!!!!!!!! Testimony!of! Andrew!Stettner! National!Employment!Law!Project!!!! Hearing!Before!the! U.S.!House!of!Representatives,!

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1 Testimonyof AndrewStettner NationalEmploymentLawProject HearingBeforethe U.S.HouseofRepresentatives, Ways&MeansCommittee, SubcommitteeonIncomeSecurity&FamilySupport May4,2010 AndrewStettner,DeputyDirector NationalEmploymentLawProject 75MaidenLane,Suite601 NewYork,NY10038 (212)285"3025x303

2 TestimonyofAndrewStettner,DeputyDirector NationalEmploymentLawProject BeforetheU.S.HouseofRepresentatives,Ways&MeansCommittee, SubcommitteeonIncomeSecurity&FamilySupport May6,2010 ChairmanMcDermottandmembersoftheCommittee:Thankyouforthisopportunityto testifyonthetrustfundinsolvencycrisisfacingthestateandfederalunemploymentinsurance programandtheimpactofthiscrisisontheviabilityandeffectivenessoftheunemployment safetynet. MynameisAndrewStettner,andIamtheDeputyDirectoroftheNationalEmploymentLaw Project(NELP),anon"profitresearchandadvocacyorganizationthatspecializesineconomic securityprograms,includingunemploymentinsurance(ui),tradeadjustmentassistance(taa) andtheworkforcedevelopmentsystem.nelphasalonghistoryofservingfamilieshithardby economicdownturnsbyhelpingthemaccessbenefitsandservicesundertheseeconomic securityprogramsandpromotinginnovativestateandfederalpoliciestostrengthenthem. ChairmanMcDermott,thankyouforyourcriticalleadership,especiallysincetherecession began,inhelpingtosteerthenation sunemploymentinsuranceprogramthroughthetoughest economicdisasterthiscountryhasfacedsincethegreatdepression.asaresultofyourefforts andthoseofyourcolleagues,federalunemploymentinsuranceextensionsanduiprovisionsin theamericanrecoveryandreinvestmentactof2009(therecoveryact)haveprovidedstrong relieftothenation sunemployedfamilieswhilereducingjoblossandboostingthenation s economy.withtoday shearing,thecommitteeisinitiatingatimelydiscussionoftheui program sfinancingcrisis,acriticalfirststeptowardresponsiblereformoftheprogram. Today, we would like to emphasize the following points describing the roots of the solvency crisisandthepathtowardsresponsiblefinancingoftheunemploymentinsurancesystem. Fortystatesarelikelytofaceunemploymentinsurancetrustfunddeficitsof$90billion (cumulative)byfy2013.alreadynumerousstateshavecontemplatedmakingsharp benefitcutsinacounterproductiveresponsetothisfundingcrisis,andpressurewill growformorestatestodosoifcongressdoesnotprotecttheprogram. TheUIfundingcrisisisdeeplyrootedinyearsofshort"sightedstateunemployment insurancefinancingdecisions,includingrecordlowunemploymentinsurancetaxes duringgoodeconomictimesthatfailedtobuildupthereservesnecessarytopay benefitsduringevenamildrecession.indeed,thosestatesthattookresponsiblesteps tofinancetheirprogramsbyindexingtheirtaxablewageswerefourtimeslesslikelyto borrowfromthefederaltreasurytopaystateunemploymentbenefits. Statesenteredthisrecessionlesspreparedthaninanyrecessioninrecenthistory;even amuchmilderrecessionwouldhavewipedoutallofthelimitedtrustfundbalancesin 1

3 manystates.theunsustainablerevenuesystemnowonlychargespremiumsonslightly morethanaquarterofwages,andfederalrulesonlyrequirestatestocollectpremiums onthefirst$7,000ofeachemployee sannualearnings. Toreducethepressureonstatestocutworkers benefitsandenactsteeptaxincreases, Congressshouldcontinuethewaiveroffederalinterestontrustfundloansthrough 2011.Thiscontinuedreliefshouldbetiedtoanexplicitmaintenanceofeffort requirementthatensurestheuiprogramwillcontinuetodeliversupportjobless workersandtheirfamiliesneed,especiallynowatatimeofsuchhighunemployment. Ifstates programsarenotrepairedinthewakeofthissevererecession,workerswill notbeabletocountonthemthenexttimetheeconomydipsintorecession.perhaps morethanatanypointinthe75"yearhistoryoftheprogram,thefederalpartnerwill needtotakeeffectiveactiontohelpthestatesrestoretheunemploymentinsurance programtothecoreprincipleof forwardfunding, whileprotectingthebenefitssideof theprogram. TheultimatetestofthesolutiontothesolvencycrisisshouldbewhetheritsteerstheUI programontoacourseofresponsiblefinancing,enablingittoreliablyandeffectivelydeliver benefitstojoblessfamiliesandstabilizeandstimulateastrugglingeconomy. 1. Unemployment Insurance Has Sustained Millions of American Families ThroughtheWorstJobMarketSincetheSecondWorldWar ItisimpossibletooverstatethepositiveimpacttheUIprogramhashadontheeconomyover thetwo"plusyearssincetherecessionbeganindecember2007.duringthistime,theprogram hasdeliveredatotalof$141billioninstateunemploymentbenefitstoaneconomystarvingfor economicdemand.andthefederalextensions,fullfundingofextendedbenefits,andfederal AdditionalCompensation(FAC)havecontributedmorethan$90billiontotheeconomy. EconomistshaveconsistentlypointedtothepotentmultipliereffectofUIbenefits,ascash circulatesfromthehandsofjoblessworkersintolocaleconomies.accordingtomarkzandiof Moody seconomy.com, [t]hepartofthestimulusprovidingthebiggestbangforthebuck the mosteconomicactivityperfederaldollarspent istheextensionofunemploymentinsurance benefits. 1 Morethan17millionAmericansperyearhavereliedonthejoblesssafetynetduringthe recession. 2 Thebenefitstheseworkersreceivedhavepreventedfamiliesfromfallingfromthe middleclassintopoverty.cbo spreviousresearchfoundthatpovertyratesamonglongerterm UIrecipientswouldhavebeenashighas50percenthaditnotbeenforUI.Amorerecent analysisfoundthatfederalunemploymentbenefitprogramsfromtherecoveryactalonewere estimatedtohavekept800,000americansoutofpovertyin2009 andtheeffectissuretogrow through2010.andtheexperienceofthepasttwoyearshasprovedyearsofresearchright thatuibenefitskeepfamiliesintheirhomes,abletosupportthemselvesandmaintaintheir dignity. 2

4 Withtheunemploymentrateprojectedtoremainovereight(8)percentthroughtheendof 2012,theunemploymentsafetynetwillcontinuetoplayakeyroleincreatingasustainable recoveryandholdingtogetherthefabricofourcommunities.thisrealityputsinsharpreliefthe urgencyofprotectingandsustainingthejoblesssafetyneteveninthefaceoftheserious financingproblemsthecommitteewillbediscussingtoday. 2.UnemploymentTrustFundFinancingHasReachedaCrisisPoint Byalmosteverymeasure,thefinancingproblemsfacingtheunemploymentprogramhave reachedacrisispoint.asofapril28,2010,34statesandthevirginislandshaddrainedtheirui trustfundsandbeenforcedtoborrowover$41billionfromthefederalgovernmentinorderto continuepayingstateuibenefits.twelvestates,includingmanyofthenation slargeststates, havealreadyborrowedmorethan$1billiondollars(california,michigan,newyork, Pennsylvania,Ohio,NorthCarolina,Illinois,Texas,Indiana,NewJersey,FloridaandWisconsin). Borrowingfromthefederalgovernmentwillriseasweaklabormarketspersistincomingyears, andpayrollcontributionstothetrustfundscontinuetofallshortoftheamountsbeingpaidin statebenefits.theu.s.departmentoflabor(usdol)predictsthatinfy2011,stateui collectionswillincreaseto$52billioninrevenue(from$31.4billioninfy2009),butthatstate benefitswillstillbeattheelevatedlevelof$75.1billion. 3 BytheendofFY2013,asmanyas40 ofthe53uijurisdictionswillhaveborrowedover$90billionaltogetherinfederalloansfor statetrustfunds. 4 Asaresult,theFederalUnemploymentAccount(FUA),whichfundsloansto states,hasitselfbecomeinsolventandisborrowingfromthefederaltreasurytocoverthestate loans. 3.FinancingProblemsPressureStateUIProgramstoReduceBenefits TheCommitteeisholdingthishearingatacrucialjunctureintheemergingdebateabout unemploymentinsurancefinancing.theoutcomehasseriousimplicationsfortheprogram s abilitytoprotecttheeconomyandworkingfamilies. Theunemploymentsafetynetisatriskbecauseofirresponsiblefundingoftheprogram. Thenascenteconomicrecoverywouldbegravelyimperiledbyarepeatofthe1980s solvency crisisthatproducedmajorcutstotheuiprogram.duringthatperiod,32statestookout federalloans.between1981and1987,44statesenactedmorerestrictivebenefiteligibility standardsorstricterdisqualificationprovisions.morespecifically,35statesincreasedthe minimumearningsthresholdtoqualifyforbenefitsand18statesenactedstricterformulasfor calculatingmonetaryeligibility. 5 Inlargepartduetothesemajorcutsinbenefits,thepercentof joblessworkersreceivinguibenefitsplummetedfrom50%in1975to28%in1983.andthe U.S.hasbeenlivingwithlowratesofworkerscollectingunemploymentbenefitseversince thosecuts. TheRecoveryActhelpedlessenthepressureonstatestoreducebenefits,bywaivingthe interestonuitrustfundloansuntildecember31,2010.thecurrentinterestrate,which fluctuatesalongwiththeratefortreasuries,isnow4.34%.despitethebreathingroom 3

5 providedbytherecoveryact,trustfundinsolvencyhasbeguntoprovokeseriousstate discussionofbenefitcuts: NewJersey:AfterpledginginaradiointerviewtoleavetheUIsystemuntouched, GovernorChristieproposedreducingthemaximumweeklyunemploymentbenefitby $50,institutingawaitingweek,andimposinghigherpenaltiesforworkerswhoarefired fromtheirjobsandapplyforui. 6 RhodeIsland:GovernorCarcieriproposedapackagethatincluded$7millionintax increasesand$48millioninbenefitcutsinresponsetothestate strustfundsolvency crisis. 7 Thebenefitcutsincludeda10%reductioninthemaximumweeklybenefit amountanda10%cutinthebenefitcalculationformula proposalsthatwere projectedtoknock$80perweekoffofthestate saverageweeklyunemployment insurancebenefit. Vermont:GovernorDouglasproposedtoinstituteawaitingweekandtoslicethe benefitamountsofthemajorityofclaimantsbyadoptingamorerestrictivebenefit eligibilityformula. 8 Thefinalnegotiationseemssettoincludetheinstitutionofthe waitingweek,andafreezeinthestate smaximumweeklyunemploymentbenefitwhich isnormallyadjustedeachyear. 9 Kentucky:TheKentuckyHouseofRepresentativespassedH.B.349,whichinstituteda waitingweekforbenefitsandreducedtheweeklyuibenefitamountby10percent. TheproposaldidnotgetthroughtheSenatebutthebenefitcutissuewillreturnagain nextyear. Thusfar,stateshavelargelystoppedshortofmakingthecounterproductivedecisiontoreduce benefitsinthemidstoftheseverelabormarket,butastheyfaceincreasedfederalpenalties andotherpressurestopaybacktheirloans,weanticipatemanystateswilltakeupmore extremeproposalstocutbenefits.ifafewstatesweretobegincuttingbenefits,thepressure onotherstatestofollowsuitandappearmore business"friendly couldquicklybuildintoa downwardspiral. Thepressuretorestrictbenefitscomesontheheelsofhistoricprogresstomodernizethe eligibilityrulesoftheprogram,madepossiblebythe$7billioninfundingprovidedbythe RecoveryActtomodernizestateUIprograms.ThankstotheRecoveryAct,injustalittleovera year,31stateshavealreadytakenactiontomaketheiruiprogramsmoreaccessibletolow" wage,womenandpart"timeworkers.thetrustfundsolvencycrisisthreatenstoundermine thesehistoricreforms. 4.ForwardFinancingoftheUnemploymentInsuranceProgramisRecognizedas CrucialtoFulfillingtheProgram sgoals Anaccurateunderstandingoftherootsoftoday suifinancingcrisisiscriticaltodetermining howtofixit.iftoday ssolvencycrisisissimplytheresultofanimpossiblybadrecession beyondthecontrolofstates,thenperhapsno"strings"attachedreliefforthestateswouldbe 4

6 appropriate.however,ifunsounddecisionsbythestatessetthestageforthiscrisis,itis incumbentonthefederalpartnertotakeamoreaffirmativeapproachthatguidesstates towardmoreresponsiblefinancinginthefuture.asdescribedbelow,thegenesisoftoday s crisismakesthelattercoursetheappropriateone. Thebreathtakingmagnitudeoftoday ssolvencycrisiscanbetracedtothedecisionofstatesto moveawayfromtheeconomicallysoundtheoryofforwardfinancingoftheiruiprograms. WayneVroman,thenation sleadingauthorityonuifinancing,summarizestheoverall economictheoryunderlyingforwardfundingofuiprograms: Trustfundbalancesarebuiltupbeforerecessions,drawnonduringrecessions,and thenrebuiltduringthesubsequentrecoveries.thefundingarrangementimpliesthat theprogramactsasanautomaticstabilizerofeconomicactivity,thatitmakeslarger benefitpaymentsthantaxwithdrawalsduringrecessionsandlargertaxwithdrawals thanbenefitpaymentsduringeconomicexpansions. 10 Tohaveaforward"financedsystem,astatemustbuilduplargeandadequatetrustfund balancesbeforethestartofarecession.themostappropriatemeasureofsolvencycompares thesizeoftrustfundreservestopastbenefitpayoutsduringrecessions.termeda cost multiple, thismeasureofsolvencyusespastperformancetoassesstheadequacyofcurrent reservesbycomparingtrustfundreservestohistoricallyhighuibenefitpaymentlevels.the mostcommonlyusedcurrentmeasureistheaveragehighcostmultiple(ahcm),which measuresthisratiofortheprecedingthreerecessions.theresultingmultipleiscalculatedin suchawaythatanahcmof1.0meansthefundhasoneyearofreservesathistorichighpayout levels. Theleadingexpertswhohavestudiedunemploymentinsurancehaverecognizedthe importanceofforwardfundingandhavespecificallyrecommendedthattrustfundsatleast equalthe1.0level.in1995,thecongressionally"appointedbi"partisanadvisorycommissionon UnemploymentCompensationconcludedthat: Congressshouldestablishanexplicitgoaltopromotetheforwardfundingofthe UnemploymentInsurancesystem.Inparticular,duringperiodsofeconomic health,eachstateshouldbeencouragedtoaccumulatereservessufficienttopay atleastoneyearofunemploymentinsurancebenefitsatlevelscomparableto itsprevioushighcost. 11 AccordingtotheU.S.DepartmentofLabor,ifthestateshadfollowedthesefederalsolvency standards,onlysixstateswouldnowbeborrowingfromthefederalgovernmenttopaystate unemploymentbenefits.ifallthestateshadgoneintotherecessionwithanaveragehighcost multipleof1.0,only12stateswouldhavehadtoborrow$6billionbymarch31,

7 5.StatesIgnoredYearsofRecommendationsandWereWoefullyUnprepared forevenamildrecession Measuredagainsttheobjectivestandardsdescribedabove,statesenteredthisrecessionfar lesspreparedthantheyhadenteredanyofrecentrecessionsoverthepast35years.therewas anespeciallysteepdeclineintrustfundpreparednessattheonsetofthecurrentdownturnat theendof2007(just19statesmetthestandard)comparedtotheonsetofthelastrecessionat theendof2000(30statesmetthe1.0standard). Figure1 Toappreciatethelackofpreparednessforevenamilddownturn,wehavesimulatedthe impactofarecessionsimilartothedownturnintheearly1990s,whenthenational unemploymentratepeakedat7.8%.table1belowsimulateswherestateuitrustfundswould havebeenhadbenefitsbeenpaidoutatthesamerateastheywereinthe1990sandstates hadbroughtinrevenuessimilartothefirsttwoyearsofthisrecession.underthisscenario, statestrustfundswouldhavestoodat"$7.5billion,withalargenumberofstatesindebt.this compareswithanendof2009trustfundbalanceof"$15.5billion. Table1:SimulationoftheimpactofamodestrecessiononstateUITrustFundsfrom2008"9 Endofthe StartofYearTrust Benefits Year FundBalance Paid Revenues Balance 2008 $38.3 $57.9 $31.8 $ $12.2 $51.0 $31.3 "$7.5 SomeobserversofUIfinancingmayarguethatitwasimpossibletoanticipatearecessionofthe magnitudeofthecurrentdownturn,butfromthestandpointofresponsibleuifinancing,states shouldhavebeenpreparedforbenefitpayoutsofthismagnitude.giventhehistoryofpost"war recessions,thebenefitlevelsthatstatessawin2008and2009werewithinthereasonable scenariosthatstatesshouldhavelookedatwhensettingtheiruitrustfundfinancingpolicies. ThebasisoftheabovementionedAverageHighCostMultipleisthebenefitcostrate the amountofstateuibenefitspaidoutasapercentoftotalwagesinsuredbytheprogramand 6

8 subjecttopremiums.thebenefitcostratewas0.85%in2008andapproximately1.7%in 2009 andinthecontextofasevererecession,notfarofffrompreviouspeaksof2.0%in1975 andequaltothepeaklevelof1.7%in1982. Figure2 Current Unemployment Benefit Costs are Not Unprecedented Unemployment Insurance Benefit Cost Rate 2.50% State UI Benefits as a Percent of Total Wages 2.00% 1.50% 1.00% 0.50% 1.72% 1.08% 1.20% 1.76% 1.44% 2.01% 0.00% Peak Years During Recent Recessionary Periods 6.TheWeaknessofStateTrustFundswasPrimarilyDuetoRecordLow EmployerTaxes,NotOverlyGenerousBenefits Theuntoldstoryofinadequateunemploymentinsurancefinancing Overthelastthreedecades,stateshavedramaticallyreducedunemploymentinsurancetaxes relativetowages.thisisthesinglemostimportantreasonwhysomanystatetrustfundsare insolventtoday.overthisperiod,contributionratespeakedat1.5%ofwagesin1983and plummetedto0.5%ofwagesby2001beforeclimbingupjustabove0.7%in2009.steep declinesoccurredasaresultof1990s"erataxcuts,withtaxesdroppingfromover0.9%of wagesin1994tothelowpointof0.5%in2001.therategoingintothe2001recessionwasthe lowestsincethedatawerefirstcollectedin1938.beforethelastrecessionbeganindecember 2007,theratewasunder0.7%. 7

