RD41 - Commission on Unemployment Compensation Executive Summary of Interim Activity and Work - January 2014

    Executive Summary:

    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, 2013, and December 17, 2013. 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.


    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 average 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, with other factors, in determining employers' state unemployment tax (SUTA) rates.

    The solvency level of the Unemployment Trust Fund on June 30, 2013, was 24.4 percent; one year previously it was 9.9 percent. The solvency level is projected to continue improving. The VEC expects the solvency level to be 38 percent in 2014, 56 percent in 2015, and 68 percent in 2016. When the solvency level exceeds 50 percent, the fund builder tax (which is assessed at the rate of 0.2 percent of the first $8,000 of each employee's wages) is suspended. The balance in the Trust Fund on June 30, 2013, was $335 million; one year earlier, the balance was $135 million. The balance is forecast to rise to $612 million in 2014, $901 million in 2015, and over $1.1 billion in 2016.

    The improved status of the Trust Fund reflects both increased SUTA revenue and decreased benefit payments. From 2012 to 2013, SUTA collections increased from $787 million to $793.4 million and benefits declined from $610.2 million to $569.9 million. The average annual SUTA, including the pool tax and the fund builder tax, peaked in calendar year 2012 at $236 per employee. In 2013, it dropped to $221, and is projected to continue falling to $218 in 2014, $212 in 2015, and $174 in 2016. The corresponding national average for the year ending March 31, 2013, was $435.

    2. Borrowing to Pay Benefits

    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 when the balance in the Unemployment Trust Fund reached zero, the Commonwealth began borrowing from the Federal Unemployment Account in October 2009. VEC Commissioner John Broadway reported that the Commonwealth borrowed and repaid from October 2009 through May 2013 a total of $986 million to pay unemployment benefits. Of this sum, $938 was from the federal government and $48 million was from the state treasury.

    In May 2012 Virginia completed repaying all then-outstanding federal funds with interest. However, variations in the schedules of when SUTA payments are received and when unemployment benefits are paid required additional borrowings in late 2012 and early 2013. Between October 2012 and January 2013, the VEC commenced borrowing from the state treasury. Borrowing from the state treasury in the fourth quarter of 2012 had 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.

    A final payment to the federal government of $133.5 million was made in May 2013, and no further borrowing is anticipated. Because all loans were borrowed and repaid in the current calendar year, an interest obligation of $753,254 to the federal government was waived.

    3. Unemployment Program Data

    In November 2013, nonfarm employment in the Commonwealth totaled 3,767,500, which was up about 7,300 from the average of the preceding 12 months. Virginia's seasonally adjusted unemployment rate for October 2013 was 5.6 percent; for October 2012, the rate was 5.8 percent; and for October 2011, the rate was 6.5 percent. Virginia's unemployment rate in the Great Recession peaked in December 2009 through March 2010 at 7.4 percent, which was the highest rate since 7.8 percent in November 1982 through January 1983. Unemployment rates in 2013 have averaged about seven percent lower than rates from the corresponding months in 2012. In October 2013, the national average unemployment rate was 7.3 percent, down from 7.9 percent a year earlier.

    The number of initial claims for unemployment benefits in Virginia for the first ten months of 2013 is 228,093, which is down 7.8 percent from the same period in 2012. In October the number of initial claims increased from the preceding month as a result of the impact of the partial federal shutdown.

    Final payments of benefits in the first 10 months of 2013 are down 10.9 percent from the same period in 2012 and down 17.6 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 47.7 percent in October 2013; in the same month of 2012, it was 50.9 percent.

    Virginia's maximum weekly unemployment benefit in 2013 was $378, which is third-highest of the six Fourth Circuit jurisdictions; the national average is $416. The maximum weekly benefit reflects a weekly benefit replacement rate in 2013 of 39 percent of the state's average weekly wage; the national average replacement rate in 2013 was 44 percent.

    For most of 2013, the maximum number of weeks of unemployment benefits a claimant may be eligible to receive in Virginia was 40 weeks, of which 14 weeks were authorized under the federal emergency unemployment compensation program for Tier I states. Commissioner Broadway also observed that the federal program providing extended unemployment benefits beyond the 26-week duration of state-funded benefits was scheduled to expire this month. Absent federal legislation continuing or reviving the program, all federal extended and emergency unemployment benefits will end as of December 28, 2013.

