RD35 - Executive Summary of Interim Activity and Work of the Virginia Commission on Unemployment Compensation - January 13, 2009


    Executive Summary:
    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 Samuel A. Nixon, Jr., of Chesterfield County, Delegate Lionell Spruill, Sr., of Chesapeake, Senator A. Donald McEachin of Richmond, Delegate R. Lee Ware, Jr., of Powhatan County, Delegate Joseph D. Morrissey of Richmond, and Senator Phillip P. Puckett of Tazewell County. Senator Watkins chairs the Commission, and Delegate Purkey is its vice chairman.

    The Commission met on September 10, 2008, and December 16, 2008. 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 Commission is charged with monitoring the current status and long-term projections for the unemployment trust fund. The trust fund is funded by state unemployment taxes paid by employers. The rate of the state unemployment tax (SUTA) paid by an employer depends on its experience rating, as well as such factors as the solvency status of the trust fund. For new for-profit employers generally, the SUTA rate is 2.5 percent of the first $8,000 of wages per employee. This rate remains in effect until the Virginia Employment Commission (VEC) provides a computed tax rate based upon claims made against the employer, with employers having more claims paying a higher SUTA rate.

    At the December 16, 2008, meeting, VEC Commissioner Dolores Esser updated projected data on the solvency of the trust fund that she presented at the September 10 meeting. The trust fund's solvency level is directly affected by unemployment levels and the health of the economy. The national economy has officially been designated as being in recession since December 2007. Economists are projecting that the recession will last though 2009, and that a slow recovery will occur in 2010. The current recession is expected to be slightly worse than the 1991 recession, but not as bad as the 1982 recession.

    The national unemployment rate is expected to peak at 8.7 percent nationally, while Virginia's unemployment rate is expected to reach slightly over 6 percent. Virginia's unemployment rate in September 2008 was 4.2 percent; one year earlier, it was 3.0 percent. The Commonwealth's August 2008 unemployment rate of 4.6 percent was the highest monthly rate since January 1997.

    Initial year-to-date claims for unemployment benefits through October 2008 were up 21.5 percent from the same period in 2007 and up 22 percent from the same period in 2006. Initial claims are projected to grow from slightly more than 260,000 in 2007 to 307,511 in 2008, 514,652 in 2009, and 464,054 in 2010.

    First payments of unemployment insurance benefits from January through October 2008 are up 27.5 percent compared to the first 10 months of 2007 and up 32.2 percent from the corresponding period in 2006. The average duration for receipt of unemployment benefits in October, at 12.6 weeks, is unchanged from the same month in 2007. Final payments of benefits in the first 10 months of 2008 are up 21.7 percent from the same period in 2007 and up 25.1 percent from the same period in 2006. The exhaustion rate, which reflects the percentage of unemployment compensation recipients who use up all of the weeks that they are eligible to receive benefits, was 37.1 percent in October 2008; in the same month of 2007, it was 33.1 percent.

    Virginia's maximum weekly unemployment benefit of $378 is near the median of the six jurisdictions within the area of the Fourth Circuit Court of Appeals, and is slightly less than the national average of $382. The ratio of Virginia's maximum weekly unemployment benefit to the state's average weekly wage (44 percent) is slightly less than the national average of 46 percent.

    The trust fund solvency level is determined by dividing the balance in the trust fund by the statutorily determined adequate fund balance. The solvency level of Virginia's unemployment trust fund was 64.4 percent as of June 30, 2008; one year ago it was 70.4 percent. The solvency level is projected to be 38.5 percent in 2009, 20 percent in 2010, and 24 percent in 2011. By 2012, the solvency level is expected to rise to 40 percent. Part of this projected rebound is due to assessment of the fund builder tax of 0.2 percent of the first $8,000 of each employee's wages, which is triggered when the solvency level falls below 50 percent. In addition, a partial Social Security benefit offset is instituted when the solvency level drops below 50 percent.

