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October 17, 2008    DOL Home > Newsroom > Speeches & Remarks   

Secretary of Labor Elaine L. Chao

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Testimony Before the Committee on Ways and Means
U.S. House of Representatives
Washington, D.C.
March 12, 2003

Good morning. Chairman Thomas and distinguished members of the Committee, I thank you for inviting me to testify. I am extremely pleased to have the opportunity to discuss the President’s fiscal year 2004 budget proposal to reform the federal-state Unemployment Insurance (UI) program and the President’s proposal for Personal Reemployment Accounts (PRAs). Our proposed reforms of the UI program will promote long-term economic growth and job creation by reducing federal unemployment taxes, making federal-state extended unemployment benefits available earlier and to more workers in future economic downturns, and giving states the opportunity to take control of administrative funding along with new administrative flexibility. While UI reform will have a positive impact on the economy in the long-term, PRAs will help our current economy by giving UI claimants unprecedented choice in accessing the services they need to get back to work as quickly as possible.

The Unemployment Insurance program is a key element of our Nation’s economic infrastructure acting as an automatic stabilizer during economic downturns by providing temporary, partial wage replacement for workers who have been laid off and are seeking jobs. In addition, UI is the front door for these workers to a wide array of reemployment services available through the Workforce Development System. Improving the UI program’s ability to act as a macroeconomic stabilizer and providing UI claimants with new resources and incentives to get back to work foster labor market flexibility and mobility—two essential elements of a dynamic and vibrant economy.

The President’s Economic Message

UI reform and PRAs are important parts of the President’s comprehensive plan for the economy. On January 7, President Bush announced a growth and jobs package that places great emphasis on improved job creation to ensure the economy continues to grow. The main goals of this economic agenda include encouraging consumer spending; promoting business investment; and delivering critical help to unemployed workers. In early January Congress responded on a bipartisan basis to the President’s request for an extension of Temporary Extended Unemployment Compensation. Last month, Congress received the Economic Report of the President that emphasizes the importance of designing government policies that preserve and build on the dynamism and vitality of the labor market. UI reform and PRAs are important elements of the President’s vision for the economy.

The President’s FY 2004 Budget Request

Before addressing UI reform, I would like to comment briefly on the FY 2004 discretionary budget request for UI state administration. $2.6 billion is requested, about the same as the FY 2003 enacted level. In FY 2004, these funds will finance the following major functions of the states:

  • Determining benefit entitlement for about 14 million newly unemployed workers.
  • Paying benefits to an average of 2.9 million unemployed workers per week.
  • Collecting state taxes from 7.1 million employers.

In line with the President’s Management Agenda—to improve government performance and efficiency—the request includes $500,000 for a study to examine current state payment practices and develop cost-effective procedures to prevent and detect UI benefit overpayments. Let me tell of some of the efforts the Department has already undertaken in improving payment accuracy and combating fraud.

  • To focus state attention on payment accuracy, we are developing a goal under the Government Performance and Results Act.
  • To quickly detect individuals who have gone back to work but continue to collect UI, we are encouraging all states to use information in state directories of new hires. About two-thirds of the states currently use this information.
  • To prevent the fraudulent use of social security numbers in filing UI claims, we are working with the Social Security Administration to provide state UI agencies real-time access to the social security database.
  • To provide a forum for sharing successful practices for preventing, detecting, and collecting UI overpayments, we are co-sponsoring a national UI integrity conference.

UI Reform Background

For several years now we have been examining ways to reform the UI program so that it reflects the 21st century economy and workforce. The system’s major stakeholders have all expressed dissatisfaction with some aspect of the present system. Worker advocates are concerned about its responsiveness to worker needs during recessions. State program administrators are dissatisfied with what they see as continued underfunding of the UI program by the federal government. Business leaders believe that federal unemployment taxes are too high and that too little of those taxes is returned to states.

In response to these concerns, we have examined the program’s funding structure, the level of federal taxation, the effectiveness of the extended benefit program, and the flexibility states have to administer the program. Our proposal addresses all of these issues, while continuing the successful federal-state partnership that has been responsible for this program for nearly 70 years.

