RD2 - Annual Executive Summary of the Virginia Unemployment Compensation Commission


    Executive Summary:
    COMMISSION ON UNEMPLOYMENT COMPENSATION

    EXECUTIVE SUMMARY OF INTERIM ACTIVITY AND WORK
    January 2, 2007


    I. BACKGROUND

    Chapter 33 of Title 30 of the Code of Virginia (§ 30-218 et seq.) establishes the Commission on Unemployment Compensation (Commission). The Commission is charged with:

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

    The members of the Commission are Senator John C. Watkins of Powhatan County, Delegate Harry R. Purkey of Virginia Beach, Delegate Terry G. Kilgore of Scott County; Senator Yvonne B. Miller of Norfolk, Delegate Samuel A. Nixon, Jr. of Chesterfield County, Delegate Lionell Spruill, Sr. of Chesapeake, Senator Frank W. Wagner of Virginia Beach, and Delegate R. Lee Ware, Jr. of Powhatan County. Senator Watkins chairs the Commission, and Delegate Purkey is its vice chairman.

    The Commission met on October 30, 2006. Meeting summaries are posted on the Commission's website at http://dls.state.va.us/uncomp.htm. This executive summary of the interim activity and work of the Commission is submitted pursuant to § 30-224. This summary is submitted in lieu of an annual report.


    II. ACTIVITIES

    1. Solvency of the Unemployment Trust Fund

    The primary responsibility of the Commission is to monitor the current status and long-term projections for the Unemployment Trust Fund. The trust fund is funded by state unemployment taxes paid by employers. State unemployment tax is assessed on the first $8,000 of each employee's wages at a rate that varies depending on the trust fund solvency level and the employer's claims experience over the preceding four years. The trust fund solvency level is determined by dividing the balance in the trust fund by the statutorily-determined adequate fund balance.

    At the October 30, 2006, meeting, Virginia Employment Commission (VEC) Commissioner Dolores Esser reported that the trust fund solvency level is projected to be 70.5 percent as of June 30, 2006; for the fiscal year ending June 30, 2005, the solvency level was 54.9 %. The Trust Fund solvency level is projected to be 67 percent for each of fiscal years 2007 and 2008.

    The balance in the Trust Fund is projected to be $650.1 million as of December 31, 2006, up from $498.9 million in the previous year. The projections for future years incorporate the anticipated impact of the closure of the Ford manufacturing plant in Norfolk, which is expected to result in 2,400 layoffs at Ford, 1,700 layoffs by direct suppliers, 1,400 layoffs by indirect suppliers, and 3,150 other layoffs by affected firms.

    The average tax per employee was $162 in 2005 and is projected to decline to $149 in 2006, to $115 in 2007, and to $113 in 2008. The increases from 2003 through 2008 are the result of higher benefits schedules and the recession. Virginia's average tax per employee for calendar year 2005 ($162) is the second lowest among the six jurisdictions in the area served by the Fourth Circuit Court of Appeals. The average tax in the other five range from $154 in South Carolina to $351 in North Carolina; the national average is $300.

    The projected rise in the Trust Fund's solvency rate is due in part to declines in the unemployment rate and shorter periods of benefit payments. Virginia's unemployment rate, which was 3.2 percent in August 2006, has not been above 4 percent since January 2004. The low unemployment rate was attributed to the balance of Virginia's economy, and to its high rate of job creation.

    The VEC also reported that:

    • Total initial year-to-date claims for unemployment benefits through August 2006 were down 5 percent from the same period in 2005 and down 18.3 percent from 2004.
    • First payments of unemployment insurance benefits the first eight months of 2006 were down 6.1 percent from the same period in 2005 and down 17.8 percent from 2004.
    • Final payments of benefits in the first eight months of 2006 were down 11.4 percent from the same period in 2005 and down 28.4 percent from 2004.
    • The average duration for receipt of unemployment benefits was 12.4 weeks in August 2006, down from 12.6 weeks in August 2005.

    2. VEC Budget and Strategic Priorities

    The VEC is atypical of state agencies in that all of its administrative funding is appropriated by the federal government. The VEC's administrative funding comes from Federal Unemployment Tax Act (FUTA) payments collected from employers. The FUTA tax is imposed at a rate of 0.8 percent of each employee's first $7,000 of wages, for a cost of $56 per employee per year. In addition to paying for the administration of state employment security agencies at the federal and state levels, FUTA revenue finances federal loan funds and provides revenue for extended benefits programs.

    In 2005, Virginia received back from the federal government 30.2 percent of the amount of FUTA taxes paid by Virginia's employers. This rate, which was 32.8 percent last year, continues to be the second-lowest rate among all jurisdictions. Commissioner Esser reported on steps taken by the VEC to address the inequities in FUTA funding. These include initiatives by the Employer Advisory Committees, steps by the Secretary of Commerce and Trade to contact the Virginia Liaison Office and members of the Congressional delegation, and initiating a resolution by the National Association of State Workforce Agencies calling on the federal government to provide every state with a minimum 50 percent return of its FUTA taxes.

    3. House Bill 964

    Delegate David Bulova introduced House Bill 964 in the 2006 Session. As introduced, the bill would require the VEC to permit employers to pay unemployment taxes and file reports annually, commencing in 2007, if they employ individuals who perform only domestic service and have a quarterly payroll of not more than $2,500. Currently state unemployment tax payments and filings are made quarterly. Federal law permits annual filing and payment of Federal unemployment tax (FUTA) for domestic workers; this is done by filing Schedule H with Form 1040. Schedule H also allows employers to pay income tax and social security taxes. Four other states (New Jersey, Georgia, Oregon and Texas) allow annual state filings.

