[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                  H.R. 3684, THE ``EMPLOYMENT SECURITY
                        FINANCING ACT OF 1998''

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 23, 1998

                               __________

                           Serial No. 105-85

                               __________

         Printed for the use of the Committee on Ways and Means



                      U.S. GOVERNMENT PRINTING OFFICE
60-840                        WASHINGTON : 1999



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel
                                 ------                                

                    Subcommittee on Human Resources

                  E. CLAY SHAW, Jr., Florida, Chairman
DAVE CAMP, Michigan                  SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               FORTNEY PETE STARK, California
MAC COLLINS, Georgia                 ROBERT T. MATSUI, California
PHILIP S. ENGLISH, Pennsylvania      WILLIAM J. COYNE, Pennsylvania
JOHN ENSIGN, Nevada                  WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona
WES WATKINS, Oklahoma

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
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converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.




                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of June 16, 1998, announcing the hearing................     2

                               WITNESSES

U.S. Department of Labor, Grace A. Kilbane, Director, 
  Unemployment Insurance Service, Employment and Training 
  Administration.................................................    12
                               __________
American Federation of Labor and Congress of Industrial 
  Organizations, Marc Baldwin....................................    87
Chrysler Corporation, and UWC, Inc., John P. Davidson............    81
Cupp, Hon. Robert R., President Pro Tempore, Ohio State Senate...    45
Florida Department of Labor & Employment Security, Douglas L. 
  Jamerson.......................................................    56
New Hampshire Department of Employment Security, Joseph 
  Weisenburger...................................................    51
Norwood, Hon. Janet L., Urban Institute..........................    64
USX Corporation, William Petz, Jr................................    73

                       SUBMISSIONS FOR THE RECORD

American Federation of State, County and Municipal Employees, 
  statement......................................................   102
Coalition for Employment Security Financing Reform, statement and 
  attachments....................................................   107
Ohio Grocers Association, statement..............................   116
Service Bureau Consortium, Roseland, NJ, statement...............   118


      H.R. 3684, THE ``EMPLOYMENT SECURITY FINANCING ACT OF 1998''

                              ----------                              


                         TUESDAY, JUNE 23, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 3:10 p.m., in 
room B-318, Rayburn House Office Building, Hon. E. Clay Shaw, 
Jr. (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

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    Chairman Shaw. The Subcommittee on Human Resources will 
come to order.
    Keeping the Nation's unemployment insurance system 
operating effectively is important to more than 100 million 
employees, to millions of employers, and to the strength and 
vitality of the United States' economy. Yet, despite this 
critical mission, today less than 60 cents out of every dollar 
in Federal taxes collected to run the unemployment insurance 
system is used for its intended purpose, and that is to 
administer benefits and get the jobless back to work.
    Florida's Labor Secretary, Doug Jamerson will testify that 
in 1996 about 35 cents per dollar in Federal taxes was returned 
to the State of Florida. In fact, the difference between 
Federal unemployment taxes paid by Florida businesses from 1991 
to 1996 and what my State received back from Washington totals 
more than $1 billion.
    Florida is not alone. Nationally, over the next 5 years, 
more than $10 billion in Federal unemployment taxes will 
probably get lost in Washington instead of helping jobless 
workers. When jobless workers don't benefit from billions of 
dollars in unemployment taxes collected specifically for them, 
something is terribly wrong.
    That's one reason why working with a bipartisan coalition 
of employers and 27 States, I introduced H.R. 3684, the 
Employment Security Financing Act of 1998. This legislation's 
goal is simple--to get jobless Americans back to work sooner.
    H.R. 3684 is endorsed by the United States Chamber of 
Commerce, the National Association of Manufacturers, the 
National Restaurant Association, and even the National Broiler 
Council. Now, if the Nation's fried chicken lobby is on our 
side, who can possibly be against us at this point? [Laughter.]
    For recipients, little would change; benefits would remain 
set by States as part of a national system; small States would 
retain extra Federal payments; and extended benefits and 
special assistance for veterans and the disabled would 
continue. But States would collect all taxes that support the 
system, cutting business paperwork and tax filings in half. 
More employment services would help the jobless find work 
sooner. And Federal unemployment taxes would fall with the end 
of the .02 percent surtax, which its defenders label 
``temporary'' even though it has been around for the last 22 
years.
    This Subcommittee should consider ways to improve the 
unemployment system to benefit workers, employers, and 
especially jobless Americans. But we have to acknowledge the 
heart of the current problem--a Washington-designed system that 
taxes too much and helps jobless Americans too little. The 
funds are there. But as with welfare reform, we need to repair 
an outdated system so it works better for jobless Americans and 
for their families.
    [The opening statement follows:]
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    Chairman Shaw. Now, I will recognize Mr. Levin for his 
opening statement.
    Mr. Levin. Thank you, Mr. Chairman. Let me start by saying 
that I agree that we need to reform a system, the Nation's 
unemployment compensation system that was enacted over 60 years 
ago to help provide assistance to laid off workers. The 
strength of today's economy provides us with a good opportunity 
to begin making some of these changes or to put it another way, 
to fix the roof while the sun is shining.
    However, I have deep concerns that the legislation that's 
being proposed, H.R. 3684, would do much more harm than good. 
Rather than fixing the roof, it might put a huge hole in it. 
First, the legislation ignores many of the current problems 
faced by our unemployment comp system, such as the decline in 
the number of unemployed Americans receiving UI, a figure that 
I think is shocking, and the threatened solvency of the State 
unemployment trust funds. To remain silent when the percentage 
of workers qualifying for unemployment compensation has 
declined from nearly 50 percent in the 1950's to about 35 
percent today is a mistake; and to ignore the fact that 22 
States have insufficient reserves in their unemployment trust 
funds to weather a sustained recession is equally unwise.
    Second, the bill would create new problems for our 
unemployment comp system. For example, H.R. 3684 would 
eliminate the current benefit for extended unemployment 
benefits, EB, without proposing a reliable replacement. It's 
true the legislation calls on States to establish their own EB 
programs, but there is no enforcement mechanism on the Federal 
level to ensure they do so. This could place dislocated workers 
in jeopardy during severe economic downturns. And I might add 
that I think this is national, not only a State problem because 
in times of downturn, people move from one State to another.
    Furthermore, H.R. 3684 could undermine the insurance 
principle of shared risk, under which the current UI system 
pays States based on their administrative workloads, not on the 
amount of taxes paid in that State. Under this bill, it would 
not matter if one State has an unemployment rate of 3 percent 
and another has an unemployment rate of 10 percent.
    I believe that we can build upon the current State/Federal 
partnership rather than ripping it apart. After all, 
unemployment is a national problem requiring shared 
responsibility and oversight between the States and the Federal 
Government.
    Therefore, along with Mr. English and Mr. Rangel, I have 
introduced legislation proposed by the administration to make 
improvements to the current unemployment comp system while 
still maintaining the State/Federal partnership. This 
legislation, H.R. 3697, would help States voluntarily improve 
UI coverage among low-wage workers, encourage States to improve 
the solvency of their unemployment trust funds, establish a 
more accurate and more equitable trigger for extended 
unemployment benefits, and provide new supplemental funding to 
help States with their administrative costs.
    On this last issue, let me explain that our legislation 
would provide an additional $106 million in mandatory funding 
for State administrative expenses in Fiscal Year 1999, as well 
as additional mandatory funding in subsequent years.
    Let me also add in terms of Federal/State partnership, it 
seems to me that we need to step back and to take an even 
broader look at unemployment compensation in 1998. There's been 
a lot of change in recent years, perhaps in recent decades, as 
to the nature of unemployment. Fewer and fewer people are 
temporarily laid off and more and more are permanently laid 
off. And it may well be that we need to look at ways to 
integrate unemployment compensation--or unemployment with 
training and re-training programs. If we're going to do that, I 
would think on a Federal/State partnership basis, that the 
notion of devolution could work against the need to adjust 
unemployment--the response to unemployment as it's occurring in 
1998 and 1999 as compared to 1978 or 1968.
    Mr. Chairman, I look forward to hearing from today's 
witnesses, and to an open discussion about our unemployment 
compensation system.
    Thank you.
    [The opening statement follows:]
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    Chairman Shaw. Thank you, Sander.
    Our first witness today is Grace Kilbane, who is the 
Director of the Unemployment Insurance Service, United States 
Department of Labor.
    Welcome. We have your full statement which will be placed 
in the record in full, and you may proceed and summarize as you 
see fit.

