RD9 - Executive Summary of Interim Activity and Work of the Virginia Commission on Unemployment Compensation - January 4, 2013


    Executive Summary:
    I. BACKGROUND

    Chapter 33 (§ 30-218 et seq.) of Title 30 of the Code of Virginia establishes the Commission on Unemployment Compensation (UC Commission). The UC 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 UC Commission's membership is comprised of Senators John Watkins, Donald McEachin, and Frank Wagner and Delegates Bob Purkey, Lionell Spruill, Lee Ware, Joseph Morrissey, and Kathy Byron. Senator Watkins chairs the Commission, and Delegate Purkey is its vice chairman.

    The UC Commission met on August 20, 2012, and December 4, 2012. This executive summary of the interim activity and work of the Commission is submitted pursuant to § 30-224, and is provided in lieu of an annual report.

    II. ISSUES ADDRESSED

    1. Status of the Unemployment Trust Fund

    The account of the Commonwealth in the Unemployment Trust Fund in the U.S. Treasury ("Trust Fund") is composed of state unemployment taxes collected from Virginia employers. Moneys in the Trust Fund are used solely for paying unemployment compensation benefits to eligible unemployed Virginians. Since 1982, Virginia has measured Trust Fund adequacy by use of a statutorily prescribed high cost multiple approach. Section 60.2-533 of the Code of Virginia requires the Virginia Employment Commission (VEC) to determine the "adequate balance" of the Trust Fund as of the end of each fiscal year. The solvency level, measured by dividing this adequate balance by the actual balance in the Trust Fund, is used in determining employers' state unemployment tax rates.

    The Trust Fund's solvency level on June 30, 2012, was 9.9 percent, which reflects a greatly improved condition from the previous two years; on June 30, 2011, it was negative 6.1 percent, and on June 30. 2010, it was negative eight percent. The solvency level is projected to continue improving. The VEC expects the solvency level to be 25 percent in 2013, 48 percent in 2014, 68 percent in 2015, and 78 percent in 2016.

    The balance in the Trust Fund on June 30, 2012, was $135 million. At the end of fiscal years 2010 and 2011 it stood at negative $104 million and negative $80 million, respectively. The balance is projected to remain positive on each June 30 of the next four years. It is forecast to rise to $396 million in 2013, $763 million in 2014, and over $1 billion in each of the next two years.

    The improved status of the Trust Fund reflects both increased state unemployment tax (SUTA) revenue and decreased benefit payments. From 2011 to 2012, SUTA collections increased from $702.2 million to $785.3 million and benefits declined from $630.9 million to $601.3 million. The average annual SUTA, including the pool tax and the fund builder tax, in calendar year 2012 was $232 per employee, which is $17 more per employee than in 2011. The average annual SUTA assessment per Virginia employee is projected to decline to $231 in 2013, $216 in 2014, and $194 in 2015. For calendar year 2011, Virginia's average unemployment tax per employee was the lowest among the six Fourth Circuit Court of Appeals jurisdictions and ranked 48th lowest among all states and the District of Columbia; only South Dakota, Arizona, and Louisiana had a lower average unemployment tax per employee. The corresponding national average for 2011 was $452, up from $356 in 2010.

    2. Borrowing to Pay Benefits

    When the balance in the Trust Fund reached zero, Virginia borrowed from the Federal Unemployment Account in order to pay unemployment benefits to claimants. Title XII of the federal Social Security Act provides a mechanism by which states may borrow federal funds to offset shortfalls in their unemployment trust funds. In order to meet its obligations to pay unemployment benefits, the Commonwealth began borrowing from the federal government in October 2009.

    In the spring of 2012, Virginia completed repaying all of the borrowed federal funds, with interest. While the Trust Fund had a positive balance at mid-year, variations in the schedules of when SUTA payments are received and when unemployment benefits are paid has returned the Trust Fund to a negative balance. Between October 2012 and April 2013, $175 million will be borrowed to make benefit payments. However, the funds borrowed to meet the shortfall in calendar year 2012 will be from the Commonwealth in the form of treasury loans. As of December 3, 2012, the VEC had borrowed $18 million from the state treasury. Starting in early 2013, the VEC will return to borrowing from the federal government to meet its obligations to pay benefits, with the total of federal loans expected to total less than $140 million. The VEC anticipates that the total amount borrowed from state and federal sources of up to $175 million will be repaid in May 2013, and thereafter no further borrowing is anticipated.

    Borrowing from the state treasury rather than the federal government in the fourth quarter of 2012 has the advantage of allowing Virginia's federal loan balance as of January 1, 2013, to be zero. Avoiding a year-end federal loan balance allows employers in Virginia to avoid an automatic loss of a portion of the federal unemployment tax (FUTA) credit. FUTA payments are used to fund state workforce agencies, job service programs, and a portion of federal extended benefit programs.

    An employer's FUTA liability is set at six percent of the first $7,000 of each employee's taxable wages. However, employers in states whose unemployment compensation programs are in compliance with federal requirements receive a credit of 5.4 percent, which results in an effective rate of 0.6 percent. A state that has failed to repay borrowed federal funds within two years loses 0.3 percent of the 5.4 percent credit against an employer's FUTA liability. This automatic reduction in the FUTA credit raised Virginia employers' rate in 2012 from 0.6 percent to 0.9 percent, which increased an employer's FUTA liability for each employee from $42 to $63. The $63.5 million generated from the partial loss of the FUTA credit has been applied to Virginia's federal loan balance. If Virginia had an outstanding loan balance at the end of 2012, an additional 0.3 percent reduction in the FUTA credit would occur. However, the fact that Virginia's year-end balance to the federal government was zero restores the full 5.4 percent FUTA credit against employers' FUTA liability.

    3. Unemployment Program Data

    In October 2012, nonfarm employment in the Commonwealth totaled 3,744,400, which is an increase of 0.8 percent over the same month in 2011. Virginia's unemployment rate (not seasonally adjusted) for October 2012 was 5.4 percent; for October 2011, the rate was 6.0 percent. Virginia's unemployment rate in the Great Recession peaked in January 2010 at 7.8 percent, which was the highest rate since 8.1 percent in February 1983. Unemployment rates in 2012 have averaged about eight percent lower than rates from the corresponding months in 2011. Virginia's not seasonally adjusted unemployment rate in October 2012 was less than the corresponding national rate of 7.5 percent. The number of Virginians receiving a regular unemployment benefit payment in October 2012 was 46,392, down from 54,123 in October 2011.

    Virginia's seasonally adjusted unemployment rate in October was 5.7 percent. For the month, the Commonwealth's unemployment rate was in a three-way tie (with Kansas and New Hampshire) for the tenth lowest rate in the nation. While the national average was 7.9 percent, the rates in the states ranged from a low of 3.1 percent (North Dakota) to a high of 11.5 percent (Nevada).

    The number of initial claims for unemployment benefits in Virginia for the first ten months of 2012 was 247,456, which is down 8.2 percent from the 2011. First payments of unemployment insurance benefits from January through October 2012 totaled 112,114, which is down 1.5 percent from the corresponding period in 2011. Final payments of benefits in the first 10 months of 2012 totaled 58,995, which is down 7.5 percent from the same period in 2011. The exhaustion rate, which reflects the percentage of unemployment compensation recipients who use up all of the weeks of regular unemployment benefits for which they are eligible, was 50.9 percent in October 2012; the exhaustion rate in the same month of 2011 was 49 percent.

    The maximum number of weeks of unemployment benefits a claimant may be eligible to receive in Virginia is 40 weeks. Of these, 26 weeks are authorized under the regular program that is funded from the Trust Fund. The additional 14 weeks are authorized under the federal emergency unemployment compensation program for Tier I states. The number of weeks of federally-funded unemployment benefits available to a claimant is based on a state's unemployment rate. However, the federal programs providing emergency and extended unemployment benefits are scheduled to end on December 29, 2012.