    4. Senate Bill 1357: Benefits Eligibility of Summer Interns

    Senate Bill 1357, introduced by Senator Thomas Norment, would have disqualified a graduate student from receiving unemployment compensation benefits based on services performed as a student summer employee during a summer break period, if the individual was notified in writing at the time of his hiring that his employment is only for the summer break period. The measure attempted to address situations such as a claim filed by a law school student for unemployment benefits based on employment with a law firm during its summer internship program. The Commission has held in such cases that if the student's separation was not the result of misconduct, it will be found to result from the lack of work. As a result, the student may be eligible for benefits even when he agreed at the start of the internship that the work would be available for a specified term.

    The measure was passed by in the Senate Commerce and Labor Committee with the request, by letter from the Clerk of the Senate, that this Commission study the issues related to the bill. The issue was addressed by the Commission at its meeting on August 20, 2013. The bill was passed by in Committee as a result of advice from the federal Department of Labor (DOL) that the legislation created a conformity issue. Conformity with the federal Social Security Act's unemployment program requirements, including those of the Federal Unemployment Tax Act (FUTA), is vitally important because a ruling that a state is not in conformity may subject employers to sanctions that include the loss of the federal tax credit and the loss of funds to administer the unemployment program.

    Section 3304(a)(6)(a) of the Federal Unemployment Tax Act requires, as a condition of certification that a state program conforms to federal law, that unemployment benefits be payable based on certain services that are not subject to the FUTA tax. Unemployment compensation must be payable based on services excepted from the federal definition of employment solely by reason of being performed for the state governmental entities or Indian tribes described in § 3306(c)(7) of FUTA, or for the nonprofit organizations described in § 3306(c)(8) of FUTA. States may exclude services from this required coverage only if they are exempt under other provisions of federal law, and the only exclusions for services by a student are found in § 3306(c)(10)(B) and (C) of FUTA. The exclusions apply to service performed by a student who is enrolled and is regularly attending classes at such school, college, or university or by an individual in a certified work-study program, respectively.

    Providing that such an individual would be disqualified from receiving benefits if his separation from work arose solely as a result of the end of his summer internship would violate the requirements of § 3304(a)(1) of FUTA, because it would constitute a cancelation of wage credits or a total denial of benefit rights for a reason that is not permitted, unlike misconduct connected with the work, receipt of disqualifying income, or fraud in connection with the receipt of benefits. The VEC advised the Commission that there does not appear to be an approach that would implement the objective of Senate Bill 1357 while retaining conformity with the federal framework. Senator Watkins asked staff to report to the patron on the bill that the conflicts with federal law would preclude its adoption.

    5. Calculating an Employer's Benefit Ratio

    In Virginia, employers pay SUTA on a wage base of the first $8,000 of each employee's wages. The tax rate assessed depends on the employer's history of claims. For new employers, the rate was 3.08 percent in 2013. Generally 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. When an experience-rated employer has no employees who have received unemployment benefits, its SUTA tax rate would generally be low because the quotient obtained by dividing the benefits charged to the employer by the employer's payroll results in a low benefit ratio. However, when the sole employee of an employer is not paid salary or wages in the preceding year, the employer's taxable payroll is 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.

    Prior to the 2013 Session, the Commission recommended legislation that would have allowed data from years when wages were paid to be used as a substitute for a year when no wages were paid. The measure was carried by Delegate Kaye Kory as House Bill 1466. The bill would have established an optional methodology for calculating an employer's benefit ratio when the employer has no taxable payroll for the 12-month period preceding a calendar year. It sought to allow employers who paid no wages during the last year of a four-year period to use, for the fourth year, the average of the wages paid over the period. However, during the 2013 Session the DOL reconsidered an earlier interpretation of the bill and announced that it was not in conformity with federal law. Specifically, the DOL took the position that House Bill 1466 ran afoul of the federal uniform method requirement that all employers with at least three years of experience be rated throughout the same period of time using the same factor or group of factors. As a result, House Bill 1466 was left in the House Commerce and Labor Committee.

    Delegate Kory continued to search for an alternative approach that would address the issue within the parameters of the federal program's requirements. At its August meeting, the VEC told the Commission that the DOL has approved an alternative proposal under which an employer's annual payroll is deemed to be the greater of $1 or the taxable payroll on which taxes have been paid. By eliminating the requirement that the VEC divide by zero when calculating the benefit ratio for an employer with no wages in a year, the approach appears to the VEC to address the situation in which such employers currently are subjected to the highest tax rate.
    Delegate Kory has introduced House Bill 22, which adopts this new approach, for the 2014 Session. The Commission agreed, by a vote of 3-1-1, to recommend the enactment of this bill.

    6. Contingent Effective Date of Military Trailing Spouse Provision

    Virginia law provides that a worker who voluntarily quits a job, absent good cause, is ineligible for unemployment benefits. The fact that a worker's spouse has relocated is not good cause for a worker to voluntarily quit his job. In the past decade, numerous bills have sought to create an exception that would remove the automatic ineligibility for unemployment benefits if a worker leaves a job because the worker's spouse is in the military and has been assigned to a new duty station.

