SD11 - Annual Report of the Commission on Unemployment Compensation


Executive Summary:
Senate Bill 889, passed in the 2003 Session of the General Assembly, established the Commission on Unemployment Compensation. The Commission continues the work of the Joint Subcommittee Studying the Funding Requirements of the Virginia Unemployment Trust, which was established in 1977. The legislation creating the Commission expanded the scope of responsibilities assigned to the Joint Subcommittee, which had been charged to make a study of the future funding and administrative requirements for the Commonwealth's unemployment compensation system, by requiring the Commission to:

• Evaluate the impact of existing statutes and proposed legislation on unemployment compensation and the Unemployment Trust Fund;
• Assess the Commonwealth's unemployment compensation program and examine ways to enhance effectiveness;
• Monitor the current status and long-term projections for the Unemployment Trust Fund; and
• Report annually its findings and recommendations to the General Assembly and the Governor.

The Commission's members include Senators John C. Watkins, Chairman, Delegate Harry R. Purkey, Vice-chairman, Delegate Terry G. Kilgore, Senator Yvonne B. Miller, Delegate Samuel A. Nixon, Jr., Delegate Lionell Spruill, Sr., Senator Frank W. Wagner, and Delegate R. Lee Ware, Jr.. The Commission met twice, on June 17,2003 and November 17, 2003.

KEY ISSUES CONSIDERED BY THE COMMISSION IN 2003

1. Solvency of the Unemployment Trust Fund

Initial projections indicated that the Trust Fund balance would decline from $528 million on January 1, 2003, to $176.8 million on January 1, 2004. The solvency level is projected to fall from 41.2 percent to 23.5 percent between June 30, 2003, and June 30, 2004, but to rebound to 43 percent in 2005, 67 percent in 2006, and 82 percent in 2007. The average tax per employee is projected to increase sharply, from $77 in 2003 to $138 in 2004, $171 in 2005, and $179 in 2006 before dropping again to $134 in 2007. At the same time, benefits payments are decreasing as a result of lower benefit schedules that became effective in July 2003, when the minimum weekly benefit dropped from $59 to $50, and the maximum weekly benefit decreased from $318 to $316.

2. Low First Payment Rate

A claimant can receive only one first payment in his benefit year; first payments thus provide a good estimate for the number of paid claims annually. Virginia's first payment rate is approximately nine percent below the national average. The low first payment rate may be related to the low benefit recipiency rate, which in turn is due in part to the fact that Virginia historically has had an unemployment rate lower than the national average. The Virginia Employment Commission will continue to report on this issue.

3. Tax Burden

Low-wage paying employers carry a disproportionate share of the employer tax burden. The contributions to the unemployment insurance Trust Fund come from only a portion of wages, currently $8,000. Because wages have grown faster than this tax base, employers paying higher wages (which result in higher unemployment compensation payments) are paying proportionately less in taxes for relatively higher unemployment insurance benefit payments to any former employees

4. Impact of 2003 Laws

The expected net effect of legislation enacted in the 2003 Session of the General Assembly will be to decrease Trust Fund solvency commencing in 2004 and to result in slightly higher tax levels commencing in 2005. The elimination of 50 percent of the pension offset applied to Social Security and Railroad Act pensions is expected to add 0.5 percent to annual benefit costs. The implementation of an optional alternative base period for claimants who would not qualify for benefits using the current base period determination is expected to add one percent to annual benefit costs.

5. Coordination of Workforce Training Resources

House Bill 2075, passed in the 2003 Session in partial response to draft recommendations of the Joint Legislative Audit and Review Commission, expanded the responsibilities of the Virginia Workforce Council and authorized it to give policy advice to the Governor on workforce and workforce development issues, and to provide policy direction to local workforce investment boards. The legislation also reduced the size of the Council by 14 appointees (from 43 to 29) and established the Virginia Workforce Network to replace "Virginia's Workforce Development Program."

The Secretariat of Commerce and Trade is approaching workforce coordination at the cabinet level through a memorandum of understanding signed by the Secretary of Commerce and Trade, the Secretary of Education, and the Secretary of Health and Human Resources. The Virginia Workforce Council is focusing on (i) consistency in goals and approaches and capacity among the local workforce investment boards and (ii) clear measures of accountability.

6. SUTA Dumping

State unemployment tax (SUTA) dumping occurs when a company reorganizes or acquires another company in order to obtain a lower tax rate. The Virginia Employment Commission has apprised the Commission of concerns on a national level that employers are using such strategic business practices to avoid paying taxes based on their true employment experience. The Commission will monitor this issue to assess the extent to which it is occurring in Virginia.

COMMISSION ACTIONS IN 2003

The Commission met twice during 2003. At its first meeting, it voted unanimously to accept the report documenting a two-year actuarial analysis of Virginia's unemployment compensation system by Dr. Wayne Vroman of the Urban Institute, with the proviso that acceptance does not constitute an endorsement of the report's recommendations. Dr. Vroman's report is summarized in the Report of the Joint Subcommittee Studying the Funding Requirements of the Virginia Unemployment Trust Fund (H. Doc. 30, 2003). Two of the recommendations contained in Dr. Vroman's report were accomplished through legislation enacted in the 2003 Session of the General Assembly.

The Commission received information from the Virginia Employment Commission on several issues, including the Trust Fund solvency, the low first payment rate, and the impact of legislation enacted in 2003. The Commission continued to monitor the unemployment compensation Trust Fund and issues associated with effective implementation of the unemployment compensation program.