    Virginia's maximum weekly unemployment benefit is $378; the national average is $407. The maximum weekly benefit reflects a weekly benefit replacement rate in 2012 of 40.2 percent of the state's average weekly wage, down from 41 percent in 2011 and 42 percent in 2010.

    4. Senate Joint Resolution 16: Conformity with Trade Adjustment Assistance Extension Act

    Senate Joint Resolution 16, introduced by Chairman Watkins in the 2012 Session, directed the UC Commission to study conforming provisions of the Virginia Unemployment Compensation Act to requirements of the federal Trade Adjustment Assistance Extension Act of 2011 (TAAEA). The Chairman will submit an executive summary of its findings and recommendations regarding TAAEA conformity, as directed by the resolution.

    5. Conformity to Provisions of the Middle Class Tax Relief and Job Creation Act

    Section 2013 of the federal Middle Class Tax Relief and Job Creation Act of 2012 (MCTRA) sought to improve the integrity of the unemployment compensation program through better recovery of benefit overpayments. This provision requires states to collect overpayments of unemployment benefits that are paid under a federal program, including trade adjustment allowances and extended and emergency benefits, as well as benefits paid under an unemployment benefit program of another state. While efforts to collect overpayments under these other programs had been permissible, this section mandated states to make such efforts by changing statutory language from "may" to "shall."

    A state's failure to conform its unemployment insurance laws to the requirements of federal law will result in the loss of the 90 percent credit against employers' FUTA liability and the loss of federal funding for the administration of the state's unemployment program.

    Virginia Code § 60.2-633 provides that any person "who has received any sum as benefits under this title to which he was not entitled" is required to repay such sum to the VEC. The phrase "under this title" does not apply to benefits paid under a program of another state, and it is unclear whether the phrase is applicable to benefits paid under a federal program. To bring § 60.2-633 into compliance with the requirements of § 2013 of the MCTRA, the UC Commission adopted a proposal to add language specifying that for purposes of § 60.2-633, "benefits under this title" includes benefits under an unemployment program of the United States or of any other state.

    In the course of its review of the MCTRA's requirements, the VEC discerned, and the U.S. Department of Labor confirmed, that § 60.2-633 was also out of conformity with a requirement that states offset prior benefit overpayments under federal programs against any future unemployment benefits payable to a claimant. Section 60.2-633 provides that the VEC's obligation to offset benefit overpayments against any future unemployment benefits is subject to an exception if the overpayment of benefits occurred due to administrative error. In the event of administrative error, the Commission is authorized to negotiate the terms of repayment and offset up to 50 percent of the payable amount, forgoing collection until the recipient has found employment, or determine an individualized repayment plan.

    In light of the federal requirement that overpayments of federal benefits be collected by offset against future benefits without exception, the UC Commission endorsed further amending § 60.2-633 to provide that the Commission's authority to negotiate the terms of repayment in the event of administrative error will not apply if the overpayment involved benefits under an unemployment benefit program of the federal government or another state.

    The legislation endorsed by the Commission to address MCTRA conformity includes an emergency clause, making it effective upon enactment, because MCTRA § 2103(c) provides that "amendments made by this section shall apply to weeks beginning after the end of the first session of the State legislature which begins after the date of enactment of this Act."

    6. Senate Bill 376: Shared Work Program

    Senator George Barker introduced Senate Bill 376 in the 2012 Session. The bill would have established a shared work program. A shared work, or worksharing, program gives a participating employer an alternative to laying off some employees by allowing it to reduce the hours of all employees while allowing the employees whose hours are reduced to receive reduced unemployment compensation benefits. Advocates see such programs as offering a way for employers to retain trained staff while improving employee morale. Employees in a work sharing program would receive a prorated share of the unemployment benefits they would have received if they had been laid off. The bill was carried over to the 2013 Session by the Senate Commerce and Labor with a recommendation that the UC Commission examine the issue.

