RD47 - Commission on Unemployment Compensation Executive Summary of Interim Activity and Work - January 2015


    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 composed of Senators John Watkins, Donald McEachin, and Frank Wagner and Delegates Lee Ware, Kathy Byron, Riley Ingram, Lionell Spruill, and Joseph Morrissey. Senator Watkins chairs the Commission. Delegate Ware serves as the Commission's vice chairman.

    The UC Commission met on August 14, 2014, and December 9, 2014. This executive summary of the interim activity and work of the Commission is submitted pursuant to § 30-224 of the Code of Virginia 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 tax (SUTA) 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' SUTA rates.

    The state of the Trust Fund improved in 2014. The solvency level of the Trust Fund almost doubled, from 24.4 percent on June 30, 2013, to 40.3 percent on June 30. 2014. Two years earlier the solvency level was 9.9 percent.

    Moreover, the solvency level is projected to continue to improve. Projections provided by the VEC at the Commission's December 9 meeting put the solvency level at 46 percent in 2015, 59 percent in 2016, 67 percent in 2017, and over 70 percent in 2018, 2019, and 2020. The increases in the solvency level affect the unemployment taxes paid by employers, because the fund builder tax (which is assessed at the rate of 0.20 percent of the first $8,000 of each employee's wages) is suspended in years when the solvency level exceeds 50 percent.

    The positive trend in the Trust Fund solvency level tracks a similar trend in the cash balance of the Trust Fund. The balance exceeded $1 billion in 1998-2002 but as a result of the Great Recession fell to negative $104 million in 2010. The balance in the Trust Fund on June 30, 2014, was $564 million; one year earlier the balance was $335 million, and two years earlier the balance was $135 million. The balance is forecast to rise to $710 million in 2015, $938 million in 2016, and over $1.1 billion in each of 2017 through 2020.

    From 2013 to 2014, SUTA collections decreased from $791.1 million to $745.3 million, while unemployment benefits disbursed over this period declined even more rapidly, from $575.8 million to $499.6 million. The average annual SUTA per employee, including the 0.22 percent pool tax and the 0.20 percent fund builder tax, peaked in calendar year 2012 at $236 per employee. In 2013 it dropped to $234, and in 2014 it dropped to $209. Average total state unemployment tax is projected to continue falling to $190 in 2015, to $186 in 2016, and to $159 in 2017. The corresponding national average for the year ending December 31, 2013, was $424.

    Virginia had nearly 200,000 employing units in 2014 who were assessed SUTA at either computed rates, which are based on the employer's record of benefit charges, or assigned rates, which are assessed based on status as a new employer, delinquent employer, foreign contractor, or other category. Of these, 56.7 percent were assessed SUTA at the lowest rate of 0.10 percent, exclusive of the pool tax and fund builder tax. Virginia's 25,250 new employers were assessed SUTA at a rate of 2.5 percent. Approximately 12.8 percent of employers were assessed SUTA at the highest rate of 6.2 percent. A Virginia employer's SUTA rate is assessed on the first $8,000 of each employee's wages. Virginia's taxable wage base is the lowest among the five states that compose the area of the Fourth Federal Appellate Circuit and the District of Columbia.

    2. Unemployment Program Data

    Nonfarm employment in the Commonwealth in October 2014 was estimated to be 3,799,600, which represented an increase of 0.4 percent over nonfarm employment in October 2013. According to acting VEC Commissioner Sam Lupica, Virginia's not-seasonally-adjusted unemployment rate for October 2014 was 4.8 percent, which compares favorably with the corresponding national rate of 5.5 percent.

    The number of initial claims for unemployment benefits in Virginia in 2014 is projected to be 222,000, based on initial claims of 182,897 during the first 10 months of the year. If this projection proves accurate, the initial filings in 2014 will be almost 57,000 fewer than in 2013.

    Final payments of benefits in the first 10 months of 2014 are down 18.9 percent from the same period in 2013 and down 27.7 percent from the same period in 2012. 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 44.6 in October 2013; in October 2013, it was 47.7 percent.

    Virginia's maximum weekly unemployment benefit in 2014 was $378, which is unchanged from 2013. The national average weekly unemployment benefit in 2014 was $423. The maximum weekly benefit reflects a weekly benefit replacement rate in 2014 of 39 percent of the state's average weekly wage; the national average replacement rate in 2014 was 45 percent.

