This report presents an actuarial and policy analysis for a prospective Paid Family and Medical Leave (PFML) program for the Commonwealth of Virginia, focusing on SB373 legislation introduced during the 2024 General Assembly session. The study examines the economic, social, and demographic impacts of the proposed program and includes an actuarial analysis by Milliman, an international actuarial consulting firm.

Paid Family and Medical Leave (PFML) programs provide temporary replacement income for workers with a serious health condition, those caring for an ill family member, or those welcoming a new child. By 2024, 13 U.S. states and the District of Columbia have enacted PFML programs.

Virginia workers currently rely on a mix of federal programs and employer-provided benefits. The Federal Family and Medical Leave Act (FMLA) offers unpaid leave and covers only 56% of the workforce. Private employers have increasingly offered short-term disability and paid family leave benefits, but coverage remains limited, particularly for part-time, lower-wage workers, and employees of small businesses.

Policy design elements used by states in devising their PFML programs can affect the cost, utilization, distributional effects; and health, social, and economic impacts of PFML programs. Key design features include funding methods, eligibility requirements, benefit structures, and administrative characteristics.

SB373 proposes an 8-week PFML program with 80% wage replacement, funded by payroll taxes shared between employers and employees. It offers exemptions from program participation for state government and selected local government employers and employers with qualified private plans. Small businesses with 10 or fewer employees are exempt from the employer payroll tax share. Also, selfemployed individuals may opt into the program.

Virginia's proposed program offers shorter leave compared to other states. However, in many other respects, including the wage replacement rate, it is similar to other state plans. Most states use payroll taxes to fund PFML, with varying splits between employers and employees. Virginia's proposed 50-50 split is common among states with PFML programs.

Milliman Study Findings

Milliman conducted actuarial analyses for several program options based on previous Virginia legislation. Each option assumes that the PFML program is established on July 1, 2025; initial staffing, procurement and education/outreach begins on January 1, 2026; implementation of the payroll tax on workers and businesses starts on January 1, 2026; and benefit payments are initiated on January 1, 2027. Since contributions begin one year before benefits are paid, a one-year period is used to build reserves for the PFML trust fund. The analyses project the revenues and payroll tax needed for benefit payments and the direct and indirect costs of operation and administration to maintain a sufficient cash balance to ensure program solvency over the 2026 to 2035 period. Analyses were performed for the options listed on page iii of the report.

Research Findings: PFML Economic, Social and Demographic Effects

The study also reviews the academic empirical literature on the economic, social, and demographic effects of PFML programs. The review focuses on studies conducted in the U.S., examining outcomes such as leave utilization, maternal labor market attachment, infant and child health, parental well-being, employer outcomes, and caretaker outcomes. The evidence is generally positive and more indicative of generally positive impacts than a review conducted earlier as part of a 2021 Virginia PFML study. