NASWA UNEMPLOYMENT INSURANCE ADMINISTRATION FINANCE REFORM PROPOSAL

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1 NASWA UNEMPLOYMENT INSURANCE ADMINISTRATION FINANCE REFORM PROPOSAL June 21, 2012 Richard A. Hobbie, Ph.D. Executive Director National Association of State Workforce Agencies (NASWA)

2 2 Reform Proposal In September 2010, NASWA adopted the following proposal: States shall receive the higher of 50 percent of Federal Unemployment Tax Act (FUTA) revenue collected in the prior year, Or, the amount determined by the Secretary of Labor necessary for proper and efficient administration of state Unemployment Insurance (UI) programs.

3 3 Funding in Four Parts a) Base funding (current practice); b) Above-base funding (current practice); c) Contingency funding (current practice); and d) Additional amounts, if any, would be the difference between 50 percent of FUTA revenue collected in the prior year and the sum of a), b) and c) above (new).

4 4 Discretionary and Mandatory Funding Base and Above-base funding would continue as discretionary spending determined by the annual appropriations process. Contingency funding would remain mandatory spending determined by a trigger mechanism in law (appropriations or statute). Additional amounts by which 50 percent of FUTA revenue in the prior year exceeds the sum of the amounts above would be mandatory spending.

5 5 Base Funding Base funding covers the cost of administering the UI program even when unemployment is very low, say at full employment. Over time, it should reflect the effects of inflation, growth in insured unemployment and changes in productivity. There should be incentives for efficient performance.

6 6 Trend in Base Funding Real, relative base funding has been declining since the mid-1990s. The figure on the next page shows base funding adjusted for inflation per 2 million average weekly insured unemployment (AWIU) each year from 1986 through It shows a nearly steady decline in real funding per two million AWIU since 1996 to the point that the level in 2007 is lower than in 1986 at less than $1.8 billion.

7 $ Billions UNEMPLOYMENT INSURANCE UNEMPLOYMENT INSURANCE ADMINISTRATIVE FUNDING Some Preliminary Investigations 1.9 By Richard A. Hobbe 1.8 NASWA Executive Director 1.7 UI Base Funding Inflation UI Adjusted Base Funding Dollars per 2 million AWIU Inflation Adjusted Dollars per 2 million AWIU Fiscal Year

8 8 Above-Base Funding Above-base funding covers the cost of insured unemployment experienced by each state that is above the base funding needed to run the program at minimal unemployment levels. States earn above-base funding as they experience insured unemployment above their base insured unemployment.

9 9 Contingency Funding Contingency funding is provided if insured unemployment rises above projected levels. Under current practice, the federal government provides $28.6 million per each additional 100,000 in AWIU above the projected level.

10 10 Additional Revenue Sharing If 50 percent of FUTA revenue exceeds the sum of base, above-base and contingency funding, the excess revenue would be shared with states based on: 50 percent to states based on their shares of the sum of funding under base, above-base and contingency funding and 50 percent to states based on their shares of estimated FUTA revenue paid by employers in their states in the prior year.

11 11 $100 million Per year for Productivity Investments The proposal also has $100 million per year for investments in information technology to promote efficiency and better service to employers and workers. Average state benefit and tax systems are over 20 years old.

12 12 What Would Have Happened from 1986 through 2010? There would have been an added $100 million each year for investments in productivity. There are three time periods when insured unemployment was relatively low that the revenue sharing proposal would have added funding: In 1986 through 1990, the proposal would have added $89, $110, $116, $203, and $123 million in those five years, respectively. In 1999 to 2001, the proposal would have added $158, $246, and $186 million in those three years, respectively. In 2005 through 2008, the proposal would have added $13, $128, $234, and $150 million in those four years, respectively. (All estimates exclude revenue from the FUTA 0.2 percent surtax) (Estimates done by staff at the New York State Department of Labor.)

13 What Would States Do with Additional Funds: Invest in Information Technology Average age of state UI benefit and tax systems is about 25 years. Operating costs are rising with these anachronistic systems. Systems are inflexible compared to today s technologies. States are unable to improve productivity with these systems. Cost of new systems per state ranges from $40 million to $100 million per state. Answer is state consortia building systems together with 80 percent usable by each state. 13

14 States Have Spent Recently on Automated Communications Technology 14 Virtual hold for telephone callers; instead of holding, callers are given call-back days and times. Large states have invested in this. Automatic letters when a new hire has been reported on a continued claimant. Automatic stop claim temporarily when claimant has changed from reporting wages and receiving a partial benefit to no wages and a claim for full benefits.

15 Texas Automated Its New Hires Directory Communications 15 Claimant/New Hires match run daily. Letters to employers and claimants generated automatically with matches. Adjudication automatic if claimant does not respond or data matches employer record. Reported automated system reduced the average overpayment from $3,000 to $700, a 77 percent reduction.

16 More Data Matches and Investigative Staff to Follow Up on Matches 16 Directories of New Hires Profiling of most likely to be overpaid Jail records Reservist pay Death lists Retirees Workers Compensation Etc.

17 17 Emphasize the Reemployment Vision Integrated registration with employment services Real time triage of services Skill transformations Social Media

18 18 Need for Metrics USDOL has not funded much research on UI since the 1990s. As a result, metrics are scarce. If we could reduce average duration by one week we could save about $3 billion per year in regular benefits. Reemployment Services (RES), and Reemployment and Eligibility Assessments (REA) were shown to reduce duration by more than one week in research conducted in the 1980s and 1990s.

19 Investing in UI Administration Will Yield Substantial Returns 19 Lower Overpayments Lower duration on UI Lower Benefit Costs Lower Taxes Faster Reemployment Better Reemployment

20 20 Challenges Current Budget Environment Reducing deficits and debt make it hard to enact new spending. Pay-as-you-go requirements Where are the spending/tax offsets to fund new mandatory spending? (Increase in FUTA taxable wage base?) Last Fall the UWC Board of Directors Supported NASWA s proposal as long as it would lead to substantial system improvements.