    In 2009, Senator Mamie Locke introduced Senate Bill 1495. The bill as introduced provided that good cause for leaving employment exists if an employee voluntarily leaves a job to accompany the employee's spouse, who is on active duty in the military or naval services of the United States, to a new military-related assignment established pursuant to a permanent change of duty order from which the employee's place of employment is not reasonably accessible. The measure applies only if the state to which the spouse is transferred has a similar provision. This military trailing spouse provision also provided that benefits paid to qualifying claimants shall be charged against the pool rather than against the claimant's employer.

    The General Assembly passed this measure but only after adding a third enactment clause that provided that it would not take effect until the federal government appropriates adequate funds specifically for the purpose of paying benefits to employees who would be made eligible for benefits under the legislation. Consequently, the military trailing spouse provision has not been implemented because the federal government has not made such an appropriation.

    The contingent effectiveness of this military trailing spouse provision has created substantial confusion and uncertainty among military spouses and the legal officers advising them. The Code of Virginia currently sets out versions of § 60.2-618 both with and without the military trailing spouse provision, and editorial comments advise readers that the version with such provision will become effective if adequate funds are appropriated. Commissioner Broadway noted that currently the VEC receives more letters on this issue than any other.

    The third enactment clause on Senate Bill 1495 creates potential problems that extend beyond the lack of clarity as to what the law is at any particular moment, including the inability of the claimants and employers to determine whether such a provision is included in any of the dozen federal budget bills in any year or the continuing resolutions that may be adopted when Congress fails to adopt its budgets in a timely manner. The clause states that the military trailing spouse provision will become effective if adequate funds are appropriated, but it does not specify what constitutes adequate funding or who is responsible for making the determination. Similarly, it does not provide what would happen if funding is provided for a limited time. In addition to these practical concerns, creative litigants may argue that the third enactment clause and the confusion it has produced result in a lack of due process resulting from the act's vagueness or that giving Congress the power to determine whether Virginia's military trailing spouse provision takes effect constitutes an inappropriate delegation of the Commonwealth's legislative power.

    At its August meeting, several members of the Commission concurred that something should be done to address the confusion caused by the third enactment clause of Senate Bill 1495. The chairman expressed the view that Congress is not going to make the appropriation described in the third enactment, and that this should be addressed so that people are not misled.

    The discussion of the issue continued at the Commission's December meeting. Prior to the meeting, Senator Locke prefiled Senate Bill 18 for the 2014 Session. Other than eliminating the contingent effective date, Senate Bill 18 is substantively identical to Senate Bill 1495 of 2009. The bill retains the reciprocity condition of the 2009 bill, which means that a Virginia claimant will not be eligible for benefits unless the state to which the military spouse is transferred provides a similar military trailing spouse provision. As there are only five states other than Virginia that do not have a military trailing spouse provision, this condition is not expected to affect the bill's fiscal impact but would impose an additional administrative burden on the VEC.

    Senator Locke spoke in favor of Senate Bill 18 and observed that when the proposal was considered in 2009, the funding of the additional benefits was a major issue. The Unemployment Trust Fund is now in better shape than during the Great Recession. The critical issue is whether an employee married to a transferred military spouse should be put in the situation of deciding whether to keep the family together or to keep the job.

    In response to a question posed by Senator Frank Wagner regarding how we would know whether a claimant who has relocated to another state continues to remain eligible for unemployment benefits, Commissioner Broadway and VEC staff noted that the National Directory of New Hires is cross-checked to determine whether beneficiaries have obtained employment anywhere in the country. In addition, claimants are required to certify weekly, under penalty of perjury, that they are eligible for benefits and have satisfied job search requirements.

    Jim Wilson of the VEC provided an analysis of the fiscal impact of the military trailing spouse legislation. Data from seven states responding to a survey provided a basis for estimating that it would provide additional benefits equal to 0.08 percent of those under existing law. This increase would result in between $300,000 and $400,000 in annual benefits. These benefits would result in additional pool tax of $8.1 million, resulting in an average increase in state unemployment tax per employee of $0.34 per year. The estimated result is the same if the reciprocity condition is removed from the legislation. Senator Wagner questioned the reliability of the data, noting that six of the seven states on which the estimate was based have a relatively small military presence, which would result in fewer military spouses filing claims.

