World Bank in 2003 and 
published in the Quarterly Journal of Economics (Djankov et al. 2004) 
makes a definitive case that the ``Regulation of Labor'' (the title of 
the paper) can be harmful to macroeconomic outcomes. The Djankov labor 
data cover 85 countries over dozens of labor categories, including the 
size of the minimum wage, strike laws, protections from dismissal, 
generosity of social benefits, and so on. The data are coded so that a 
maximum score of 1 represents the most rigid labor rule, while zero 
represents perfect flexibility. Importantly, this very deep data set 
represents laws during a single year, 1997, which precludes some uses 
that would be available with a time series.
    Nevertheless, Djankov et al. (2004) find that an increase in the 
employment laws index is associated with an increase in black market 
activity, a reduction in labor force participation, and an increase in 
unemployment rates (averaged over the decade). The econometric tests 
are not robust and report an R\2\ of 0.13, with the labor regulation 
variable significant at the 5 percent level.
    I am hopeful that the excellent new data sets in place will be 
improved in years ahead and that, with greater knowledge of how 
institutions and outcomes relate to one another, countries will be even 
better armed to lower the barriers to riches.
    For our discussion of Unemployment Insurance, the point to 
emphasize is that higher replacement rates and durations of UI are 
related to longer unemployment spells and higher unemployment rates.

One Model of Unemployment Insurance Reform
    Now I would like to share with you the results of rough analysis of 
a reform proposal of the U.S. Unemployment Insurance (UI) system by the 
Heritage Foundation. This research was done out of personal interest, 
and has not been peer-reviewed, but I would like to share some of the 
insights with the Members on this occasion.
    The basic reform considered is a conversion of UI tax payments 
toward personal employment insurance savings accounts (PESA) that can 
be drawn down in the event of an unemployment spell. This reform holds 
the promise of creating incentives that will limit rather than 
encourage the duration of unemployment spells. Upon retirement, accrued 
funds will be paid to the individual.
    Cash paid into the system would not flow out as insurance to 
others, but would instead build up individual accounts. If the 
individual PESA becomes exhausted during an unemployment spell, 
benefits could still be drawn out in the form of a non-recourse loan 
from the PESA trust fund (aggregate pool of PESA savings). The system 
itself would need additional inflow revenues to maintain solvency, 
making it more expensive than the current UI system. The feasibility of 
the reform rests entirely on the sensitivity of behavior to different 
incentives, which current economic studies are unable to specify with 
much accuracy.

Executive Summary of our Model
    We created a model for reform of the U.S. Unemployment Insurance 
(UI) which would create personal employment insurance savings accounts 
(PESA) that can be drawn down in the event of an unemployment spell--
with the key distinction that PESAs are personal property. Unutilized 
PESA savings are paid to the individual upon retirement. The goal is to 
change incentives for utilizing UI, which economists widely believe 
extends the duration of unemployment spells.
    Results from our multiple agent model:

      A PESA would provide positive retirement savings for 
about 94 percent of workers, even if existing UI usage behaviors do not 
change. The additional cost of transitioning to the program amounts to 
$88.8 billion for the first 50 years of the program. The typical PESA 
at retirement would amount to $20,000 per worker.
      Our best approximation of incentive effects on UI usage 
imply the costs will be much lower--$21.5 billion for the first 50 
years of the program. Further, up to 97 percent of workers would retire 
with positive PESA savings. The typical PESA savings at retirement 
stays at $20,000 per worker.

    When we allow for incentive changes induced by a PESA, we assume 
the duration of benefit usage is cut in half, lowering overall 
unemployment and raising aggregate supply and economic output. However, 
with PESAs, people are also more likely to use their benefits more 
frequently.

Design of the Model
    The model considers a set of simulated agents over their work life, 
and runs them through the current program and its established 
parameters. We then modify the incentive parameters to simulate reform 
options. A representative agent is defined by work-life characteristics 
including an annual income vector, and a weekly unemployment spell 
vector. Dollars are expressed in 2003 terms, so funds available upon 
retirement do not include the effect of inflation, nor do benefit 
levels and tax payments.
    The model uses a representative state since each of the 50 states 
uses different parameters for maximum and minimum weekly benefits, 
taxable wage base, tax rate, and so forth. The model uses the following 
parameters:

$10,750;                            Taxable wage base (for benefits, not
                                     administrative)
2.1 %;                              Tax rate (for benefits)
50.0 %;                             Replacement rate (% of total wages
                                     paid as benefit) \2\
$400;                               Maximum weekly benefit
3.0 %;                              Real rate of return on PESA savings
3.0 %;                              Interest rate charged on PESA loans

\2\ The average replacement rate of covered employees is roughly 37.5%
  (weekly total wages divided by weekly average benefit), but 50% is the
  typical legal replacement rate before placing a maximum weekly benefit
  that averages roughly $400.

    Reform Option 1 introduces PESAs, which we assume cuts UI durations 
in half, but also increases utilization by half.
    Many research studies confirm that a 10 percent increase in the 
replacement ratio (percent of employment income replace) results in an 
increase in UI duration ``between 1.0 week and 1.8 weeks.'' \3\ One 
labor textbook notes that a consensus estimate is that 25% reduction 
reduces average duration by 3-4 weeks. The theoretical question is how 
much would UI durations fall if replacement ratios were essentially 
zero? Under a PESA, the recipient would not have benefits as income, 
but would instead be drawing down wealth. The mind-set of ``free'' 
money from the government would be replaced the ideal personalized 
incentive to preserve wealth. The introduction of PESAs would act like 
a 100 percent reduction in replacement ratio, resulting in a 10-week 
reduction in UI durations under conservative assumptions, or a two-
thirds decline from the typical UI duration of 15-16 weeks. We used an 
even more conservative assumption that all UI durations would be 
reduced by half, not by two-third (or ten weeks).
---------------------------------------------------------------------------
    \3\ From Tom Stengle (July 1998), U.S. Department of Labor, 
``Dynamic Models of Unemployment Inusrance Receipt,'' page 22.
---------------------------------------------------------------------------
    However, the introduction of PESAs may also incent more 
participation. We know that more than half of eligible people do not 
utilize UI benefits currently. Take-up may increase if PESAs were 
implemented, for a variety of reasons. There would be less stigma 
(personal and social), eligibility hurdles would probably be lowered, 
bureaucratic access to funds might be simplified, and so on. 
Ultimately, it would be a rational decision for an unemployed worker to 
draw down a PESA before all other forms of saving during an 
unemployment spell. When faced with unemployment, why take money out of 
your mutual fund before taking it out of your PESA? We assume these 
factors would increase PESA usage rates by 50 percent.

Simulation using a Single Representative Agent
    This model assumes a single representative agent, who is on UI once 
for 4 months at age 32.\4\ His lifetime income profile is based on 
Department of Labor (DOL) income average data for each age group.
---------------------------------------------------------------------------
    \4\ Empirically, 2.42 percent of the workforce is on UI in the 
typical month. A typical insured unemployment spell lasts 15-16 weeks. 
With 49 working years (18 to 66), there are 588 working months.
---------------------------------------------------------------------------
    The agent draws unemployment benefits from his PESA for each of the 
16 weeks, which replaces 50 percent of his total wages at that time. 
His PESA fund builds up to a positive balance of $3,960 by the time 
when the unemployment spell begins, then it falls to a negative balance 
of $1,825 by the end of the unemployment spell, which is treated as a 
non-recourse loan. The net cost to the government of the agent's UI 
spell is $5,785. Further PESA payments initially go towards paying off 
the loan, then begin building up as positive savings. Upon retirement 
at age 66, the agent's savings are a positive balance of $9,154. If the 
PESA is seeded with $100, the individual spends 9 fewer months under 
the loan deficit, and the final PESA savings are $9,497.
    When we allow for incentive changes induced by a PESA, the agent is 
more likely to resume work faster, and also is likely to draw down his 
PESA more often. This is ambiguous to model using a single 
representative agent, but we assume a second UI spell--later in life at 
age 42, and briefer (one month). We also cut the first spell by half 
(two rather than four months). Under these assumptions, and the $100 
seeding, the PESA never goes into deficit during the first spell, and 
ends with positive savings of $13,000.
    If we further assume that the first month of any unemployment spell 
was not eligible for PESA draw down, the PESA would grow to $21,000 
upon retirement.

Simulation using Multiple Agents
    Fifteen representative agents--representing three income profiles 
weighted by five benefit usage patterns--are the basis of this model. 
The following table illustrates various cases, run without changing 
behavior, seeding each PESA with $200.

Table 1. PESA Savings at Retirement in 2003 dollars (without  behavioral
                                 change)

                                       Number of Lifetime UI Spells

                                        (Percent of insured covered
         Income Profiles                        employment)

                                     0       1       2       3      4+

(Yearly Average)                  (61.1%  (24.9%  (7.9%)  (3.5%)  (2.6%)
                                   )       )

Low Income ($14,296)              $21,94  $19,51  $10,83  $5,768  $(4,97
                                   1       4       7               9)

Average Income ($25,168)          $24,34  $19,32  $4,758  $(3,23  $(18,9
                                   4       4               8)      83)

Higher Income ($39,649)           $26,07  $16,25  $246    $(11,9  $(34,3
                                   4       4               60)     62)


    This multiple-agent model implies that even under current usage 
parameters, a PESA would provide positive retirement savings for about 
94 percent of workers. The PESA system would generate an additional 
cost above what the existing UI system costs today, mainly by paying 
out individual PESAs upon retirement. In the first run of this model 
without changing behavioral assumptions, the ``overhang'' of the PESA 
fund amounts to $88.8 billion for the first 50 years of the program.
    A second version of the model includes assumptions about behavioral 
change among the workforce, presented in Table 2. In this case, up to 
97 percent of workers would retire with positive PESA savings, and the 
overhang amounts to just $21.5 billion.

       Table 2. PESA Savings at Retirement with behavioral change

                                       Number of Lifetime UI Spells

                                        (Percent of insured covered
         Income Profiles                        employment)

                                     1       2       3       4      5+

(Yearly Average)                  (61.1%  (24.9%  (7.9%)  (3.5%)  (2.6%)
                                   )       )

Low Income ($14,296)              $19,55  $15,70  $10,66  $9,608  $5,471
                                   4       6       3

Average Income ($25,168)          $20,08  $13,57  $5,642  $3,047  $(1,87
                                   5       5                       9)

Higher Income ($39,649)           $20,70  $10,85  $120    $(3,01  $(13,0
                                   5       6               9)      64)


    Those few workers who had negative PESA balances upon retirement 
would not have to pay back PESA loans, just as UI recipients today are 
not expected to settle their UI account with the government.
    There is one major limitation to the current model: agents are all 
in the labor force, and this is not a realistic assumption. A future 
run of the model will include more realistic agents who are out of the 
labor force during different periods of time, and also agents who are 
unemployed and neither adding to or drawing from their PESA.
    For discussion, the introduction of the PESA system would be 
scrutinized immediately for any changes in unemployment behavior or 
financial effects. Long-range incentives can be very difficult to 
introduce, especially if the term is four or five decades. Therefore, 
the incentive to maintain a positive PESA balance may be enhanced if 
some percentage of positive PESA balances were paid out periodically. 
For example, if annual PESA ``dividends'' were 10%, paid out every year 
on December 1st, then the poorer workers in our model would get check 
for $37.20 in the very first year.

Conclusion
    Again, let me thank you for the honor of testifying today. America 
can retain its economic leadership in the world by continuing 
successful free market policies of the last two centuries. Labor 
freedom is one of the most important freedoms of all, and a more 
effective UI program will help balance economic justice with higher 
growth.

                                 