    The balance in the trust fund is projected to fall from $708.2 million on January 1, 2008, to $565.3 on January 1, 2009, and to $148.4 million on December 31, 2009. Benefit payments are forecast to rise from $493 million in calendar 2008 to $760 million in the following year. In December 2007, weekly benefits payments totaled $7.2 million. In July 2008, the VEC was paying $8.6 million per week in benefits. The weekly average for the first half of December 2008 was $14.2 million.

    If the trust fund balance becomes inadequate to pay benefits, the Commonwealth may borrow federal funds to cover the shortfall. If the current recession is similar to that experienced in 1990-1991, the Commonwealth will borrow $232 million in total in 2010 and 2011. However, if the current recession becomes as severe as that of 1981-1982, Virginia may need to borrow about $800 million to pay benefits, all of which may not be repaid by September 30 of the year in which the money is borrowed. Under this worst-case scenario, the Commonwealth could be required to make interest payments from the general fund of about $25 million between 2010 and 2012. In such event, employers would lose 0.3 percent of the existing federal credit on FUTA payments, which would increase employers' monthly FUTA liability from $56 to $77 per employee. Virginia last borrowed money from the federal government in 1981-1982. The Commonwealth has never been required to pay interest or penalties on such loans. A dozen states are expected to need to borrow to meet their unemployment benefits obligations in the first quarter of 2009.

    The average annual state unemployment tax paid by Virginia's employers is projected to be $88 per employee for calendar year 2008. In 2009, the average tax per employee is expected to rise to $98; in 2010, to $159; in 2011, to $191, and in 2012, to $199. By contrast, in September, the VEC projected that the average tax per employee would peak in 2012 at $163 per employee.

    Virginia's average annual per-employee tax remains the lowest, by $50, among the six jurisdictions in the Fourth Appellate Circuit. The national average is $258. The average tax per employee in Virginia reflects its average tax rate, which at approximately 1.2 percent of taxable wages is the lowest of the six jurisdictions in the Fourth Appellate Circuit, and its taxable wage base, which at $8,000 is tied for second lowest among these jurisdictions. Virginia's taxable wage base has not changed since 1991, when it was increased from $7,000.

    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 receives funding to administer the unemployment insurance, job service, labor market information, and veterans employment service programs from allocations of Federal Unemployment Tax Act (FUTA) payments by Virginia employers to the federal government. 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.

    The federal government's reductions in the FUTA payments that are returned to the Commonwealth for program administration continues to cause concerns. In fiscal year 2006, Virginia received from the federal government $57 million for administration of the VEC's programs, or 27.6 percent of the amount of FUTA taxes paid in by Virginia's employers. In fiscal years 2005 and 2004, Virginia received $60 million and $63 million, respectively, exclusive of $12 million of Reed Act allocations. Virginia ranks 52nd of 53 jurisdictions in terms of the percentage of FUTA funds returned by the federal government.

    Reasons given for Virginia's low level of administrative funding include the relative low statewide unemployment rate and the efficiency of the VEC. The VEC and Office of the Secretary of Commerce and Trade continue to lobby Virginia's Congressional delegation to increase the percentage of FUTA taxes returned to the Commonwealth. Congressman Tom Davis has written to the General Accounting Office asking that it examine the resource justification model currently used to allocate administrative funds among the states. The VEC has worked through a national association of similar agencies to require that Congress provide each state with at least 50 percent of the FUTA taxes paid in by its employers, while holding harmless those states currently receiving a greater percentage. 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.

    The VEC is anticipating that administrative funds from FUTA taxes will pay for 80 percent of the VEC's administrative costs. In anticipation of the projected shortfall, the VEC has closed offices, laid off employees, and eliminated 80 positions.

    3. House Bill 1314

    House Bill 1314, introduced by Delegate Kathy Byron in the 2008 Session, transfers responsibility for collection of employment taxes from the VEC to the Department of Taxation. The House Commerce and Labor Committee asked the Commission to study the measure over the 2008 interim.

    Delegate Byron told the Commission that the bill sought to spur an examination of whether the current system was the most efficient way to deliver services. She stated that the "cost-cutting caucus" anticipated that the transfer would generate savings by allowing the VEC to focus on its core mission while taking advantage of the Tax Department's expertise in collecting taxes.