 STATEMENT OF GRACE KILBANE, DIRECTOR, UNEMPLOYMENT INSURANCE 
               SERVICE, U.S. DEPARTMENT OF LABOR

    Ms. Kilbane. Thank you, Mr. Chairman and Members of the 
subcommittee, for this opportunity to testify before you today 
on the Employment Security Financing Act of 1998. First of all, 
I would really like to applaud the coalition and this bill's 
objective to both reform the funding for employment security, 
as well as to increase the funding and the return on FUTA for 
the employment security system.
    However, we do have some concerns that we also would like 
to share with you about this bill today from the 
administration's perspective.
    I also would like to commend you, the members of this 
subcommittee, for taking your time to look at these programs 
during this good economy. This is the best time to look at the 
unemployment insurance program so that we're ready if and when 
the economy takes a downturn.
    In the interest of time, I would like to do two things 
today, one is to summarize what our concerns are with this 
bill, and, secondly, to present what the administration's 
proposals are regarding these issues.
    First of all, the stated primary purpose of this bill, H.R. 
3684, is to remedy the insufficient administrative funds that 
are in the system. The concern that we have is that the 
solution that is proposed to this major problem, which is to 
transfer the funds from Congress to the States, does not 
guarantee the problem will be fixed. Most State legislatures 
meet for only a portion of the year, and six State legislatures 
meet biennially. There's no guarantee in this legislation that 
the States will be able to respond quickly to economic 
downturns at the State level: either to unforeseen economic 
downturns or even those that are caused by large natural 
disasters, which we have seen particularly in small States.
    Transferring funding from Congress to States, too, has also 
brought some concerns to some of our other agencies. Our 
Veterans Employment and Training Service is concerned that 
States could make decisions to not fund veterans' programs with 
no guarantees or requirements that they be funded. And our 
Bureau of Labor Statistics is concerned that there is no 
guarantee that the States would be sufficiently funding these 
programs if they're funded at the State level--there's some 
question about whether that remains a Federal or State 
responsibility.
    In addition to having the States appropriate funds instead 
of Congress, the bill also transfers the responsibility for 
collecting the Federal unemployment tax, or FUTA, from the IRS 
to the States. We think that we need to take a close look at 
this because having the States collect Federal revenue, and 
having their legislatures then appropriate Federal dollars, 
with no Federal requirements, no guidelines, no standards, nor 
any kind of Federal requirements, actually flies in the face of 
the Government Performance and Results Act, which Congress 
passed a few years ago in order to make sure that we were 
spending Federal dollars wisely and achieving outcomes.
    We would like to see other options considered in terms of 
how to restructure the funding of this. For example, maybe the 
funding should be totally switched to the mandatory side of the 
budget, that's where we pay benefits. We pay $22 billion a year 
of benefits right now. Perhaps, the administrative dollars 
should be switched there. Another idea that has been considered 
in the past is to create a permanent cap adjustment on the 
discretionary side so that you could fund these programs based 
on workload, and when workload went up, you'd have sufficient 
funding to pay for it. A third idea is that if there is a 
public policy--a good public policy reason to transfer the 
administration to the States, that is, the States being 
responsible for administration of these programs, then perhaps 
we should consider a State-based administrative tax, just like 
a State-based benefits tax that the States would collect 
together and keep a reduced FUTA tax for Federal activities 
that Congress would still appropriate.
    This bill basically restructures our current trust fund, 
and eliminates the three current Federal accounts and creates 
53 specific State accounts. In doing that, it creates a Federal 
administrative account for Federal activities. It limits to 
Congress for appropriation to the Federal Government 2 percent 
of the Federal funds, or the FUTA funds, collected. So the 
States keep 98 percent (including 2 percent small State set-
aside) of the money and they give 2 percent to the Federal 
Government. This would produce right now about $125 million a 
year. For the Department of Labor administration alone this 
year, it cost $195 million. Current Federal activities would be 
cut by 36 percent by this proposal.
    Basically, the Secretary of Labor's responsibilities stay 
pretty much the same under this bill. Congress would be limited 
to only the 2 percent appropriation. And, in addition, the 2 
percent in this bill would cover the IRS activities which would 
be an additional amount of money, we're not sure how much. 
Currently, it costs a little over $100 million for the IRS but 
they wouldn't be collecting the taxes but would still be 
maintaining accounts. So this would even further underfund 
Federal activities.
    Under H.R. 3684, the Extended Benefit Program would be 
given over to the States to be administered solely by the 
States. So the whole Federal partnership--State partnership for 
extending benefits when the economy starts going down in 
certain areas or regions would be eliminated. We would have no 
special funding mechanism but for EB. Congress would be faced 
with enacting special compensation programs, extended 
unemployment compensation programs.
    And if we look at our experience in the last recession, 
when Congress did this in the 1990's, it cost $28.5 billion in 
Federal funds in order to enact these programs, $12 billion of 
which was funded by FUTA, which we will be eliminating in this 
proposal, and $16.5 billion of which was funded by general 
revenue which had to be offset.
    We also believe that this proposal weakens State 
accountability for performance. The bill does require States to 
determine what they want to achieve and then report annually to 
the Governor. There's no requirement that these be comparable 
State by State, so we could look at the country and see what 
the performance is.
    Finally, looking at this bill in an era of more and more 
multinational corporations and global economies, we just have 
to wonder if it makes sense to reduce our ability to respond as 
a nation by reducing our Federal and national roles.
    In terms of the administration, we think that in order to 
enact reform and strengthen the unemployment insurance program, 
we need to address three key issues:
    The first one is recipiency, which Mr. Levin referred to 
earlier in his remarks;
    Secondly, recession readiness; and
    Finally, administrative funding, which is where we agree 
with the overall objective of H.R. 3684.
    If we could look at recipiency for a moment, and we do have 
some charts over here, which I've also made available to you, 
copies for the record, you can see that those able to receive 
unemployment compensation have been steadily trending downward, 
or eroding since the 1950's. It used to be about half 
unemployed workers who could get unemployment insurance. Now, 
nationally, about 36 percent can in 1990, and that's what that 
chart shows you. In some States, it's under 25 percent, or only 
one in four unemployed workers receive benefits.
    If we could look at the next chart, we know, and studies 
have shown, that this downward trend in recipiency has 
negatively impacted the program's ability both to help 
individuals with their economic stabilization during periods of 
joblessness, as well as the economy. And what this chart shows 
you is that post-World War II, which is about 1945 there on the 
chart, you'll see that the squiggles, the up and down squiggles 
in terms of change in our Gross National Product, were 
stabilized or smoothed so to speak. Before that, the swings in 
our economy were much broader. And what economists have agreed 
to is that the unemployment insurance program, as well as other 
fiscal activities that have been taken, have in part 
contributed to smoothing out the economic cycles in our 
economy.
    The second goal is recession readiness and what we're 
concerned about there is during the last recession in this 
country, in the early 1990's, only nine States triggered on to 
extended benefits, which caused Congress to act with a national 
program for all States.
    Also, we're concerned about State trust fund levels, or 
solvency levels. These levels are below where they should be in 
this recovery of the economy, in our opinion, and we're 
concerned that a large economic downturn would cause major 
State borrowing.
    And, finally, we believe that we need to pay attention to 
administrative funding which, again, is also the purpose of 
H.R. 3684. Since Fiscal Year 1995, appropriations for the 
unemployment insurance program have remained static, and have 
not accounted for increases in workload or inflation. The 
Employment Service funding has been steadily cut since 1984, 
hindering its ability to re-employ workers quickly. In 1997, 
States had to pitch in $200 million of their own money and so 
we see evidence of this.
    Our approach to reform is, therefore, in our budget 
request, which the President set in motion. For 1999, we set in 
motion a plan to reform the employment securities system. This 
is a two phase strategy that we have put in place. The first 
phase is a bill, H.R. 3697, which was introduced by 
Representatives Levin, English, and Rangel to provide 
incentives to strengthen the unemployment insurance program in 
these areas: recipiency, recession readiness, and 
administrative funding; and to really provide a down payment 
for further and larger discussions of how to permanently reform 
this program.
    H.R. 3697 would provide $20 million in each of the next 
three fiscal years for States to install an alternative base 
period. If every State did this, this would help an additional 
450,000 people to become eligible for benefits today. Mostly, 
these are low-wage workers and this would increase recipiency 
by 6 to 8 percent and start reversing that trend that we saw on 
the first chart.
    In terms of recession readiness, H.R. 3697 would prepare 
the Unemployment Insurance Program for a recession. It would 
strengthen the Extended Benefit Program by revising the program 
triggers so that the program could respond during a recession.
    And if we could look at the next chart real quickly, this 
will show you that if the Adminstration proposed law was in 
place in the 1990's recession, it would have cost the country a 
total of $7.2 billion and it would have triggered on in 29 
States. Instead, the triggers only happened in nine States, 
shown by that really skinny color on the ``current law'' bar, 
and Congress enacted five extensions of extended unemployment 
compensation for a total cost of $28.5 billion. We believe that 
if the program was more responsive, it would go on quicker, it 
would be more effective in the right places, and it would cost 
less money.
    We also provide incentives in this bill for helping to 
improve the solvency of the trust fund. And, again, if we look 
at the next chart, you will see a----
    Chairman Shaw. Ms. Kilbane, could you go ahead and wrap up?
    Ms. Kilbane. Yes.
    Chairman Shaw. You're about three times your five minutes 
right now.
    Ms. Kilbane. Okay. Essentially, if I could just move on to 
the end, basically we would also fix administrative funding by 
adding some additional funds. And the bill also proposes to 
extend the Self-Employment Assistance Program, which is due to 
expire December 8th--10 States currently have that program.
    One of the issues that we have in both extended benefits 
and administrative financing is return on FUTA. And if I could 
just show our final two charts here, return on FUTA is more 
than administrative dollars. It also includes extended benefits 
and loans; it does not include general revenue for emergency 
programs. If you would look at, here's an example, 1989, which 
was a pretty good economic time for our country--almost every 
State got back less than 70 percent of their FUTA dollars that 
they put in. But if you look a few years later, just three 
years later, to 1992, when we were, in fact, in a recession, 
you will see that almost every State in the country got back 
more than the dollars that it put into FUTA funding. We need 
more administrative funding and we need more FUTA funding for 
extended benefits when our workload goes high, when the economy 
goes down.
    I would like to thank you for your time and this concludes 
my formal remarks, Mr. Chairman.
    [The proposed statement and attachments follow:]
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    Chairman Shaw. Ms. Kilbane, we've seen all the charts and 
we've seen the maps and we know the amounts of money and what 
happens in a recession and what doesn't, and I think through 
both of those years, I've been serving in the Congress, but the 
question remains that some $6 billion has been paid in and 
about $3.5 billion have paid out. Where's the money? Where does 
it go?
    Ms. Kilbane. Well, first of all, we agree that we do need 
to get more administrative funding back to the States. 
Currently, as you mentioned----
    Chairman Shaw. Don't tell me, don't answer the question as 
to where we're going. If you could tell us what happened? I'm 
just asking for the history? What happened to the money? The 
only way we're going to keep history from repeating itself is 
to find out what happened.
    Ms. Kilbane. The money is retained in the Federal accounts. 
The Federal accounts are three. They're for three purposes: 
administration of the program, Federal loans, and for extended 
benefits. Now, we don't need the Federal loans and extended 
benefits when times are good, but we do need to build up those 
accounts. Currently, there's $18 billion balance in the Federal 
loan accounts, which is where these balances are going and so 
they've been building up over the last few years.
    Chairman Shaw. Well, do you think that it's necessary to 
build them up to that extent?
    Ms. Kilbane. Well, as I mentioned----
    Chairman Shaw. I mean, at some point, don't you think we 
ought to maybe get rid of that temporary tax, .02 percent?
    Ms. Kilbane. I think to the extent that we don't need the 
taxes that we shouldn't collect them. But I also think that we 
want to run an insurance program----
    Chairman Shaw. Can I take that as the administration's 
position?
    Ms. Kilbane. I'm sorry?
    Chairman Shaw. Can I take that as the administration's 
position, that as long as you don't need it, you shouldn't 
collect it?
    Ms. Kilbane. Right. And the administration's position is 
that we should have an actuarially sound trust fund, including 
the Federal accounts. In the last recession----
    Chairman Shaw. The $18 billion----
    Ms. Kilbane [continuing]. We went through $28.5 billion.
    Chairman Shaw [continuing]. Is that going in to make up 
part of the surplus that the administration and the Congress 
are bragging about so much? What's in that account, does that 
go in the unified budget?
    Ms. Kilbane. It goes into the unified budget, that's right.
    Chairman Shaw. So there's about $18 billion, another $18 
billion, we're finding out that's in the trust fund that we 
really shouldn't be calling part of the surplus. So, as I take 
it, the way you've answered my question, in that, unless 
there's some actuarial reason to keep that .02 tax on there, 
that we ought to get rid of it?
    Ms. Kilbane. I think that's correct, but I think the 
administration's position is that at this point, actuarially, 
we need to make sure that those accounts are built up to cover 
a downturn.
    Chairman Shaw. What amount is necessary?
    Ms. Kilbane. Well, the administration has put forward an 
extension of the two-tenths through the year 2007, but we are 
also expecting that the Reed Act would----
    Chairman Shaw. Wait a minute, the administration thinks 
that that two-tenths should stay in until the year 2007?
    Ms. Kilbane. That's the current law.
    Chairman Shaw. I mean, do you think that's what it ought to 
be?
    Ms. Kilbane. We are anticipating in the year 2003 that the 
Reed Act distributions would reduce those Federal accounts by 
spilling over excess administrative funds to the States, and we 
think that that's the proper way of taking care of that.
    Chairman Shaw. Does that $18 billion that's in the surplus 
fund account for most of the imbalance of what's paid in 
compared to what comes out? I mean this is, I don't know of any 
program that crazier than this as far as the imbalance of the 
monies. This isn't just a question of socking the employer, 
this is part of the employees' compensation, so I think we need 
to put this on the right plane. This is part of the 
compensation paid to labor today. So this is not a big business 
issue any more than it is a big labor issue, and it's one that 
I think jointly we should address and do something about. And 
if the monies are not necessary and if we've got these huge 
surplus funds, let's give the guy a break.
    Ms. Kilbane. Right, and, Mr. Chairman, I guess I would say 
that the administration does not agree that the funds are not 
necessary. We think that we need to, just like a private 
insurance company----
    Chairman Shaw. I'm just talking about now just the .02 
percent.
    Ms. Kilbane. Well, the .02 percent is part of the overall 
FUTA funds that goes to build the Federal accounts, and as 
those two charts (charts 5 and 6) show that when----
    Chairman Shaw. Well, let's cut it short----
    Ms. Kilbane [continuing]. You hit an economic downturn, you 
need more money.
    Chairman Shaw [continuing]. Where should the surplus fund 
be? When are we going to stop, at $25 billion, $30 billion, 
what do you think is reasonable?
    Ms. Kilbane. Well, the analysis----
    Chairman Shaw. It's $18 billion now.
    Ms. Kilbane. The analysis that we did last year when the 
two-tenths was continued showed that if we hit an economic 
downturn like the 1980's, we would end up--States would end up 
borrowing somewhere in the neighborhood of $25 billion, and we 
would also be paying extended benefits. And so we didn't think 
that $18 billion, at that time, looked like too much money, nor 
do we now. I don't have a magic figure off the top of my head. 
We look at the percentages of the caps as in relation to our 
past experience with recessions.
    Chairman Shaw. Well, do you think you could supply this 
committee with what would be a reasonable figure, according to 
the administration, to be put in this trust fund?
    Ms. Kilbane. We'll give you whatever we can give you----
    [The following was subsequently received:]

    A simulation shows that approximately $25 billion is needed in the 
Federal accounts right now in order to remain solvent in the event of a 
1980s-type recession in the near future. The necessary balance will 
grow in future years as growth in the labor force and in wage levels 
causes potential recessionary outlays to increase. This estimate 
assumes that the changes to the Extended Benefit program proposed in 
H.R. 3697 will be implemented. It should be noted that the extended 
benefit account was also used to fund the Emergency Unemployment 
Compensation program in the last recession.