    Chairman HERGER. Thank you, Dr. Kane. The gentleman from 
Washington to inquire.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Let me start with 
Mr. Halley and Mr. Devereux. Mr. Devereux and Mr. Halley, we 
just heard testimony from the department, from Ms. Chao's 
operation, that the ES Program is redundant, and it serves 
little purpose. Can you respond to that suggestion? I mean, 
what specific services are provided? Why have the two programs? 
It sounded there for a moment like we had two programs doing 
absolutely the same thing, just in different offices, the way 
it was described by Mr. Mason. Would you explain, is there any 
reason for having the two different programs?
    Mr. HALLEY. Thank you, Congressman. Let me respond to that 
from the State of South Carolina perspective. Whereas we do 
have an employment service and we do have the WIA in 12 
workforce investment areas, the employment service is a State-
wide labor exchange agency. It has a State-wide job bank, which 
the workforce investment areas do not have. Fortunately, in the 
State of South Carolina, the workforce investment areas, the 
One-Stop Careers are located, in 98 percent of the cases, 
within the Employment Security Commission. Let me assure you 
that the integration of service is very obvious when you walk 
into one of our One-Stops in terms of the services that are 
provided from the employment service to the--which are 
basically core services and, in addition, to the intensive 
services. But in terms of partners that operate out of that 
One-Stop, it is an integrated process that we exercise. I also 
have to reference the fact that in the State of South Carolina, 
the Wagner-Peyser budget to provide labor exchange activities 
is $10 million. We served over 400,000 people last program 
year. We placed 65,000 people in employment. The WIA budget in 
the State of South Carolina is $45 million. They served a 
little over 200 people in this agency as far as people 
graduating, actually graduating from an institution. I think 
that the Wagner-Peyser, the employment service, the labor 
exchange service is essential. I think that you have to have a 
State-wide labor exchange program in place, which is the 
Wagner-Peyser State-wide labor exchange program, in order to 
give the applicants, I think, the right to apply and the 
convenience of looking for jobs on a State-wide basis.
    Mr. MCDERMOTT. Mr. Devereux?
    Mr. DEVEREUX. I would echo some of those comments. I think 
it is incredibly important to have a State-wide system where UI 
and ES is tied together in a very coordinated fashion. The One-
Stop programs under WIA are governed by local boards and have a 
very different set of priorities than the ES system. I think it 
is far more important to have that State-wide coordinated 
system under the employment----
    Mr. MCDERMOTT. The one that is locally controlled has to do 
with what the jobs that they are looking in the local area, and 
so they design what they are doing locally?
    Mr. DEVEREUX. That is correct. Correct.
    Mr. MCDERMOTT. The other one is a State-wide system?
    Mr. DEVEREUX. State-wide integrated system.
    Mr. MCDERMOTT. It is not correct then, in your view, to say 
that if you combine these systems you will get more for less, 
and we can save $2 billion, as the President's budget tries?
    Mr. DEVEREUX. That is my belief, yes.
    Mr. MCDERMOTT. Also your----
    Mr. HALLEY. I agree with that, Congressman.
    Mr. MCDERMOTT. That would be your organizational assessment 
from a national board that you sit on and you are here 
representing? Or you are just speaking for South Carolina at 
the moment?
    Mr. HALLEY. I am speaking from South Carolina. As an 
administrator of the Employment Service Program for the State 
of South Carolina.
    Mr. MCDERMOTT. Is there any State that has yet received a 
waiver to let some outside agency decide who is eligible for 
UI?
    Mr. HALLEY. I am not familiar with any.
    Mr. DEVEREUX. I am not either.
    Mr. MCDERMOTT. You don't know whether this bill that has 
these new waivers in it would give States that option of 
letting some--I know about this from workers' compensation, 
where workers' comp has now been, in some States, put out to 
private agencies to decide if somebody is able to go back to 
work on a physical basis. I wondered if this kind of thing had 
happened at the administrative level. But you know nothing 
about anything like that?
    Mr. HALLEY. I have no concept of that, Congressman.
    Mr. MCDERMOTT. Mr. Rosen, we hear a lot of good numbers 
here. We are getting 175,000 new jobs a month. My remembrance 
from a previous Administration was that it took at least 
250,000 jobs a month simply to keep up with the new people 
coming into the employment base. Now I see your head going 
``yes,'' and I see Mr. Kane's head going ``no.'' I would like 
to hear some discussion about the wagging heads here.
    Mr. ROSEN. Well, I was saying yes because I think you have 
identified an important issue. But you know, it is conventional 
wisdom that somewhere around 200,000, 250,000 a month is the 
number we are looking for. It is curious. The markets wait--you 
know, bated breath--for that number to come out, and then we 
are told that the markets respond to that number, if it is 
above or below, and then we know how healthy the economy is. 
Well, one of the factors is that we actually are not, our labor 
force is not growing as fast as it was before because of 
demographic factors. In terms of bringing people into the 
market, that number is less important. As I pointed out before, 
I wish that the Government would stop reporting that number 
because I think it is incredibly misleading. That really what 
we want to know is not the net number, but the total. Because 
it is possible, let us say, for example, during a recession, we 
will have job creation, some--it will be a lot lower than 
usual--and very high job termination. But during recoveries, we 
will have higher job creation, but we could also have higher 
job termination. But just the net might be positive. The net 
is, I think, a very misleading number. Only a couple of years 
ago has the BLS and the Bureau of Census begun collecting data 
from establishments on actual numbers of people who are 
employed and jobs that are terminated. We have the ability now 
to start looking at those numbers, and that is what we really 
need to look at in terms of really understanding the health of 
the economy.
    Dr. KANE. I would agree with some of that. I am sorry.
    Chairman HERGER. On my time. The time has expired. But, Dr. 
Kane, why don't you answer the question also?
    Dr. KANE. Yes, sir. I will be brief. I think the 
conventional wisdom has varied quite a bit. But if it were as 
high as 250,000 a month, that would be about 3 million workers 
a year. If you assume half are employed, that is 6 million 
people you are adding a year. That is way too high. I think a 
study done by the Federal Reserve in Atlanta pointed out that 
because of the demographic changes, it is about 100,000 a month 
now. If you get 175,000 job creation a month, you are way above 
what you need to replace. The best measure is the unemployment 
rate. That is where you see utilization of labor, and it is 
incredibly strong right now.
    Mr. MCDERMOTT. Even when you are considering a number of 
people who have given up looking?
    Dr. KANE. Yes, sir. There is this theory of discouragement, 
which is, frankly, a real canard.
    Mr. MCDERMOTT. You don't believe that happens?
    Dr. KANE. It is not that I don't believe it. It is that the 
data say it is not true. This story was put out, and I think it 
was a good story in the 1991 recession. The Labor Department--I 
had nothing to do with it. I would love to take credit--they 
responded, and they started to ask people why they were not 
looking for work. One of the choices is if they are 
discouraged, and they take great care to find that out. We know 
since 1992 how many discouraged workers there are, and there is 
not a growth of them in this last recession. We have the same 
amount of discouraged workers today as we did in some of the 
best years in the 1990s. You go back to that unemployment rate. 
It is a great statistic, and 4.7 percent, you are not going to 
find a way to explain that away.
    Chairman HERGER. I thank you.
    Mr. MCDERMOTT. Thank you for extending my time a little.
    Chairman HERGER. A lot.
    [Laughter.]
    Mr. MCDERMOTT. It is all in the eye of the beholder.
    Chairman HERGER. Right. Dr. Nilsen, what do you know about 
the effect of profiling programs which were created in the 
1990s with the intent of better targeting services to people 
most likely to exhaust unemployment benefits before finding a 
new job? Should we be surprised that after this many years, we 
still have such limited data on the effect of worker profiling 
efforts?
    Dr. NILSEN. Mr. Chairman, it is unfortunate that we don't 
have a lot of good information on the effectiveness of 
profiling. I know it was started in the 1990s based on some 
research that said if we identify those people most likely to 
exhaust their benefits and focus assistance on them, we should 
get shorter durations of unemployment for those. There hasn't 
been good research funded by Labor to look at this program to 
see if, in fact, it is operating the way it was conceived to 
operate. As I covered in my statement, the current research 
right now that Labor is funding is just seeing how good the 
models are on predicting exhaustion. They are not looking at 
how good the assistance is to shorten the duration of 
unemployment. Right now, I agree with your statement. We don't 
know enough about how successful this profiling experiment has 
been. I know in Washington State, where Mr. McDermott is from, 
they have a program that also targets people who are more or 
less the most job ready and says let us help you get into the 
workforce, get back to work quicker. Those are the kinds of 
things that I think also should be tried. But we need the 
research to show that these efforts are effective. Right now, 
we don't know enough about profiling. We don't know how much 
each State profiles its unemployment recipients. We don't know 
what proportion are being provided assistance. I would hope 
that the Labor Department would fund more research. When we 
looked at its research budget over time or the last 5 years, 
this is all of the Employment and Training Administration 
programs. The research budget has gone down from about $86 
million to in 2007 they are requesting about $17 million. That 
has got to be spread not only for UI research, but for all the 
research on the programs. If I just might add something to Mr. 
McDermott's question from before? Looking at the UI system and 
its relation to the workforce investment system, this is a big, 
broad system. When Mr. Bishop was talking about the amount of 
training in the workforce investment system, we did a study 
that said 40 percent of the dollars are spent on training. That 
60 percent that is left over is not administrative funding. 
That is helping people get jobs. Many more people are placed in 
jobs as a result of that assistance than the training. 
Basically, the training is people in training are barely 10 
percent of the people going through the system, and we have 
seen many examples across the country in our work of systems 
that are integrated with ES and the workforce system. That is 
the model. That is the way it should be. It is not that way 
everywhere, as Mr. Bishop pointed out.
    Mr. MCDERMOTT. It is in Washington.
    Chairman HERGER. Thank you, Dr. Nilsen. Mr. Halley, could 
you please give us an update on how many States are using the 
authority Congress provided in the SUTA Dumping Prevention Act 
of 2004 to compare unemployment rolls with the NDNH? Do you 
have any sense of the savings to the State unemployment trust 
fund due to State use of this new authority?
    Mr. HALLEY. Thank you, Mr. Chairman. To the best of my 
knowledge, I have no concept as to the number of States 
involved in the North Carolina model. In terms of savings, 
there have been projected savings. But in terms of actual 
savings that have occurred, I cannot tell you.
    Chairman HERGER. Okay. Thank you. The gentleman from 
California, Mr. Becerra, to inquire.
    Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for 
your testimony. If I could begin with is it Mr. Halley or----
    Mr. HALLEY. Halley. Like the Halley Comet.
    Mr. BECERRA. Halley. Let me ask you something and also to 
Mr. Devereux, as folks who work in the system. Were you 
consulted by the DOL on these proposals to consolidate some of 
these employment service programs and combine them so we could 
have some savings?
    Mr. HALLEY. No, I was not. The State was not. The State of 
South Carolina was not.
    Mr. BECERRA. You are the president-elect of the----
    Mr. HALLEY. National Association of State Workforce 
Agencies.
    Mr. BECERRA. You would represent all those various State 
agencies that deal with workforce employment and the efforts 
that are being done by the various States?
    Mr. HALLEY. Yes.
    Mr. BECERRA. Okay. Mr. Devereux?
    Mr. DEVEREUX. I represent 2,400 members who are in 
employment security. I, myself, was not consulted. They may 
have been. I am not sure whether they were or not.
    Mr. BECERRA. Mr. Halley, I think you mentioned that you 
know of some programs that had to be eliminated that were 
having some success in reemploying individuals because of lack 
of funding?
    Mr. HALLEY. Basically, I did not mention. I think that is 
one of the other panelists.
    Mr. BECERRA. Oh, okay. I am sorry. Thank you. I apologize 
for that. Let me ask a question of Mr. Rosen. You talked about 
the employment figures and job creation/job loss. My sense is 
that over the last several years, we have seen a lot of jobs 
lost in manufacturing and a lot of jobs gained in the service 
sector. A lot of jobs lost that had benefits attached to them, 
a lot of jobs gained that come without benefits. A lot of jobs 
lost that had large or lengthy security attached to them, a lot 
of jobs gained that are very insecure. Tell me if my gut and 
some of the data which I have seen reflects what I have just 
said.
    Mr. ROSEN. What you said is exactly the conventional 
wisdom, and it is the story that we are being fed by the press 
constantly. But, in fact, if you look at this new database that 
I have mentioned, it actually suggests--I mean, you are correct 
that there are large numbers of manufacturing job losses and 
very few job creation in manufacturing. Therefore, the net in 
manufacturing is negative. The contrast is true in services, 
which is that the job creation is high. But there is also a lot 
of job termination in services.
    Mr. BECERRA. ower paying jobs in the service area.
    Mr. ROSEN. Correct. Correct.
    Mr. BECERRA. We are not talking about just computer jobs 
service area.
    Mr. ROSEN. Correct.
    Mr. BECERRA. We are talking a lot about the hospitality 
industry.
    Mr. ROSEN. Finance industry.
    Mr. BECERRA. Yes.
    Mr. ROSEN. Okay. The net may be greater in services than it 
is in manufacturing. But in fact, when you correct for the size 
of those two sectors--i.e., service is now 80 percent of the 
workforce, and manufacturing is less than 20 percent--in fact, 
the relative size of job termination in services is much 
greater than it is in manufacturing because manufacturing is a 
small base in the economy.
    Mr. BECERRA. Which I think, to some degree, to Dr. Kane's 
point, I think addresses why so many Americans still feel so 
insecure. Because while they may be working, it is no longer 
the same job that their parents had, where they knew for 40 
years they would be there, and they would have a pension at the 
end of the time that they were there. They had their benefits. 
Like my father, who was a laborer all of his life, he at least 
knew through his union job that he was going to have some 
health benefits for his family. He has a small pension through 
his work and also through Social Security. I think most people 
today are saying I better work very hard because I don't know 
how long I will keep this job, and I don't have any benefits 
that will be attached to it. I am sorry. Did you want to----
    Mr. ROSEN. Mr. Congressman, could I just add that in 
addition to your point about the fact that these new jobs may 
not have benefits associated with it, they also are putting a 
strain on our UI system because many of these people are not 
covered.
    Mr. BECERRA. That is right.
    Mr. ROSEN. That is why we are seeing a decline in the 
number of people who are unemployed actually getting 
assistance. That is why we need to rethink our system to try to 
cover some of those people.
    Mr. BECERRA. In the remaining time I have, I would like to 
engage the two of you, and Dr. Kane as well, on this issue. 
Because, Dr. Kane, I know a lot of folks who have come to me 
and said, ``I am working at a job that, if I could, I would 
leave. But I don't have anything else that I can turn to. I am 
working part time, but I would love desperately to work full 
time.'' A lot of part timers--my understanding is somewhere 
around 4 million or so Americans are working part time, and 
they are considered part of that full-time employment number 
that reduces the unemployment rate, but are barely making ends 
meet. I know a lot of folks who are discouraged and have not 
had success. These are folks who have some skills. The 4 or 5 
million people that we consider discouraged are no longer even 
counted in the unemployment rate. I am surprised that you say 
it is a fiction that there are these folks out there because my 
understanding is there are a lot of folks who have tried very 
hard. There are lot of folks who are working part time but are 
considered part of the full-time employment number, and that 
reduces the unemployment rate. Just, I know I am running out of 
time, but any quick comments. First let me turn to Dr. Kane, 
since I have already asked Mr. Rosen for some comment.
    Dr. KANE. Thank you, sir. No, I think you are right that 
there is--I don't mean to say that it is a fiction that there 
are discouraged workers that have skills that can't find work. 
My point is that they are not in greater number than they have 
been. It is pretty much a permanent feature of an economy that 
goes through change. If we want to have change and higher 
productive jobs in the future, that is part of the process. The 
issue today is does the UI help or does it protract that 
experience? I think you and both want to solve it. I would 
caution that we don't know all of the answers, and State 
experimentation is the best way to get there. On the part-time 
issue, I think you are right as well. I have looked at the data 
on that. There are more part-time workers. Some don't want to 
be. But a greater proportion are voluntarily part time. 
Mothers, for example--is a great story--that want to stay 
involved, and our economy now lets them on a part-time basis, 
professional women. I would also just briefly challenge, I 
don't think the loss of manufacturing, which is about 14 
million workers now in an economy--that is only 10 percent--the 
loss of those jobs, they are not replaced by bad jobs. Most of 
us, over 80 percent, are in the service sector. I would suspect 
every person in this room is in the service sector. Many of 
those jobs have benefits. If we look at the average data, pay 
and benefits on average is higher today than it was last year 
and the year before and in the 1950s, when there was all this 
supposed security. I do think it is fiction that we are losing 
benefits and that we are losing job security.
    Mr. BECERRA. But my understanding is that real wages, what 
you take home and what you can use to buy with that money, has 
actually gone down?
    Dr. KANE. Yes, sir.
    Mr. BECERRA. Your pay may have gone up, but relative to 
inflation, the cost of everything you have to buy, it has gone 
down.
    Dr. KANE. It is higher today. Cash payment earnings are 
higher today than during the dot-com boom. It has maybe gone 
down in the last year or two. But that points out again to the 
real rise that we have seen is in benefits. To your point, 
things like health, things like fringe benefits of other kinds. 
Those are even higher than they were.
    Chairman HERGER. The gentleman's time has expired. The 
gentleman from Pennsylvania, Mr. English, to inquire.
    Mr. ENGLISH. I want to thank the Chairman, and I want to 
thank the panelists for their contributions to our debates. I 
particularly want to thank you, Mr. Rosen, for raising the 
issue of wage insurance. I realize at a time when we are 
talking about retrenching at the Federal level, it may be 
unfashionable to talk about something that might prove to be an 
increment to the safety net. But at the same time, we are at a 
moment where it is very difficult for us, particularly in a 
district like mine, to rationalize some of our trade policies 
and recognize that some of the job displacement that is 
occurring may lead to higher incomes. But at the same time, 
there are many people who are losing their jobs and are facing 
a great deal of uncertainty. On that point, I know there is 
always a concern about the cost of entitlements. If we were to 
consider a system of wage insurance added to the current 
unemployment benefit system, what would it cost? Relative to 
the potential benefits in the economy that would accrue from 
our continued commitment to a rules-based globalization, are 
there potential savings as well from putting in this kind of a 
system?
    Mr. ROSEN. Well, thank you very much, Congressman. 
Actually, wage insurance is the extension of the discussion 
that we have been having here. The discussion about the 
difficulty people have in finding new jobs, the problem with 
training and those kinds of things. If I could just very 
quickly, just to say what wage insurance is? Under TAA, this 
program has just been implemented by your leadership. That if a 
worker takes a new job which pays less than the previous job, 
the Government will subsidize 50 percent of the difference up 
to 2 years with a cap of $10,000. Right now, it is structured 
for older workers, but there is no reason why it would have to 
be limited just to older workers. What is the reason for wage 
insurance? Number one, it is to encourage people to take jobs 
quicker. That would get them off the UI rolls quicker. Also, it 
would also have them go into work, and hopefully, the new 
employer would provide on-the-job training. We don't know a lot 
about the effectiveness of training. But the one thing we do 
know is that on-the-job training is always more effective than 
classroom training. If we can encourage more on-the-job 
training, that is a good thing. Now, to answer your question 
directly--I am sorry for the introduction--the estimates are 
somewhere between $4 billion and $6 billion to cover all 
dislocated workers. That is not everyone on UI. That is just--I 
shouldn't say just--it is the number of people that are 
permanently displaced from their jobs because those are the 
people that are most seriously in need. In fact, as you 
suggest, getting these people back to work quicker would save 
money on the UI rolls and would also, you know, help the macro 
economy. In all sense, I mean, it is a kind of a positive all 
around. As I mentioned in my opening statement, it is, 
therefore, curious to me that the Labor Department has been 
rather slow in implementing this program under the TAA program 
because of all of the benefits to it, both to the fiscal budget 
and also to the economy as a whole. We are hoping that that 
will change relatively soon.
    Mr. ENGLISH. Dr. Kane, I think Heritage brings in 
sometimes, you know, a very formidable experience on these 
issues and also a solid track record of questioning 
entitlements. Looking at wage insurance as something that would 
be potentially part of a bigger picture of rationalizing some 
of existing entitlements, saving money in some places, and also 
committing us to continued involvement in the global economy, 
from a Heritage perspective, what questions should we be asking 
about a new entitlement like this?
    Dr. KANE. I appreciate the opportunity, sir. I have to say 
I am not very steeped in wage insurance, but I am little 
suspicious of it. I like the idea of thinking creatively about 
ways to address some of the concerns that we have with the loss 
of manufacturing jobs. But off the top, I think it sounds a 
little bit like it gets in the way of the free market. If 
someone goes to a job or if they can't compensate for the past 
job, I don't know if the Federal Government has a role there. I 
do like some of the ideas that I have heard out of the 
Republican Party to build skills at a very fundamental level by 
bringing choice into education, you know, at a very intro. But 
that is not really what you want.
    Mr. ENGLISH. Yes. Is there a scruple you would have against 
this that you wouldn't also apply to, say, UI?
    Dr. KANE. Well, I think I presented some strong scruples 
earlier to UI.
    Mr. ENGLISH. Ready to give it up. People will get back to 
work quicker.
    Dr. KANE. That is one way to think about it. I would want 
to encourage the States to experiment with radical freedom on 
how they do UI and wage insurance, which should be part of 
that. Let me say that.
    Mr. ENGLISH. Well, and let me say I would encourage 
Heritage, coming at this again with a lot of expertise, to 
maybe team up with the Institute for International Economics 
because certainly you end up in the same place on a lot of 
trade issues, and this might be, granted, an interventionist 
approach, but one that I think is worth reviewing. Mr. 
Chairman, I realize actually wage insurance is more in the 
jurisdiction of the Trade Subcommittee. But I am grateful that, 
as always, you have given us a forum to consider the bigger 
picture, and I thank you for it.
    Chairman HERGER. I thank the gentleman from Pennsylvania. 
On that note, I might mention we have been talking about some 
reductions here, several of you have. These reductions really 
are not under our jurisdiction. They are really under the 
jurisdiction of the Education and Workforce Committee. But Dr. 
Brough, could you tell us more about your research that has 
found that people who operate the UI system are capable of 
helping the unemployed find work more quickly and effectively? 
What States are doing the best job of that?
    Dr. BROUGH. Just briefly, the work that I am referring to 
there is actually done by a colleague of mine, Bill Connelly, 
who has done work looking in Arizona, in particular, where you 
did have these interviews. What they did find was, you know, a 
$10 savings for every dollar put into this system. As I 
mentioned in the testimony, Oregon is another State that has 
done these things. I think, looking at the system as a whole, 
getting that kind of experimentation at the State level and 
allowing them to come up with a package that meets the 
individual claimant's needs is probably the best way to move 
forward. I think we do have a study that Dr. Connelly did that 
I would be glad to forward to the Committee that talks about 
some of those things.
    Chairman HERGER. I would appreciate you doing that, if you 
would? Do you know specifically what those States do to help 
laid-off workers more quickly?
    Dr. BROUGH. Off the top of my head, I am not. Again, it is 
research that he did, and I will be able to pull that together 
for you.
    Chairman HERGER. I appreciate that. Thank you very much. 
Again, I would like to thank all of our witnesses this morning 
for your testimony and ask that you also answer any additional 
questions for the record that may be sent in writing. As we 
continue to look at ways to improve the Nation's unemployment 
system, the information you provided today will be very 
helpful. With that, the Committee stands adjourned.