9 Figure3 Whiletheseaveragetaxratesarelow,whatismoresurprisingaretheminimumratesof unemploymentinsurancetaxation.thisisthepremiumpaidbystableemployerstomakesure thattheirworkforcehassomeprotectionshouldtheirbusinessunexpectedlydecline.evenin 2009,20statesallowsomeoftheiremployerstopaylessthan$20peremployeeperyearin unemploymentinsurancetaxes.thisminimumleveloftaxationdoesnotmatchthevitalrole unemploymentinsurancebenefitsareintendedtoplayintheeconomy. 7.ADeathbyaThousandCuts:UITrustFundSolvencyCausedbyErosionofthe BaseofTaxationandActiveDecisionstoUndermineUITaxRates TheshareofwagessubjecttoUItaxeshasrapidlydeclinedinrecentdecades Tothoseoutsidetheevery"dayworkingsoftheUIsystem,itmaycomeasasurprisethattaxes areonlydueonasmallportionofeachworker sannualearnings.theportionsubjectto assessmentisknownasthe taxablewagebase. Afterworkers earningsexceedthisamount inayear,employersdonothavetocontributeanymorepremiumsforthatyear. In1935,federallawrequiredthatbothsocialsecurityandunemploymentinsurancetaxeswere tobeassessedonthefirst$3,000ofeachworker spaycheck.today,oversevendecadeslater, thatminimumfigurestandsat$7,000forunemploymentinsuranceand$106,800forsocial security.theproportionofwagessubjecttouitaxeshasdroppedfrom98%in1938atthe startoftheprogramto50%in1973toanalltimelowofjustover25%now. 8

10 Figure4 Thiserosionofthetaxablewagebasehasamajoreffectontheprogram ssolvency,and threatensitsfutureviability. Moststatesleavetheirnominalunemploymentinsuranceratestructureunchangedyearafter year,evenifwagesgoupsignificantly.withthebaseofwagessubjecttotaxfrozenatsuchlow levels,statescannotrecoverthecostofbenefitspaidattoday srates.whilebenefitshavenot becomemoregenerous,thenominalcostsofbenefitspaidperindividualsriseseachyearalong withgrowthinthewagesinsured.stateswithalowfixedtaxablewagearelikeaninsurance companythatissettingitsratesasifitisinsuringafleetof1982fordescorts,notafleetofthe 2010FordFusion.Aninsurancecompanylikethatwouldsimplygooutofbusiness,and unemploymentinsuranceisreachingasimilarcrisispoint.economistphilliplevinedescribed theproblemeloquentlynearlyadecadeago: AmajordeficiencyinthecurrentsystemofUIfinancingisthattheinfrequent,ad hocadjustmentstothetaxablewagebaseleadtoacontinualerosionofits financialstability...evenintheabsenceofseverecyclicaldownturns,these basicrelationshipsindicatedthatthecurrentsystemofuifinancingwilldrift towardinsolvency." 13 Indeedtheaveragetaxablewagebaseofinsolventstatesis$9,500whilethewagebaseof solventstatesstandsat$20,500. Changeinphilosophymovedtheprogramawayfromforwardfinancingandsetthe stagefortoday scrisis Theerosionoftaxablewagescanbeseenpartlyasanissueofbenignneglect.However,trust fundswerealsodrivendownwardasaresultofachangeinphilosophyofunemployment insurancefinancing.startinginthelate1980sandcontinuingintothe1990s,theu.s.witnessed 9

11 awideracceptanceofauifinancingphilosophycalled pay"as"you"go (othershaveusedthe term flexiblefinancing ).Pay"as"you"goproponentsheldthatUItrustfundsshouldnotbe forwardfundedduringeconomicgoodtimes,butratheruipayrolltaxesshouldbekeptlowon thetheorythatdoingsowouldallowformoreemployerinvestmenttoproducegreaterjob growth.intheunlikelyeventofrecessions(whichwereassumedtobemilderina new economy ),taxeswouldberaisedcommensuratelytoquicklyrecoveranincreaseinbenefits cost,afterwhichtaxesandtrustfundswouldagainreverttolowlevels. TheAdvisoryCommissiononUnemploymentCompensationrecognizedthatthelogicofpay"as" you"gofinancingfliesinthefaceofsounduifinancingprinciples: Theextenttowhichanunemploymentinsurancesystemprovideseconomic stabilizationislinkedtotheextenttowhichthewagereplacementfunctionis achievedandalsotothefundingmechanismofthesystem.duringrecessions,apay" as"you"gosystemislargelyineffectiveinstabilizingtheeconomy,sinceitprimarily redistributesmoneyratherthanpumpingpreviouslycollectedfundsbackintothe economy.aforward"fundingsystempromoteseconomicstabilizationbyincreasing totalbuyingpowerduringrecessions. 14 Thisrecessionhaspointedoutthefollyofpay"as"yougosystemsthatarepremisedon increasingbusinesses taxesimmediatelyafterayearofhighclaims.nostatewillbeableto recover2008"2010benefitsinasingleyearoroverafewyears.understandably,stateswith theseuntenablerulesarelikelytotakeactiontomakesuretaxesdon tincreasebysuchalarge amountinasingleyear. Unemploymentbenefits generosityisnotacontributortotrustfundinsolvency WhilesomearguetheUIprogramhasbeendriventowardsinsolvencybyoverlygenerous benefits,theevidenceindicatesthisisnotthecase.amongthe34insolventjurisdictions, benefitsforworkershavenotgrowndramaticallyoverthelasttenyears.weeklybenefit amountshaveincreasedslightly,yetsomeinsolventstateshavefailedtoincreaseweekly benefitamountsatall.forexample,newyork sweeklymaximumbenefithasbeen$405since 1999;Michiganhaspaidonly$362since2002;andFloridahaspaidjust$275since2001.During thelastdecade,thepercentageofunemployedworkerscollectingstateunemployment benefitshasremainedlargelyunchanged,averagingjust39percent.in2009,averageweeklyui benefitswereequivalenttoonly36percentoftheaverageweeklywageearnedbyworkers. ThoughUIbenefitsserveasanimportantbufferagainsteconomichardshipformany,forsome familieseligibletoreceiveunemploymentbenefits,themaximumweeklybenefitamountis inadequatetokeepthemfromfallingintopoverty. 8. States Will Struggle Mightily to Navigate Out of Trust Fund Indebtedness andregaintrustfundsolvency StateUItaxesarerisingthroughexperiencerating(i.e.,themorelayoffs,thehigherthetax rate)andchangesintaxratesthatautomaticallyoccurwhenfundsbecomeinsolvent.asurvey ofstateagenciesrevealedthat28stateshadincreasedtaxesandtenstateswerealreadyat 10