    House Bill 964 was carried over to the 2007 Session by the House Committee on Commerce and Labor, with a recommendation that the chairman request that the Commission examine the issues raised by the legislation. Delegate Bulova worked with representatives of the Tax Department and the VEC, and the Secretary of Finance, to revise the bill to address several concerns. The VEC requested that the requirement be postponed for several years in order to allow its implementation to be coordinated with the agency's new computer system. In addition, the patron sought to craft a measure that would allow eligible taxpayers to file their unemployment tax returns as a schedule to their annual state individual income tax return.

    However, an effort to combine the state income tax and unemployment tax returns was thwarted by federal conditions on eligibility for the FUTA credit. The FUTA tax is assessed at a rate of 8 tenths of 1 percent of the first $7,000 of wages paid to each worker, or $56. However, the $56 per worker tax is the net amount due after application of the federal credit, which is provided to employers that make their unemployment filings by January 31. An employer that fails to file its return by January 31 is required instead to pay FUTA tax of $434 per employee.

    Virginia's state individual income tax returns are due May 1. Consequently, if the unemployment filing was consolidated with the state return, employers would not get the FTA credit and would be required to pay $434 per employee, rather than the $56 they would pay if they filed their return by January 31. Of the other states that allow annual filings, some allow filing consolidated returns, but only for quarterly taxes and not with the annual income tax returns.

    Recognizing that the loss of the federal FUTA tax credit would be an insurmountable barrier to consolidating the state income and unemployment filings, Delegate Bulova presented an amendment in the nature of a substitute to House Bill 964 at the October 30 meeting. The substitute, like the original bill, allows annual filings of state unemployment reported and payment of tax. Changes from the introduced version of the bill include:

    • Delaying the effective date until 2009, at the request of the VEC.
    • Removing the $2,500 quarterly limit on wages.
    • Moving the deadline for filing reports and paying taxes from January 1 to January 31, to reflect the federal deadline.
    • Replacing the definition of "domestic services" in the introduced bill with a reference to the federal regulatory definition.

    The Commission expressed concern that removing the wage threshold would allow persons with several high-paid domestic workers, who might have the resources and expertise to comply with the current quarterly payment and reporting requirements, to avoid them. Such a result was viewed as inconsistent with the bill's goal of making compliance easier for individuals who are unaccustomed or ill-equipped to comply with the burden of quarterly filings and payments. The Commission concluded that the substitute should be amended to reinstate the $2,500 quarterly threshold. With this change, the Commission agreed, with one negative vote (by Senator Miller), to recommend that the amendment in the nature of a substitute to House Bill 964 be acted on favorably by the House Commerce and Labor Committee.

    4. 2006 Legislation

    In the 2006 Session, the General Assembly enacted House Bill 567, patroned by Delegate Nixon, which increased the maximum weekly benefit from $330 to $347, effective with regard to claims filed on or after July 3, 2006. With this increase, three of the other jurisdictions served by the Fourth Circuit Court of Appeals have higher maximum weekly benefits (led by North Carolina's $442) and two (Maryland and South Carolina) have lower maximum weekly benefits. The national average in 2006 is $357. Virginia's maximum weekly benefit replacement level for 2006 is 44% of the state's average weekly wage; the national average is 46%. Among other jurisdictions, the replacement rate ranges from 65% (in West Virginia) to 31% (in the District of Columbia).

    5. Other Matters

    The VEC alerted the Commission on the following matters relating to its operations:

    • The VEC is using the $67 million in Reed Act funds that were appropriated by the General Assembly in 2006 to initiate projects for (i) unemployment insurance systems modernization; (ii) implementation of the Virginia Workforce Network Information System; and (iii) enterprise architecture for the new financial management system.
    • A pilot program for the use of debit cards for the delivery of benefit payments, which promises substantial savings compared to issuing paper checks.
    • The VEC is reviewing recent federal regulations issued by the U.S. Department of Labor (20 C.F.R. Part 603) addressing confidentiality of unemployment insurance data, in order to determine what steps, if any, are required to bring Virginia into conformity.
    • An internal VEC work group has been established to conduct a periodic review of its regulations, and the group will commence work in November 2006.
    • The VEC is engaged in discussions regarding the allocation of expenses charged by VITA to federal grants. The federal Office of Management and Budget circular A-87 requires that charges be based on actual incurred costs that benefit federal grants, and that savings be credited back to the federal grants. A multi-agency Cost Allocation Work Group is working with staff of the federal Department of Health and Human Services to address that Department's failure to approve VITA's Central Service Cost Allocation Plan and its recommendation that payments be deferred until a resolution is reached.


    III. RECOMMENDATIONS

    The Commission's only recommendation from its work in 2006 was to endorse the enactment of the proposed amendment in the nature of a substitute to House Bill 964, as presented by Delegate Bulova and revised at the October 30 Commission meeting. As discussed above, the Commission concluded that the substitute proposed by Delegate Bulova should be amended to reinsert the $2,500 cap on an employer's total quarterly payroll. However, the Commission observed that the reinsertion of the cap on earnings of $2,500 per quarter for domestic workers may be reconsidered upon additional data regarding an appropriate wage limit. The only vote against the recommendation was cast by Senator Miller.

    House Bill 964 was presented to the House Committee on Commerce and Labor at its December 5, 2006, meeting on carry-over legislation. The patron the bill announced that the Commission had endorsed the substitute for the bill. The committee agreed to the patron's request to amend the substitute to increase the threshold amount of an employer's total payroll in each calendar quarter from $2,500 to $5,000, regardless of the number of domestic service employees. With this amendment, the Commerce and Labor Committee reported House Bill 964 without any negative votes.