    [Whereupon, at 11:48 a.m., the hearing was adjourned.]

    [Questions submitted from Chairman Herger to Mr. Bishop, 
Dr. Nilsen, Mr. Halley and Dr. Kane, and their responses 
follow:]

        Questions from Chairman Wally Herger to Mr. Mason Bishop

    Question: Written testimony submitted by UWC, a trade association 
representing employers, suggests that states provide employers with 
``charge notices''--a list of all employees collecting unemployment 
benefits based on work with that employer--no less frequently than 
quarterly. Some states, like California, provide these notices to 
employers only annually, limiting the ability of employers to contest 
benefit payments to individuals who may not have worked for them, or 
who were fired for cause and may not be due unemployment benefits. Have 
you examined this issue, and whether states that provide more frequent 
charge notices in effect better prevent overpayments by allowing 
employers time to contest improper payments in time to do something 
about it?

    Answer: The Department of Labor (DOL) has not conducted specific 
studies to determine whether more frequent notices prevent 
overpayments. However, we agree that these notices allow employers to 
know about claims that have been filed and allow them to respond and 
alert state unemployment insurance (VI) agencies about potential 
problems or potential fraud. Most state VI agencies issue a notice of 
claim immediately to the last employer when a claim is filed, and many 
states also immediately issue a notice of claim to each employer whose 
wages are used to establish the monetary determination for the VI 
claim--i.e., those employers for whom the individual worked during the 
recent 1-year period, or the base period, which is used to determine 
the monetary entitlement and the weekly benefit amount. This notice of 
claim serves as a systematic internal control to help prevent and 
detect fraud. Most states also then issue quarterly ``charge notices,'' 
which also serve as an internal control or check and balance in the 
system to prevent fraud and abuse. Only five states issue a charge 
notice to employers less frequently than quarterly; however, all of 
these states advise employers of their possible liability at the time a 
claim is being processed.

    Question: Please explain why DOL estimates that only about half of 
the estimated $3 billion overpayments in the unemployment program are 
potentially recoverable. Is this percentage similar to potential 
overpayment recoveries in other Federal programs?

    Answer: Operational overpayments (those that the states can 
reasonably be expected to detect and recover) tend to be about one-half 
of the total estimated overpayments. Certain types of overpayments are 
excluded from the definition of operational overpayments because it is 
not cost effective for the state VI agencies to pursue them, they are 
not detectible through normal operations, or they are deemed not 
recoverable under state law. Examples of excluded overpayments are 
those caused by improper work search, failure to register with the 
employment service, and issues related to the monetary determination 
process.
    Because of the unique nature of the VI program, which is a Federal-
State partnership, it is difficult to make an ``apples to apples'' 
comparison of overpayment recoveries in other Federal benefit programs.

    Question: Several witnesses express concern about DOL's decision to 
end ``America's Job Bank.'' Please provide the Committee with 
additional information that would explain DOL's decision to suggest 
such action.

    Answer: America's Job Bank (AJB) was the first national electronic 
job board on the Internet and served an important role when it was 
first developed in 1995. During the past 2 years, the U.S. Department 
of Labor's Employment and Training Administration (ETA) has extensively 
reviewed and evaluated the ongoing viability of maintaining a national 
job site. Due to a number of factors, the benefits of AJB no longer 
outweigh the costs of operating and maintaining this national system 
and it will cease to be operational on June 30, 2007. The 2007 Budget 
requests no funds to support AJB.
    Numerous factors were weighed in coming to the decision to end AJB, 
most of which fell into two broad categories: 1) changes in the broader 
environment AJB is operating in, and 2) the costs associated with 
running the system.
    1) Changes in the Operating Environment: Since the launch of AJB, 
the number of private-sector Internet-based job boards (Career Builder, 
Monster, Yahoo! Hot Jobs, and so forth.) has proliferated. This 
development calls into question the need for a Federal government-
sponsored job board.

      The numerous private-sector electronic labor exchange 
systems are continuously improving and most, if not all, of these sites 
offer free services to job seekers. Current trends in the industry 
suggest that some level of free service will also be offered to 
businesses/employers in the future.
      Most of the employers who currently use AJB also use 
other job boards simultaneously to advertise their openings.
      As Internet technology and technical resources have 
become widespread and the costs associated with them have declined, 
states and local areas that used to depend on AJB for their Internet 
self-service labor exchange presence have built and operate job banks 
of their own that are not based on AJB.

    2) The Cost of Operating AJE: The cost of operating AJB has been as 
high as $27 million per year, with a current operating budget for 
systems maintenance of $12 million per year. Even with this sizable 
investment, AJB has not been able to keep up with private sector job 
boards or industry standards regarding up-to-date technology. 
Additionally, the technology platform on which AJB is built is 
outdated. Therefore, the cost to maintain AJB and constantly upgrade 
the foundational technology and make improvements to the site is no 
longer justifiable given that AJB duplicates what is already available 
in the private sector.

    Question: One of the DOL proposals would to require states to 
impose at least a 15 percent penalty on improper payments due to fraud. 
Savings from that penalty would be deposited in a special fund, which 
in turn could only be used to further program integrity activities. 
Overall, this proposal is estimated to save $314 million over 5 years. 
How much of that $314 million in savings is from the initial penalty, 
and how much from your estimate of the secondary effect of states' 
performing more program integrity activities using those penalty 
savings?

    Answer: The entire $314 million estimated savings is derived from 
additional integrity activities funded by the penalty. We estimate that 
collections from the penalty will be $116 million over 5 years and 
assume that the entire amount will be spent.

    Question: Why is it taking so long for all states to start using 
data in the National Directory of New Hires to help ensure unemployment 
benefits are paid to the right people?

    Answer: In early 2005, DOL and the Department of Health and Human 
Services (HHS) conducted a pilot test with three states to determine 
the procedures and technical specifications/requirements that would be 
used for the National Directory of New Hires (NDNH) data matching. The 
pilot was completed successfully and after some modifications by HHS, 
the NDNH was accessible to all states by October 2005. In order to 
begin matching data against the NDNH, states must execute a Computer 
Matching Act (CMA) agreement with HHS, modify their automated systems 
to meet the HHS CMA system security requirements, and implement data 
transmission protocols. These automated systems changes are time 
consuming, and the programming and implementation are subject to state 
priorities. This has caused delays in implementation. Currently, 14 of 
the 27 states with signed CMA agreements are matching state data 
against one or more of the NDNH databases. The remaining 13 states, as 
well as several states with agreements pending, have indicated to DOL 
that they intend to begin matching in 2006. DOL provided funds 
requested by 37 states in 2005 to implement the NDNH data matching. DOL 
will continue to monitor state implementation. In addition, DOL is 
issuing guidance promoting the use of the NDNH and disseminating 
information about the pilot and the benefits of accelerating 
implementation.

    Question: Some other witnesses expressed concerns about mixing 
administrative and benefit funds, as the DOL budget proposals would do. 
For example, allowing states to use a share of recoveries of improper 
unemployment benefit payments to support administrative costs has drawn 
the objection of state agencies and employers. Do you agree these are 
valid concerns? If so, are there ways to address such concerns within 
the context of the DOL budget proposals?

    Answer: We are aware that some UI stakeholders have this concern 
regarding our integrity proposals. While we understand the historic 
origins of this concern, we believe that addressing the integrity of 
the VI system is critical at this juncture. There is precedent 
permitting limited amounts of state unemployment funds to be used for 
administration. Under the Reed Act--in place for 50 years--states have 
received funds that must be used for the payment of UI benefit payments 
unless the state legislature authorizes use for administrative 
purposes. Our proposal follows this approach--recovered moneys must be 
used for the payment ofUI unless the state legislature authorizes use 
of up to 5% for UI integrity activities. In the context of our 
proposals, it is important to remember that these proposed provisions 
are optional on the part of states--they simply provide another source 
of funds states can use to improve prevention, detection, and 
collection of overpayments and reduce SUT A dumping if they so choose. 
(SUTA stands for state unemployment tax act.) As does the Reed Act, our 
approach gives state legislatures the flexibility to determine the best 
use of the funds. Under the integrity proposal, state legislatures will 
decide whether those funds can best be spent for benefits or for 
improper payment reduction, because the legislature will be interested 
in assuring that use for administrative purposes really is promoting 
trust fund solvency by saving the state's unemployment fund money.

