RD5 - Executive Summary of Interim Activity and Work of the Virginia Commission on Unemployment Compensation, January 2, 2008


    Executive Summary:
    COMMISSION ON UNEMPLOYMENT COMPENSATION

    EXECUTIVE SUMMARY OF INTERIM ACTIVITY AND WORK
    January 2, 2008

    I. BACKGROUND

    Chapter 33 (§ 30-218 et seq.) of Title 30 of the Code of Virginia 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 examining 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 September 27, 2007, and November 27, 2007. 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 November 27, 2007, meeting, Virginia Employment Commission (VEC) Deputy Commissioner Nicholas Kessler updated projected data on the solvency that had been presented by Commissioner Dolores Esser at the Commission's September 27 meeting. The final data for the fiscal year ending June 30, 2007, was unavailable as of the meeting date.

    Kessler reported that the trust fund solvency level is projected to be 70.4 percent as of June 30, 2007; for the fiscal year ending June 30, 2006, the solvency level was 71.9 percent. The Trust Fund solvency level is projected to be 64 percent and 61 percent in fiscal years 2008 and 2009, respectively. The balance in the Trust Fund totaled $743 million in September 2007.

    The average tax per Virginia employee was $155 in 2006 and is projected to decline to $109 in 2007 and to $94 in 2008. Virginia's average tax per employee for calendar year 2006 of $155 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 $346 in North Carolina; the national average is $289.

    Kessler also reported that:

    Total initial year-to-date claims for unemployment benefits through September 2007 were up 0.4 percent from the same period in 2006. However, compared to the first nine months from 2005, initial year-to-date claims were down 4.4 percent.

    First payments of unemployment insurance benefits for the first nine months of 2007 were up 3.7 percent from the same period in 2006. However, compared to the first nine months from 2005, first payments were down 1.9 percent.

    Final payments of benefits in the first nine months of 2007 were up 2.9 percent from the same period in 2006, but were down 8.4 percent from 2005.

    The exhaustion rate in September 2007 was 33.3 percent, down from an exhaustion rate in September 2006 of 33.8 percent.

    The forecasted end to a period of increases in the solvency level of the Trust Fund may be attributed in part to the cessation of levying the fund builder tax, which occurred in 2006 when the solvency level rose above 50 percent for the first time in three years. Other factors include increases in final payments and average duration of benefit payments. In addition, Virginia's year-to-date unemployment rate was 3.0 percent through September 2007, compared to 3.1 percent for the same period in 2006.

    2. VEC Budget Issues

    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 2004, Virginia received back from the federal government 32.8 percent of the amount of FUTA taxes paid by Virginia's employers; in 2005, the rate fell to 30.2 percent; and in 2006, Virginia's return of FUTA taxes fell to 27.6 percent. This continues to be the second-lowest rate among all jurisdictions. Adjusting for inflation, over the past four years the VEC has lost funding of over $2 million for Job Service programs and over $6 million for the Unemployment Insurance program. Commissioner Esser projected that the VEC will face a shortfall of $21 million in 2009.

    Steps taken to address the inequities in FUTA funding include testifying before Congress and meeting with Virginia's Congressional delegation, the Governor's staff, and staff of the Department of Labor and Congressional committees. The Virginia Liaison Office is coordinating efforts with other states to address this issue. Members of the Employer Advisory Committee and the Virginia Chamber of Commerce are also actively involved in the effort to raise the percentage of FUTA funds returned to Virginia to 50 percent.

    The VEC advised the Commission at the September meeting that it expected to request the General Assembly to authorize the allocation of $12 million of the approximately $16.5 million of Reed Act funds currently in the Trust Fund. The funds would be used for administration of VEC programs. The removal of $12 million in the Trust Fund would not cause a change in employer taxes at the current levels of benefits and current earnings requirement.

    3. Treatment of Indian Tribes

    Amendments to the federal Unemployment Compensation Law made by the Consolidated Appropriations Act of 2001 require that Indian tribes be provided the option to pay unemployment taxes by reimbursing the Trust Fund based on actual claims made. This method is currently provided in Virginia to state and local governments and some nonprofit organizations. The Commission was advised that the federal Department of Labor has determined that Virginia needs to amend its Unemployment Act to be in conformity with the requirement that Indian tribes employing Virginians be given this option, regardless of the fact that at present there are no federally recognized Indian tribes based in Virginia.

    The bill provides that if they elect to do so, Indian tribes that employ persons can agree that they will not pay state unemployment taxes based on payroll, like private businesses. Instead, they will pay in to the Trust Fund only if they have a former employee who receives unemployment benefits; in that event, they will be assessed charges to reimburse the Fund for benefits it paid out. If an Indian Tribe fails to pay its reimbursement assessment, the VEC could revoke its ability to be a reimburseable employer.

    At the September 27 meeting, the Commission received copies of draft legislation that tracks model legislative language provided by the Department of Labor. At the Chairman's request, the legislation was forwarded to the Attorney General's Office and representatives of Virginia's Indian tribes for their review. A copy was provided to staff of the Virginia Council on Indians, who forwarded it to the eight Virginia-recognized Indian tribes with the request that they contact staff if they had any concerns with the legislation. The option to be a reimburseable employer is also currently available to non-profit organizations, and Virginia-recognized Indian tribes are organized as 501(c)(3) organizations. Therefore, the enactment of the legislation may not have any immediate impact on the tribes.