    The UC Commission received testimony on shared work programs at its August 20, 2012, meeting. Senator Barker noted that the MCTRA makes states that enact work sharing laws eligible for federal reimbursement of all work sharing benefit costs for three years, plus planning and implementation grants. Federal law has authorized similar shared work programs since 1992. Several bills providing for the establishment of shared work programs have been introduced in prior sessions in Virginia, including House Bill 2559 in 2003 and Senate Bill 1474 in 2011.

    In addition to providing funding for state shared work programs, Subtitle D of Title II of the MCTRA requires several changes to shared work programs, for both new and existing programs, not the least of which is a change in the name from "shared work" or "worksharing" program to "short-time compensation" program. The MCTRA directs the Secretary of Labor to develop model legislative language, guidance, and reporting requirements for use by states in developing short-time compensation programs. To date, this has not been completed.

    Senator Barker conceded that shared work programs increase unemployment program costs because employers that may have kept employees on the payroll during periods when business is slow would have an incentive to reduce the hours worked by its employees during such periods. At the August 2012 meeting, Senator Barker cited data indicating that the additional cost may be as large as one percent, though data from Maryland shows an additional cost of 0.2 percent. Another issue relates to whether the program's costs would be shifted from the participating employer (through their experience rating) to all employers (through pool charges). He cited data indicating that in Virginia during most of the next eight years the costs would be charged to the participating employers through higher experience ratings.

    David Balducchi of Social Action Linking Together noted that 24 states and the District of Columbia have adopted worksharing programs. He estimated that the federal reimbursement of work sharing benefits costs could save the Commonwealth $14.5 million, and Virginia's share of planning and implementation grants could reach $2.7 million. VEC Commissioner John Broadway noted at the August UC Commission meeting that the administration has not taken a position on the program.

    At the December 4 meeting, the UC Commission received estimates of the costs of a short time compensation program. The start-up costs were estimated to range between $588,276 and $669,276, and the administrative costs in the first year were estimated at $208,360. Senator Barker noted that the estimated administrative costs are less than the federal funds for which the Commonwealth may be eligible. The seven-year average of the effect of such a program on the Trust Fund was estimated to be zero, while the average increase over the period in SUTA taxes was estimated at $0.40 per employee. Of that amount, Senator Barker explained that eight percent, or $0.03, would be in the form of increased pool taxes, as most of the increase in taxes would be charged to the employers that participate in the program.

    Senator Barker presented to the UC Commission a short-time compensation bill that he intends to introduce in the 2013 Session. UC Commission members asked about other states that have implemented short-time compensation program and the effect of the federal Affordable Care Act on the programs. The VEC intends to ask the U.S. Department of Labor to review the bill to ensure its conformity with federal requirements. The chairman noted that, given the number of questions yet to be answered, the UC Commission is not ready to endorse the bill at this time.

    7. Self-Employment Assistance Program

    Subtitle E of the MCTRA makes $35 million available to encourage states to establish and promote self-employment assistance programs. Such programs allow unemployed individuals to claim jobless benefits while getting access to small business development assistance. Delaware, Maine, New Jersey, New York, and Oregon have enacted such programs. The U.S. Department of Labor has issued guidance, including model statutory language, for states that seek to offer self-employment assistance programs.

    At the December 4 meeting of the UC Commission, Delegate Alfonso Lopez presented legislation to implement a self-employment assistance program. Under the program, unemployed persons who want to start a new business would be eligible get financial aid equal to their unemployment benefits for a maximum of 26 weeks. While in the program, participants would receive a waiver of requirements that they actively seek work while receiving benefits and that limit the amount of income that can be earned while receiving benefits. Participants will also receive entrepreneurial training, counseling, and other assistance to help them launch a business. Under self-employment assistance programs in other states, a participant must be unlikely to return to his previous employment, must have a viable business plan, and must be willing to work full time in developing the business.