12 theirhighesttaxscheduleallowedbylawin2009duetothesefeaturesoftheuisystemthat aredesignedtoreplacetherevenueneededtopaybenefitsduringhardeconomictimes.most ofthesewereasaresultofautomaticadjustmentsintaxesthatwentalongwithsolvency.u.s. DOLwillnotpublishofficialestimateddataonUItaxlevelsin2010untillaterintheyear,butits preliminaryprojectionsindicatethattaxeswillrisefromjustabove0.7%oftotalwagesin2009 tojustbelow1.0%in2010,stilllessthantheaverageratesexperiencedthroughthefirst50 yearsoftheprogram. 15 Whiletheserevenuesareexpectedtogrowthrough2013throughautomaticincreases,they won tbringtheprogrambacktosolvencygiventheexpectedlevelofbenefitpayoutsandthe sheersizeofthedebts. Beyondtheseautomaticincreases,asmallnumberofinsolventstates generallystateswith smallerfederaldebt havetakenincrementalstepstoimprovetheirfinancing.meanwhile,a fewotherstateshavetakenmodeststepstoeitherpreventordelayinsolvency.arkansas,new Hampshire,Tennessee,Vermont,andWestVirginiahaveallmarginallyincreasedtheirtaxable wagebasesin2009or2010.currently,massachusettsisconsideringagovernor sproposalto substantiallyincreaseandindexitstaxablewagebase.asmallnumberofborrowingstatesare stillconsideringeitheranincreaseinthetaxablewagebaseoranadjustmenttosolvencytax ratesintheircurrentlegislativesessions. However,thevastmajorityofstates includingallofthedozenstatesthathaveborrowed$1 billionormore havemadenomajorstructuralchangestoimprovethefinancingoftheir systems.twoofthosestates FloridaandIndiana haveactuallycutemployertaxesduring the2010legislativesession.withoutthethreatofanimmediatedemandforrepaymentof principaloraccrualofinterest,thelargestborrowingstatesaregenerallytakingawait"and"see approachtothemountingdebtliabilitythatwillfalltotheirstates employers. Theactuarialmathofwhatitwouldtakeforthesestatestopaybacktheirdebtandestablish areasonablefundoverthenexteconomiccycleisstaggering.but,evenstatesthattakethe issueseriouslyaresharplyhemmedinby aracetothebottom amongthestatesthat elevateslowerbusinesstaxesasakeyindicatorofthestate seconomiccompetitiveness. Underthisscenario,stateswilllimptowardsazerotrustfundleveltowardstheendofthe decade bywhichtimeanotherrecessionislikelytocomeatatimeofnearzeroreserves. Thisscenariomakesacompellingcaseforamuchstrongerrolebythefederalpartnerin providingrelieftothestates,butmoreimportantly,insettingaminimumfloorforstateui contributionsandotherincentivestopromotesolvency. 9.ExceptionalStatesPointaWayOutoftheCurrentTrustFundCrisisandthe KeyOptionsforFederalReform Stateswithhigherandindexedtaxablewagebaseshavelargelyescapedinsolvency Sixteenstateshaverecognizedthatafixedtaxablewagebaseisnowaytorunaninsurance programthatisseekingtoprotectworkingfamilieswhosewagesandexpensesarerisingeach year.thesestatesindextheirtaxablewagebase,meaningthatitgoesupmarginallyeachyear 11

13 toacertainpercentageofthestate saverageannualwage.forexample,oklahoma staxable wagebaseof$14,900is50percentofitsaverageannualwageandoregon staxablewagebase of$32,100is80percentofitsaverageannualwage. Thedifferenceinperformanceofindexedandnon"indexedstatescouldnotbesharperduring thisrecession.asofapril2010,onlysixofthe35states(17%)thatusefixedtaxablewagebases remainedsolvent.incontrast,11ofthe16thestates(69%)ofthestateswithanindexed taxablewagebasehavemanagedtostayintheblackmorethantwoyearsaftertherecession hit.whileanindexedtaxablewagebasedoesnotguaranteesolvency,thissinglechangehas madestatesfourtimesmorelikelytoremainsolventthanwithoutit.table2attheendof thistestimonyliststhetaxablewagebaseandsolvencystatusofeachstate. 10.TheAgendaforFederalReformtoRestoreForwardFundingofthe UnemploymentInsuranceProgram Ahigherfederalwagebasecouldhavelargelyamelioratedtoday strustfundfinancing crisis Thefederaltaxablewagebasewaslastincreasedin1983toitscurrentlevelof$7,000.Ifthe wagebasehadkeptpacewithinflationsince1983,itwouldnowbeover$15,000.ifithadkept pacewithinflationsincethe$3,000taxratewasfirstestablishedin1938,itwouldnowbeover $46,000.Evenamodestincreaseinthetaxablewagebasewouldhaveamajorimpactontrust fundsolvency,as34stateshaveataxablewagebaselowerthan$15,000. AtNELP srequest,theurbaninstitutesimulatedwhattheimpactoftheincreaseintaxable wagefrom$7,000to$14,000onstatetrustfundrevenueswouldhavebeenleadinguptothe recession.thischangewouldhaveincreasedtheproportionofwagessubjecttouitaxation from27percentto38percent.aftercarefullylookingattheincreaseintaxablewagesineach statedependingonitsowntaxablewagebase,theurbaninstitutefoundthatwitha$14,000 ceiling,statetaxcollectionsin2008wouldhaveincreasedfromby$14billioninthatsingleyear to$44billion. 16 Justthreeyearsofthisextra$14billioninrevenuewouldhavewipedoutthe currenttrustfundloans. Federaltrustfundswereinabetterpositionthanthestatesbutcouldhavebeeneven strongerhadthefederaltaxablewagebasebeenadjusted Significantly,thefederaltrustfundshavetakenmajorstepstohelpboostthestatefinances.In thelastdecade,tworeedactdistributionsdistributedasmuchas$15billiontothestatesfrom thefederalreserves. 17 Thebuild"upoffundsenabledthefederalgovernmenttoprovideasolid programofextendedbenefitsduringandafterthe2001recessionandtoprovideforinitial monthsoftheextensionofjoblessbenefitsduringthisrecession. Thefederalfunds,too,havebeenimpactedbythefrozentaxablewagebase.Only19.5percent ofwagesin2008weresubjecttofederalunemploymenttaxes.ifthebasewere$14,000per year(infact,lessthanwhatitwouldhavebeenhaditbeenraisedeachyearalongwith inflation),morethanone"thirdofwageswouldhavebeencovered.atcurrenttaxrates,this 12