    4. 2007 Legislation

    In the 2007 Session, the General Assembly enacted four bills affecting the Commonwealth's unemployment compensation program:

    House Bill 2066, patroned by Delegate Nixon, increased the maximum weekly benefit from $347 to $363, effective with regard to claims filed on or after July 1, 2007. 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 $457) and two (Maryland at $340 and South Carolina at $303) have lower maximum weekly benefits. The national average in 2007 is $366, an increase of $9 over the previous year. Virginia's maximum weekly benefit replacement level for 2007 is 44 percent of the state's average weekly wage; the national average is 45 percent. Among other jurisdictions, the replacement rate ranges from 64 percent in North Carolina and West Virginia to 29 percent in the District of Columbia.

    House Bill 2272, patroned by Delegate Purkey, requires employers with 100 or more employees to file quarterly reports electronically with the VEC, commencing January 1, 2009. Prior to this legislation, employers with 250 or more employees were required to file by magnetic media.

    House Bill 964, patroned by Delegate David L. Bulova, was legislation introduced in the 2006 Session and carried over to the 2007 Session. In the interim, it was reviewed and amended at the request of the Commission. The bill requires the VEC to permit employers to pay unemployment taxes and file reports annually, commencing in 2009, for employment of domestic service in the private home of the employer, if the quarterly payroll is $5,000 or less. Currently such payments and filings are made quarterly.

    Senate Bill 1056, patroned by Senator Watkins, increased the VEC Commissioner's discretionary fund in any fiscal year from $200,000 to $375,000. The discretionary fund is part of the Special Unemployment Compensation Administration Fund, and is commonly known as the penalty and interest fund.

    5. Other Matters

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

    The recent increase in the federal minimum wage may prompt some to seek modifications to Virginia's minimum earnings requirement and minimum weekly benefit amount. The rational for changing these amounts is that there had been interest group consensus that the minimum weekly benefit amount should equal the product obtained by multiplying the federal minimum wage rate by 40 hours by 13 weeks, and that a change in the minimum wage justifies a recalculation of these amounts.

    The Unemployment Insurance Modernization Act, currently pending in Congress, may provide $65 million for Virginia's Trust Fund. The Act also provides annual payments of $2.7 million for program administration and the prospect for an additional $130 million if Virginia broadens unemployment benefit eligibility in certain specified ways, including providing benefits to certain trailing spouses.

    The VEC obtained General Assembly approval in the 2007 Session to access $67 million of Reed Act funds for three administrative initiatives. At the September 2007 meeting, the Commission was briefed on the status of the three business projects, which pertain to unemployment insurance systems modernization, the Virginia Workforce Network Information System, and a financial management system.

    At the November 27 meeting, the VEC gave an abbreviated version of a presentation that it made to the Virginia Commission on Immigration on November 13, 2007. The presentation focused on eligibility of unauthorized workers to receive unemployment compensation benefits. The VEC reported that in order to be eligible for benefits, a person who is not a U.S. citizen is required to have a current work authorization number. As a result, illegal workers generally do not file for unemployment benefits, with the possible exception of when a mass claims filing is made by an employer on behalf of multiple employees. The VEC verifies social security numbers or work authorization numbers through the Department of Homeland Security's Systematic Alien Verification for Entitlement (SAVE) program. In the past three years, 202 persons were denied benefits because they were found not to be authorized to work in the U.S. In the vast majority of these cases, the persons entered the country legally, but their work permits expired before they received an extension.

    III. RECOMMENDATIONS

    The Commission reviewed two items of potential legislation for the 2008 Session.

    1. Status of Indian Tribes as Employers

    The Commission reviewed the draft legislation providing that unemployment compensation benefits based on service in the employ of an Indian tribe are payable to the same extent as benefits payable to other employees covered by the Virginia Unemployment Compensation Act. The measure provides Indian tribes with the option to make reimbursement payments to the unemployment trust fund, in lieu of tax payments, to the same extent currently allowed for local governments. If an Indian tribe fails to make required payments, the tribe will become liable for the FUTA tax and the Virginia Employment Commission may remove tribal services from unemployment coverage.

    After receiving information from Frank Ferguson of the Office of the Attorney General regarding difficulties with some sovereign Indian tribes involving escrow payments under the master settlement agreement with tobacco manufacturers, the Commission agreed that the legislation should provide that its enactment would not be deemed to affect the sovereignty of any tribe. With that amendment, the Commission endorsed the proposal.

    2. Study of Benefits for Temporary and Seasonal Employees

    The Commission was advised that Delegate Harvey Morgan plans to introduce a resolution calling on the Commission to study the issue of unemployment benefits for temporary and seasonal workers. The issue involves current law that has been interpreted to provide that a person employed for a seasonal job is not ineligible for unemployment compensation benefits from that employment when the term of the job ends, even if the employee is informed and understands at the commencement of employment that the job will end on a fixed date. The Virginia Court of Appeals recently confirmed this interpretation in its opinion in Hutter v. VEC, in which the court noted that Virginia did have a provision from 1968 until it was repealed in 1978 that provided that seasonal workers were ineligible for benefits, except for unemployment occurring during the operating season determined for their base period seasonal employer.

    Delegate Morgan's resolution asks the Commission to study this issue in 2008, focusing on the impact on employers, employees, and the solvency of the Trust Fund of reinstituting a seasonality provision in the Commonwealth's unemployment compensation laws. The resolution also asks the Commission to consider whether a seasonality provision should be limited to specific categories of employment. The Commission took no action on this proposal.