    3. Short-time Compensation Program Legislation

    During the 2014 Session, the General Assembly enacted Senate Bill 110, which was jointly chief patroned by Senators William Stanley and George Barker. The bill provided for the establishment of a short-time compensation program, under which employers may seek approval of a plan to reduce the hours worked by employees and permit the employees whose hours are reduced to receive partial compensation for lost wages. The measure became effective January 1, 2015. The bill was amended to add enactment clauses providing that (i) the program will expire on January 1, 2020, and (ii) if federal grants covering certain costs of establishing the program are not received by the VEC by July 1, 2016, the program will expire on that date.

    The U.S. Department of Labor has notified the VEC in writing that the inclusion of these two enactment clauses precludes Virginia's short-time compensation program from qualifying for federal grants that may otherwise reimburse the VEC for costs associated with establishing the program. Mr. Lupica reported that the U.S. Department of Labor has extended the time period for which start-up grants may be obtained, and that if the two offending enactment clauses were repealed, Virginia would be eligible to apply for grants to cover program start-up costs.

    4. Military Trailing Spouse Legislation

    During the 2014 Session, the General Assembly also enacted Senate Bill 18, patroned by Senator Mamie Locke. The legislation provides 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, unless the transfer involves members of the Virginia National Guard relocated within the Commonwealth. Benefits paid to qualifying claimants shall be charged against the pool rather than against the claimant's employer. The measure also repeals Chapter 878 of the Acts of Assembly of 2009, which is similar to this measure but did not take effect because that bill included an 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. Because the federal government did not made such an appropriation, the military trailing spouse provision under the 2009 bill was not implemented.

    Senate Bill 18 included an enactment clause providing that the measure will expire on December 31, 2020. In order to assist the Commission in monitoring the costs and benefits provided by this measure, the VEC reported that in the period between July 1, 2014, and early December 2014 the agency paid out $235,356 in unemployment benefits to 82 claimants.

    5. Solvency-based Conditions for Interest-Free Federal Loans

    The U.S. Department of Labor administers a program whereby states that have exhausted the cash balance of their unemployment trust fund may obtain loans for the purpose of paying unemployment benefits to claimants. These loans have historically been without interest to the borrowing state if (i) the advance is repaid by September 30 of the same year the advance is made and (ii) no additional advance is made after September 30 of that same year.

    The federal Balanced Budget Act of 1997 added a new requirement that the state meet funding goals relating to its unemployment trust fund account, which goals were to be established under regulations issued by the Secretary of Labor. In late 2010, the Secretary of Labor issued the regulations implementing this requirement. The regulations seek to encourage states to maintain solvent trust funds by conditioning interest-free advances on the state's having met funding goals that rely more on forward-funding, where the state builds up its fund balance in anticipation of increased outlays.

    As a condition of receiving interest-free loans, a state is required to (i) achieve fund solvency and (ii) maintain its tax efforts. Fund solvency is measured by a criterion called the average high cost multiple (ACHM), which represents the number of years a state could pay benefits at a rate equal to its average high cost rate without collecting any additional unemployment compensation taxes.

    Maintenance of tax effort is measured by whether a state, in every year between the last year in which it obtained an ACHM of 1.0 and the year in which it obtained an advance, the state's unemployment tax rate was at least 80 percent of the prior year's tax rate and at least 75 percent of the average benefit-cost ratio over the preceding five calendar years.

    The Department of Labor delayed application of the funding goals until 2014, when an implementation schedule began to be phased in. For 2014, a solvency level of 0.50 ACHM applied. The ACHM requirement will increase by 0.10 each year thereafter until the 1.0 requirement is reached in 2019.

    According to the Department of Labor's Trust Fund Solvency Report for 2014, Virginia's AHCM was 0.21 as of the end of calendar year 2013. The VEC has concluded that based on historical and current projected data, the Commonwealth will not meet the solvency criteria in any year and will not meet the maintenance of effort criteria in some years. As a result, Virginia would be ineligible for interest-free cash flow loans under these new regulations.

    6. Status of the VEC's Unemployment Modernization Project

    The VEC has been working since 2010 to implement upgrades to its information technology systems. Mr. Lupica told the Commission that the Unemployment Modernization Project (UI Mod) was intended to replace the agency's mainframe computer system. UI Mod will support the payment of benefits to unemployed workers, the collection of taxes from employers, and the accumulation of wage data. He expressed his hope that a completion date of 2015 will be finalized. While portions of the project dealing with imaging and workflow have been implemented, other aspects remain incomplete and the VEC is working with its vendor on a schedule.