    Chairman Shaw. Now, this trust fund is this--this trust 
fund really is a fiction though isn't it? I mean, is there 
actually money in it? It's just an account isn't it?
    Ms. Kilbane. Well, my understanding is that all trust funds 
are part of the unified Federal budget.
    Chairman Shaw. Yes, they're all fraudulent. There's no 
money out there is there? [Laughter.]
    Ms. Kilbane. I didn't create the trust fund. [Laughter.]
    Chairman Shaw. We couldn't go write a check on the trust 
fund so what we're really looking at, even though we can put 
that into the trust fund and say, ``Hey, it's out there for a 
rainy day,'' there's really no money. And what will be today 
will come out of the deficit of tomorrow, if it's needed to be 
drawn down, isn't that correct, because it's all in the unified 
budget?
    Ms. Kilbane. My understanding is that that's correct but it 
is still part of the trust fund and the balance is like other 
trust funds, my understanding is, are tracked separately.
    Chairman Shaw. Well, I can tell you that if lawyers would 
all treat their trust funds like the United States Government 
did, we wouldn't have any more lawyers because they'd all be in 
jail. And I think that's something that we ought to really be 
thinking about. We're setting up these fictions and that's--we 
need to take care--and I'm all for pay-as-you-go, but this is 
no pay-as-you-go, this is a fiction.
    Ms. Kilbane. Well, I think that----
    Chairman Shaw. It's stealth. It's not out there. It's just 
something we talk about. It's a feel good type thing but what 
it is is we're just taxing the hell out of the employer and the 
employee in order to build up something that will make our 
surplus look good, and it has nothing to do with the trust fund 
because it's not a trust fund.
    Ms. Kilbane. Well, and I think that the administration, 
from our perspective, in launching a broad dialogue on 
reforming the unemployment insurance program, which I have also 
brought copies of our complete paper that was released today, 
would hope that we could get into all areas of how do we fix 
this program? And, certainly, to the extent that we would get 
into a broader discussion about trust funds, or how to fund it, 
or where to fund it, where to shift the funding to, we would 
see that as being a better way of approaching this issue.
    Chairman Shaw. Okay. Mr. Levin.
    Mr. Levin. Well, I think that last exchange has been useful 
and we need to trace what's happening with the Federal monies. 
They're part of the unified budget, all the trust funds are. I 
don't think that makes them fraudulent. We have a highway trust 
fund, an aviation trust fund, and there is some sense of 
obligation as to the use of those monies. And, in a sense, it's 
a fiction, it isn't a trust fund in a strictly legal sense. It 
is, I think, however, something that has some meaning to it. 
And I've been one who has suggested we don't spend the surplus 
because it essentially exists because of the inflow from Social 
Security compared to the outflow. I don't think that means that 
it's a fraudulent system.
    But, most importantly, I don't see why that means we should 
simply throw all of this into the States and have a--if that's 
true, let's have a 50 State unemployment comp system. The 
trouble with that is what do you do when there's a recession? 
And there's a recession in some States, not in others? We talk 
about the flow-in being greater than the outflow and we have 
this surplus, and this is a complicated--I once sat through a 
long explication of the three trust funds, it's very 
complicated. And, perhaps, we can simplify it. But it turned 
out in the 1980's, we did not have enough money to pay for 
extended benefits and we, as a result, had to dip into the 
general fund, isn't that true?
    Ms. Kilbane. Yes, Mr. Levin, that was in the 1970's 
recession and that's the reason that the two tenths, temporary 
tax was put on.
    Mr. Levin. Oh, so in the 1980's, when we had the recession, 
and I remember the fights we had relative to Pennsylvania and 
other States that were in difficult positions and had trouble 
using the laws, we amended it, and the triggers did not really 
help, we had tens of thousands of unemployed workers who had 
exhausted their benefits and simply, through no fault of their 
own, could not find a job. And I think it would be interesting 
for us to get a break-out of which States are in trouble in 
terms of administrative funds and which States are in trouble 
in terms of solvency. I think it also would be interesting to 
compare the benefits that are paid State by State, and to look 
at the recipiency rates State by State. They vary 
substantially, don't they?
    Ms. Kilbane. Yes, there's a wide-range, like between 20 
percent and 50 percent on recipiency, for example.
    [The following was subsequently received:]
    [GRAPHIC] [TIFF OMITTED]60840.026
    
    Mr. Levin. My guess is that some of the States that are 
pressing for devolution are States that have very low 
recipiency rates and what it means when you have low recipiency 
rates is that some of those workers go to other States. So I 
hope we can take an objective look at what's going on. This is 
a very mixed system. It's a partnership but a very mixed 
system.
    But what would happen if we just said to every State, ``Do 
your own unemployment comp?'' Give them all the administrative, 
just tax your own employers.
    Ms. Kilbane. I think that our position is that we should 
take a look at this as a Federal/State system, that there are 
national issues, that we do have a global economy, that 
recessions happen in regional pockets, not just State by State, 
and that we should agree on what we want to achieve as a 
Federal/State system and make sure that we've got at least some 
standards or goals laid out and then proceed with making sure 
that we're funding it adequately.
    Mr. Levin. Why have any standards? I mean, right now it's a 
very mixed, I think you could argue, even a mixed-up system. 
There are standards but there are very different levels of 
eligibility, of benefits, why not just let every State do what 
it wants?
    Ms. Kilbane. Well, I think that our concern would be that 
we have had a very successful, in the past, economic safety net 
for this country, which has involved a Federal/State 
partnership. And if you look at, for example, the 
Macroeconomics Stabilization Chart (chart 2) and the 
contributions that we've made to smooth some of the recessions 
that we've had, that it's important to keep that Federal/State 
partnership in place.
    Mr. Levin. I think the answer is that if every State did 
what they wanted, it would mean that some of them would simply 
shuffle the responsibilities to other States and people would 
move during recessions, or they would try to move, and then we 
would end up with national economic emergencies where the 
Federal Government would have to bail out States that did not 
meet their responsibilities, and we would have an unemployment 
system somewhat like we have a hurricane system. And the 
Federal Government would end up as the payer of last resort, 
with States coming here and pleading for help. And the 
unemployed would be left, talking about a hurricane, high and 
dry.
    Thank you.
    Chairman Shaw. Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman. Before I ask a couple 
of questions, I want to join Mr. Jefferson in welcoming the 
State of Louisiana's Secretary of Labor, Gary Forrester, who's 
not testifying but he's here observing today. Welcome, 
Secretary Forrester.
    Let me just try to clear up this trust fund concept. I 
think ``actuarially sound'' is maybe a good phrase but let's 
examine what that means. You say there's about $18 billion in 
the trust fund. Where is that $18 billion? Where is it kept?
    Ms. Kilbane. Well, it's part of the unified budget, the $18 
billion in the Federal accounts is kept as part of that 
account, as part of the unified budget.
    Mr. McCrery. Is there any cash in the bank so to speak for 
that trust fund?
    Ms. Kilbane. Again, my understanding of how Congress has 
set up a Federal unified budget is that all trust funds are 
part of it, and that for trust funds, you account for the 
funding separately so that you know what's there for those 
purposes.
    Mr. McCrery. Sure, it's accounted for separately but the 
fact is there's no cash in the bank in the trust fund. It's all 
I-O-U's. It's Federal securities. And there--it's the safest I-
O-U in the world but it's an I-O-U, it's paper. So if we were 
to have a recession and there would be a call on this supposed 
trust fund, there wouldn't be any money there would there? 
You'd have to get the money from current revenues, and you'd 
use those current revenues maybe to redeem the I-O-U's. Big 
deal. You still have got to find the cash. You've got to find 
it from current revenues. So what's the difference if we've got 
a paper trust fund or not? It doesn't make any difference as a 
practical matter.
    So, I think this is all a fiction we've been talking about 
this trust fund. And the chairman is right. If we're collecting 
more money than we need to finance the system, let's don't 
collect it knowing that someday we're going to have a 
recession, we're going to have to make accommodations for that 
expenditure, as we have in the past, probably with deficit-
spending, and be done with it. But let's not have this fiction 
and create this need, this supposed need for more taxes. And 
that's all we're doing.
    And so I think the chairman's legislation is perfectly 
correct in saying let's give the .02 percent surtax back and 
then the next time we have a recession and we have to spend a 
bunch of money, maybe we can create another surtax to repay 
ourselves but let's don't do it when we don't have to.
    Have Federal unemployment taxes ever gone down to your 
knowledge?
    Ms. Kilbane. No, not to my knowledge.
    Mr. McCrery. Have they gone up?
    Ms. Kilbane. Well, by two-tenths of a percent, that's 
correct.
    Mr. McCrery. That's all since the first----
    Ms. Kilbane. Yes.
    Mr. McCrery. Just two-tenths of a percent? Under the 
chairman's bill, employers under----
    Ms. Kilbane. Can I clarify that?
    Mr. McCrery. Yes, please?
    Ms. Kilbane. The tax base has gone up, has increased, the 
Federal tax base over the years.
    Mr. McCrery. Yes, and taxes have never been cut nor has the 
base been reduced.
    Ms. Kilbane. The base is currently $7,000.
    Mr. McCrery. Right. And it's gone up from the initial base, 
it's gone up.
    Ms. Kilbane. From the initial base, that's correct.
    Mr. McCrery. Right. Under the chairman's bill, employers 
would file four unemployment tax payments per year, one 
consolidated Federal/State payment each quarter. Now the 
current system requires eight filings. The administration's 
Fiscal Year 1999 budget proposal would require 24 tax filings. 
Is that still the administration's position?
    Ms. Kilbane. That is in the administration's request, 
that's correct.
    Mr. McCrery. If you were an employer, which would you 
prefer?
    Ms. Kilbane. If I were an employer, I would probably prefer 
the former.
    Mr. McCrery. Then I suggest we try to find a way to make it 
easier, not harder, on the employer and just use common sense. 
If we can collect the same amount of money through an easier 
system, with a consolidated filing, let's work together to try 
to find a way to do that.
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Jefferson.
    Mr. Jefferson. Thank you, Mr. Chairman. I would also like 
to recognize our Secretary of Labor, who I had a chance to meet 
with this evening--this afternoon, as I'm sure Mr. McCrery did, 
we used to serve together in the State legislature. Good to see 
you here, sir.
    This is a rather complicated problem we have on our hands 
and it's not necessarily made more simple by the solutions that 
are offered today.
    I'm concerned about the issues you raised about the lack of 
guarantees, particularly with respect to the lack of guarantees 
with respect to what States will do with the money if they were 
to receive it. Would they establish trust funds of their own, 
or would they use the money for some other related purpose, for 
State administration, for something else, I don't know. And 
isn't there reason to require trust funds? After all, we all 
could hear that there isn't one, but are we then going to put 
ourselves in the same position on the State level to say that 
there may or may not be one.
    That's a concern which you raise. Do you see how that 
concern can be addressed in the context of the bill Mr. Shaw 
offers, or is it something that we can't remedy in the context 
of his legislation?
    Ms. Kilbane. Well, I would think that what the 
administration was hoping to do by putting forward the dialogue 
paper was to discuss all of these--the proposals included in 
H.R. 3684, as well as other ways to look at it, including maybe 
putting performance standards in place a la GPRA or other ways 
of guaranteeing that we maintain a Federal/State system, even 
if we restructure it and reform it, and completely change the 
way we've done business. I mean, maybe we should take our trust 
funds out of the Federal Unified Budget to resolve some of the 
other issues that have been raised.
    Mr. Jefferson. You speak of a lack of a guarantee with 
respect to the States responding quickly, either in the case of 
an economic downturn or in the case of, I think you described 
it as, an emergency. Is this because based on our experience in 
doing this sort of thing or they might have different setups 
State by State?
    I guess my question is, is this something that can be 
fixed, and if it is, if it can be, how can it be fixed in the 
context of this legislation? Or is it something that you have 
to worry that each State is going to have to develop some 
capacity to do?
    Ms. Kilbane. We believe that the legislation that we have 
proposed through Representatives Levin, English, and Rangel 
would put forward a target for solvency, for example; that 
States would have to work toward having at least one year of 
benefit payments at the average of a high three bad years, and 
that that would help in terms of having a goal, where we could 
have States work toward that.
    The other is, of course, without any goals the results 
could be underfunding the program, which then costs more money 
during a recession. What we know is that, if we have to borrow 
money, we raise the taxes on employers during a recession.
    Mr. Jefferson. Our Labor Secretary talked about the need 
for--at least with me he did--for more administrative money on 
the States' part out of these funds. Does Mr. Levin's 
legislation address this issue? And does it address it right 
now?
    One matter that he was concerned about was, whatever you 
do, he wanted it to be done fairly quickly. The idea of having 
it done in 2003, or whatever, seemed an idea which is too 
distant for him to get his arms around, because he thought 
basically, who knows what by 2003--that's too far out to make 
much of a plan for. Even for his own career plans it's too far 
out.
    So the idea is, if we're going to do something, why does it 
take us that long to do it, and does Mr. Levin's bill address 
this issue in a more timely way?
    Ms. Kilbane. Yes. H.R. 3697 would make sufficient funds 
available for unemployment insurance this year, 1999, as well 
as for the next four years. This is a temporary funding fix, 
until we can work on a more permanent one, which is what we 
would like to see through the dialogue and through the 
coalition proposal.
    Mr. Jefferson. Could we move toward a solution not so much 
that would take away the Federal/State partnership, like 
perhaps Mr. Shaw's appears to do now, but that would address 
some of the concerns that he has in great detail and at the 
same time keep this partnership going, and use Mr. Levin's 
approach as a temporary one, a kind of a bridge one, until we 
can make more changes that will be in place over a longer 
period of time?
    Ms. Kilbane. Yes, exactly. We believe that these bills 
could--that they're not competing bills; that one takes place 
in the next five years and one is a more permanent reform that 
becomes effective subsequent to the five-year window.
    Mr. Jefferson. Thank you, Mr. Chairman.
    Chairman Shaw. Thank you. I would just like to comment with 
regard to the year 2003 the problems are budgetary because 
we're using this stealth surplus which goes into the stealth 
trust fund as a budget problem. It creates a budget problem 
because of the Unified Budget. And that's the problem, and 
that's the reason why it's got to--we've got to work with those 
type of years.
    Mr. Jefferson. This $20 million, Sandy, there's a figure in 
your--I missed it here--that you appropriated this year for 
distribution to the States. How much money? It can't be $20 
million. What's the number, Sandy, we're dealing with?
    Mr. Levin. There's $106 million for administrative funds 
and about $20 million for low-income workers.
    Mr. Jefferson. Oh, that's what I'm thinking about.
    Mr. Levin. If I might use your time, Mr. English is next, 
and then I just want to ask a quick question, Mr. Shaw.
    Chairman Shaw. Mr. English?
    Mr. English. I'm happy to yield to the gentleman from 
Michigan.
    Mr. Levin. No, go ahead. I just wanted on the FUTA tax to 
just be clear, so I'll ask it, if I might. What bill extended 
the two-tenths of 1 percent to the year 2007, do you know?
    Ms. Kilbane. It was the Balanced----
    Mr. Levin. It was the Balanced Budget Act?
    Ms. Kilbane [continuing]. The Balanced Budget Act last 
year.
    Mr. Levin. It was the Balanced Budget Act----
    Ms. Kilbane. That's right.
    Mr. Levin [continuing]. That I think most people on this 
panel voted for.
    And the bill of Mr. Shaw would extend it until when?
    Ms. Kilbane. Until the year 2004.
    Chairman Shaw. Sandy, I would like to point out that the 
President made that as a condition for his signing the bill. 
That was the reason it's in there.
    Mr. English. I'll reclaim my time, if that's----
    Mr. Levin. I think you'd better. [Laughter.]
    That's why I hesitated to raise it during your time. I hope 
the Chair will give you a full 5 minutes. [Laughter.]
    Mr. English. No, no, I'll be fine. Mr. Chairman, I'll keep 
my questions relatively brief, but I want to ask a couple of 
specific questions, Ms. Kilbane.
    One, could you elaborate on your concerns of the effect 
that devolution or the chairman's approach to devolution might 
have on the vets' program?
    Ms. Kilbane. Well--our vets' organization believes that the 
way the bill is written would put the responsibility for 
funding this program at the State level, and they have concerns 
that States could independently make decisions to reduce 
services to veterans by reducing funding for veterans.
    Mr. English. I think that's a legitimate concern, and it's 
one that I don't think is necessarily fatal to a significant 
overhaul of unemployment compensation, but certainly it's an 
issue that I think would have to be addressed as part of an 
overhaul of unemployment compensation.
    I wonder, under the bill that the chairman has proposed, 
what options would the Federal Government have to impose 
sanctions for noncompliance on States?
    Ms. Kilbane. The Federal Government currently has two ways 
of imposing sanctions for noncompliance. The first one is that 
employers in States that are noncompliant lose their offset 
credit reduction. So their taxes would go from .8 percent to 
6.2 percent.
    The other method we currently have is we can withhold 
administrative grants from States under Title III Social 
Security Act. We would lose that under this bill because we 
would no longer be in the grant-making business, but we would 
still be in the business of being able to basically enforce it 
on employers through loss of their offset credit.
    Mr. English. In your view, from your recent experience, is 
this a significant lose of leverage or not?
    Ms. Kilbane. We believe that both are important, because 
one goes after certainly the employers, which is known as the 
atomic bomb around our office, because it's so huge. But the 
second is the threat of loss of administrative grants, which is 
sort of the usual way that Federal agencies are able to manage 
and oversee Federal grants.
    Mr. English. Well, I guess I'd like to close with a couple 
of observations. One, I think there is some agreement on the 
panel that the level of administrative funding for the States 
has not been adequate, and I do believe that needs to be 
addressed.
    Second of all--and I hope the administration will 
appreciate this perspective--I used to work as a legislative 
aide specifically dealing with some of these issues for the 
Pennsylvania State Senate, and I think the way the law is 
written right now does provide for a level of micromanagement 
at the Federal level which is not entirely appropriate. But it 
seems to me that the micromanagement could be significantly 
reduced without necessarily moving toward a radical 
restructuring, as envisioned in the chairman's bill.
    My concern is I think there clearly is a Federal role in 
unemployment compensation, and I would feel probably a greater 
one than the chairman's bill actually allows. But I wonder if 
this micromanagement couldn't be addressed and still retain 
essentially a Federal system. Do you want to comment on that?
    Ms. Kilbane. Well, I think, clearly, the dialogue that we 
have launched on how to reform unemployment insurance and the 
employment service programs is open to not only things like 
recipiency rate and economic stabilization, but what is the 
Federal/State role, and how can that be done better, looking 
into the 21st century? So we would certainly be open to all 
kinds of comments about how to improve that.
    Mr. English. Thank you, and I'll yield back the balance of 
my time, Mr. Chairman.
    Chairman Shaw. Thank you.
    Ms. Kilbane. Thank you, Mr. Chairman.
    Chairman Shaw. Our next witness is Robert R. Cupp, 
president pro tempore and cochairman of the Senate Finance 
Committee, and past chairman of the Unemployment Insurance 
Authorizing Committee, the Ohio State Senate. Joseph 
Weisenburger is the Deputy Commissioner of the New Hampshire 
Department of Employment Security; Douglas Jamerson, Secretary 
of the Florida Department of Labor and Employment Security, and 
Dr. Janet Norwood, who is a senior fellow, the Urban Institute.
    I welcome all of you. This last witness took more time than 
I had anticipated. I am going to try to enforce the five-minute 
rule. We do have all of your statements, and it will be made a 
part of the complete record. I would request that you might try 
to summarize.
    Mr. Cupp.