14 wouldhavegeneratedmorethan$6billioninfederalrevenues. 18 Severalyearsofthese revenueswouldhavereducedtheamountofborrowingfromtheu.s.treasurythatthefederal trustfundshavehadtoundertaketopayouttheloansthattheyaremaking. Asapreliminarystep,Congressshouldcontinuethewaiverofinterestontrustfund loansbuttieittoastrongmaintenanceofeffortprovision. Undernormalcircumstances,loansareinterest"freeonlybetweenJanuary1standSeptember 30thinthesameyearthattheloanisprovided.TheRecoveryActhaseliminatedanyinterest paymentuntilseptember30,2011.atthattime,thepresident sbudgetestimatesthatinterest paymentsareexpectedtoamountto$1.9billioninfy Ifthe2010interestrateof4.36% hadbeenappliedtotoday strustfundloanbalances,theseinterestpaymentswouldbeashigh as$400millionincalifornia,$180millioninmichiganand$150millioninnewyork. ThesependinginterestpaymentswillincreasepressureonthestatestoopenuptheissueofUI financingatthelegislativelevel.onatheoreticallevel,theseinterestpaymentslikethe unemploymenttrustfunditselfaresquarelytheresponsibilityofemployers.federalrulesdo notallowstatestopaytheirinterestfromtheirregularstateuitaxcollections,whichcanonly beusedforthepaymentofbenefitsortherepaymentoftheprincipaloffederalloansthat wereusedtopaybenefits.thus,stateswillhavetoenactpiggy"backtaxesontheiruitaxin early2011tomakesurefundsareavailablebyseptember andiftheyfailedtodoso,the responsibilitywouldfalltotheanemicgeneralrevenuesofthestates.eventhough21states alreadyhavespecialtaxassessmentsintheirlawstopayofftheinterest,thefactthatstates havetoenactoractivateanewtaxgivestheinterestpaymentmoreweightinstatepolicy debatesthantheamountsatstakeimply. TheRecoveryActhasplayedacrucialroleinshieldingtheunemploymentprogramfromstate proposalstocutbenefitsinthemidstofthedevastatingjobmarket.asaconditionof participatinginthefederaladditionalcompensation(fac)program,whichpaysanextra$25 perweekinbenefitstoallunemploymentinsurancereceipts,allthestateshaveagreenotto reducetheirweeklyunemploymentbenefits.thiscriticalprovisionhasgonealongwayto preventadditionalcutsinstateuibenefits. Takentogether,theinterestwaiverandFAC snon"reductionrulehaveboughtstatesandthe millionsofworkerswhonowcountonthejoblessbenefitsprogramcrucialbreathingroomin thefaceofmassivelyinsolventunemploymentinsuranceprogram.theinterestwaiverhas limitedtheneedtorushintocounterproductivesolvencylegislation,andthefacrulehas protectedtheintegrityofthebenefits. Therehavebeencallstocontinuethewaiverofinterestonfederalloanstothestatesfor anotheryearortwoyears. 20 Statesaregrapplingwithnumerousharddecisionsabouthowto balancetheirbudgetsandareeagertoescapepressuretoreducebenefitsorincreasetaxesina stillweakenedeconomy.moreover,waivinginterestwillcontinuetoserveasaneffective antidotetounwiseproposalstoreducebenefitsasapartofimmediatesolvencylegislation. 13

15 Asapreliminarysteptohelpaddressthesolvencycrisis,NELPsupportsaone"yearcontinuation oftheinterestwaiverprovisionoftherecoveryact,providedthatthestatestakingadvantage ofthefederalassistancealsomaintaintheirunemploymentbenefits.thus,nelpstronglyurges thatcongressattachamaintenanceofeffortrequirementtoacontinuedwaiveroffederal interestin2011.asstatepolicymakersconsiderhowtoescapefromundertheweightoftrust fundloans,manywilldemandso"called equalityofsacrifice, withbenefitreductionsthat matchorexceedanyincreaseintaxes.withunemploymentexpectedtoremainatlevelsof8 percentorgreater,communitiesandtheeconomysimplycannotaffordforthesafetynettobe cutirreparably,asitwasinthe1980s. However,asimportantastheFACmaintenanceofeffortprovisionis,itislimitedinscope.The provisiononlypreventsstatesfromchangingthecalculationoftheamountofunemployment benefits,butnottheeligibilityrulesthatdeterminewhoreceivesbenefits.withstateshungry forcostreductions,protectionsofbothaspectsoftheintegrityoftheunemploymentinsurance benefitrulesareneeded.toprotecttheshort"termandlong"termintegrityoftheprogram,itis necessarytomaintainboththeamountofthebenefitsandaccesstotheprogram.without sucharule,themodernizationimprovementsusheredinbytherecoveryactcouldeasilyprove tobeshort"lived. Federalunemploymenttaxesareexpectedtoautomaticallyincreaseinhalfthestates bytheendof2011 FederalrulesprovidethatifastatehasaloanbalanceonJanuary1stduringtwoconsecutive yearsandcannotrepayitsbalancebynovember1stofthatyear,employersinthestatefacean increaseinfederalunemploymenttaxes.thisisknownasthefuta(federalunemployment TaxAct)taxcreditreduction,whichincreasestheeffectivefederalUItaxofemployersinsuch insolventstatesby$21peremployeeperyear($21peremployeeinyear1,$42peremployee inyear2,etc.)theseextrarevenuesareusedtopaybackprincipalontheloan.already, Michiganhasexperiencedthispenalty,andasofNovember1,2010,employersinIndianaand SouthCarolinawillincurthesamepenaltyandhavetocontributeextrafederaltaxesbyJanuary 31,2011.AsshowninTable2,asmanyas22statescouldfacethesereductionsasoftheendof 2011,withtheextrafederaltaxpaymentdueonJanuary31,2012.TheseextraFUTApayments areapplieddirectlytoastate sloanprincipal. Withhiringstillterriblyanemiceveninthewakeofthreeconsecutivequartersofeconomic growth,policymakersarelegitimatelyconcernedaboutincreasingthepayrolltaxburdenon employers.theideaofpostponingfutacreditreductionspresentscongresswithadifferent setofconsiderationsthantheinterestwaiver.asexplainedintherestofthetestimony,existing statefinancingsystemswillnotbeabletorepaythecurrenttrustfunddebtswithoutextreme statetaxincreases.currentadministrationprojectionsshowthedebtbeingrelievedonlybythe endoffy2017.undercurrentlaw,automaticincreasesinfederalunemploymenttaxesarea crucialpartofeventhisdelayedprincipalrepayment andaretheonlytoolnotsubjecttothe crosspressuresofthestatelegislativeprocess.thus,futacreditreductionsaredirectlytiedto themaintopicoftoday shearing theflawsinstateunemploymentinsurancefinancing.and, theissueoffutacreditreductionsoranyproposalforreliefoftheloanprincipalsshould logicallybetiedtothelargerquestionofhowtofixunemploymentinsurancefinancing. 14