    Question: The DOL FY 2007 budget request for the Trade Adjustment 
Assistance program is $938.6 million. This is down almost $28 million 
from last year. Please explain why.

    Answer: The Department's FY 2007 request for TAA is $938.6 million. 
Of that amount, $259.6 million is requested for training, job search 
and relocation allowances, and administration and represents an 
increase of about $200,000 over FY 2006. The Department estimates that 
it will need $654 million in Trade Readjustment Allowance (TRA) 
benefits in FY 2007, one million less than in FY 2006. The reduction in 
the Department's request is a result of our estimate for the funding 
level expected to be needed for the Alternative TAA pilot program, also 
known as Wage Insurance. In FY 2006, the Department estimated that it 
would need $52 million. The Department's estimate for FY 2007 for Wage 
Insurance is $25 million, $27 million below FY 2006. It is important to 
note that this is not a reduction in services; rather, it is our best 
projection of the funds needed by those who access the program. It is 
also important to note that if our projections of Trade Readjustment 
Allowances or Wage Insurance are too low, the appropriators have 
provided a ready means for the T AA program to obtain additional 
resources without the need for a supplemental appropriation. The 
appropriators have provided authority for another DOL account (the 
Advances to the Unemployment Trust Fund and Other Funds account) to 
provide non-repayable advances to TAA.

    Question: DOL collects a wide variety of detailed weekly, monthly, 
quarterly, and annual information related to performance in the 
unemployment program. What does this data tell us? How has state 
performance improved since this detailed information has been 
collected? How wil DOL budget proposals ensure that state unemployment 
program performance improves?

    Answer: DOL collects both macro- and micro-level data that can be 
used to measure the performance of the UI program at both the state and 
national levels. The data tell us how quickly and accurately payments 
are made to beneficiaries, how quickly and accurately employer tax 
accounts are established and, generally, how well states operate their 
UI programs. State performance has varied over the years as states have 
implemented new technologies and methodologies for processing claims 
and dealt with fluctuations in claims workloads.
    Data have been collected for many years--payment and benefit 
timeliness since the 1970s and payment accuracy since the late 1980s. 
Except for a brief period of improvement during the mid-1990s, the rate 
of payment timeliness has been relatively stable at about 89%. When 
first measured, the overpayment rate was 10.05%. The overpayment rate 
then leveled off at about 8.5% for several years. Since 2002, 
overpayments have exceeded 9%. We anticipate that enactment of our 
proposed UC Integrity Act will help lower these numbers.
    DOL is committed to promoting proper and efficient administration 
of state UI programs. Additional budget requests are targeted to 
specific needs. For example, the Administration's Fiscal Year 2007 
budget request includes funding to prevent overpayments caused by 
identity theft and funding for states to review the continued 
eligibility of beneficiaries and provide job search assistance in 
person.
                                 ______
                                 
       Questions from Chairman Wally Herger to Dr. Sigurd Nilsen

    Question: What are your views on DOL's proposal to enhance 
unemployment program integrity, particularly with respect to allowing 
the Department of Treasury to garnish Federal tax refunds to recover 
unemployment insurance overpayments?
    Answer: Our work has highlighted the value of using this tool to 
help Federal and state-administered benefit programs recover 
overpayments. For example, in prior reports,\1\ we noted that the 
Social Security Administration (SSA) uses the tax refund offset as a 
means of improving overpayment collection in the Supplemental Security 
Income (SSI) program, which has yielded hundreds of million of dollars 
in recoveries. Similarly, SSA uses the tax refund offset to collect 
overpayments in the Disability Insurance (DI) program. Other programs, 
such as the Department of Agriculture's Food Stamp Program also use 
this tool for recovering overpayments. Thus, it would seem that using 
this tool to recover UI overpayments would be appropriate to consider.

    \1\ GAO, Supplemental Security Income: Action Needed on Long-
Standing Problems Affecting Program Integrity, GAO/HEHS-98-158 
(Washington, D.C.: Sept. 14, 1998) and GAO, Supplemental Security 
Income: Progress Made in Detecting and Recovering Overpayments, but 
Management Attention Should Continue, GAO-02-849 (Washington, D.C.: 
Sept. 16, 2002).
---------------------------------------------------------------------------
    Question: What are your views about the effectiveness of the 
National Directory of New Hires match pilot that DOL is conducting?

    Answer: We have not performed an independent assessment of DOL's 
National Directory of New Hires (NDNH) pilot, and thus cannot comment 
on the effectiveness of this initiative. However, our prior work has 
shown that use of the NDNH can help Federal agencies verify eligibility 
for individuals in means tested programs. For example, SSA uses the 
NDNH to verify the employment status and income of SSI recipients, and 
it estimated that access to this database has saved almost $800 million 
over 5 years. More recently, we also recommended that SSA obtain 
authority to match its DI program with the NDNH to help the agency more 
effectively verify beneficiaries' income.

    Question: What are your views on DOL's FY 2007 budget request for 
$10 million in additional funding for identity theft prevention 
activities, and $30 million for more reemployment and eligibility 
assessments?

    Answer: Because we have not performed a study of these proposals, 
it is difficult to comment on their merit. However, in a prior report, 
we noted that states were vulnerable to fraud and overpayments 
resulting from individuals who use Social Security numbers that do not 
exist or belong to deceased individuals.\2\ DOL estimates that $313 
million in overpayments are caused by identity theft each year. In its 
fiscal year 2005 Performance and Accountability report, DOL notes that 
is has funded states to provide them with the ability to exchange data 
with SSA on a realtime basis. The Department believes that this will 
help the states prevent many, if not most, overpayments due to 
fraudulent or mistaken use of Social Security numbers. On March 5, 
2004, DOL and SSA signed a memorandum of understanding formalizing the 
data exchange agreement. DOL estimates that the $10 million in 
additional funding for identity theft prevention activities in its 
fiscal year 2007 budget request will result in $77 million in savings 
by preventing erroneous payments caused by the use of stolen 
identities. However, we have no basis to assess the accuracy of this 
estimate.
---------------------------------------------------------------------------
    \2\ GAO, Unemployment Insurance: Increased Focus on Program 
Integrity Could Reduce Billions in Overpayments, GAO-02-697 
(Washington, D.C.: July 12, 2002).
---------------------------------------------------------------------------
    With respect to the Reemployment and Eligibility Assessments 
grants, it is too soon to know whether these will be effective in 
helping to improve efforts to connect claimants with reemployment 
services, or in reducing UI duration or improving employment outcomes. 
DOL is conducting an evaluation of these grants and initial results 
should be available in March of 2007. DOL has estimated that the $30 
million requested in its fiscal year 2007 budget could be used to 
conduct an additional 539,000 interviews and could save the UI Trust 
Fund as much as $151 million by reducing the average duration of UI 
benefits for claimants who are interviewed. However, it would be 
important to know how much is actually saved.

    Question: An April 2006 GAO report on improper payments includes 
information indicating that unemployment overpayments are rising. Do 
you have any explanation for why this is happening?

    Answer: Although we have not performed an independent analysis of 
this trend, DOL attributes the rise in overpayment error rates to an 
increase in payments to claimants who improperly continue to claim 
benefits despite having returned to work. While use of the NDNH would 
help states determine when UI beneficiaries are reemployed, it appears 
that all states are not yet using it to its full potential.

    Question: Are there any penalties or rewards for states that meet 
certain overpayment prevention goals for program improvement? If not, 
do you think an incentive or penalty-based approach would help motivate 
states to improve their unemployment payment accuracy?

    Answer: Our prior work on unemployment insurance program 
integrity\3\ concluded that DOL could enhance states' emphasis on 
payment accuracy by using its performance measurement system to 
encourage states to focus on payment accuracy. We also recommended that 
DOL revise its performance measures to ensure increased emphasis on 
this activity. In response, DOL has established a new core performance 
measure for overpayment detection at the state level. DOL believes that 
this measure will provide states with an added incentive to prevent and 
detect overpayments by implementing core measures in states' 
performance budget plans based on the level of overpayments the states 
have detected. While DOL has established overpayment detection as one 
of its core measures, it has not yet specified the level of performance 
that states will be required to meet under this measure. In addition to 
establishing performance measures that ensure increased emphasis on 
payment accuracy, we also recommended that DOL use the annual 
administrative funding process or other funding mechanisms to develop 
incentives and sanctions that will encourage state compliance with 
payment accuracy performance measures. DOL's current legislative 
proposal\4\ contains a provision that would allow states to retain a 
small proportion of recovered overpayments to reduce fraud and errors 
by enhancing states' benefit payment control activities. However, the 
proposal does not provide for sanctions for states that do not meet the 
specified level of performance.

    \3\ Ibid.
    \4\ On May 3, 2006, DOL submitted a bill entitled the 
``Unemployment Compensation Program Integrity Act of 2006''.
---------------------------------------------------------------------------
    Question: Has any research been done to explain why average 
durations on unemployment benefits have been rising in the past decade, 
even when unemployment rates have remained low?

    Answer: We did not review the research literature on the trend in 
the duration of unemployment benefits, and its interaction with 
unemployment rates, for our recent report (GAO-06-341). As you are 
aware, we used data from a nationally representative sample of workers 
born between 1957 and 1964 and spanning the years 1979 through 2002. We 
used the data to help build a model that allowed us to simulate, for 
example, how changes in characteristics of UI eligible workers--such as 
UI receipt--affected the likelihood of unemployment duration. We did 
not conduct a trend analysis. Nevertheless, in explaining the 
associations in our report, we discuss some research related to this 
question, such as: Karen E. Needels and Walter Nicholson, An Analysis 
of Unemployment Durations Since the 1990-1992 Recession, UI Occasional 
Paper 99-6, prepared for the Department of Labor, 1999 and Bruce D. 
Meyer, ``Unemployment Insurance and Unemployment Spells,'' 
Econometrica, vol. 58, no. 4 (1990), p.771. Notably, in the former, the 
researchers point out that while labor markets appeared to be quite 
healthy in the post-1992 period, the lengths of unemployment spells 
were longer than have usually been associated with such low 
unemployment rates. Further, they note several factors related to the 
labor market which appear to be the most likely explanations for the 
observed increase in average UI durations: (1) increases in the 
fraction of claimants in demographic groups who are likely to 
experience long unemployment spells (older workers, females, African 
Americans) and (2) changes in the industrial composition of the labor 
force, most notably the decline in manufacturing jobs.
                               __________
      Questions from Chairman Wally Herger to Mr. Roosevelt Halley

    Question: Please provide the Committee with information about which 
states supplement Federal funding for unemployment administrative 
funding with state general funds.

    [Answer continues on next page.]

    [GRAPHIC] [TIFF OMITTED] T1492A.003
    
    Question: What does NASWA view as the positives and negatives of 
the use of ``corrective action plans'' that states put in place to help 
them meet DOL performance goals in the unemployment benefits program?

    Answer:

      Positives--NASWA members believe corrective action plans 
are beneficial for identifying problems and solutions within state UI 
programs. They serve to bring problems to the forefront for resolution. 
Emphasis and focus are applied to specific areas that need attention. 
States develop strategic approaches and timelines to measure 
improvement in deficient areas. Focusing efforts on improving 
performance where performance is below minimum criteria helps promote 
proper and efficient administration.
      Negatives--Many deficiencies identified through 
corrective action plans result from Federal underfunding. Underfunding 
leads to understaffing, and it impedes corrective actions. States also 
have out-of-date and inefficient computer systems. Given these 
problems, corrective action planning can become a paper exercise. At 
times states are compelled to reduce staffing or other resources in 
areas that show acceptable levels of performance in order to raise 
performance in areas identified for improvement by corrective action 
plans. This creates a ``roller coaster'' performance cycle without 
addressing the fundamental performance issues. In like manner, states 
also may not invest as much effort in improving performance levels in 
areas that do not fall below the minimum required level, but could be 
improved. Finally, some performance issues are beyond the control of 
state UI programs. General economic conditions and the number of job 
openings affect reemployment prospects of individuals receiving UI 
benefits. Corrective action plans have little effect on these exogenous 
factors.

    Question: The Department of Labor has developed goals to promote 
reemployment of people receiving unemployment benefits and has a number 
of unemployment program performance goals. What happens under current 
law if a state fails to meet those standards?

    Answer: States are required by law to administer state UI programs 
in a proper and efficient manner. U.S. Department of Labor (USDOL) 
regional offices monitor state performance on a quarterly basis and 
attempt to work with the states in identifying and addressing 
potentially negative trends before they become problems. However, if a 
state fails to meet USDOL-set standards for reemployment of workers 
receiving unemployment compensation, a corrective action plan would be 
submitted by the state and updated quarterly. Consistent failure to 
meet standards would lead to a conformity or compliance hearing, which 
could result in sanctions, including the loss of administrative 
funding. A major concern with a sanction that includes a reduction in 
funding is it becomes more difficult for states to achieve the 
performance standards. NASWA members believe monetary penalties for 
failure to meet performance standards tend to be counter-productive. 
Scarce resources are primary reasons for failure to meet standards in 
the first place. Depriving a state of funds is more likely to 
exacerbate the problem, not correct it. NASWA suggests a better 
alternative would be additional funds provided to states with 
appropriate monitoring, support, technical assistance and oversight. In 
fiscal year 2007 testimony to the House Committee on Appropriations, 
NASWA requested an additional $283 million for UI administration and 
$100 million for updating computer systems above the Administration's 
request.

    Question: Your testimony mentions the use of the Government 
Performance and Results Act and UI Performs Core measures to assess 
unemployment program reemployment services and outcomes. The Department 
of Labor is in the process of establishing a baseline and setting 
performance targets for reemployment in FY 2007. What new or effective 
approaches are states taking to help unemployed workers find new jobs? 
What can Congress do to help in this effort?