STATEMENT OF ROBERT R. CUPP, PRESIDENT PRO TEMPORE, COCHAIRMAN, 
          SENATE FINANCE COMMITTEE, OHIO STATE SENATE

    Mr. Cupp. Thank you, Mr. Chairman and members of the 
committee. My name is Bob Cupp, and I am the president pro tem 
of the Ohio Senate. And, Mr. Chairman, for eight years before 
being selected for that position, I chaired the Ohio' Senate's 
Commerce and Labor Committee, which had jurisdiction over 
unemployment and employment compensation issues. I'm also a 
member of the Senate Finance Committee, which handles budget 
issues and appropriations.
    Mr. Chairman, in our senate----
    Chairman Shaw. I was just told that you're the Bill Archer 
of Ohio. [Laughter.]
    Mr. Cupp. Thank you, Mr. Chairman. Thank you, I think. 
[Laughter.]
    I have sat on your side of the bench in the Ohio Senate, so 
I appreciate your request for brevity, and I appreciate the 
opportunity to testify in support of H.R. 3684, but I just want 
to make two issues.
    One, I want to explain why as a State legislator who has 
dealt with unemployment compensation issues I think this bill 
is important for States and for providing a better system of 
employment security, and to assure you that States like Ohio 
are fully capable of the new responsibilities the bill would 
put on them and exercising the flexibility that is granted by 
the bill.
    The funds that Ohio gets from the FUTA trust fund are 
seriously inadequate to meet the costs of properly 
administering the employment services program. It has resulted 
in the closing of 22 local employment offices just in the last 
four years alone. Ohio once had 120 offices; we're now down to 
57. In my senate district, which includes seven counties, there 
are only three employment offices left, and I represent a 
geographical area that is big as the States of Rhode Island and 
Delaware combined.
    The Bureau of Employment Services has also cut staff and 
are operating at historically low levels. If we were to have a 
recession, we would not have the capacity to respond.
    More offices would have been closed except the State has 
put in general tax revenue--$50 million in the last four years 
alone, and that pays for services that the FUTA funds are paid 
by employers to support. So Ohioans are double-taxed in this 
regard. Employers pay enough in FUTA taxes to fund the 
employment security operations, but still money that's paid in 
by all Ohio taxpayers must be used to support the very thing 
that employers are paying the FUTA taxes for.
    For our new State budget year, which begins July 1st of 
this year, funding from Ohio's general revenue fund to support 
district offices and other support services for our system will 
go up 85 percent. The money could be used for schools; it could 
be used for children's health needs; it could be used for 
economic development purposes, but it's basically supplementing 
something that employers are already paying for. Without this 
additional State money, we would have to close an additional 15 
employment offices.
    Employers pay the FUTA tax, which is a dedicated tax to pay 
for administering the system, for the Public Employment 
Service, for veterans' reemployment assistance, and for labor 
market information. In fact, Ohio employers in 1995 paid $259 
million but got back only $102 million, less than 39 cents on 
the dollar. And I understand the newly released 1996 figures 
have made the situation even worse. And it's not unique to Ohio 
alone.
    The general assembly has passed Senate Concurrent 
Resolution 10 without dissent, which asks Congress to return 
adequate dollars to the State, to give employers a fair return 
on the taxes they pay, and I'm pleased to say that five members 
of Ohio's congressional delegations are cosponsoring your bill, 
Mr. Chairman.
    H.R. 3684 would correct the flawed system. It would give 
States adequate money to operate the system that they do. It 
would give employers a fair return. It assures unemployed 
workers adequate levels of service in the payment of benefits 
and in assistance in finding new jobs. And it will allow States 
the flexibility they need to meet current needs, to be able to 
shift some money here or there as is necessary to have the 
best-run system, and also the predictability to meet the long-
term needs.
    Mr. Chairman, members of the committee, I want to assure 
you that State legislatures are fully capable of handling this 
new responsibility. We already collect the State portion of the 
unemployment compensation tax. That amount that we already 
collect is two to three times greater than the FUTA tax we 
would be collecting under your bill, Mr. Chairman. For 60 
years, States have set unemployment benefit and tax rates, and 
States already appropriate the special administrative funds 
from employer penalty and interest charges.
    The legislature in Ohio and in other States is experienced 
in deciding how much to allocate for employment services around 
the State. We are experienced in meeting FUTA conformity 
requirements in our unemployment laws. We're experienced in 
utilizing dedicated funds only for dedicated purposes--improper 
budgeting and balancing budgets year after year, and setting 
aside funds for future needs.
    The legislatures and the governors of this country are 
already doing the things similar to what they would be doing if 
your bill passes, Mr. Chairman. We're doing it capably, and 
thank you for sponsoring the bill, because if it is passed, it 
will allow us to do an even better job of administering the 
system and serving the unemployed. Thank you.
    [The prepared statement of Mr. Cupp follows:]
    [GRAPHIC] [TIFF OMITTED]60840.027
    
    [GRAPHIC] [TIFF OMITTED]60840.028
    
    [GRAPHIC] [TIFF OMITTED]60840.029
    
    Chairman Shaw. Thank you, sir.
    Mr. Weisenburger.