Down Payment on Reform

I would like to start by thanking this Committee for its leadership last year in crafting legislation that established the Temporary Extended Unemployment Compensation program and distributed $8 billion of federal unemployment funds (commonly called a Reed Act distribution) to the states. These actions represent an important down payment on UI reform. These short-term actions are helping to meet the present needs of unemployed workers during the current economic slowdown and improving states’ capacity to provide vital benefits and services to unemployed workers and businesses.

An immediate effect of the Reed Act distribution was an improvement in trust fund solvency. In addition, a recently released report from the General Accounting Office provides more detail on how states have used the Reed Act funds to date. In 2003, increases in unemployment tax rates were mitigated or avoided in 20 states. Nine states increased/expanded benefits, and 20 appropriated some of these funds for UI administrative improvements. Because many states plan to propose further spending of Reed Act funds in 2003, a complete assessment of the distribution cannot be made at this time. However, information received so far indicates that states have acted appropriately to meet their unique concerns. This is a promising start in our comprehensive proposal to reform the UI program.

Give States Opportunity and Flexibility

Our proposal would resolve the longstanding issue of adequately funding UI administration. Under the current system, the cost of administering the state UI programs is funded from federal funds, while the actual state UI benefit payments are funded from state UI taxes. States determine the parameters of their UI programs, which, in turn, can affect administrative costs. In addition, a state’s unique demographic and industrial characteristics affect the dollar amounts needed to efficiently administer its UI program. Yet states have little or no control over the amount of administrative funds they will get from the federal partner. And we in Washington are not the best situated to determine the appropriate amount needed by each and every state to efficiently administer its UI program. The result is constant struggle between the states and the federal government over the amount of funds that should be granted to the states for administration.

By several measures, the states have a strong case that administrative funding has been inadequate. During the 1990s UI administration was funded below what was needed to cover workload increases and inflation, reaching 13% underfunding by fiscal year 1999. This occurred even though, during an average year in the 1990s, the federal government took in $5.7 billion in dedicated federal unemployment (commonly called FUTA) taxes each year, while returning only $3.1 billion to the states for UI and Wagner-Peyser Act funding.

The Omnibus Appropriations bill just enacted resulted in an estimated $104 million reduction from the funding level the President’s revised FY 2003 request for UI administration would have provided. Moreover, the appropriators’ change in the contingency funding mechanism runs the risk of severely underfunding the states if workloads are higher then projected, possibly up to a $260 million shortfall. States have also suggested additional funding needs of at least $400 million, based their own accounting records. All of these combined suggest states could fall short by three-quarters of a billion dollars for UI administration.

The current funding system clearly is not working well and must be replaced. Each state is in the best position to assess its own need for administrative funds. When a state legislates a change in its UI program, which may require increases in its administrative budget, it should be able to determine its funding level for administration rather than relying on the distant budgetary process in Washington. We propose that states have that flexibility, concurrent with a reduction in the federal taxes that now finance UI administration. States already have in place a system to collect UI taxes. Indeed, states collect approximately $30 billion annually for the payment of UI benefits.

In sum, our proposal gives states the opportunity to finance administration from state revenues by transferring primary responsibility for financing the administration of the UI program from the federal government to state governments. Let me explain the details of this transfer.

In our proposal, the transfer would begin with a transition period for FYs 2007–2008 and States would have full responsibility effective with the start of FY 2009. During the transition period, the federal government would:

  • Transfer $2.7 billion to states’ accounts in the Unemployment Trust Fund in each of FYs 2007 and 2008; and
  • Share costs for FY 2007 (2/3 federal share) and FY 2008 (1/3 federal share).

To further ease this transition, the federal government would provide hold-harmless funding beginning in FY 2009. For certain states where costs are high relative to their FUTA revenues, these hold-harmless funds will be provided as long as states make a strong effort to raise their own administrative funds.