16 Congresshasotheroptionstoencourageforwardfinancing Anincreaseinthefederaltaxablewagebaseiscertainlythemoststraightforwardwayfor CongresstoinfluencemoreresponsiblefinancingoftheUIprogram. ButCongresshasotheroptionsaswell.Asapreliminarymatter,currentfederallawprovides littleinthewayofincentivesforstatestobuilduptrustfundreserves.thus,long"term solvencyplansshouldincludepositiveincentivesforstatestobuilduptrustfundreserves.an examplerecommendedbytheadvisorycommissiononunemploymentcompensationin1995 wastopayanextrainterestpremiumtostatesthatmeetfederalsolvencystandards.these rewardswouldgoalongwaytowardalleviatingthefrustrationemployersinresponsiblestates feeltowardsprovisionslikeinterestforgivenessforthosestatesthathavenotmaintained responsiblefinancingrules. NewrulesrecentlyproposedbyUSDOLalsopointtootherpossiblestandardsthatcouldbe usedbeyondthenarrowscopeofexistingrules(therighttoborrowinterest"freebetween JanuaryandSeptember). 21 Theseproposalsmakeahelpfuldistinctionformorefavorableaidto statesthathadinfactbeensolventbeforetherecessionbeganandweredwarfedbya recessionthatexceededanythinginthestate sexperience.theyalsoprovidehintsformore prospectivestandards.theproposedrulealsoincludesamaintenanceoftaxeffortrequirement that,amongotherthings,requiresstatestogetassistanceonlyiftheirtaxratewasatleast75 percentoftherateofbenefitpayoutsinthepreviousfiveyears.ascongressconsidersfurther aidtothestates,theseproposedrulesprovideaguidelineforthekindofuifinancinggoalsthat statescouldbeproddedorrequiredtomeet. Finally,CongressshouldrecognizethatthelevelofstatetaxationrequiredtopulltheUItrust fundsintotheblackandrebuildtrustfundsolvencywillbestaggeringinmanystates.withthis inmind,nelpbelievescongressshouldconsidertheissueofpartialloanforgivenessinreturn forstrongstepstowardsforwardfundingandstrongworkerbenefits.thisapproachmaybethe onlywaytoensurethatfundsareavailableinstateaccountstopaybenefitsforthenext recession.thistypeofforgivenesswouldgivecongresstremendousleveragetorequirestate policychangesthatwouldinstallforwardfinancingprovisionsasamorepermanentfeatureof UIprogramsandmaintainstrongUIbenefitsforfamiliesimpactedbyfutureeconomic downturns. Conclusion Thecrisisofunemploymentinsurancefinancinghasthepotentialforimmediateandlasting impactsonthetypeofincomesupportfamiliesfacinginvoluntaryunemploymentcancounton andthekindofballasttheeconomywillreceiveduringdownturns.wecommendthe committeeforaddressinganissuesocentraltothefutureofthejoblesssafetynet. 15

17 Table2 KeySolvencyIndicatorsApril30,2010 Federal taxes will increase, if state trust fund is insolvent on Nov. 10 of year 22 State taxable wage base Indexed wage base State Solvency status Date of borrowing Alabama Insolvent Sep $8,000 No Alaska Solvent $34,100 Yes Arizona Insolvent Mar $7,000 No Arkansas Insolvent Mar $12,000 No California Insolvent Jan $7,000 No Colorado Insolvent Jan $10,000 No Connecticut Insolvent Oct $15,000 No Delaware Insolvent Mar $10,500 No District of Columbia Solvent $9,000 No Florida Insolvent Aug $7,000 No Georgia Insolvent Dec $8,500 No Hawaii Solvent $38,800 Yes Idaho Insolvent Jun $33,300 Yes Illinois Insolvent Jul $12,520 No Indiana Insolvent Nov $9,500 No Iowa Solvent $24,500 Yes Kansas Insolvent Feb $8,000 No Kentucky Insolvent Jan $8,000 No Louisiana Solvent $7,700 No Maine Solvent $12,000 No Maryland Insolvent Feb $8,500 No Massachusetts Insolvent Feb $14,000 No Michigan 23 Insolvent Sep $9,000 No Minnesota Insolvent Sep $27,000 Yes Mississippi Solvent $7,000 No Missouri Insolvent Feb $13,000 No Montana Solvent $26,000 Yes Nebraska Solvent $9,000 No Nevada Insolvent Oct $27,000 Yes New Hampshire Insolvent Mar $10,000 No New Jersey Insolvent Mar $29,700 Yes New Mexico Solvent $20,800 Yes New York Insolvent Jan $8,500 No North Carolina Insolvent Feb $19,700 Yes North Dakota Solvent $24,700 Yes Ohio Insolvent Jan $9,000 No Oklahoma Solvent $14,900 Yes Oregon Solvent $32,100 Yes Pennsylvania Insolvent Mar $8,000 No Rhode Island Insolvent Mar $19,000 No South Carolina Insolvent Dec $7,000 No South Dakota Insolvent Oct $10,000 No Tennessee Insolvent Apr $9,000 No Texas Insolvent Jul $9,000 No Utah Solvent $28,300 Yes Vermont Insolvent Feb $10,000 No Virginia Insolvent Oct $8,000 No Washington Solvent $36,800 Yes West Virginia Solvent $12,000 No Wisconsin Insolvent Feb $12,000 No Wyoming Solvent $22,800 Yes Source: U.S. Department of Labor. 16

18 Table3 PotentialInterestPaymentsonCurrentTrustFundLoans Federal Interest Payment Based on Current Balance (Payment Due Balance as September. 30, of April 28, ) Alabama $283,001,164 $13,131,254 Arizona $40,886,351 $1,897,127 Arkansas $330,853,383 $15,351,597 California $8,859,078,902 $411,061,261 Colorado $253,697,150 $11,771,548 Connecticut $498,452,705 $23,128,206 Delaware $12,901,505 $598,630 Florida $1,612,500,000 $74,820,000 Georgia $416,000,000 $19,302,400 Idaho $202,401,700 $9,391,439 Illinois $2,239,582,343 $103,916,621 Indiana $1,856,438,938 $86,138,767 Kansas $88,159,421 $4,090,597 Kentucky $795,100,000 $36,892,640 Maryland $133,840,765 $6,210,211 Massachusetts $387,313,005 $17,971,323 Michigan $3,876,782,333 $179,882,700 Minnesota $711,246,296 $33,001,828 Missouri $722,116,933 $33,506,226 Nevada $395,394,607 $18,346,310 New Hampshire $24,321,180 $1,128,503 New Jersey $1,749,563,533 $81,179,748 New York $3,176,873,428 $147,406,927 North Carolina $2,292,762,317 $106,384,172 Ohio $2,314,186,799 $107,378,267 Pennsylvania $3,008,614,961 $139,599,734 Rhode Island $222,480,710 $10,323,105 South Carolina $884,957,170 $41,062,013 South Dakota $24,027,178 $1,114,861 Tennessee $20,736,767 $962,186 Texas $2,077,252,958 $96,384,537 Vermont $32,657,065 $1,515,288 Virgin Islands $13,321,650 $618,125 Virginia $346,876,000 $16,095,046 Wisconsin $1,424,768,541 $66,109,260 Total $41,329,147,760 $1,803,851,983 17

19 Endnotes 1 MarkZandi,TestimonybeforetheJointEconomicCommittee,October29,2009,p.3. 2 UIstatefirstpaymentspeakedat14.5millionperyearinOctober2009.AsofApril2009,2.3millionwere receivingfederalextendedbenefits,andgiventhelagsbetweentheseprogramsnoneofthemcouldhavebeen thesameindividuals. 3 UIOutlook,Overview.U.S.DepartmentofLabor,EmploymentandTrainingAdministration,Officeof UnemploymentInsurance,DivisionofFiscalandActuarialServes(February2010),availableat 4 Ibid. 5 U.S.GeneralAccountingOffice,UnemploymentInsurance:TrustFundReservesInadequate(GAOHRD"88"55: September1988),p Gov.ChrisChristieisexpectedtoproposechangestoN.J.unemploymentsystem,NewarkStarLedger,February 24, ProposalToRestoreUnemploymentInsuranceTrustFundSolvency, RhodeIslandDepartmentofLaborAnd Training,presentedtotheEmploymentSecurityAdvisoryCouncilonMarch24, VermontBudgetCutsWouldUndermineJoblessSafetyNet, NationalEmploymentLawProject,April26, Vermontofficialsreachdealonjoblessfund,BurlingtonFreePress,May4, WayneVroman,TopicsinUnemploymentInsuranceFinancing(W.E.UpjohnInstituteforEmploymentResearch: 1998),p AdvisoryCommissiononUnemploymentCompensation,Benefits,FinancingandCoverage,February StatementOfJaneOates,AssistantSecretaryForEmploymentAndTraining,U.S.DepartmentOfLaborbefore TheCommitteeOnFinance,UnitedStatesSenate,April14, PhillipB.Levine, FinancingBenefitPayments, inchristopherj.o LearyandStephenA.Wandner,ed., UnemploymentInsuranceintheUnitedStates:AnalysisofPolicyIssues,(W.E.UpjohnInstituteforEmployment Research:1997),p AdvisoryCouncilonUnemploymentCompensation,UnemploymentInsuranceintheUnitedStates:Benefits, Financing,Coverage(1995),p.45(citationsomitted). 15 UnemploymentInsurance:StateTrustFundInsolvency,PresentationbytheU.S.DepartmentofLabortothe NationalEmploymentLawProjectConference"WashingtonDC,December7, UnpublishedUrbanInstitutecalculations. 17 Thisincludesthe$8billionReedActdistributionin2002,andthe$7billionmadeavailablethroughincentives undertherecoveryact,ofwhich$2.84billionhavealreadybeendistributed.statesareeligiblebuthavenot appliedforanestimated$1.3billionofthesefundsforatotalof$4.1billion. 18 Ibid. 19 U.S.DepartmentofLabor,UIOutlook,FY2011President sbudget,p TestimonyofKarenLee,NASWApresidentandCommissionoftheWashingtonStateEmploymentSecurity DepartmentbeforeTheCommitteeOnFinance,UnitedStatesSenate,April14, CFR606,Federal"StateUnemploymentCompensationProgram:FundingGoalsforInterestFreeAdvances, FederalRegister,Vol.74,No.121,ThursdayJune25,2009,ProposedRules. 22 Federaltaxeswillapplytowagespaidintheyearshown,ifthetrustfundisinsolventonNovember10thofthat year. 23 MichigandidnothaveanoutstandingbalanceonJanuary1,2007butdidhaveanoutstandingbalanceon January1,2008.MichiganrepaidthatbalanceonMay1,2008butthenbeganborrowinglaterinthemonth. BorrowingcontinuedandMIhadanoutstandingbalanceonJanuary1,2009anddidnotrepaybyNovember10, 2009.ThereforeMichiganemployershadacreditreductionthatappliedto2009FUTAwages. 18