  STATEMENT OF JOSEPH WEISENBURGER, DEPUTY COMMISSIONER, NEW 
          HAMPSHIRE DEPARTMENT OF EMPLOYMENT SECURITY

    Mr. Weisenburger. Thank you, Mr. Chairman, Subcommittee 
members. My name is Joe Weisenburger. I'm the deputy 
commissioner of the New Hampshire Department of Employment 
Security.
    H.R. 3684, a measure to reform the employment securities 
system, is not about power and control; it's about restoring 
the integrity of the unemployment insurance system and the 
Public Employment Service. It's about helping unemployed 
workers get back to work as quickly as possible. These programs 
have been devastated by budget cuts and mismanagement. The 
current system is inefficient; it's rule-bound, and it 
shortchanges employers and workers alike.
    Budget shortfalls have led to errors in our system, errors 
that have caused overpayments and longer periods of 
unemployment duration. Both of those issues have raised 
employer taxes at the State level, and have caused unnecessary 
expenditures from the Federal Unified Budget.
    Employers today are burdened unnecessarily with two tax 
systems for the same system, costing them hundreds of millions 
of dollars a year. Employment services to workers and to 
employers have deteriorated. The work test, a function 
necessary to determine an individual's continued eligibility 
for unemployment benefits, is a thing of the past in most 
States.
    H.R. 3684 will reverse the negative direction our program 
is experiencing. It is a mechanism that would allow for 
adequate appropriations while at the same time having a minimum 
impact on the Federal budget. It consolidates employer tax 
filings into a simple tax, a single tax collected by the 
States, and, most importantly, it ties the Public Employment 
Service to the unemployment insurance system, ensuring that 
workers will be provided with re-employment services after 
experiencing unemployment.
    Last year you reformed the welfare system. This year it is 
likely that the Congress will reform the job training program. 
Governors need the flexibility to manage both of these programs 
along with the unemployment insurance program, and to leverage 
the resources of these programs to provide the needed services 
at the State and local levels. Transferring the authority to 
collect the taxes and administer this program to the governors 
at the State level, and to the State legislatures, will allow 
us to make all three programs successful.
    Finally, Mr. Chairman, I'd like to discuss how the 
employment securities system is funded by the U.S. Department 
of Labor. Section 302 of title 3 of the Social Security Act 
requires the Secretary of Labor to provide adequate funds for 
the proper and efficient administration of the State's 
unemployment compensation laws. As you know, employers this 
year will pay about $6 billion in FUTA taxes. Only 80 percent 
of that, $4.8 billion, will go into the administrative account. 
The administration's budget for this year is $3.7 billion; $200 
million of that is for a one-time expenditure for the year 2000 
problem, leaving $3.5 billion available to the States for the 
proper and efficient administration of not only the 
unemployment insurance system, but the Public Employment 
Service, labor market information programs, veterans' programs, 
work opportunity tax credits, alien labor certification--a 
whole number of programs that support the workforce.
    This year the President's budget is the same $3.5 billion. 
By the Department's own admission, the Fiscal Year 1998 
appropriation for the unemployment insurance program is $305 
million short of what is necessary for the proper and efficient 
administration of the State's unemployment compensation laws. 
The President's budget for Fiscal Year 1999 raises that to $365 
million short.
    If the Secretary has a lawful responsibility to request 
funds for the proper and efficient administration of the 
program from the Congress, why isn't the Department of Labor 
doing that? This shortfall is the result of the Department 
funding other initiatives for which there is no revenue in the 
Department of Labor's budget--programs such as School to Work, 
programs such as One-Stop Career Centers.
    Mr. Chairman, bad things happen to people when they're 
unemployed. Families break apart; child abuse and spousal abuse 
increase; crime increases; drug and alcohol abuse increases; 
debt rises; families stop investing in their children's 
education; they stop volunteering. These are problems, social 
ills, that follow unemployment.
    The employment security system works to relieve the workers 
of this terrible burden of unemployment. Why wouldn't this 
country invest fully in the employment securities system? This 
year 18 million unemployed workers, 1 out of every 7 workers in 
this country, went to the Public Employment Service looking for 
work. We were able to place 3 million of those 18 million. That 
means 15 million unemployed workers did not get help from the 
Public Employment Service because we did not have the resources 
to help them.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]
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    Chairman Shaw. Mr. Jamerson.

STATEMENT OF DOUGLAS JAMERSON, SECRETARY, FLORIDA DEPARTMENT OF 
                 LABOR AND EMPLOYMENT SECURITY

    Mr. Jamerson. Good afternoon, Mr. Chairman and members of 
the subcommittee. I am very pleased to be here today and to 
have this opportunity to testify before you on H.R. 3684----
    Chairman Shaw. Douglas pull that mic to you, if you would, 
sir. Thank you.
    Mr. Jamerson [continuing]. The Employment Security 
Financing Act of 1998.
    Let me begin my remarks by commending you, Mr. Chairman, 
for your prescience in sponsoring such a comprehensive reform 
package. H.R. 3684 will provide welcome relief to States such 
as Florida that receive a disproportionately low return of FUTA 
tax revenue.
    H.R. 3684 represents a bold departure that holds the 
promise of a future in which the unemployment compensation 
system will be able to fulfill its mission in a rapidly-
changing workplace.
    We in Florida are blessed by a continuing strong national 
economy that supports the lowest level of unemployment in 
modern history. However, we would be naive to think that the 
cycle of growth will continue unabated. The very nature of work 
and one's relationship to the workplace is in the process of 
being redesigned. The dynamics of the employer-employee 
relationship is undergoing profound evolution. In this setting, 
the goals envisioned by H.R. 3684 could not come at a more 
opportune time.
    I would like to discuss the provisions of H.R. 3684 with 
you in the context of the impact that I believe that they will 
have on the State of Florida and the system that I am charged 
with overseeing.
    I don't know if I'm stopping, but you might have to stop 
for me [referring to the bells ringing]. [Laughter.]
    As I understand it, major tenets of the bill would assign 
responsibility for collection of FUTA taxes to the State agency 
beginning in the year 2000. It would also authorize 
expenditures from State administrative funds of an amount not 
to exceed $245 million annually for Fiscal Years 2000 through 
2003, subject to appropriation by the State legislature.
    These administrative dollars could then be used to provide 
for collection of the FUTA tax; to more effectively, I believe, 
determine whether or not those claiming benefits have made 
themselves available or able for suitable employment; to 
provide job search and placement services, including job 
counseling, testing, occupational and labor forecasting; to 
enhance employees' skill assessment and referral to employers, 
and to appropriate recruitment services and technical 
assistance to employers.
    Mr. Chairman and members of the subcommittee, this bill 
further provides for annual appropriation of 100 percent of the 
amount collected in both FUTA taxes and Reed Act monies to the 
States, beginning in Fiscal Year 2004, eliminating some of the 
caps that have been placed in the way.
    It authorizes expenditures of up to 140 percent of the 
amount appropriated to the States from employment security 
funds for the previous Fiscal Year, and it repeals the two-
tenths of a percent FUTA tax, surtax, effective 2004.
    You've heard it said here before, and I will reiterate, the 
repeal of this temporary tax fulfills the promise made to 
employers when it was originally enacted--that it is, indeed, a 
temporary tax, and that its goal was to, in fact, reduce the 
burden on employers by economic factors in place at the time. 
By shifting the tax collection process to the States, H.R. 3684 
holds the promise of decreasing the administrative cost to 
employers by establishing the State agency as the sole point of 
payment; reducing or even eliminating paperwork, due to the 
filing of one State tax return versus both a State and a 
Federal return; providing more localized services, thus, 
assuring quicker response patterns to the specific needs of the 
taxpayer.
    It is my opinion that allowing the States greater 
flexibility to appropriate administrative funds for 
unemployment compensation and employment services will lead to 
more efficient operation of the program, more exact tailoring 
of services rendered to the unemployed and job seekers, as 
designed by State legislators and the Executive Branch; a 
sharper focus by agencies on the business of employment, rather 
than dealing with budget shortfalls and administrative 
uncertainties that are inherent in the current system; a 
greater accountability by those charged with the mission of 
putting people back to work, and a direct link between the 
State appropriations process and the services rendered by the 
responsible State agencies.
    I would like to mention that there are a few areas of H.R. 
3684 that we believe need to be addressed. We believe that 
government plays a very important role in ensuring that 
unemployment compensation funds are dispersed properly. 
Clearly, this bill gives greater flexibility to integrate these 
programs into the workforce development system that we applaud, 
because in Florida we're moving very quickly in our workforce 
development effort. Our caution is that we do believe that 
eligibility and payment of unemployment compensation claims is 
inherently a function of government.
    We encourage you to remember to maintain the integrity of 
the unemployment compensation and services program, the current 
safeguards that are needed to be maintained and strengthened to 
ensure that States cannot use unemployment benefits for 
administrative funding or other purposes.
    Mr. Chairman, in closing, let me say that this committee I 
believe will have the ultimate responsibility for ensuring that 
the United States employment security program continues to 
fulfill its mission and remain focused on the needs of the 
people. The passage of H.R. 3684 will enhance the employment 
security program and allow States to individualize their own 
unemployment compensation programs to meet the needs of their 
own residents.
    With that, Mr. Chairman, I want to again thank you for your 
offer to address the committee, and I'm available to answer 
questions that you may have.
    [The prepared statement and attachments follow:]
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    Chairman Shaw. Thank you, Mr. Jamerson, for a very fine 
statement.
    Dr. Norwood.