Some have questioned whether this new financial responsibility could cause states to cut benefits and weaken system performance/integrity to avoid increasing state UI taxes. States already have the responsibility to determine UI benefit levels and benefit eligibility requirements, and to set and collect experience-rated taxes. We believe that state decision makers, who are closer to the workers and employers served by the system, already have sufficient incentives to adequately fund UI benefits and administration. Indeed, states are already augmenting their federal administrative allocation by about $140 million a year. In addition, new incentives for adequate administrative funding will be created. For example, although both states and the Department are concerned with payment integrity, the current system lacks a strong incentive to spend administrative dollars to reduce fraud and erroneous payments. The proposal remedies this problem because states recognize the direct connection between benefits and administrative spending. A state agency will be well positioned to request dollars from its state legislature for payment integrity since every dollar expended on overpayment reduction will translate into direct savings to that state’s unemployment fund.

Many other elements of the proposal give states new flexibility to improve program administration. For example, although many states are already using their State Directories of New Hires for quick detection of individuals who have gone back to work, they do not have access to new hires reported to other states. The proposal would address this by giving all states access to the National Directory of New Hires. This would be an additional, important tool for helping states quickly detect fraud and would result in savings to state unemployment funds.

Promote Job Growth

Our 2003 proposal includes several features that will become the seeds of economic growth and job creation. A key element that promotes job growth is a major cut in federal unemployment taxes. As explained previously, through the 1990s the federal government took in an average of $5.7 billion in FUTA taxes each year, while returning only $3.1 billion to the states for administrative funding. Even if we had adequately funded UI administration during this period, we were still collecting more in taxes than needed to maintain sufficient reserves. Therefore, a tax reduction is long overdue. Since our proposal would transfer responsibility for funding UI administration to the states, we are proposing a major cut in FUTA taxes.

Our proposal would reduce the net FUTA tax to 0.6% in January 2005, representing a tax cut of 25%. The net FUTA tax would then be reduced to 0.4% in 2007 and to 0.2% in 2009. Taken together, this represents a 75% federal tax cut for America’s employers. Even though states will need to impose their own administrative taxes, we believe most, if not all, employers will receive a net tax cut of twenty-five percent or more of their current FUTA tax. These tax cuts are vital because, by reducing the cost of doing business, employers are better positioned to invest, hire more workers, and pay higher wages. The remaining 0.2% FUTA tax would be used to:

  • Pay the federal share of extended benefits;
  • Make state grants for certain federal activities;
  • Supplement administrative funding as necessary; and
  • Make federal loans available to any state that runs out of funds to pay unemployment benefits or administrative costs.

Rest assured that even with these tax cuts, federal accounts will remain solvent. Sufficient funds will be available to handle all of these federal responsibilities.

In addition, the proposal will save employers time and money by streamlining tax filing. A technical change to federal law would allow the IRS to simplify the federal unemployment tax form, saving employers time and money in their efforts to comply with federal reporting requirements thus freeing resources for economic development.

Strengthen the Economy

The UI system is an important economic stabilizer during economic downturns and this proposal strengthens its stabilization capacity by reforming the extended benefit (EB) program. The EB program did not work in the early 1990s recession, when only ten states met the current 5.0% insured unemployment rate trigger, which is the only mandated method of “triggering on” the EB program in all states. Last year, only three states met this trigger, and none currently meet it, although three states are now on EB using one of the optional triggers for the program. In part because of the inadequacy of the EB program, special emergency federal extensions have been enacted that made benefits available in all states, not just those that had higher unemployment.

To address this problem, the level of unemployment at which EB is triggered would be lowered from the current 5.0% insured unemployment rate to 4.0%. Our goal is to ensure extra benefits are triggered when they are needed without special legislation. Improving the responsiveness of the EB trigger will mean more workers would receive the extra help they need earlier in future downturns and EB would be a stronger economic stabilizer.

In addition, we propose eliminating the special federal requirements relating to eligibility of claimants for EB. State law provisions regarding eligibility for regular compensation would apply to EB. This will simplify state administration and cut “red tape” for workers.

Maintenance of a Strong Federal Role

Although this proposal provides states with much flexibility, it maintains a strong federal role. The federal government’s role of monitoring conformity/compliance with federal requirements and state program performance against federal standards would continue. Moreover, federal requirements related to prompt payment of benefits, fair hearings, coverage of services, etc. would not change. Lastly, we would provide funding for the hold-harmless, federal activities, 50% of EB, and loans to states for UI benefits and administration.