    The Auditor of Public Accounts (APA) reported in February 2014 that the UI Mod was without an approved schedule, which places the project at risk of failure. The total budget for UI Mod was $58.5 million, with $49.1 million coming from Reed Act federal funds and the remaining $9.4 million coming from the VEC's penalty and interest fund. The APA report states that the Tax and Benefits elements of UI Mod were originally scheduled to go live in December 2012 and May 2013, respectively. In order to address schedule changes resulting from the project's complexity and resource turnover, the VEC and its vendor agreed to extend the remaining implementation dates multiple times. A contract modification executed in September 2013 extended the go-live dates for both remaining phases to December 2013. However, the project team tested the system in November 2013 and found the core system functionality was not ready for implementation; therefore, the December 2013 go-live was not met, making the contractually defined final acceptance date of February 28, 2014, unobtainable.

    Senator Watkins advised Mr. Lupica that the APA has found the VEC to be one of two agencies out of compliance with VITA security standards. He also noted that a recent study by the Joint Legislative Audit and Review Commission on workforce development programs has criticized the lack of data from the VEC. Senator Watkins observed that there has been a lack of emphasis over the past four years on completing the project and asked the VEC to obtain a commitment from the vendor on a timeline for completing the installation of the project and to satisfy the APA's concerns.

    7. Legislative Proposals for the 2015 Session

    The Commission traditionally provides members the opportunity to discuss legislation that they intend to introduce in the ensuing legislative session. Three proposals were presented to the Commission at the December 9 meeting.

    a. HB 1278 (Davis): Making the Last 60-Day Employer Liable for Benefit Charges

    Delegate Glenn Davis discussed House Bill 1278, which he prefiled on July 31, 2014. The measure seeks to amend provisions that require the last employer that employed a benefits-eligible individual for 30 days or 240 hours to be assessed benefit charges relating to the individual's benefit claim. House Bill 1278 would extend the period when an employer may employ an individual before becoming liable for the benefit charges from 30 days or 240 hours to 60 days or 480 hours.

    Delegate Davis advised the Commission that the issue was brought to his attention by employers that felt that extending the period would provide more time to determine if a newly-hired employee is going to be a good fit. Some members recalled that a similar effort was proposed without success in 1994.

    The Commission agreed to make no recommendation on the proposal.

    b. HB 1382 (Head): Making the Pool Liable for Benefit Charges Currently Charged to the Last 30-Day Employer

    Delegate Christopher Head presented legislation introduced for the 2015 Session as House Bill 1382. This measure represents another approach to address the concerns that gave rise to Delegate Davis' House Bill 1278. The measure would excuse the last 30-day employer from responsibility for benefit charges associated with unemployment benefits paid to a claimant whose unemployment is caused by separation from a subsequent employer. In such a case, the bill would assess the individual's benefit charges for such period of unemployment to the pool, and thereby spread charges among all taxable employers through the pool tax.

    Delegate Head acknowledged that the issue involves who should be responsible for the benefit charges, the last 30-day employer who had no involvement in the employee's separation from employment or all of the employers who are assessed a pool charge. Neither outcome of this debate affects the claimant's eligibility for unemployment benefits. Senator Watkins asked the VEC to determine if the proposal to assign the benefit charges to the pool would affect the Trust Fund's revenues.

    The Commission agreed to make no recommendation on the proposal.

    c. Senator Stanley: Financial Literacy Courses for Persons Receiving Public Assistance

    Senator William Stanley was delayed in attending the meeting, and staff outlined his proposal to expand access to financial literacy courses. In the 2014 Session, Senator Stanley patroned Senate Bill 266, which required the VEC, either by itself or in collaboration with workforce service partner entities, to provide information to all unemployment benefits claimants and job seekers on courses in financial literacy. The courses are to be at no cost to claimants and to job seekers and may be offered online or in any other medium the VEC deems appropriate.

    Senator Stanley's proposal calls for expanding the program initiated in Senate Bill 266 to apply to all persons receiving public assistance. Members questioned how the VEC would know who was receiving forms of public assistance that are administered by the Department of Social Services and other agencies. After he arrived at the meeting, Senator Stanley agreed to rework his bill to address these concerns.

    The Commission agreed to make no recommendation on the proposal.

    III. CONCLUSION

    Materials provided by speakers at the UC Commission's meetings in 2014 may be found on the UC Commission's website at http://dls.virginia.gov/commissions/ucc.htm?x=mtg.