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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 Presidents fiscal year 2004 budget
proposal to reform the federal-state Unemployment Insurance (UI) program and
the Presidents 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 Nations
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 programs 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
mobilitytwo essential elements of a dynamic and vibrant economy.
The Presidents Economic Message
UI reform and PRAs are important parts of the Presidents
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 Presidents 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 Presidents vision for the economy.
The Presidents 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 Presidents Management Agendato improve
government performance and efficiencythe 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 systems 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 programs
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 states 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 Presidents 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 20072008 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 states 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 Americas 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 governments 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 systems 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 todays 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 Ill 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 individuals 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 optioncertain UI claimants who were previously
identified as likely to exhaust UI and certain UI exhausteesthat 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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