 STATEMENT OF JANET NORWOOD, SENIOR FELLOW, THE URBAN INSTITUTE

    Ms. Norwood. Thank you, Mr. Chairman. As you all know, I 
spent three years chairing the Advisory Council on Unemployment 
Compensation, having been appointed by both the Republican and 
Democratic President, and I've also served more than 13 years 
as Commissioner of Labor Statistics with responsibility for the 
country's Federal/State labor market information system.
    The UI program is now more than 60 years old, is one of the 
most important examples of effective cooperation between two 
levels of government with shared responsibility. Although the 
overall unemployment rate for the country as a whole is 
relatively low and job growth remains quite strong, more than 
20 States still have rates higher than the national average. We 
know also that the proportion of total unemployed who received 
unemployment benefits has fallen over the last several decades.
    The solvency of the State UI trust funds must remain a 
matter of real concern. If the unemployment insurance program 
is to meet its twin objectives--to promote economic stability 
and to provide temporary assistance to workers with job 
detachment who lose their jobs through no fault of their own--
it is important that States accumulate reserves during periods 
of economic health that are sufficient to pay benefits during 
economic recessions.
    But, by the end of last year, State trust fund reserves 
were only about 80 percent of the levels they were at just 
before the last recession. Instead of building up trust fund 
reserves during these current good times, last year alone 16 
States reduced unemployment insurance taxes.
    It is clear that the States have the important 
responsibilities and powers in the administration of the UI 
program, and I believe they should continue to have them. 
However, our research demonstrated that increasing competitive 
pressures on the States has at times caused a tightening of 
eligibility standards, resulting in a reduction in coverage. 
These conditions have caused a race to the bottom among some 
States, affecting especially trust fund solvency and the 
treatment of low-wage workers.
    Of course, some States have maintained a sensible degree of 
forward-funding, but some States have not. In those States 
which do not, one extremely important purpose of the UI 
program, the provision of purchasing power during economic 
downturn, just does not work. State trust funds must be 
adequately funded in good times, so that funds are available 
for payment to workers in recession times. I am concerned that 
H.R. 3684 provides little Federal role for working toward trust 
fund solvency.
    Our research also found that competitive pressures among 
the States to attract business could lead to a continued 
decline in the proportion of workers who receive benefits, 
disproportionately affecting low-wage workers. Those working 
part-time are especially hard-hit. I believe that it is 
important to ensure that a low-wage worker not be required to 
work more hours to qualify for benefits than a higher-wage 
worker. H.R. 3697 deals with this issue, but H.R. 3684 does 
not.
    Finally, as I'm sure you are aware, Mr. Chairman, I have a 
very real interest in any action that could affect the Federal/
State statistical system. I'm pleased to see that H.R. 3697 
takes note of the importance of labor market information, but I 
am concerned about the effect of the proposed change and the 
manner in which the statistical programs are funded. I believe 
that this change could damage most of the most important 
national and State economic intelligence that the country 
produces.
    I could review all the programs, but I won't do that now. 
It's sufficient to say that these data are extremely important. 
I am concerned that H.R. 3684 makes the appropriation of much 
of the funding, apart from whatever comes out of the 2 percent 
setaside, to administer the important State activities, to 
produce State and national data, dependent on the legislatures 
in each of the States and other jurisdictions.
    We should not put programs such as this in jeopardy by 
making them dependent on the likelihood that 53 different 
jurisdictions would each year appropriate the funds required to 
maintain the quality and consistency of the national data. If 
they do not, and the history of this Nation's statistical 
system suggests that this is a very real possibility, the 
country's entire system of labor market statistics would 
suffer. Some State data would be inconsistent with those in 
other States producing national data of poor quality. Indeed, 
the Federal Government might be forced to mount new national 
surveys which would inevitably increase respondent burden as 
well as cost. I urge you to reconsider the bill's treatment of 
the method of funding for these programs.
    Mr. Chairman, I appreciate this opportunity to be here, and 
I'd be glad to try to answer any questions.
    [The prepared statement follows:]
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    Chairman Shaw. Thank you, Dr. Norwood.
    As some of our regular attendees here know, those buzzers 
mean that we've got to go down and vote, and there's two votes 
on the floor. I hope all of our witnesses on this panel and the 
next panel can stay. The Members, we will be gone for 
approximately 15 minutes, and so we will stay in recess until 
that time.
    [Recess.]
    Chairman Shaw. If you could be seated, we will commence the 
hearing.
    Mr. Levin, to inquire.
    Mr. Levin. Well, it's an interesting panel. I think there's 
basic agreement we want to try to reduce paperwork where we can 
and we don't want employers paying unnecessary taxes. 
Hopefully, we can have an open dialogue where we go from here 
without too many pre-set positions. One thing that would be 
helpful is if we get the facts--if we get a common 
understanding of the facts.
    It was mentioned that the administration's request would 
underfund the needs. I think the facts are that the 
appropriations for several years did not meet the 
administration's requests. Therefore, the administration 
reduced its request. Also, the reference, I think, Mr. Cupp, 
about the employment services, the underfunding, there's been a 
big argument here about the funding of the employment service 
and I think you need to study the history of that. Indeed, at 
one point, there was a proposal, the previous administration's, 
to abolish the employment service.
    But let me just ask, and I want it to be as constructively 
as possible, but you mentioned, Mr. Jamerson, about the need to 
individualize to meet the needs of our citizens and, with the 
welfare reform bill as we finally worked it out, there was 
flexibility within the States, but within some parameters, a 
requirement to meet health needs, daycare needs, a maintenance-
of-effort provision. We worked it out.
    Now I think each of these programs has its own 
characteristics. But individuality is one thing, but meeting 
responsibilities is something else. Unemployment in one State 
affects another and, indeed, unemployment in one State calls 
upon the Federal Government--other States--to help out. And the 
three of you come from States that, in terms of certain 
markers, are way below the norm. And the question is: How much 
individuality do we want?
    For example, recipiency rates--that's the percentage of the 
unemployed who receive benefits--New Hampshire, you compare it 
with my State of Michigan, your--New Hampshire is far less than 
even half of the recipiency rate of Michigan and you're near 
the bottom. And Florida isn't much better. You're half of--
you're better than half, but you're 20 points--percentage 
points--below Michigan. And Ohio's a bit better on recipiency 
rates, but when it comes to solvency, you're, I think, Mr. 
Cupp, in pretty bad shape, aren't you? This chart shows you--
you're at .63. You have six-tenths of a year--I think that's 
what it means--to--you'd have sixty three-one hundredths of a 
year. I think these are accurate figures, and in terms of 
replacement rates, the percentage of wages that's replaced, 
Ohio and New Hampshire are very low.
    Now, I mean, I want us to take a fresh look at this, but I 
think we want some flexibility for the States, but isn't there 
also a level of responsibility incumbent on the States. Yes, 
all three of you.
    Mr. Cupp. Mr. Chairman, Mr. Levin, in terms of the solvency 
issue, it seems to me that the benefit issue is really a little 
different issue in regards to this bill in terms of my 
testimony, because States have historically set their benefit 
levels and this bill wouldn't change that. In terms of 
solvency--and I don't know what chart you're looking at----
    Mr. Levin. Well, this is from the unemployment insurance 
service and it's the calendar year 1997 and it has Ohio at .63. 
You're tenth from the bottom.
    Mr. Cupp. We have a $2 billion surplus and we have, in 
terms of our rate structure, we have automatic triggers that go 
into effect when there isn't a sufficient safe level in our 
fund. And this was agreed to by the legislature and by business 
and labor interests years ago. And so when there is a need to 
replace the fund or to add additional money to it, the rates--
increased rates automatically trigger and the money will go 
into the system. So we believe we do have a sufficient safe 
level.
    Mr. Levin. Well, I mean, there can be agreement in the 
State. That's part of the dilemma of one proposal. It would let 
every State set its solvency rate and it's interesting, here 
New Hampshire has a much higher solvency strength. In fact, 
it's more than three times Ohio and what that means is that 
essentially every State sets its own solvency rate and when it 
gets into trouble, you come looking here. I think that's what 
it means.
    And we've been through the pain of regional recessions. 
Each of you should understand that. Surely you should, from 
Ohio, and I think Florida, which came later. And we had immense 
difficulty responding to that because only a number of States 
were impacted and we had to convince the majority of States to 
cough up their taxpayers to pick up, through Appropriations, 
the funding so there would be loans available and so that there 
would be extended benefit.
    So--and I'll finish, Mr. Chairman--I think we need very 
much to take a fresh look, that we've got to look at the blend, 
and I'll finish. If you look, Mr.--you talked about what you're 
getting now in FUTA return, 38 percent. In 1992, Ohio got 188 
percent. New Hampshire got 154 percent. Florida got 205 
percent. You got double what you paid in because of the 
recession and I think we ought to dig out what the figures were 
for 1983 and 1984 in Michigan and Ohio and States that were 
impacted, what we got back compared to what we paid in. Because 
the recession of 1983, 1984, 1985 was much, much more severe.
    And our fund, our proposal, will increase the returns to 
States for FUTA. That should happen. But there is an insurance 
principle that has to be built in here.
    Chairman Shaw. In looking at the chart that you've been 
referring to, it's not a snapshot, it's a chart that goes back 
during the last recession. Mr. Weisenburger, are you familiar 
with this? And would you like to comment on that?
    Mr. Weisenburger. Yes, I am. The chart that covers the 
1991, 1993 recession includes about $12 billion under the 
Extended Emergency Unemployment Compensation Act, which was a 
Federal--100 percent federally funded extension of unemployment 
benefits because the extended benefit program that the States 
run did not work. So this was not a return of FUTA dollars to 
the States, as the Department said. An additional $16 billion 
came from Federal General Revenue. The $12 billion balance in 
the EUCCA Account was literally stolen from the EUCCA Account 
to fund EUC, the emergency unemployment compensation program, 
simply because the Extended Benefit program, as it's currently 
written, didn't work--only worked in nine States. And the 
Congress, being very concerned that the program didn't work, 
passed an Emergency Unemployment Compensation Act and the $12 
billion from the EUCA account is being included in the 
Department's documentation and called a return on FUTA revenue 
to the States when, in fact, it was not. New Hampshire received 
no money from the Federal Extended Benefits program.
    Chairman Shaw. I think, you know, that just throws these 
figures out. They're just totally--they have no application. 
But what I would like to do is to have our staff come up with a 
year-by-year chart to chart these amounts for these States so 
we can really take a close look at it and take out the special 
appropriation that was made at that time. So we do have honest 
figures to look for and then we can go back and look at it 
because it's something that we should be concerned about.
    Dr. Norwood.
    Ms. Norwood. Yes.
    Chairman Shaw. I share your views on the importance of 
maintaining good data about the unemployment benefit receipts 
and other labor market information. How can we best make sure 
that the data is still available if we do press ahead with H.R. 
3684?
    Ms. Norwood. Well, I'm not sure, because what your bill 
does, really, is to return to the States for purposes of 
unemployment insurance, the money, the 2 percent setaside is 
relatively small considering that it goes to the Secretary of 
Labor to do the--whatever--oversight, and I think that 
everybody agrees there should be at least some reporting to the 
Federal Government and the IRS and a variety of other programs.
    The Bureau of Labor Statistics gets about $53 million in 
the latest budget for the Federal/State programs. All of that 
goes to the States. I mean, BLS is a pass-through. The Congress 
approves this. It goes into the BLS budget. BLS turns all of 
that money over to the States. It retains none of it. I don't 
see how, out of the 2 percent set-aside, the Secretary of Labor 
could possibly take $53 million out of about--what--$120, I 
hear, and put it into statistics.
    Therefore, what would happen is that you'd have to go to 
every--every State would have to go to its own legislature and 
I can just tell you that what would happen is some States would 
approve it and some wouldn't.
    Chairman Shaw. Well, how much would it take?
    Ms. Norwood. Well, for this year, it's about $53 million, 
as I understand it, that the States get. I'm not--I don't know 
what it would be next year or what it was last year. But this 
is something that's agreed to between the Bureau and the 
States. But I think it's indicative of the kinds of problems 
that exist when you have a set-aside. The other point is that 
that whole fund could go down if the taxes are reduced, of 
course. And, as I pointed out, 16 States have reduced the tax.
    So I'm very concerned about that. There is some confusion, 
I think, because it comes in and--the labor market programs 
come in in several places in the law. But the problem is the 
amount that is there. And it's indicative of what is happening, 
really, when you take a set-aside of a fixed pot of money for 
some very good programs that exist. I mean, I recognize that 
statistical programs have to take their lumps with everybody 
else. We've done that. But I'm very worried about this, because 
I'm afraid that what it will do is increase the burden on 
respondents.
    Chairman Shaw. Mr. Jamerson, how do you explain the slow 
return that the State of Florida gets on the unemployment taxes 
paid?
    Mr. Jamerson. Mr. Chairman and Mr. Levin, I think the slow 
return on the investment is, again, a factor--and I'm learning 
this. My UI director is here with me--based upon what I think 
this bill--one of the things this bill attempts to address is 
the formula, the formula that currently exists is arcane and 
perhaps needs to be revisited in some fashion. And that's what 
I would expect part of your legislation to do; look at this 
formula. The recipiency rate, as I understand the recipiency 
rate, that's only one factor that's brought into the equation 
to determine the amounts. And, as far as Joe said, the EB, as I 
understand the situation, Florida won't be triggered by it.
    So we would hope that, as the discussion evolves around 
your legislation, your good legislation, there would be a way 
to look at this formula which has, I believe, outlived its 
usefulness, Mr. Chairman, and that's part of Florida's problem 
in getting our--what we call a fair share.
    Chairman Shaw. Thank you.
    Mr. Levin. Let me just take a few minutes if I might to 
finish this off. Do you favor the improvement in the triggers 
in the bill that Mr. English and Mr. Rangel and I have 
proposed?
    Mr. Cupp. I'm not familiar with them.
    Mr. Weisenburger. We believe that changes need to be made 
in the extended benefit program that allow the program to work 
in States that have a need to extend benefits. In New 
Hampshire, we just recently passed a total unemployment rate 
trigger on top of a trigger that doesn't work. We have not 
triggered on an extended benefit since February of 1981. This 
year our legislature enacted what it is in H.R. 3697.
    Mr. Levin. Okay.
    Mr. Jamerson. I'm not that familiar with them either, Mr. 
Levin.
    Mr. Levin. All right. Let me just say that--I take it 
that's more or less yes. You know, the problem is that your 
proposal has no improvement in the Extended Benefit program. 
There isn't one, except as the States would provide it, as I 
understand it. And let me just say something--and Mr. Shaw, I 
think it would be good to look at these, at the figures, 
because, you know, we tried for years to improve the Extended 
Benefit program and it was those improvements were opposed by 
the people who are sponsoring Mr. Shaw's bill. We fought like 
the dickens to do that and we could not get the votes. And I 
think it reflects, Mr. Jamerson's, your statement, ``too much 
power in the hands of the States and the program loses its 
national character and could lead to a race to the bottom.'' 
But, you know, if we had improved the trigger, Mr. Shaw, these 
figures----
    Chairman Shaw. By the way, my bill does have the Extended 
Benefit provision in it. So your character----
    Mr. Levin. With any improvement in the trigger?
    Chairman Shaw. It continues the way it is. Our bill attacks 
the administrative problem, which I think you would admit is a 
nightmare and it's a damn waste of money.
    Mr. Levin. I think there are real problems. I don't think 
you want to destroy the partnership in doing so. And all I can 
say is, if there had been an ample trigger mechanism, these 
figures of 205 for Florida in 1992, 154, and 188 would have 
been probably more or less the same, except instead of the 
money coming from the General Treasury, Mr. Weisenburger, they 
would have come from the unemployment funds.
    And so we'll take a look of these figures, but if there had 
been an appropriate trigger that some of us had fought for for 
years, I'm not sure you wouldn't have received much more in 
1992 than you paid in, because you would have triggered. So you 
ought to be in here fighting to change and improve the trigger 
mechanism. That's what you should be doing, in addition to 
straightening out the administrative programs.
    Chairman Shaw. You through? [Laughter.]
    Okay, I would like to--perhaps someday you will share with 
me these figures that are fed to you by the administration that 
we don't get. Well, I didn't get them. I don't know where you 
got them.
    Mr. Levin. Oh, no, no. They're not Fed--I mean--what? 
They're published figures. I mean, they're not fed to me by 
anybody. I just read them.
    Chairman Shaw. Just pull them out of the air, I guess.
    Okay, lady and gentlemen, I appreciate your testimony.
    Mr. Levin. Thank you.
    Chairman Shaw. Now we will bring our final panel. Mr. 
William Petz, Jr., manager, Payroll and Unemployment Taxes, USX 
Corporation, Pittsburgh, Pennsylvania; Mr. John P. Davidson, 
staff attorney, Chrysler Corporation, Auburn Hills, Michigan; 
and Marc Baldwin, who is the assistant director of the Public 
Policy Department of American Federation of Labor and Congress 
Industrial Organizations.
    Excuse me for laughing, but it's interesting to note that, 
two chairs down, the man from labor sits. [Laughter.]
    Well, we might have a standoff.
    Mr. Levin. Actually, there are good relationships between 
them.
    Chairman Shaw. Mr. Petz.