    Analyses of House Bill 1314 were provided by the VEC and Tax Department. The VEC observed that employers are required to file quarterly payroll and tax reports. The VEC collects on average $411 million annually in unemployment insurance (UI) taxes, which are deposited in the unemployment trust fund. Of the $57 million received from the federal government to administer VEC programs, $33-$36 million is for UI administration, of which 26 percent, or $9.7 million, is earmarked for UI-related tax activities.

    The VEC noted that transferring the UI tax program to the Tax Department will not save the VEC any administrative funds, because the funding for these activities would flow to the agency responsible for the function. Implementing the transfer would involve substantial start-up costs, and federal funds would not be available to defray them. A transfer would increase administrative complexity by involving two agencies in the tax collection process, which involves receiving and processing quarterly wage and payroll reports and reconciling reports. The VEC is in the process of evaluating bids for a new integrated UI benefits and tax system and transferring the UI tax program would require re-scoping the project and would delay the project by at least 12 months.

    Joe Mayer, Lead Tax Policy Analyst at the Department of Taxation, cautioned that it is unclear that the Commonwealth would benefit from any savings that would occur from the transfer of functions from the VEC. While there may be savings in the Tax Department's taking over the processing of payments and returns from the VEC, the set-up and programming costs may be more expensive for the Tax Department. He noted that the cost estimates do not include costs of continued operation of the VEC systems until it is proven that the Tax Department's systems are operating acceptably. While savings may result at present from use of the Tax Department's up-to-date technology, the VEC is in the process of acquiring a new system that may provide similar savings.

    4. House Joint Resolution 51

    House Joint Resolution 51 of the 2008 Session, introduced by Delegate Harvey Morgan, directs the Commission to study the need for limitations on the eligibility of seasonal or temporary employees for unemployment compensation benefits. In its study, the Commission is directed to examine the impact on employers, employees, and the solvency of the unemployment trust fund of reinstituting a seasonality provision in the Commonwealth's unemployment compensation laws, and whether a seasonality provision should be limited to specific categories of employment.

    Currently, a claimant's last 30-day employer is chargeable for the claimant's unemployment compensation benefits. Allowing employees who lose seasonal jobs upon the end of the season to receive unemployment benefits arguably penalizes the employers who hired them by raising the employer's state unemployment tax rate.

    There are two situations where Virginia currently provides that workers in two seasonal employment categories - educational institutions and professional athletics - are ineligible for unemployment benefits. For other seasonal jobs, an employee is not ineligible for unemployment compensation benefits 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.

    In Hutter, Inc. v. VEC, Va. Ct. App., No. 0537-07-2 (November 6, 2007), the Court of Appeals affirmed a circuit court holding that a claimant who enters into an employment contract for a specific term does not leave employment voluntarily when that term expires. This case involved an individual who entered into a written employment contract with a tax return preparation firm. The contract stated that the employment was temporary and would end on April 15. When the job ended, the claimant sought unemployment benefits. The employer argued that the claimant had effectively resigned because the employment was acknowledged to be temporary when the job was accepted. The VEC held that the claimant became unemployed because the employer no longer needed her services, and that the layoff amounts to a no fault discharge.

    The Court of Appeals mentioned contrasting public policy concerns raised by the employer and the VEC. The employer had argued that under the VEC's interpretation, employers, in return for providing good seasonal jobs, "will be rewarded with the highest, most burdensome unemployment tax possible." The VEC responded that if the court adopted the employer's position, "unemployed individuals would be discouraged from taking part-time work because they would be excluded from obtaining unemployment compensation." The court declined to address the public policy arguments, noting that "a court may not second-guess the lawmakers on matters of economics, sociology and public policy."

    The seasonal employment issue has been addressed previously by the General Assembly. In 1948, the General Assembly enacted legislation establishing a process for the VEC to designate an employer as a seasonal employer. The bill provided that no seasonal worker shall be paid benefits except for unemployment occurring during the operating season determined for his base period seasonal employer. The measure did not specify what industries were "seasonal." The VEC was required to determine whether an applying employer's industry, as a whole or in any separate division, establishment or department, was a seasonal employer based on whether "because of the seasonal nature of its operations, it is customary to operate only during a regularly recurring period or periods of not less than thirteen weeks nor more than forty weeks within any calendar year." (Code § 60.1-54) A seasonal employer was required to post and maintain notices that the individuals employed there were performing services in seasonal employment.