    Answer: Many states have enjoyed success in reducing UI benefit 
duration and expediting reemployment through enhanced Reemployment 
Eligibility Assistance (REA) and employment services. While 
unemployment insurance administrators encourage its claimants to find 
work, the responsibility and expertise in reemployment services lies 
with staff of One-Stop Career Centers and the Employment Service (ES). 
The goal of REA focuses on early intervention (e.g., between the eighth 
and twelfth week of an active UI claim) to shorten the benefit period 
for UI recipients. Virtually all of the strategies for increasing 
reemployment of UI recipients involve the use of additional personnel 
to provide more intensive services in the form of labor exchange 
services and training if necessary. Few states afford to provide these 
services on their own; likewise, reemployment services are staff 
intensive and extremely difficult to maintain without adequate funding. 
For many states, funding for ES is the primary state support for 
assisting UI claimants with their work test requirements outlined in 
federal legislation. NASWA members believe additional funding is 
necessary to support the efforts of states and allow for expansion of 
those efforts. As less funding is appropriated for ES activities, the 
ability to be successful in reemployment of UI recipients probably will 
diminish. In fiscal year 2007 testimony to the House Committee on 
Appropriations, NASWA requested the federal government restore the 
fiscal year 2005 appropriations levels for labor exchange services of 
$781 million for the ES and $35 million for Reemployment Services (RES) 
for UI claimants.
                                 ______
                                 
          Question from Chairman Wally Herger to Dr. Tim Kane

    Question: The Department of Labor proposes allowing states to 
operate waiver programs to test various new approaches to improve 
unemployment benefits and how they help workers. Could you envision one 
or more states operating a savings-based unemployment benefit system 
like the one you outlined in your testimony? Is that the only way to 
test how individuals actually respond to such a system? Do any other 
countries operate such a system, offering lessons for us in how workers 
react when faced with these new choices?
    [Answer not received at time of printing.]

                                 

    [Submissions for the record follow.]

 Statement of Greg Devereux, Washington State Federation of Employees, 
                          Olympia, Washington

    Despite efforts to fill in the gap with other sources of funds, the 
decline in employment service funding since the mid 1980s has had a 
significant impact on the services that the Spokane, Washington 
employment service office can provide workers and employers.
    In the early 1980s, the Spokane office had 25 employment 
specialists who provided placement services to unemployed workers that 
included job search assistance and referral to job openings. The number 
of staff has declined by 75 percent to only five employees. In 
addition, the number of veterans employment specialists who work 
exclusively with unemployed veterans has declined from five to two.
    The establishment of the computer center in the employment office 
self-help area has created some efficiencies since many jobseekers are 
adept at using the electronic job bank. However, most people need some 
in-person assistance to learn how to perform online job searches. 
Workers with limited education who have lost their jobs, when employers 
such as Columbia Lighting have moved their operations to other 
countries, are in particular need of help. Many are not computer 
literate and have to be taught not only how to search the database of 
job listings but also how to submit job applications online since many 
employers want jobseekers to submit their job applications 
electronically. Unless they can master these skills, these workers 
cannot reach a whole group of employers.
    With only five employment specialists, the office has been forced 
to depend in part on volunteers from the AARP to help in the computer 
center, but this help is of uneven quality and not always reliable. In 
addition, some staff from other programs, such as the TAA program, now 
spends part of their time away from their primary work working in the 
self-help area.
    The Spokane employment service office has an effective reemployment 
program that provides early intervention with unemployment insurance 
claimants within their first few weeks of filing a claim. Claimants 
receive referrals to job openings and training in how to write their 
resumes and in interview techniques. They also receive help with other 
services such as skills assessments and the use of the electronic job 
bank.
    These services are likely to be eliminated beginning in July when 
the $35 million in federal state reemployment grants end.
    The Spokane office also provides work search verification for the 
unemployment insurance program. To the extent they are able, when the 
staff calls claimants into the office for verification, they also 
provide job search assistance, skills analysis and other services the 
claimants might need. The availability and quality of these services 
will be affected by a continued contraction in resources.
    Services to employers have deteriorated considerably. In the mid 
1980s, the office had industry specialists who had expertise in 
particular sectors, such as industrial, clerical, and construction 
occupations. These employer specialists developed and maintained 
ongoing relationships with employers for the purpose of serving their 
needs and also building their listings of employment opportunities. 
This in-person proactive approach to working with employers has been 
abandoned entirely. Now employers simply call and register jobs with 
whoever takes the phone call. In addition, some discussion has occurred 
about charging employers modest fees in order to support services for 
them.
    While the Administration has claimed that private agencies can 
replicate the work of the local employment offices, the primary private 
agencies in Spokane are temporary service agencies that largely provide 
temporary placement to low paying jobs with no benefits. This is a very 
different orientation than the local employment service office that 
attempts to find ways to upgrade workers skills and find good jobs with 
benefits, especially for the many workers who have been displaced by 
off shoring and other economic dislocations.

                                 
  Statement of Eric J. Oxfeld, Strategic Services on Unemployment and 
                         Workers' Compensation

    Thank you for the opportunity to comment on the unemployment 
compensation aspects of the Department of Labor (DOL) proposed Fiscal 
Year 2007 budget. Because there are integrally related unemployment 
compensation aspects of the Treasury proposed budget, this statement 
addresses both agencies' proposals. UWC applauds the increased 
attention to UI payment and tax accuracy (``integrity'') in the DOL and 
Treasury proposed budgets. The improper payment rate for the UI system 
is a shocking 9.9%, according to the latest statistics from the DOL 
Benefit Accuracy Measurement (BAM) report. Addressing this problem 
should be a priority for federal and state officials, as well as 
employers. Unfortunately many of the specific strategies in the form 
proposed by DOL and Treasury raise significant policy concerns.
    UWC cannot support, and urges Congress not to approve, the 
following proposals:

    1.  Mandate that states penalize an employer for a response the 
state deems ``late'' or ``incomplete'' after sending a separation 
notice.
    2.  Increase the Federal Unemployment Tax Act (FUTA) through a 5-
year extension of the ``temporary'' surtax.
    3.  Finance administrative costs for integrity activities with 
state unemployment tax revenue, which federal law has always required 
be dedicated to financing benefits.
    4.  Use a ``bounty hunter'' contingency fee method of reimbursing 
contractors hired to recover improper benefit payments or tax 
underpayments states deem ``uncollectible.''
    5.  Mandate that states impose a fraud penalty of at least 15%.

    UWC supports the proposal to recover improper payments out of 
federal income tax refunds. We also support the DOL request for 
Congress to appropriate an additional $10 million to combat UI identity 
theft and $30 million to expand re-employment and eligibility review 
initiatives.
    We are reviewing three additional proposals. Although we have not 
finalized our position, we see merit in the Treasury proposal allowing 
a professional employer organization (PEO) to remit FUTA for its 
clients, when the PEO is certified by the Treasury as meeting stringent 
financial standards, along the lines of H.R. 4985. We are also 
reviewing the DOL proposal mandating that employers report start work 
dates on their new hire reports. We understand the value of obtaining 
this information but must also weigh the economic and practical burden 
of re-designing established employer reporting systems to capture this 
information. Finally, we are awaiting additional information needed to 
evaluate the DOL proposal to facilitate a claimant's return to work by 
allowing state waivers of unspecified federal requirements (for 
demonstration projects).
UWC--The Voice Of Business On Unemployment And Workers' Compensation
    UWC is the only national association exclusively devoted to 
providing legislative/regulatory representation for the business 
community in connection with unemployment insurance (UI) and workers' 
compensation (WC) public policy. UWC's members include employers, 
national and state business associations, third party claims and tax 
administrators, accounting and law firms, and other service providers, 
all of whom support and advocate sound, cost-effective UI and WC 
programs. UWC members, and their clients, policyholders and members, 
collectively represent a major share of the business community in the 
United States. UWC is intimately acquainted with unemployment insurance 
law and best practices. In addition to UWC's advocacy efforts on behalf 
of business, we manage the National Foundation for Unemployment 
Compensation & Workers' Compensation, which conducts educational 
activities such as the annual National UI Issues Conference, as well as 
reference materials on UI, including the annual Highlights of State 
Unemployment Compensation Laws book, the annual RESEARCH BULLETIN: 
Fiscal Data for State Unemployment Insurance Systems, and the 
Employer's Unemployment Compensation Cost Control Handbook.

Analysis of UI proposals in the Administration's FY 2007 proposed 
        budget
    UWC strongly supports the state UI program, through which employers 
provide benefits for a temporary period of time to insured workers with 
a strong attachment to work who become temporarily and involuntarily 
jobless when their employer no longer has suitable work available. We 
advocate greater efforts by states to prevent and recover improper 
payments, and it is very refreshing that DOL has given greater emphasis 
to payment accuracy. However, many of the specific strategies embodied 
in the Administration proposals raise significant policy concerns for 
employers.
    Of greatest concern are (1) the DOL proposal to prohibit non-
charging for improper payments attributed, even unfairly, to an 
employer's fault and (2) the Treasury proposal to extend the FUTA 
surtax.

Non-charging proposal
    UWC opposes the federal mandate in the form proposed last year, 
which requires state UI laws to charge an employer's unemployment tax 
account for erroneous UI payments due to the ``fault'' of the employer 
or its agent. Employer fault was defined in last year's UI integrity 
proposal as ``failure to respond timely and in good faith to a state 
request for information'' relating to a UI claim. However, what is 
timely or complete or a good faith response was not defined.
    This proposal will significantly increase payroll taxes for 
employers who have done nothing wrong. For example, there is no 
assurance that an employer will not be charged even though it did not 
receive the notice in time to respond before the deadline or the state 
subjectively determines that the employer's response was 
``incomplete.''
    Employers support procedures for processing unemployment claims 
promptly, but it is also important that speedy benefit delivery should 
not result in erroneous payments. Claimants may be adversely affected 
by the requirement to repay improperly paid benefits, and these amounts 
are rarely fully recovered because, the claimant has often spent the 
money by the time the error is discovered. Improper payments also 
reduce state unemployment trust fund balances and therefore result in 
higher taxes for employers. And they add to the workload of state 
workforce agencies.
    When a claim for unemployment benefits is filed, most states 
conduct an initial review and make an initial determination relying 
solely on information supplied by the claimant and the employer's 
response to the state ``separation notice'' advising them that the 
claim was filed. DOL rules require that states begin paying benefits, 
even if the employer protests the determination and asks for a re-
determination or a hearing. When an initial determination favoring the 
claimant is overturned, benefits already paid are not charged to the 
employer's unemployment tax account. This practice is appropriate and 
represents a very small cost to the system. Only a minuscule amount of 
non-charging results from reversals where the employer did not provide 
timely or complete information at the initial proceeding. DOL's own 
figures show that improper payments are rarely the fault of the 
employer. The DOL Benefit Accuracy Measurement (BAM) report shows that 
claimants are responsible for 73% of overpayments, administrative 
agencies are responsible for 24% of overpayments, and employer error is 
responsible for only 11% of overpayments. (These figures add up to more 
than 100% because they include overpayments where there is dual 
responsibility.) DOL estimated that its proposal will save less than 
.1% of all benefits paid (an average of just $22.7 million a year).

[GRAPHIC] [TIFF OMITTED] T1492A.004

    Employers already have strong financial incentive to file timely 
and complete responses to state separation notices. The odds of 
prevailing on a contested claim are much reduced if the employer must 
overturn an initial determination favoring the claimant. Furthermore, 
employers who do not submit timely information for the initial 
determination will incur considerable business cost if they must 
participate in a formal hearing or an appeal. Hearings are costly for 
the employer, because it must send members of its staff to participate, 
including witnesses and the claimant's the supervisor, as well as a 
hearing representative. The lost productivity and time away from work 
required to prepare for and participate in a hearing are very 
expensive.
    The proposed mandate against non-charging is also objectionable 
because it creates an unworkable and unfair federal standard governing 
state charging requirements. Unemployment taxes, benefits, and 
eligibility are areas of regulation traditionally left to the states in 
designing and administering their UI programs. Federal law is ill-
equipped to address non-charging for failure to respond to a separation 
notice, because there are many inextricably related issues which the 
DOL proposal does not address.
    As noted, prompt payment is a critical objective for a program 
designed to provide insurance against loss of work. Federal regulations 
hold state UI administrators to stringent performance standards 
governing prompt payment. To comply with these standards, many states 
provide short--and often completely unrealistic--timeframes for 
employers to respond to separation notices. In these states, the DOL 
proposal will significantly, and unfairly, increase unemployment tax 
costs for responsible employers because of circumstances that beyond 
their control. The deadlines vary by state, and usually are 10 days or 
less, including weekends and holidays. Typically these deadlines run 
from the date when the state mails out the notice, rather than the date 
when the employer actually receives it.
    The brief time allowed for a response often does not allow for the 
vagaries in mail delivery or state practices which contribute to the 
delay in the employer's actual receipt of the notice. For example, it 
is not unusual for the state to mail the separation notice to the 
address provided by the claimant rather than to the address of record 
provided by the employer. This practice causes a delay in delivery to 
employers who have multiple locations or have designated a third party 
representative to receive their notices. Furthermore, in some states 
the form and envelope do not have an ``attention line'' or sufficient 
room to display the full name and address. At least 5 or 6 lines may 
actually be needed for a proper address (in fact, many state UI 
agencies themselves have addresses containing this many lines). When 
the state mails the notice to a wrong or incomplete address, it is 
likely to be lost in the mail or received at the main employer address, 
where it may be indistinguishable from the rest of the mail from that 
state. Delivery is delayed until the envelope can be opened and routed 
to the appropriate location. The employer thus receives the claim form 
well past the due date. Many companies experience this problem, and the 
states have traditionally ruled against them when they appeal the 
timeliness of their responses.
    Many employers now third party agents to assist with UI claims. 
However, some states do not allow employers to designate a third party 
administrator as the recipient of state notices to their clients. This 
situation further delays response to the notice.
    Due process must be applied to employers as well as claimants. Due 
process requires that states give an employer a reasonable amount of 
time to learn of a claim, investigate it, and respond when appropriate. 
Charging an employer's tax account when the employer was not given 
sufficient time to respond is a denial of due process. A deadline for 
response which allows the employer less than 10 calendar days after the 
notice is mailed out before the response is due often puts the employer 
in a Catch 22 situation.
    If federal law mandates that states amend their laws to prohibit 
non-charging for failure to submit a timely or complete response, then 
fairness dictates that it also must require states to provide adequate 
time to submit their response. Any federal legislation prohibiting non-
charging for failure to submit timely and complete responses should 
also pre-empt state laws that have taken a different approach in trying 
to encourage prompt submissions. Some states now assess monetary civil 
penalties against an employer for failure to respond to a separation 
notice. Such penalties are unfair. An employer may have legitimate 
reasons not to respond to a UI separation notice. The circumstances 
surrounding the separation from employment claim may entail a potential 
risk of separate litigation over employment law issues related to the 
reasons for separation. An employer which is at risk of litigation in 
another legal venue may not wish to provide the claimant's legal 
representative with an opportunity for discovery prior to the case 
going to court. In many states, the law and facts are construed in 
favor of the claimant. Consequently, the employer may not contest a UI 
claim because it wishes to avoid a potential legal problem down the 
road. In such cases, benefits are then charged to the employer's 
account. If federal policymakers are going to address the consequences 
of not responding to separation notices, it is unfair to allow states 
to enforce laws imposing monetary penalties, too.
    States are actively debating how to encourage prompt response to 
separation notices. Federal mandates may make sense where the need for 
uniformity among the states is compelling, but no such need has been 
demonstrated for federal law to require that states charge benefits to 
the employer's tax account for failing to respond to separation 
notices.
    It is true that the DOL proposal recognizes that charging is not 
appropriate in all circumstances. The DOL proposal includes an 
exemption for ``good faith'' error. But ``good faith'' is not defined, 
and what is considered either ``good faith'' or an employer's ``fault'' 
in one state may not be the same in others. Even greater variability is 
likely with respect to what is considered ``sufficient'' information to 
avoid being charged for an ``incomplete'' response. What is 
``sufficient'' is a very complex issue. A determination of what is 
complete will not only vary among the states, it will vary from claim 
to claim and from adjudicator to adjudicator within a state. 
Furthermore, employers will be burdened with fifty different 
definitions, thereby making compliance and avoidance of punitive 
charging nearly impossible.