     STATEMENT OF WILLIAM PETZ, JR., MANAGER, PAYROLL AND 
      UNEMPLOYMENT TAXES, USX CORPORATION, PITTSBURGH, PA

    Mr. Petz. Thank you, Mr. Chairman.
    Chairman Shaw. And again, I have all of your full 
statements which will be made a part of the record.
    Mr. Petz. Good afternoon to you, Mr. Chairman and Mr. 
Levin.
    Again, my name is William Petz, Jr. I am manager of the 
payroll and unemployment compensation taxes for USX 
Corporation, a major worldwide producer of steel products, 
energy, and oil and gas, headquartered in Pittsburgh, 
Pennsylvania.
    I thank you for the invitation to speak today in support of 
H.R. 3684, the Employment Security Financing Act of 1998. USX 
would like to take this opportunity to commend Chairman Archer 
and especially you, Mr. Chairman and cosponsors for this 
historic step in advancing the reform of the Federal 
Unemployment Tax administrative finance process.
    Over the years, USX has been at the forefront in support a 
sound and efficiently run State UC program. Our company 
believes that H.R. 3684 will bring those characteristics back 
to the program. As you know, State UC administrative expenses 
are funded solely by FUTA dollars and the funding level must be 
such that claim processing and job search services for the 
unemployed individual are not jeopardized by the underfunding 
of Congress.
    However, in recent years, Congress has funded less than 100 
percent of the State UC administration costs and this has 
resulted in a serious deterioration and service for employers, 
unemployed workers eligible for benefits, and other job 
seekers. Annual FUTA payments by employers total nearly $6 
billion. The Congress has been appropriating only about 60 
percent or $3.5 billion.
    This lack of sufficient funding has forced the State UC 
agencies to cut critical services that affect the unemployed 
worker, such as work search and counseling. It has also 
decreased the State's ability to monitor and prevent fraudulent 
UC payments. In addition, various States have taken it upon 
themselves to fill the deficiency in funding by Congress to 
enact over $200 million in supplemental State payroll taxes on 
business. In effect, USX and other employers are paying for UC 
administration costs via three forms: FUTA tax, through State 
supplemental payroll taxes, and through inflated UC tax rates 
by longer benefit durations.
    This is particularly frustrating for employers given that 
the FUTA trust fund accounts contained over $19 billion at the 
end of Fiscal Year 1997 that was primarily being used to offset 
general spending by Congress. H.R. 3684 will end that kind of 
productive over-collection of more than $2 billion a year in 
FUTA taxes. It will assign the responsibility for the 
collection, reporting and appropriation of FUTA tax to the 
States.
    USX believes that with additional administrative financing, 
the State's will be encouraged to run a more efficient UC 
benefit and employment service program for the unemployed 
individual without taking anything away from current claimant 
rights and privileges or veterans or LMI statistics.
    USX strongly supports H.R. 3684 for the following reasons: 
Sufficient funding for administration of State UC programs will 
be provided.
    The FUTA surtax of two-tenths will be repealed after the 
year 2003. An example of how it affects an employer, USX 
currently pays a surtax of over $.5 million each year. Just to 
pay for this temporary surtax obligation, USX must sell about 
$7,100 tons of steel products and over $100,000 of equivalent 
barrels of refined oil products.
    H.R. 3684 will eliminate the need for that $200 million of 
State supplemental taxes. It will also promote lower UC 
spending and taxes, because each State will become the tax 
collector, the appropriator, and the overseer of how the 
employers FUTA tax is used.
    The bill will eliminate the duplication and collection of 
reporting of UC taxes. It is estimated to save employers most 
of the $100 million which is annually being paid to the U.S. 
Treasury by the FUTA administrative fund for these services.
    And finally, H.R. 3684 will codify the quarterly payment of 
FUTA and State UC taxes. USX does not support the 
administration's Fiscal Year 1999 proposal to pay and support 
FUTA and State UC taxes monthly, which is nothing more than a 
gimmick that does not actually raise any new revenue. More 
importantly, if the administration's proposal were enacted, it 
would triple the reporting for USX. Presently, it costs about 
$7,000 for us to make our reports and deposits of FUTA tax and 
State UC taxes. It would triple that burden to around $21,000. 
It would also place another unfunded mandate on employers and 
States.
    In summary, USX supports H.R. 3684 because it finally 
addresses the problem of underfunded administrative financing 
for State UC programs. It will allow each State to control its 
own UC program with sufficient funds being provided to pay out 
UC benefits to the jobless and deliver needed work search 
assistance to unemployed individuals while maintaining the 
program's integrity. It is definitely a win-win-win proposition 
for employers, the jobless, and State UC agencies. Employers 
FUTA dollars will be used as it was intended.
    This, Mr. Chairman, ends my prepared remarks.
    [The prepared statement follows:]
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    Chairman Shaw. Thank you.
    Mr. Davidson.

    STATEMENT OF JOHN P. DAVIDSON, STAFF ATTORNEY, CHRYSLER 
                 CORPORATION, AUBURN HILLS, MI

    Mr. Davidson. Thank you, Mr. Chairman, Mr. Levin. I 
appreciate the invitation to address you this afternoon on H.R. 
3684.
    As an opening comment, I want to say that Chrysler strongly 
supports an efficiently run employment security system 
throughout the country. While supporting this system, we also 
recognize the need for individuality among the States, as they 
all have their special circumstances to be addressed.
    The FUTA tax which is the subject of H.R. 3684 is the issue 
being addressed here today. This tax is dedicated to financing 
the administration of the employment security system and 
creates a reserve for the payment of Federal share of extended 
benefits. Employers pay approximately $6 billion a year in FUTA 
taxes.
    Throughout the years I have seen many State employment 
security agencies struggle to deliver the services because they 
do not have the funds avot have the funds available. Being one 
of the large customers of the State agencies, we are concerned 
about these reductions. The reduced funding has left the 
State's with the following alternatives: One, supplement the 
administrative funds for their State general revenues; two, 
assess a special State tax solely for the supplementation of 
the available funds; or three, cut services by closing branch 
offices or diverting available resources to other functions.
    States should not be confronted with such choices. The 
funds are there, but are being diverted to other purposes not 
intended by FUTA.
    Employers and workers rely on the services of the 
Employment Security Agencies. We have instructed our plants to 
use the employment service exclusively to obtain workers. We 
also rely on the unemployment insurance agencies to pay 
benefits in a timely and accurate manner to eligible employees. 
It is troubling that our employees are unable to receive the 
services while employers continue to provide adequate revenue 
through the FUTA taxes.
    Perhaps the greatest concern is the loss of program 
integrity. Based on USDOL quality reports, error rates of 10-15 
percent are not unusual. In 1997, nearly $20 billion were paid 
in unemployment benefits. That means, assuming a 10 percent 
error rate, nearly $200 million were paid incorrectly. That is 
money employers have paid and entrusted to the States to 
properly administer. Unfortunately, most of the money paid in 
error is never recovered and the trust funds and the employers 
suffer from that loss.
    The biggest change which has taken place under the guise of 
efficiency is the use of automated systems for applying and 
certifying for benefits. While this is good administratively, 
it adds to the decline in program integrity. Let me illustrate 
with a couple of scenarios that we have encountered.
    When States started allowing claims by mail, we actually 
had a former employee certifying for and receiving benefits 
while he was in prison. Another situation that we have caught 
where improper benefits were paid is when a person is 
hospitalized. With phone certification, the individual can call 
from his hospital bed. How can these claims be caught?
    Don't misunderstand, I am not advocating returning to the 
old days when people were lined up around the block waiting up 
to six hours to be serviced. Instead, I'm advocating more funds 
for the audit and the police functions at the State agencies. 
Improper benefits are a direct cost to employers since they are 
charged to the State's experience rated trust funds.
    How does this address the need for H.R. 3684? Where States 
have adequate funding to administer the program, they can staff 
the agencies to improve the integrity and the services 
provided. The squeeze caused by the reduction in funding has 
forced States to seek approximately $200 million per year from 
other sources, notwithstanding the fact that, there is $2 
billion in surplus FUTA being collected.
    The main feature of H.R. 3684 is the establishment of the 
State specific accounts for the deposit of FUTA revenues. It 
will be up to the State legislatures to appropriate the funds 
needed for proper administration of their system. The funds 
will still be held by the U.S. Treasury, as are the benefit 
trust funds.
    The second feature is the collection of the FUTA by the 
States. This would eliminate the need for the employers to file 
two tax returns each quarter. It would also eliminate the 
collection expense currently charged by IRS while increasing 
the integrity of the tax collection.
    And then, there is the notorious two-tenths temporary tax. 
This amounts to an unnecessary $1.5 billion per year of 
employer payroll taxes. The purpose of this tax was to repay a 
loan for emergency benefits in the mid-1970's. This loan was 
repaid in 1987. There is no need for that tax to be continued 
at this time, much less, to the year 2007. H.R. 3684 will 
repeal this tax in 2004.
    I'm not going to lengthen this testimony discussing the 
rest of the bill--others will be doing that. I'm here to say 
that we support this bill and hope the committee and other 
members of Congress will support its passage.
    Mr. Chairman, thank you for your attention.
    [The prepared statement follows:]
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    Chairman Shaw. Thank you, Mr. Davidson. I'd like to make 
one correction in your testimony. I hate to do it, but the math 
was incorrect. Ten percent of 20 billion is 2 billion, not 200 
million.
    Mr. Davidson. I'll accept that correction. [Laughter.]
    I'll just add, I think that just highlights the problem 
further.
    Chairman Shaw. Mr. Baldwin.