    Delegate Lopez advised that $575,000 of federal funds is available to implement and administer such a program in the Commonwealth. Additional funds are available to promote the program. The deadline to apply for the federal funding is June 2013. Senator Watkins suggested that Delegate Lopez assemble examples concrete examples from other states that have implemented self-employment programs.

    8. Calculating an Employer's Benefit Ratio

    Delegate Kaye Kory's office advised the UC Commission that it has been working with the VEC to fashion a remedy to an unintended consequence of existing law that has ensnared a constituent, David Huddleston. The issue concerns the methodology by which the VEC is required to calculate an employer's benefit ratio for purposes of calculating the employer's SUTA rate. In general, an employer's benefit ratio is obtained by dividing the unemployment benefits paid to his employees and charged to his account by the employer's total taxable payroll.

    In Virginia, employers pay SUTA on a wage base of the first $8,000 of each employee's wages. The tax rate for 2012 ranges from 0.68 percent to 6.78 percent, depending on the employer's history of claims. For new employers, the rate is 3.23 percent.

    When an experience-rated employer has no employees who have received, or are eligible for, unemployment benefits, its SUTA tax rate would generally be low. However, a problem may exist if a self-employed person who is subject to SUTA does not pay himself a salary in the preceding year and consequently has a taxable payroll of zero. The unintended consequence results from the fact that when any number is divided by zero, the quotient is indeterminable. As a result, such an employer defaults to the highest SUTA rate.

    The UC Commission was presented with a draft of legislation, intended for introduction in the 2013 Session, that would remedy the situation by requiring the VEC in such a case to count wages paid in the preceding two years and to average the result, thereby avoiding the pitfall of dividing by zero. The draft presented also included a requirement that the VEC recalculate the benefit ratio for periods since June 30, 2011, and revise SUTA assessments accordingly. The chairman expressed skepticism about the retroactivity feature.

    9. Response to Review of Employee Misclassification

    On July 12, 2012, the Joint Legislative Audit and Review Commission (JLARC) released its report on the misclassification of employees as independent contractors in Virginia. The report cited a VEC audit in 2010 of one percent of Virginia employers that found that 5,639 workers were misclassified by 584 employers, or 27 percent of the employers audited. Based on findings in other states, Virginia could have on the order of 40,000 misclassifying employers and 214,000 misclassified employees. Employers that misclassify workers avoid paying unemployment taxes on those workers. JLARC found that misclassifying employers may have avoided paying between $0.6 million and $25 million in unemployment taxes in 2010. While reducing worker misclassification would result in more SUTA funds being paid into the Trust Fund, more funds would have been paid out in benefits to eligible workers, which may negatively impact the Trust Fund's balance.

    The VEC was asked to respond to the provisions of the JLARC report regarding the Unemployment Trust Fund. Bill Walton, Director of UI Programs at the VEC, noted that worker misclassification is due either to a lack of understanding by employers or to a disregard of the statutory requirements in order to reduce tax liability. He conceded that the issue of worker misclassification has negative effects on the Trust Fund. VEC economists have examined the numbers and found that there is a $25 million annual effect on the Trust Fund. Mr. Walton observed that often the VEC is prompted to conduct an investigation of an employer's classification of an employee when the individual applies to the agency for unemployment benefits and learns that an account has not been established. Occasionally the VEC receives reports of an employer's misclassification from a competitor.

    The chairman noted that worker misclassification is a concern in the construction industry, and cautioned that we have not heard the last of the issue. He expressed concern that some entities craft their business plan in order to avoid classifying their workers as employees. Senator Wagner raised questions about situations where workers are classified as employees but a large portion of their wages are paid as per diem reimbursements for travel expenses, which has the effect of lowering payroll taxes.

    III. CONCLUSION

    Materials provided by speakers at the UC Commission's meetings in 2012 may be found on the UC Commission's website at http://dls.virginia.gov/commissions/ucc.htm?x=mtg.