FUTA surtax extension proposal
    UWC opposes the 5 year extension of the FUTA surtax. Over 10 years, 
extending the FUTA surtax will cost employers more than $17 billion 
extra yet will make just a $710 million dent in the federal budget 
deficit.
    The FUTA surtax directly punishes employers $14 for each worker, 
every year, and the indirect costs are even greater. At a time when the 
Treasury has asked Congress to extend expiring tax cuts to continue 
promoting a healthy economy and employment growth, this payroll tax 
increase makes no sense.
    Congress originally imposed the FUTA surtax in 1976 to retire a 
deficit created by a temporary ad hoc supplemental extended 
unemployment program. Business accepted it, subject to agreement that 
the surtax would expire when the debt was repaid. The debt was retired 
in 1987. Nevertheless, the surtax has already been extended four times.
    FUTA revenue may be expended for only three purposes: the 
administration of the state unemployment insurance (UI) and employment 
services program, the federal share of Extended Benefits (EB), and 
interest-bearing loans to states which temporarily deplete their 
unemployment trust accounts. Yet the FUTA trust fund is already over 
funded. Over the past 24 years, less than 57% of FUTA revenue has been 
used for administration and EB, and there is no need for more revenue 
just to provide loans.
    There is no UI policy reason to extend the surtax, but there are 
strong policy reasons to let the surtax expire. The accumulation of 
unneeded FUTA revenue by extending the surtax will create significant 
problems for the UI system. FUTA balances over a statutory ceiling are 
automatically distributed to the state accounts used to pay basic UI 
benefits. Extending the surtax will cause the federal accounts to hit 
the ceiling and trigger a large distribution to the state unemployment 
funds. The expectation of federal funding for basic unemployment 
benefits will discourage state fiscal discipline in financing their UI 
programs. It also weakens the positive effect of using experience rated 
state unemployment taxes to finance UI benefits. Consequently, 
employers will have less incentive to avoid lay-offs and to protest 
improper claims.
    Raising the FUTA ceiling would prevent a distribution to the 
states--but that also is poor public policy. The accumulation of 
unneeded funds will make the Unemployment Trust Fund an inviting target 
for proponents of new federal spending programs. For example, former 
HHS Secretary Donna Shalala once referred to the Unemployment Trust 
Fund as ``unused pots of money'' that could be re-programmed to 
transform UI into paid family leave (``Baby UI''). It will also make it 
more difficult for states still in debt from the last recession to 
raise the money needed to restore solvency.
    The reason for the FUTA surtax expired almost 20 years ago. The 
Department of Labor got it right in 2002 when it proposed ``reducing 
employers' federal unemployment taxes.'' The cost to employers will add 
up over time--not to mention the indirect cost of weakening experience 
rating, encouraging states to depend on federal financing for basic UI 
benefits, and accumulating paper balances which will be used to justify 
expanded government spending in the future. All these adverse 
consequences in exchange for a negligible impact on the federal budget 
makes extending the FUTA surtax too high a price. Congress should allow 
the surtax to expire on schedule at the end of 2007.

Other DOL integrity proposals
    UWC agrees that additional financial resources are needed to 
enhance state efforts to prevent and recover overpayments and underpaid 
taxes. Because state budget dollars for UI administration are very 
limited, integrity often gets little emphasis. However, the specific 
financing mechanism proposed by DOL raises significant policy concerns. 
Allowing states to retain a portion of recovered overpayments or 
underpaid taxes creates an exception to the federal law known as the 
``withdrawal standard.'' This standard prohibits the expenditure of 
payroll taxes deposited in state unemployment trust funds for any 
purpose other than payment of unemployment benefits. This stricture 
provides a firewall against the use of benefits funds for various other 
purposes, including system administration. Maintaining the withdrawal 
standard, including the firewall between funding for benefits and 
administration, is important, because paying for administrative costs 
using benefits revenue will ultimately lead to higher state payroll 
taxes for employers. State unemployment payroll tax rates are closely--
and automatically--tied to unemployment trust fund balances. 
Expenditures to cover administrative costs will reduce these balances 
and trigger higher tax rates, with virtually no accountability on the 
part of state or federal elected officials.
    Although the DOL proposals seemingly do not create the risk of 
payroll tax increases because they have the potential to recover that 
presumably would have been lost to the system, they open the door to 
additional proposals to expend state unemployment revenue on other 
administrative functions, all of which arguably will also improve trust 
fund solvency. For example, hiring more hearing officers and 
adjudicators, who have more training and are paid higher salaries, is 
likely to result in fewer errors on claim determinations and appeals. 
Establishing more ``job clubs'' may result in more disqualifications of 
claimants who were not able to work or available for work. Maintaining 
more unemployment offices may foster more referrals of claimants to 
suitable work. Automating communications between agencies and employers 
will unquestionably result in fewer improper payments. Greater 
enforcement of work search requirements will also produce significant 
reductions in improper payments. All of these functions are 
administrative, and all would benefit from more money. Opening the 
firewall to allow funding for overpayment recovery efforts will 
undoubtedly trigger a myriad of other ideas which ``require'' reaching 
into the state trust funds.
    Moreover, reaching into the state benefits trust funds to pay for 
any administrative expenses is totally unnecessary. The FUTA tax paid 
by employers is levied for the specific purpose of financing state UI 
administration, and it produces far more revenue than is needed for 
this purpose, even after allowing for ``beefed up'' state efforts to 
increase recoveries of overpayments. Since 1981, the federal government 
has returned less than 57% of FUTA revenue to the states for program 
administration and the state share of extended benefits, the sole 
purposes allowed by law for expenditure of FUTA revenue. There is more 
than enough revenue in the FUTA accounts in the Unemployment Trust Fund 
to finance additional integrity activities, even if the ``temporary'' 
surtax is allowed to expire at the end of 2007. If Congress agrees that 
the return on these proposals will more than offset the cost--and we 
believe that is the case, at least initially--then it should allow 
states to tap FUTA revenue already paid by employers for UI 
administration rather than looking to alternative state funding 
sources.
    A net gain from the collection agency proposal is more speculative. 
State UI agencies should be expected to use the resources of their own 
office in performing their public duty--including recoveries of 
overpayments and delinquent taxes--and they should be provided 
sufficient financial resources to accomplish this purpose. Because 
federal grants for UI administration are chronically inadequate, there 
will be strong temptation for states to write off as much as possible 
as ``uncollectible'' and thereby obtain supplemental financial 
resources. If this dynamic occurs, the use of collection agencies will 
appear to pay off, while actually doing little to increase real net 
recoveries.
    The collection agency proposal also raises another public policy 
issue because a contingency fee is used to pay for the collection 
services. Contingency fee agreements were not meant for state 
governments--they were designed to increase access to courts for 
individuals without the resources to pay an hourly attorney fee. 
Delegating state authority to collection agencies on a contingency fee 
basis can lead to government enforcement activity on the basis of 
profitability, not public interest. State UI administrators serve to 
protect the public interest--not enrich private collection agencies. 
And there is a danger that contracts will be granted to firms that 
contributed to a political campaign, creating an appearance of 
impropriety.
    Our policy opposing federal standards also compels us to oppose the 
proposed mandate that states impose a 15% fine on overpayments due to 
fraud. UWC advocates that states impose such fines, but there is no 
compelling need for federal uniformity. Unnecessary federal standards, 
even those favoring employer interests, will create precedent for 
additional unnecessary federal standards that will hurt employers, 
workers and the UI system. Furthermore, as a practical matter, the 15% 
fraud penalty may be counter-productive. Many states are reluctant to 
impose fraud penalties, and the greater the penalty, the more likely 
the state will not find that fraud occurred.

Better ways to improve UI integrity
    We would like to suggest other ways to improve system integrity 
that were not included in the DOL integrity proposal. This is not a 
complete list of our suggestions, but these proposals will have a 
measurable positive impact:

      Administrative financing reform

    The root cause of many of the systemic problems in the UI system 
which are responsible for the high error rate is the chronic under 
funding of the state workforce agencies which administer the UI 
program. UWC has gone on record on many occasions, including hearings 
before this subcommittee, regarding the need for permanent 
administrative financing reform to assure that workers receive 
necessary services, states receive adequate funds for administration, 
and employers are not taxed excessively. The problem is not inadequate 
revenue. As noted above, employers pay far more in FUTA than Congress 
appropriates for state administration. The problem arises primarily 
because federal appropriations are chronically inadequate because 
federal budget rules create incentive for the federal government to 
hold onto FUTA receipts and maintain an excessive FUTA tax rate. Past 
proposals for administrative financing reform, designed to return a 
greater share of FUTA revenue to the states, have not advanced in 
Congress but the problem is no less acute than it was previously. We 
urge Congress to step up to the plate and assure that states receive 
adequate administrative funding. But rather than just ``throwing money 
at the problem'' and trusting the states to spend it wisely, we would 
like to explore a ``pay for performance'' approach that will provide 
supplementary administrative funding for states that demonstrate they 
meet reasonable administrative standards and goals.

      More frequent charge reporting and automation

    States should send employers their charge notices at least 
quarterly, and distribute them promptly at the end of the reporting 
period covered. These notices, similar to credit card statements, list 
all benefits charged against an employer's unemployment tax account. 
Employers check these notices for errors and often detect mistakes in 
time to stop payment of additional benefits to claimants who were not 
eligible. However, 6 states, including California, send these notices 
only once a year. By the time the employer has a chance to alert the 
state to an improper payment, there is virtually no chance of stopping 
future erroneous payments or recovering past overpayments. DOL should 
encourage these states to send quarterly notices, and Congress should 
provide funding for the states to make the adjustment.
    In addition, efforts should be expedited to develop automated 
systems for sending employers separation notices, charge notices, and 
similar communications. The states have established more efficient 
procedures for claimants to submit claims--e.g., by phone and by 
Internet--but automation of employer communications in most states has 
lagged far behind. The paper forms sent through the mail and the few 
``one size fits all'' web applications do not lend themselves to the 
breadth of today's employers, many of which operate in multiple states 
and have centralized in-house UI management programs or outsource this 
function to authorized agents. Such a system could be established 
nationwide and used on a voluntary basis, giving the employer the 
opportunity to provide separation information at the time of discharge 
and not have to worry about receiving notice in the mail at a later 
time and missing deadlines or providing ``incomplete'' information. 
Such a system could also retain separation information to be used for 
benefit charge issues in subsequent separations that might involve base 
period wages. The potential for reducing fraud and administrative 
overpayments is tremendous. Again, federal funding to design and 
implement the system would be helpful.

Conclusion
    UI overpayments are a serious problem. The root cause is tied 
directly to inadequate administrative funding that results from the 
hopelessly broken administrative financing mechanism for the state 
workforce agencies. The Administration proposals are a sincere and 
well-intentioned effort to focus attention on payment and tax accuracy 
but generally fall short of what's needed for an effective solution. A 
few, such as the recovery of overpayments out of tax refunds, have 
merit and should be enacted as soon as possible. Unfortunately, many of 
the others are misguided in various respects and should be rejected or 
modified.
    Of greatest concern is the proposed federal standard requiring 
states to amend their laws to prohibit non-charging of benefits paid 
because of employer fault. This proposal will not result in a material 
reduction in overpayments. Few overpayments result from an employer's 
failure to provide timely and complete information. Often, the employer 
cannot respond any sooner because the principal reason for the late or 
incomplete response is that the state does not provide a realistic 
deadline or procedures which make it possible to submit timely and 
complete information. In some cases, the employer has legitimate 
reasons for choosing not to respond or not providing more detail. State 
systems, deadlines and procedures for responding to separation notices 
and adjudication of UI disputes vary widely. Employer cooperation in 
the UI claims process is essential, but a federal standard requiring 
that benefits be charged to the employer's account for failure to make 
timely or complete submissions will not only be ineffective, it will 
compound existing procedural problems and make the UI system more 
costly and frustrating for responsible employers.
    Instead of charging benefits to the employer, the federal 
government should foster expedited development of more efficient 
processes to automate communications between states and employers. 
States should change their notification procedures to improve the 
timeliness of employer receipt of charge notices--and now is the best 
time to act on these changes because many states are in the process of 
re-engineering their UI systems. In addition, states should send charge 
notices to employers at least quarterly.
    More funding for integrity functions and automation is urgently 
needed. The DOL proposals move in the right direction, but the proposed 
funding source, driven by federal budget rules, is objectionable. It is 
not appropriate to tap payroll taxes contributed to finance benefit 
costs or impose additional payroll taxes at the federal or state level 
when more than enough FUTA revenue is available. The principal purpose 
of FUTA revenue, by law, is administrative financing. Breaking down the 
firewall between benefits and administrative taxes is a mistake that 
will increase payroll taxes on employers. Proposals to allow use of 
recovered overpayments for enhanced benefit payment controls and 
collections, and enhanced IT upgrades, should be financed out of 
existing FUTA revenue, not additional taxes.
    There is no compelling reason for uniformity of state laws imposing 
penalties for overpayments and some doubt as to whether a minimum 15% 
fraud penalty will be effective. We therefore do not support a federal 
mandate for this purpose. Federal mandates, even when helpful to 
employers, will simply invite additional federal mandates that 
ultimately will make the UI program more costly.
    Of equal concern, there is absolutely no sound reason to raise 
payroll taxes on employers by extending the FUTA surtax past the end of 
2007. The FUTA tax rate should be established based on UI program 
needs, not federal budget rules. The accumulation of unnecessary FUTA 
revenue is detrimental to a sound unemployment insurance system.
    We appreciate your inclusion of these comments in the hearings 
record. We would be pleased to answer any questions or provide 
additional information. Please feel free to contact me by telephone or 
by email.