 STATEMENT OF MARC BALDWIN, ASSISTANT DIRECTOR, AFL-CIO PUBLIC 
                       POLICY DEPARTMENT

    Mr. Baldwin. Thank you, Mr. Chairman and Members of the 
Subcommittee, for the opportunity to present our views this 
evening. I've submitted a statement for the record, so I'll 
briefly review the key issues in that.
    Our UI system is a program of roughly thirds. About one-
third of the unemployed receive benefits, one-third of their 
last wages are replaced, and one-third of those who enter the 
system exhaust their benefits before finding a new job. The 
record of State programs fall short of the goals of the UI 
system in the new economy.
    The road to a one-third system is not travelled because 
governors or State agency's want to restrict access or because 
State agency's are poor administrators. The one-third system 
emerges precisely because of the decentralized structure of the 
benefit side of the program which devolution advocates 
mistakenly would expand. Because States face competitive 
pressures from their neighbors, they have strong incentives to 
limit benefits in the name of business climate. Whatever we may 
think of the ultimate effectiveness of this economic 
development model, the fact that benefit recipiency rates have 
fallen from 75 to 35 percent over the last 20 years is directly 
related to interstate competition in this downward pressure.
    H.R. 3684 and the other devolution proposals would subject 
additional elements of the UI program to this pressure, 
limiting the national effectiveness of the program. Instead of 
following established social insurance principles, like pooled 
risk and a broad revenue base, devolution proposals force 
individual States to rely almost entirely on their own funding 
bases.
    This isolation combined with interstate competition 
provides an incentive to underinvest in the Nation's re-
employment system, promoting privatization and shifting funds 
from administration to benefits. Clearly, by maintaining FUTA 
funds in the unified budget, the current system also contains 
incentives that encourage underinvestment, in this case, in 
pursuit of a balanced Federal budget.
    But devolution cures this structural problem by creating 
more severe structural problems. The concern about Federal 
trust funds being unreal or not fiduciarily sound, as was 
mentioned this morning, to me, is only heightened by a proposal 
to create 50 such State-based funds. H.R. 3684 dismantles the 
current system of pooled risk and reduces funding by one-
fourth, putting State programs in jeopardy during recessions.
    In an attempt to rebuild the current broad-sharing of risk, 
the proposal suggests two small funds--a revolving loan fund 
and a small State fund. Our written testimony details the 
administrative difficulties with these inadequate attempts to 
rebuild risk-pooling which the proposal dismantles. More 
broadly, this dramatic structural change runs counter to all 
insurance principles--pooling of risk, fair distribution, and a 
broadest possible funding base.
    H.R. 3697 introduced by Congressman Levin and English of 
this subcommittee propose reform which is in keeping with these 
fundamental principles. It provides incentives funds for States 
which choose to address administrative problems facing 
temporary and contingent workers. It provides an increase in 
administrative funds generally. It establishes a solvency 
measure linked, again, to incentive funds and it creates an 
extended benefit trigger which will work, unlike the current 
measure which has resulted in Congressional emergency action 
when the EB system failed to trigger on despite high 
unemployment.
    These reforms are overdue. They have bipartisan support and 
they should be passed as a first step toward longer term 
solutions.
    Although we see the devolution proposals as a dangerous 
rejection of the principles which should govern insurance 
programs, we are also aware of the perils caused by the current 
situation. Both the administration of the program and the 
benefits side of the program are in need of reform. On 
administration, the devolution proposal seeks to address the 
level of funding to States by altering both the level and the 
distribution of funding. A dialogue should promote solutions 
which combine the best outcomes both for levels and for 
distribution on the following lines:
    Administrative funding to be expanded while maintaining 
national risk-pooling and Federal stakeholder commitments. The 
distribution of funding among the States should more accurately 
reflect the cost of an effective system in each State and 
actual State expenditures. And finally, the countercyclical 
impact of the system should be improved through extended 
benefit reform and solvency measures.
    H.R. 3697 and H.R. 3684 should provoke a broad debate about 
stable financing for a system which meets the three goals of 
unemployment insurance as outlined in our testimony. Reforms 
based on devolution only highlight inequities among the States 
and reject sound principles for organizing social insurance. 
Instead, we look forward to a dialogue around expanded funding 
and improved formula for distributing funds on the basis of 
need and countercyclical reforms.
    Thank you.
    [The prepared statement follows:]
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    Chairman Shaw. Mr. Levin.
    Mr. Levin. Well, it's late. I'll be brief.
    I agree with you completely about the monthly. I don't 
think it's part of our proposal. It's a budget proposal. I 
don't think it will happen. I also agree about the underfunding 
of the administrative funding and we try to handle that. I 
would simply urge--you come from a very responsible 
corporation--that we try to proceed not kind of automatically 
choosing upsides here or getting caught in labels, but try to 
look at what the problem is.
    I think one of the problems with the proposal with the 
majority, at this point, is that if you don't have a 
substantial sharing of the risk, it can affect the 
administrative provisions, as well as the other side of it. I 
think you have more employees in States with high recipient 
rates than low. To some extent, the administrative formula 
today reflects how many people the States are servicing, and I 
would think you would want to keep some reflection of that.
    Also, you have, I think, an unusual or beyond average 
proportion of your employees in States that have had a very 
cyclical past. And, if you don't have some sharing of the risk, 
you're going to have some real problems. I don't think the 
automation is the result of the shortage of administrative 
fund. I think the history, for example, Michigan is something 
else. That went in into effect I think, when there was a much 
larger receipt of administrative fund. The present proposal on 
the employment service side in Michigan is to abolish and to do 
things by machine--employment placement.
    So, I would hope that we can take, Mr. Chairman, a look at 
those administrative problems. Extended benefit program needs 
to be looked at. The last thing we want to do is to maintain 
the status quo, I would hope, which your proposal does. So, 
this isn't going to happen this year. We've got some time.
    Chairman Shaw. Whose proposal maintains the status quo?
    Mr. Levin. On extended benefits?
    Chairman Shaw. Oh, on extended benefits.
    Mr. Levin. I would hope that we could sit down and have a 
true dialogue about looking at the unemployment system in an 
age which is very different from when it was formed. But, I do 
think that reflexive shifting to the States at a time when it 
isn't only globalization internationally, there is 
globalization nationally, is something we really need to look 
at and I hope we can all do it together.
    I don't know, Mr. Davidson, and Mr. Petz and Mr. Baldwin, 
you want to comment.
    Mr. Davidson. Mr. Chairman, if I may respond to it briefly?
    Mr. Levin, I don't want my comments with regard to 
automation to sound like I disapprove of that. I do agree that 
it is a good thing to have. The concern that I had that I tried 
to address is that because of the automatization, the integrity 
of the program is suffering. And because it is suffering, it 
needs a tighter policing or auditing or control within the 
State agencies. Unfortunately, the insufficient revenues 
prevents them from doing that.
    This is the point that I was trying to get to.
    Mr. Levin. I would just say that I worry about the quality 
of the system. In fact, one of my objections to what's proposed 
in Michigan in terms of the abolition of the employment service 
is that, I think, you're never sure who's looking for work. So, 
let's not argue that--discuss it.
    But, I just hope all the focus isn't on the .2 percent. 
We've debated that off and on and our proposal continues to 
2003, and I understand the resistance to it. But, let's also 
focus on the larger needs of tailoring an unemployment system 
in this age where more and more dislocation is not temporary, 
but permanent. And where we need to be sure where people like 
we reformed the welfare system, if they're going to be laid 
off, in more cases than was true 20 years ago, permanently, are 
trained and re-trained to go back to take another job.
    Mr. Davidson. Thank you, Mr. Chairman.
    Chairman Shaw. We've brought up reforming the welfare 
system, and I think somewhere during this debate, I have to 
remind you, Mr. Levin, that all through this debate on welfare 
reform race to the bottom, was used over, and over, and over. 
Lack of confidence in the State was expressed over, and over, 
and over, and all of this came from your side of the aisle--a 
bunch of it from you.
    Mr. Levin. No, no, no. You never heard me once say that 
about race to the bottom.
    Chairman Shaw. I never heard you say that----
    Mr. Levin. I never used that term.
    Chairman Shaw. Well, you're the only one that didn't.
    Mr. Levin. I never.
    Chairman Shaw. But anyway, we had confidence in the States. 
I have confidence in the States. Frankly, the three gentlemen 
representing States here today, I have ultimate confidence in 
them and I have a total lack of confidence in the present 
system and the way it's being administered.
    There is no question in my mind, tax on employment is the 
most regressive tax you can have and I'm sure all of us would 
agree to that--business and labor. And this is part of the 
compensation of the people you represent in labor unions. It's 
a question of this being a tax on their employment. Now the 
fact that the employer pays it, makes no difference. It's still 
a tax on employment and it's regressive.
    I think it is really, really outrageous that these huge 
surpluses that we have built up, that don't even exist--and you 
talk about actuarialy sound. Nobody is going to say a program 
where there ``ain't no money in it'' is actuarialy sound. It's 
an IOU from the taxpayers that they're going to have to come 
up, cough up with the money on the future budgets, future 
congress's and future administrations. There's no recession out 
there. I know that--you know that--we all know that. There are 
going to be times when that so-called stealth surplus is 
depleted and comes down to zero, but that's just simply a book 
entry because it's going to be taxed against the taxpayers of 
the day of the recession. We know that.
    There is no surplus. It is a fraud. It is a total fraud and 
I think the quicker we face up to that, and I think the .2 
percent is a very, very valid issue. A temporary tax is a 
temporary tax. And it should become a permanent tax. And to 
make things even worse, it's kept as a permanent tax in order 
to make it look like we're balancing the budget.
    I do have one question that I'd like to ask you, Mr. 
Baldwin. As I read your testimony, on page 2, you discuss 
various ways that States have narrowed eligibility for benefits 
which you oppose, and I can understand that. Later on page 6, 
you argue that more extended benefits should be provided, half 
of which would come from State taxes through the use of a more 
generous trigger mechanism. Then, on page 7, you talk about how 
States should use alternative base periods allowing more 
individuals to qualify for unemployment benefits.
    Following through on your position on this proposal would 
result in more unemployment benefits being paid out. I totally 
understand that. Yet, later on page seven, you talk about the 
importance of establishing and reaching a solvency target that 
is, by building up larger reserves in State benefits accounts 
to meet needs of a recession. Now how do you reconcile these 
competing goals? And wouldn't it require huge State benefit tax 
increases to both provide more regular and extended benefits, 
and ensure that sufficient funds are built-up for their future 
needs?
    Mr. Baldwin. Well, clearly, it might. The extended benefit 
piece would be in the future. So, you would have funds built-up 
between now and then to cover that. That's paid for in the 
Levin-English proposal.
    The administrative side of the alternative base period 
change is covered by the Levin-English. That covers about 6-8 
percent of the unemployed. But it has a smaller price tag 
because they are not average employees. They're virtually, by 
definition, low wage employees. So, their impact on the budget 
is actually smaller than that.
    In your own State, the State estimate was extremely low. 
I'm actually quoted in the Wall Street Journal questioning 
whether it's high enough. So, I'm acknowledging that these 
things will cost some money. But I believe we have a national 
commitment to the unemployment insurance system, not just the 
administrative side, but the benefits side. It's vital to the 
countercyclical capacity of the economy. It's vital to the 
income support for individuals who lose their jobs and 
increasingly, it is the gateway to re-employment services.
    It's no accident, in my mind, that the percentage of the 
unemployed receiving benefits and the durations are moving in 
opposition directions. Fewer people are getting benefits and 
durations are climbing. Most people would say that benefit 
receipt would climb and durations would climb together because 
they have this image that people sit around. On the contrary, 
people get into the UI system and that is their gateway to re-
employment services. So, I actually think that the cost will be 
lower than a lot of folks would estimate.
    Chairman Shaw. Mr. Baldwin, I recall vividly, the hearing 
that we had on this when we were extending the benefits. At 
that time, Mr. Downey was chairman of this committee. And I 
don't recall whether I was a ranking Republican member or just 
one of the members of this committee, but from all the 
statistics we sought, people went back to work about the time 
the benefits ran out. This was clearly a trend. And to have 
more generous benefits would appear, or longer period-of-time 
benefits, particularly in good times--I'm not talking about 
really tough times, I'm talking about good times--would simply 
make the periods of unemployment even longer.
    Surely, you'll certainly--maybe without enthusiasm--but 
agree with me that people tend to look harder for jobs and tend 
to go back to work towards the end of the benefit period.
    Mr. Baldwin. That's correct. The operative question though 
is, will they find them. And in fact, because one-third of the 
unemployed actually exhaust benefits, that suggests that there 
must be something else going on in the system that extends 
their durations whether they have continued to received 
unemployed insurance or not.
    Chairman Shaw. But do you have statistical data as to what 
happens to them when they fall off of the----
    Mr. Baldwin. There was a Department of Labor study on 
benefit exhaustees in the 1980's--yes. And, I'm not sure what 
the answer is, but I know that there is a known answer, at 
least in that setting.
    Chairman Shaw. Well, we'll find out what they came up with 
back in the 1980's.
    Mr. Baldwin. There's another explanation for the spike 
right before you exhaust and that is, that you are looking for 
a job which replaces a higher percentage of your wages than 
what you're able to find. Closer to exhausting benefits, you 
give up and take the first job you can get. There's a lot of 
evidence of that in the displaced worker programs which show 
that most people have to change jobs based on--there may be 
some data in my testimony--lose up to 20 percent of their 
income. I think there's some numbers to that effect, in our 
testimony.
    Chairman Shaw. Well, I think all of us should be outraged 
by the fact, maybe for different reasons--Mr. Baldwin, you'd be 
outraged by the fact that these surpluses are building up and 
being used to balance a budget because you feel there should be 
more generous benefits.
    Business, on the other hand, feels that their payroll tax 
is being used for something for which it wasn't intended. And 
this is being used to balance a budget and they're being taxed 
unfairly.
    And I think back in the middle--I think what we have to 
remember here and don't lose sight of the fact, that a payroll 
tax is part of the compensation for America's worker. The fact, 
at the bargaining table, if we can save those monies, save some 
administrative costs that you will be looking for a greater 
share from the corporations because it will be showing in their 
income statements. And you have a great deal of interest in 
their income statement during the time of contract 
negotiations.
    So, I think this is one area where we can agree that we 
should be pushing together, and exactly where it's all going to 
shake out is another thing. But I think the present system that 
we all agree is an absolute outrage.
    I want to thank all the witnesses of all the three panels 
that we had here today. I think we've all learned a great deal. 
I think that all of us are going to have to go back to the 
drawing boards and make some adjustment, but we do agree, and 
it's fine to come away from here, and even if you don't agree 
what road we're going to take, that we're going to get out of 
this mess and we're going to start, if not in this Congress, 
we'll get the job finished up in the next Congress.
    Thank you all very much.
    This hearing is adjourned.
    [Whereupon, at 5:45 p.m., the hearing was adjourned subject 
to the call of the Chair.]
    [Submissions for the record follow:]


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