[House Hearing, 109 Congress]
[From the U.S. Government Publishing 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
U.S. GOVERNMENT PRINTING OFFICE
31-492 WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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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
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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
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but must carry with them their respective government issued
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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
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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,
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FORMATTING REQUIREMENTS:
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* * * 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\
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\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).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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
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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\
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\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.
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\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.
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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.
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\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\
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\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).
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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.
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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).
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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.