    Thomas Hinton of the Department of Defense's State Liaison Office concurred with the members' assumption that Congress would not appropriate funds specifically to address the third enactment of Senate Bill 1495. He estimated that benefit payments to trailing military spouses would increase payments of unemployment benefits by 0.39 percent. The difference between the estimates provided by Mr. Wilson and Mr. Hinton prompted members to question their reliability. Wilson observed that there are problems obtaining reliable and current data on the number of military personnel based in Virginia. Delegate Ware asked if the discrepancies between the estimates could be reconciled.

    Brooke Goldberg of the National Military Families Association asked the Commission to support the military trailing spouse proposal. She noted that military families face a unique circumstance in that when the military spouse is ordered to a new duty station, there is no choice but to follow orders. Her organization has heard from many spouses who are surprised that the Commonwealth is one of only a few states that do not provide this benefit.

    Keith Martin of the Virginia Chamber of Commerce noted that his organization has recently completed developing a business plan for the Commonwealth. Titled "Blueprint Virginia," the plan supports efforts to make Virginia more attractive to the military, thereby aiding its economic competitiveness. The Chamber's Military and Veterans Affairs Industry Council was supportive of industries that assisted military families, including allowing trailing military spouses to be eligible for unemployment benefits. Mr. Martin reported that the Virginia Chamber would support a law that satisfies four conditions. First, only spouses of members of the military, and not other types of trailing spouses, are allowed to collect benefits if they are unemployed as a result of following their spouses. Second, it has a minimal fiscal impact for employers. Third, it does not detrimentally affect the Unemployment Trust Fund. Fourth, the VEC will develop an efficient notification process to avoid erroneous charges to employers. In response to a question from Delegate Ware, Mr. Martin stated that the Virginia Chamber has not yet taken a specific position on Senate Bill 18 because it did not know what its impact would be, but added that he anticipates that the proposal will meet the four conditions.

    Nicole Riley, representing the National Federation of Independent Businesses - Virginia, noted that at this point her group has not taken a position on the proposal. She is encouraged that the benefits would be charged to the pool rather than the affected employer's experience rating. However, she expressed concerns about the cost of the initiative. She also wants assurances that claimants who move to another state keep looking for work and do not engage in fraud.

    Delegate Spruill moved that the Commission recommend the enactment of Senate Bill 18, but the motion failed for lack of a second. However, the members later agreed to reconsider this matter and voted (three in favor, one opposed, and one abstention) to recommend the proposal.

    7. Short-time Compensation Program

    The Commission considered a legislative proposal by Senator William Stanley that would establish a short-time compensation program. An identical bill introduced in the 2013 Session, Senate Bill 1230, passed the Senate without a negative vote and was sent to the floor of the House of Delegates. Before final action was taken, the measure was referred to the House Commerce and Labor Committee.

    The short-time compensation bill authorizes employers to reduce the hours worked by employees, while permitting the employees whose hours are reduced to receive partial compensation for lost wages. The program is viewed by advocates as giving an employer an alternative to laying off some of its employees during a slowdown. Program participation would require VEC approval of a plan, which must provide that the reduction in hours of work is in lieu of a layoff of an equivalent percentage of employees and that employees' health and retirement benefits cannot be reduced or eliminated under the plan. Some benefits paid under the program through August 2015, as well as administrative costs incurred in setting it up, may be eligible for reimbursement from the federal government.

    The Commission agreed, by a vote of 4-0-1, to recommend the enactment of this bill.

    8. Domestic Violence as Good Cause for Leaving Employment

    The third legislative proposal was presented by staff on behalf of Delegate-elect Marcus Simon. The bill would remove the disqualification for unemployment benefits when an individual voluntarily quits a job in cases where the quitting resulted from domestic violence. The bill would require the claimant to reasonably believe that continued employment would jeopardize the individual's safety or the safety of any member of the individual's immediate family. Benefits paid to qualifying claimants would be charged against the pool rather than against the claimant's employer.

    The VEC interprets the "good cause" exception to the provision that bars the payment of benefits to workers who leave work voluntarily as allowing claimants to receive benefits if their decision to leave work was based on substantial, compelling, and necessitous circumstances that left them no reasonable alternative but to quit work. The VEC has applied this test to domestic violence situations to require claimants to show that (i) they have been or are in imminent danger of being the victim of domestic violence, (ii) they have secured the assistance of law-enforcement authorities, and (iii) they have provided their employers a reasonable opportunity to provide an accommodation, such as a leave of absence or transfer to another work location, provided such alternatives are available and meaningful.

    Based on the VEC's interpretation of the existing law in a manner that allows it to allow claimants to receive benefits in these circumstances, the Commission concluded that the legislation is not necessary and made no recommendation.


    Materials provided by speakers at the UC Commission's meetings in 2013 may be found on the UC Commission's website at http://dls.virginia.gov/commissions/ucc.htm?x=mtg.