STATEMENT OF CLIENTS, PERSONS, OR ORGANIZATIONS ON WHOSE BEHALF THE 
        STATEMENT IS SUBMITTED
    This statement is submitted on behalf of UWC--Strategic Services on 
Unemployment & Workers' Compensation (UWC). UWC is a 501(c)(6) 
association incorporated under the laws of Wisconsin. UWC offices are 
located in the District of Columbia.

                                 
Statement of William Samuel, American Federation of Labor and Congress 
                 of Industrial Organizations (AFL-CIO)

    On behalf of the more than 9 million working men and women of the 
AFL-CIO, I appreciate the opportunity to submit written testimony on 
the Bush Administration's FY 2007 budget request for the Department of 
Labor (DOL), with special emphasis on the Unemployment Insurance (UI) 
system, the Employment Service (ES), and the workforce development (job 
training) system.
    On February 6, 2006 the Bush Administration released its FY 2007 
budget request for DOL programs, and on May 3, 2006 the Administration 
submitted legislative language--called the ``Unemployment Compensation 
Program Integrity Act of 2006''--to implement several of its budget 
proposals. Notwithstanding the modest title of this legislation, the 
Bush Administration is proposing nothing less than a radical 
restructuring of the U.S. employment security system.
    The most far-reaching and harmful of the Administration's proposals 
would allow the entire balance of state UI trust funds to be diverted 
to purposes other than paying UI benefits--and specifically to pay for 
tax subsidies for low-wage employers, personal reemployment accounts 
(PRAs) to induce displaced workers to forego job training, and wage 
supplements to induce displaced workers to take lower-paying jobs with 
subsidized low-wage employers.
    The Administration's sweeping agenda poses serious questions for 
the future of the U.S. employment security system. Bush Administration 
policies and proposals are taking us in the direction of lower-quality 
jobs with lower wages and reduced benefits; a shift in the mission of 
our economic security system from helping workers find good jobs 
towards inducing them to accept ``rapid reemployment'' at lower-quality 
jobs; and under-funding and neglect of the federal programs that help 
displaced workers find and qualify for good jobs. We propose a very 
different agenda that puts a priority on helping displaced workers find 
reemployment at good jobs with good wages and good benefits.

Four Principles for Reform
    We believe the urgent task of reforming and improving our economic 
security system should be guided by the following four principles:

    1.  Reform should improve the effectiveness of our employment 
security system in preventing economic hardship for workers who lose 
their jobs;
    2.  Reform should improve the effectiveness of our economic 
security system in helping displaced workers find reemployment at good 
jobs with good wages and good benefits, and keeping workers on a career 
path of higher wages and higher benefits;
    3.  Reform proposals should recognize the role played by the U.S. 
economic security system as an economic stabilizer, providing 
countercyclical economic stimulus to depressed areas of the country 
during periods of high unemployment; and
    4.  Reform should promote fairness and efficiency in the 
administration of our economic security system, and promote compliance 
with the law by both employers and workers.

    In our testimony below, we use these criteria to evaluate the 
Administration's budget and legislative proposals.

Principle #1: Prevent Hardship and Promote Economic Security
    The first and most obvious purpose of the employment security 
system is suggested by its name: to promote economic security by 
preventing economic hardship for workers who lose their jobs. This goal 
is as important today as it ever has been, but it is not being met by 
the current system.
    None of the remarkable changes in the American workforce in the 
past few decades have obviated the need to promote economic security 
for displaced workers. Despite an ostensibly low U.S. unemployment rate 
of 4.7 percent, there are still seven million Americans officially 
unemployed. If discouraged workers and involuntary part-time workers 
were counted, the U.S. unemployment rate would be 8.4 percent.
    One noticeable change in the U.S. labor market is the rising level 
of job turnover, which has increased 4 percent just since 2003 (from 37 
percent in 2003 to 41 percent in 2005). This troubling development 
calls for more, not less, UI assistance for displaced workers. It also 
suggests additional reforms such as universal health care coverage and 
increased portability of defined-benefit pension plans.
    Despite the need for increased assistance, the UI system is now 
providing less assistance to fewer workers than it has in the past. 
Unemployment benefits replace only 34.7 percent of the lost income of 
jobless workers in the U.S., and much less in some states.
    States such as California, Arizona, Missouri, and Indiana have 
raised regular UI benefit levels since the 1990s, but much more remains 
to be done. To promote higher levels of wage replacement, future 
special distributions from the federal UI trust funds should be 
dedicated, at least in part, to raising regular state UI benefit 
levels.
    The percentage of unemployed workers who receive regular state UI 
benefits has fallen from 50 percent in 1975 to 36 percent in the last 
quarter of 2005. One reason for the decline in UI eligibility is that 
most states have failed to update their eligibility rules to reflect 
the massive entry of women, contingent workers, and part-time workers 
into the workforce. Low-wage workers are twice as likely to be 
unemployed as other workers, yet they are half as likely to receive UI 
benefits, partly because 32 states do not count workers' most recent 
earnings for purposes of determining eligibility. Approximately one in 
five workers is employed part-time, most of them women, but only 18 
percent of part-time workers received UI benefits in the 1990s.
    Several states have adapted to these changes in the workforce by 
modernizing their UI programs to serve more workers. Nineteen states 
now cover more low-wage workers by using an alternative base period 
(ABP) that counts workers' most recent earnings. Twenty-four states 
allow UI eligibility for at least some part-time workers. And twenty-
seven states provide UI benefits to victims of domestic violence who 
are forced to leave work.
    Federal funding should support such state efforts to expand UI 
eligibility. In the late 1990s, the ``stakeholder'' process--involving 
employers, organized labor, state UI administrators, and the U.S. 
Department of Labor--produced a consensus package of UI reforms that 
encouraged eligibility expansion. This ``stakeholder package'' included 
federal funding for states to cover more low-wage workers by 
implementing an ABP, as well as federal funding for states to cover 
part-time workers.
    Another noteworthy development in the U.S. labor market is the rise 
in long-term unemployment, most likely caused by structural changes in 
the economy. Repairing the dysfunctional federal extended benefit (EB) 
program would be an especially appropriate response to the increase in 
structural unemployment. The EB program was intended to allow long-term 
unemployed workers in high-unemployment states to receive benefits even 
when Congress has failed to enact a nationwide program of extended 
federal benefits. However, the EB activation triggers are obsolete, and 
the ``stakeholder package'' of UI reforms includes repair of the EB 
triggers.
    Raising UI benefit levels, expanding UI eligibility, and improving 
UI outreach obviously require additional budget resources. We propose 
that these reforms be paid for through a special account funded by the 
Bush Administration's proposed five-year extension of the Federal 
Unemployment Tax Act (FUTA) surtax.

Principle #2: Set Workers on a Career Path Towards Higher Wages and 
        Higher Benefits
    The second principle of reform is to improve the effectiveness of 
our economic security system in helping displaced workers find, and 
qualify for, good jobs with good wages and good benefits.
    Recent changes in the U.S. labor market underscore the need for a 
much more ambitious national reemployment strategy. Because of rising 
job turnover, there are obviously more workers seeking reemployment 
than ever before. And because of increased structural unemployment, the 
challenge of finding good reemployment opportunities lies increasingly 
beyond the means of individual workers and localities, and demands a 
national response.
    Reform efforts should therefore focus on developing a comprehensive 
``good jobs strategy'' to ensure that good jobs are available in the 
first place; improving the effectiveness of programs that connect 
workers with the good jobs that are available; and improving the 
effectiveness of job training programs that help workers qualify for 
those good jobs.
    A comprehensive strategy to create and maintain good jobs must 
include (1) balanced monetary and fiscal policies to promote full 
employment; (2) robust investments in physical infrastructure; (3) a 
national strategy to revive the manufacturing sector, including 
investments in technology development and dissemination, currency 
policy reform, and repeal of tax subsidies that encourage off-shoring 
of manufacturing jobs; (4) trade and currency policies that discourage 
downward competition in wages and benefits and the off-shoring of good 
jobs; (5) other sectoral strategies to rescue and modernize ailing 
sectors of the economy, building on successful labor-management models 
in hospitality, telecommunications, and health care; (6) economic 
development initiatives; and (7) policies that promote worker rights 
and collective bargaining, higher wages, and improved health care and 
retirement security.
    To do a better job of matching workers with available good jobs, 
the Employment Service (ES) must be reinvigorated. Today the ES 
administers the ``work test'' for millions of UI claimants to ensure 
that they are registered for, and matched with, suitable job openings, 
and provides reemployment services that help UI claimants return to 
work. In 2005, the ES helped over 14 million workers look for jobs.
    A number of studies have demonstrated that labor exchange services 
provided by the ES are extremely cost-effective. According to a 2002 
paper by Westat researcher Lou Jacobson, public labor exchange services 
spend about $330 per job placement. Mr. Jacobson observes, ``What is 
particularly remarkable is that virtually every rigorous analysis of 
PLXs [public labor exchanges] indicates that they are highly cost-
effective.''
    The ES has a unique state and national focus that cannot be 
duplicated by private contractors, or by One-Stop offices under the 
Workforce Investment Act (WIA). Private businesses such as Monster.com 
cannot match the breadth of services or listings offered by the ES. WIA 
One-Stops have a local focus that is ill-suited to carry out a 
national, or even statewide, reemployment strategy. Congress should 
direct the WIA system to devote fewer resources to wasteful duplication 
of ES infrastructure, and more of its resources to job training. Core 
services provided by the WIA One-Stops should be provided by ES merit 
staff employees.
    However, the ES cannot meet its current responsibilities, much less 
shoulder additional responsibilities, without additional budget 
resources. The ES budget has been cut for five years in a row. In FY 
2006 its budget was cut $45.8 million in nominal dollars over FY 2001, 
and $34 million in DOL grants for reemployment services for UI 
claimants were eliminated.
    Finally, the quality and effectiveness of job training programs 
must be improved, starting with restoration of recent budget cuts. The 
WIA system should ensure that training investments lead to good jobs by 
developing and implementing performance standards, economic self-
sufficiency standards, and other measures to ensure accountability of 
public subsidies.
    In light of rising job turnover and structural unemployment, 
studies show that the most effective job training programs are those 
that offer workers a broad skill set that can be transferred to 
multiple employers. There is also a correlation between the 
effectiveness of job training and the duration of training, which 
suggests the need for additional budget resources for training, and 
accompanying income support, modeled after the Trade Adjustment 
Assistance (TAA) program.

Principle #3: Provide an Economic Stabilizer
    One of the original purposes of the UI program was to stabilize 
local economies by helping displaced workers maintain purchasing power 
during spells of unemployment. Reform proposals should not overlook 
this important purpose of the UI program, but rather should seek to 
create additional countercyclical stimulus.
    In the last recession, regular UI benefits pumped over $50 billion 
back into the economy, and temporary federal extensions injected 
another $23 billion. According to a 1999 study, every one of these 
benefit dollars generated $2.15 in additional economic growth.
    Reforms designed to raise UI benefit levels, expand UI eligibility, 
and repair the EB program would serve the dual purpose of stabilizing 
the economy during economic downturns.

Principle #4: Ensure Fair and Efficient Administration
    The best way to ensure fairness and efficiency in the 
administration of the UI/ES system is to guarantee ``merit staffing'' 
(public administration) and adequate congressional appropriations of 
administrative funding. Adequate administrative funding is also the 
best way to prevent overpayments and underpayments to UI claimants, and 
to achieve better tax compliance by employers.
    Under current law and regulations, fairness and efficiency in the 
UI and ES programs are served by the ``merit staffing'' requirement--
the requirement that the UI and ES programs be administered by state 
civil service employees. The principle behind merit staffing is that 
unbiased, nonpartisan staff should perform the functions of the UI and 
ES programs, which are inherently governmental and intimately related 
to the public interest.
    The merit staffing requirement must be maintained for both the UI 
and ES programs to ensure unbiased services, confidentiality, and 
accountability. Merit staffing is important in the ES system, 
especially, to avoid discrimination against African American and 
Hispanic workers, who are often turned away from private placement 
agencies, and to ensure compliance with federal equal opportunity 
requirements. Merit staffing is necessary in both the UI and ES 
programs to protect the confidentiality of information provided by 
workers and employers, which may be compromised in the hands of private 
firms. And there is greater public accountability over public employees 
than over profit-motivated private contractors.
    Fair and efficient administration also requires adequate 
administrative funding, which is the responsibility of the federal 
government. Unfortunately, appropriations for UI administration have 
not been adjusted for inflation, including personnel and services 
costs, since 1995.
    To protect states against chronically inadequate appropriations, 
the ``stakeholder'' process recommended mandatory funding of UI 
administration at levels sufficient for states to adequately administer 
their UI programs. At the very least, Congress should support the NASWA 
proposal to increase funding to $3.023 billion in FY 2007, $283 million 
more than DOL's request.
    Inadequate administrative funding hampers state ``program 
integrity'' efforts to ensure that unemployed workers receive the 
correct amount in UI benefits and employers pay the correct amount in 
payroll taxes. Most overpayments of UI benefits result from innocent 
errors that could be reduced or avoided with more adequate 
administrative resources.
    However, the underfunding of UI administration also results in 
underpayments to workers, which also should be avoided. The National 
Employment Law Project (NELP) estimates that workers were improperly 
denied a total of $1.3 billion in benefits in 2002, while DOL 
statistics show overpayments of $888 million.
    The chronic shortfall of UI administrative funding hampers the 
ability of states to detect and collect unpaid employer taxes. While 
DOL recommends that states audit 2 percent of employers, states audited 
only 1.7 percent of employers in 2004, though nearly half of state 
audits result in the adjustment of reported wages. States blame their 
failure to conduct more audits on a shortage of administrative funding.
    Furthermore, additional administrative resources are necessary to 
detect employer misclassification of workers as ``independent 
contractors'' rather than ``employees.'' According to a recent report 
by the DOL Inspector General, seven states that use IRS data sets to 
detect misclassification of employees have recovered close to $1.5 
billion in underpaid employer taxes, and two-thirds of their audits 
have resulted in adjustments of employer taxes. Congress should direct 
DOL to provide IT resources, training, and grants to help states 
prioritize use of the IRS data.
    Federal administrative funding is also necessary to help states 
detect SUTA dumping. In 2004 Congress passed legislation to prohibit 
``SUTA dumping'' schemes, in which employers evade payment of UI taxes 
by improperly transferring their UI experience ratings to third 
parties. The GAO has identified 14 states that have uncovered SUTA 
dumping schemes costing over $120 million in lost UI revenue. Funds 
made available for the implementation of SUTA dumping detection systems 
have been insufficient for states to purchase the necessary hardware, 
train staff to implement the programs, or investigate and prosecute 
SUTA dumping schemes.
    Finally, legislative changes are necessary to increase recoveries 
from SUTA dumping. The 2004 legislation ignored one of the most common 
forms of tax evasion--the transfer of employees to the payroll of a 
professional employee organization (PEO). California estimates that PEO 
schemes account for half of the $100 million in UI taxes underpaid 
every year. Congress should pass legislation to allow states to recover 
unpaid taxes from employers who evade taxes through the use of PEO 
schemes.

The Bush Administration's FY 2007 Budget Proposal for DOL Programs
    Unfortunately, the Bush Administration's FY 2007 budget proposal 
violates all four of the reform principles discussed above. None of the 
Bush budget proposals would help prevent economic hardship for workers 
when they lose their jobs, or make it easier for workers to find 
reemployment at good jobs with good wages and good benefits.
    The budget proposal would make it harder for displaced workers to 
find and qualify for the higher-quality jobs that are available. It 
calls for a reduction of $63 million in real dollars for all ES 
programs over FY 2006, and $378 million over FY 2001. It would also 
eliminate America's Job Bank (AJB), funded through the ES, which is now 
the largest listing of job openings in the world.
    DOL also proposes another round of cuts in the job training budget. 
The budget proposal would eliminate funding for WIA programs designed 
to help unemployed workers, disadvantaged adults, and at-risk young 
people, and cut training and assistance overall by $831 million in real 
dollars over FY 2006, and by more than $2 billion over FY 2001.
    Finally, the FY 2007 budget request for UI administration is only 
slightly higher than the appropriation for 2003, and far less than what 
is needed to administer the UI program.

DOL's Legislative Proposal to Divert UI Trust Funds to Pay for Employer 
        Subsidies, PRAs, and Wage Insurance
    In a letter to Speaker Hastert dated May 3, 2006, Secretary Chao 
outlined DOL's legislative proposal to waive fundamental requirements 
of the UI program, including the requirement that states use their UI 
trust funds only to pay for UI benefits, and the requirement that 
states assess UI employer taxes based on employers' experience rating. 
We strongly oppose this proposal.
    The scope of DOL's proposal is astonishing. It would allow states 
to divert UI trust funds to purposes other than UI benefits--the only 
limitation being that such diversions must be ``consistent with'' one 
of two purposes: (1) accelerating reemployment or (2) improving the 
effectiveness of state administrative activities. There is no 
restriction on the size of such diversions, so states could divert the 
entirety of their trust funds to other purposes.
    Obviously, diverting UI trust funds to other purposes threatens the 
ability of states to provide unemployment compensation to workers who 
need it. Furthermore, it makes it far less likely that states will be 
able to make needed reforms such as expanding UI eligibility or 
increasing UI benefit levels. Diversion of UI trust funds may also 
compromise the role of the UI system as an economic stabilizer if the 
trust funds are used in ways that have less stimulative effect on the 
economy.
    On May 4, Deputy Assistant Secretary of Labor Mason Bishop gave two 
examples of how DOL expects states to divert their UI trust funds under 
the proposal: personal reemployment accounts (PRAs) and wage insurance. 
Mr. Bishop testified that DOL expects states to set up personal 
accounts that workers could use to pay for job training, which is yet 
another formulation of the controversial PRA proposal, and that DOL 
expects states to supplement the wages of unemployed workers who find 
reemployment, a concept known as ``wage insurance.'' As part of wage 
insurance programs, DOL expects states to use UI trust fund money to 
provide ``unemployment tax incentives'' for employers who hire workers 
receiving a wage supplement.
    The drawbacks of PRAs are well known. PRAs would result in less, 
not more, assistance to displaced workers. Certainly the amount of 
unemployment compensation for workers would fall if UI trust funds were 
diverted to other purposes. And while PRAs could be used to pay for job 
training and reemployment services, it is unlikely that overall funding 
for such assistance would increase by a corresponding amount, given 
that funding for job training and reemployment services has been cut 
five years in a row.
    While details are missing from this latest version of the PRA 
proposal, previous versions would reduce the amount of assistance 
available to individual workers. PRAs would establish--for the first 
time--a federal cap on the amount of job training and reemployment 
services available to workers, at a level lower than the amount 
available under current law.
    Another significant drawback of PRAs is that they would discourage 
workers from enrolling in job training. If workers are able to retain 
the unspent balances of their accounts upon finding a job, or if they 
receive a cash bonus for finding reemployment within a certain period, 
they are less likely to spend down their accounts on training. This is 
because unemployed workers cannot know in advance what the payoff to 
retraining will be, or when that payoff will occur, yet they are often 
in dire need of immediate cash assistance.
    This is not an unintended consequence of PRAs; it is their 
principal selling point. It is the reason why DOL expects PRAs to 
qualify for the proposed waiver authority: because PRAs are 
``consistent'' with the purpose of ``accelerating the reemployment of 
individuals who establish initial eligibility for unemployment 
compensation under a state's law.''
    However, in many cases it may not be in the best interest of 
workers to forego training. Many training programs are effective, and a 
generalized policy of steering workers away from job training can have 
the effect of diminishing workers' long-term job prospects and living 
standards.
    Wage insurance is a very similar concept, and shares many of the 
same flaws. Like PRAs, wage insurance would reduce the amount of UI 
trust funds available to pay for UI benefits. Like PRAs, wage insurance 
would accelerate reemployment by offering workers a cash incentive. The 
intended purpose of wage insurance, like PRAs, is to induce workers to 
accept jobs they might not otherwise accept.\1\ And neither proposal 
takes into account the quality of those jobs, or the sacrifice workers 
are being induced to make in terms of wages, benefits, and working 
conditions.
---------------------------------------------------------------------------
    \1\ Carl Davidson and Stephen Woodbury, ``Wage-Rate Subsidies for 
Dislocated Workers,'' Upjohn Institute (January 1995) (``The wage-rate 
subsidy we consider--would induce dislocated workers to search harder 
for jobs and accept employment that they might otherwise refuse'').
---------------------------------------------------------------------------
    The jobs that workers would be induced to accept are not promising 
career choices. By definition, they would pay less than the worker's 
old job. Only if the pay cut were substantial would a wage supplement 
affect workers' decisions (because the wage supplement is determined as 
a percentage of the pay cut). The new employer is therefore unlikely to 
be one that pays high wages. Any on-the-job-training that might be 
provided by low-wage employers is likely to be poor quality training 
that does not give workers transferable skills. And once the wage 
supplement is exhausted, workers may well end up with poorer job 
prospects than when they started.
    Meanwhile, workers would have foregone whatever opportunities they 
may have had to find a good job with good wages and good benefits. 
Workers who are able to rely on UI income support while conducting a 
thorough job search, receiving career counseling, or enrolling in job 
training are often able to find higher-quality jobs.\2\
---------------------------------------------------------------------------
    \2\ See, e.g., Heather Boushy and Jeffrey Wenger, ``Finding the 
Better Fit: Receiving Unemployment Insurance Increases Likelihood of 
Re-employment With Health Insurance,'' Economic Policy Institute (April 
14, 2005).
---------------------------------------------------------------------------
    The more wage insurance programs succeed in inducing workers to 
accept ``rapid reemployment'' at lower-paying jobs, the greater the 
potential sacrifice of job quality for workers. Unfortunately, under 
DOL's proposal, there is no limit on the amount of state UI trust funds 
that could be diverted to wage insurance. While worker participation 
would presumably be voluntary, states could easily favor wage insurance 
by making it harder for workers to remain in the UI program. Employers 
that benefit from the resulting downward pressure on wages,\3\ or from 
DOL's proposed tax subsidy, would have an economic incentive to agitate 
for such policies. Already, DOL has proposed a new regulation--not yet 
implemented--that could pressure UI recipients to accept low-wage 
jobs.\4\ DOL's waiver proposal threatens to transform UI into a 
workfare program, instead of a ``good jobs'' program.
---------------------------------------------------------------------------
    \3\ Litan et al. apparently believe that wage insurance would 
subsidize employers by depressing wages. Robert Litan, Lael Brainard, 
and Nicholas Warren, ``A Fairer Deal for America's Workers in a New Era 
of Offshoring,'' Brookings Institution (2005) (``The second critical 
value of wage insurance is that it acts like a training subsidy for the 
new employer'').
    \4\ 70 Fed. Reg. 42474, at 42477.
---------------------------------------------------------------------------
    The problem with ``rapid reemployment'' schemes is that they fail 
to distinguish situations in which ``rapid reemployment'' at low-wage 
jobs is beneficial to the worker from situations when it is not. Their 
effectiveness in modifying workers' behavior depends largely on the 
degree to which workers lack information and are financially 
vulnerable, not the degree to which ``rapid reemployment'' would serve 
workers' long-term interests.
    A better approach is to make workers less financially vulnerable 
and provide them with information necessary to properly assess their 
best interests. This is precisely what the UI system and the Employment 
Service (ES) are designed to do. The ES promotes ``rapid reemployment'' 
too, by providing workers with the information they need to find good 
jobs that match their skills. In 2000 the Labor Department noted that 
every $1 spent on reemployment services produces $2.15 of savings to 
the UI Trust Funds.\5\ But ES promotes ``rapid reemployment'' when it 
is in the worker's best interest. When a broader job search or 
retraining might better serve a worker's needs, the ES also supplies 
the information workers need to make that determination.
---------------------------------------------------------------------------
    \5\ Stephen Wander and Jon Messenger, Worker Profiling and 
Reemployment Services Policy Workgroup: Final Report and 
Recommendations, U.S. Department of Labor Employment and Training 
Administration (2000).
---------------------------------------------------------------------------
DOL Legislative Proposal to Privatize Administration of the UI System
    DOL's legislative proposal would also allow states to privatize 
administration of the UI system by obtaining waivers of Section 
303(a)(1) of the Social Security Act, which requires that states 
establish and maintain a merit-based personnel system to administer the 
UI program. This proposal should be rejected for reasons discussed 
above--namely, because the administration of publicly-funded UI 
benefits is an inherently governmental function, and because 
privatization would result in diminished guarantee of fairness and 
equal opportunity, compromised confidentiality, and less 
accountability.

DOL Legislative Proposals to Recover UI Overpayments and Underpayments
(``Program Integrity'')
    DOL's ``Unemployment Compensation Program Integrity Act of 2006'' 
includes five legislative proposals designed to promote the ``program 
integrity'' of the UI system. These legislative proposals represent an 
unfair and unworkable approach whose shortcomings could be avoided if 
DOL would simply provide states with adequate levels of administrative 
funding.
    Ensuring ``program integrity'' of the UI system is an 
administrative function that should be financed through federal 
administrative grants to the states. Several of DOL's ``program 
integrity'' proposals would use money belonging to the state UI trust 
funds--recoveries of benefit overpayments and tax underpayments--to 
finance this administrative function. Instead of using state UI trust 
fund money to pay for UI administration, the federal government should 
fulfill its responsibility to adequately fund administration of the UI 
system.
    If UI administration were adequately funded, there would be fewer 
benefit overpayments in the first place, as well as fewer underpayments 
to workers. The failure to provide adequate administrative funding also 
unfairly skews enforcement priorities against workers, since improving 
tax compliance by employers requires additional administrative 
resources.
    Under DOL's proposals, the weight of collection efforts would fall 
on workers, in many cases unfairly. DOL fails to distinguish UI benefit 
overpayments that result from fraud from those that result from 
innocent error. In 2005, only 38 percent of overpayments were the 
result of fraud; about 30 percent were caused by errors on the part of 
the UI agency or employers; and the remaining overpayments were due to 
innocent errors on the part of claimants.
    Moreover, DOL's proposal to intercept tax refunds would affect 
mainly low-income workers, since a greater percentage of low-income 
individuals receive tax refunds. According to CPS data, 41 percent of 
UI claimants have incomes low enough to receive the Earned Income Tax 
Credit (EITC).
    The tax intercept proposal may also be unworkable. Because UI 
benefits are taxable income, if overpayments are deducted from a 
taxpayer's federal tax refund, the taxpayer may be owed a refund of 
taxes paid on the UI benefit. The IRS would either have to recalculate 
the worker's taxes or offset the tax overpayment against the benefit 
overpayment, at considerable cost and effort.
    With regard to fraudulent overpayments, we strongly oppose DOL's 
proposal to allow private collection agencies to collect up to 25 
percent of recoveries. This proposal would establish a dangerous 
precedent for the privatization of ``program integrity'' activities, by 
allowing private parties to recover money that belongs to the UI trust 
funds. And there is no evidence that private collection agencies would 
perform any better than public agencies in collecting these debts.
    This proposal illustrates many of the problems with privatization 
of UI administration generally. The profit motive of private collection 
agencies could lead to abusive and potentially fraudulent collection 
practices. Private collection agencies are the most complained-about 
industry in the country in terms of unfair and abusive practices, even 
though they are subject to the Fair Debt Collection Practices Act. 
Moreover, it is unclear how the privacy controls that govern state 
agency employees would apply to private collection agents. Even when 
such privacy protections exist, private contractors have an abysmal 
record of protecting the confidentiality of taxpayer information.

Conclusion
    The dramatic changes that have occurred in the U.S. economy in 
recent decades underscore the need for significant improvements in our 
economic security system. We propose an ambitious new national 
reemployment strategy to help displaced workers find good jobs with 
good wages and good benefits. But we strongly oppose shifting the 
mission of our economic security system to promoting downward economic 
mobility and subsidizing low-wage employers.