    Virginia's seasonal worker provisions were repealed in 1978. According to the report of the Joint Subcommittee Studying the Funding Requirements and the Administrative Needs of the Virginia Unemployment Compensation Act (Senate Document 27; 1978), administrative and legal problems related to enforcing the provisions were considerable.

    VEC Chief Administrative Law Judge M. Coleman Walsh, Jr. reported that in the 1940's as many as 33 states had laws that limited UI eligibility for workers in seasonal occupations. A majority of these laws have since been repealed. Fears that such laws were necessary to avoid depletion of UI trust funds and that seasonal workers would have high tax rates were not generally realized, and the provisions proved difficult to administer. In 1996, the U.S. Advisory Council on Unemployment Compensation recommended that seasonality provisions be abolished by the states.

    Several policy issues relating to seasonality provisions were identified by the VEC. Some seasonal workers are among the lower paid members of the workforce and may not be able to save money to offset lost income during the off-season. Unemployment because a season is over is not the fault of the worker or the employer. Some seasonal employers use UI as a fringe benefit to attract and retain workers. The loss of UI benefits for seasonal employment may shift some workers to public assistance programs funded through the general fund.

    Currently 15 states have laws that limit unemployment compensation benefits based on seasonal work. One category of such laws, in effect in eight states, applies to industries that customarily operate during regularly recurring periods of less than a certain duration, which ranges from 16 to 41 weeks. The other category of such laws, in effect in seven states, applies to specific industries, such as processing agricultural or seafood products, and may include a requirement that a certain percentage of the workforce is laid off.

    At the Commission's September meeting, several members expressed concerns that allowing employees to collect unemployment benefits, if they have agreed as part of an employment contract that their employment will end when the employer's season ends on a fixed date, contravenes the terms of their employment contract. Following the September meeting, the chairman requested an informal opinion of from the Attorney General on the issue. The Office of the Attorney General informed the chairman that the Court of Appeals' decision in the referenced case does not abrogate the rights of the employer under the employment contract, and that even if it did, any such impairment of contract would be subject to the Commonwealth's sovereign power to protect the welfare of the people.

    At the December meeting, staff presented three possible legislative approaches, prepared at the request of the chairman, to re-introducing a seasonal employment law. The first option would institute a seasonality law similar to the measure repealed in 1978. The second option would be similar to the first option with one major broadening feature: Instead of making the seasonality provision apply only to those employers who requested and obtained designation as such from the VEC, all employees of employers that because of the seasonal nature of their operations customarily operated only during a regularly recurring period of between 13 and 40 weeks per year would be ineligible for benefits. The third option would make seasonal employees of tax return preparation establishments ineligible for unemployment benefits.

    Judge Walsh reported that under the first option, about 7,300 employees, or 0.25 percent of covered employment, would be ineligible for benefits. Under the second option, it was estimated that about between 22,000 and 85,000 employees, or between 0.75 and three percent of covered employment, would be ineligible. Under the third option, about 3,000 employees would be ineligible, with a resulting annual change in benefits charges of about $500,000.

    A fourth option was offered by Delegate Morrissey, who expressed that the fairest approach would be the one with broadest applicability. His approach would disqualify an unemployed individual for unemployment benefits if he was provided with written notice, and signed an acknowledgment of receipt of such notice, by his employer stating that his employment is temporary or seasonal and will terminate by a date certain or upon the completion of seasonal work specified in the written notice.

    Several stakeholders and interested citizens provided testimony to the Commission on the issue at both the September and December meetings. The chair indicated that seasonal employment ineligibility is a complex issue that may require additional study.

    III. RECOMMENDATIONS

    As noted above, the Commission reviewed two legislative actions during the 2008 interim. The Commission lacked a quorum to take any action at its December 16 meeting. Therefore, the Commission makes no recommendations on House Bill 1314 or House Joint Resolution 51.