Key Advantages

We firmly believe that this proposal has key advantages for all of the UI system’s major partners and stakeholders. By taking responsibility for funding, states will have more flexibility and control, enabling them to better serve the unique needs of their workers and employers. By lowering the trigger for extended benefits and using states’ rules, unemployed workers will get help faster with less hassle. By significantly cutting FUTA taxes and streamlining filing, employers will be positioned to hire new workers.

Supporting Job Growth through Personal Reemployment Accounts

One of the proposals that would specifically help today’s UI beneficiaries who are struggling to get back to work is Personal Reemployment Accounts (PRAs). These accounts will be worker-managed, contain up to $3,000, and will be used for the purchase of a variety of reemployment services or as a bonus for obtaining early reemployment.

These proposed accounts rely on existing program structures. They will be administered through the established and easily accessible One-Stop Career Center System, where UI claimants already seek assistance in obtaining employment. As I’ll discuss in more detail later, UI claimants who are potentially eligible for these accounts will be identified through the existing UI worker profiling system.

The anticipated economic benefits of the proposed PRAs are numerous. These accounts represent a new and innovative approach to helping unemployed workers make a quick return to work and provide businesses with the skilled workforce that they need. They will empower individuals by giving them more flexibility, personal choice and control over their job search and career.

Since experience has shown that unemployed workers have a wide range of needs, the PRAs allow each worker to custom design a reemployment services package in accordance with his or her needs. For example, some individuals may determine they need extensive retraining in order to compete for jobs in a high-growth industry while others may only need to complete a short-term computer course in order to return to work quickly or purchase child care in order to search for work. The flexibility of PRAs will accommodate these and many other situations, thus making the delivery of government services more efficient.

By enabling unemployed workers to access the reemployment services they need most, there is an increased likelihood that they will return to work sooner and in a job for which they are more prepared and better skilled.

Relationship of Personal Reemployment Accounts to UI

Although the accounts are closely tied to the UI program, they do not supplant or replace UI benefits. They are an additional means of speeding the long-term reemployment of UI claimants. In that sense, they complement both the existing UI and One-Stop Career Center Systems. Receipt of account funds will not adversely affect an individual’s UI eligibility nor make a UI exhaustee ineligible for public assistance.

PRAs build upon the Social Security Act requirement, commonly called “profiling,” which originated in this committee in 1993. Under this requirement, states currently identify those workers who are at greatest risk of exhausting UI and most in need of reemployment services. Workers so identified are referred to available reemployment services. PRAs will insure that a wide range of reemployment services are available to at least 1.2 million UI beneficiaries who are identified through this system. Under special transition provisions, States will have the option of making accounts available to certain current UI claimants who were previously found likely to exhaust UI or to certain workers who have already exhausted their UI benefits.

The accounts can also be used to pay a Reemployment Bonus under certain conditions. To provide additional assistance, new UI claimants who receive PRAs and who become reemployed by the thirteenth UI benefit payment will receive any cash remaining unspent in their account as a Reemployment Bonus. Similarly, the groups added at state option—certain UI claimants who were previously identified as likely to exhaust UI and certain UI exhaustees—that become reemployed by the thirteenth week of the effective date of the account can also receive the Reemployment Bonus.

The bonus would be paid to the individual in two installments: 60% at employment and 40% after six months of job retention. Individuals who do not find employment within the thirteenth week rule would not be able to “cash out” their account but would continue to be able to purchase intensive reemployment, training and supportive services for up to one year from the effective date of the account.

With respect to the income tax implications of PRAs, the Administration will work with Congress to ensure that pay-outs for training and supportive services would not be taxable; payouts for income support and reemployment bonuses would be taxable.

Conclusion

I enthusiastically conclude that these proposals are exactly what is needed to respond effectively to current economic conditions and future trends. I look forward to working with this Committee as we move ahead on UI reform.

This concludes my remarks. I will be glad to respond to any questions you may have. Thank you.

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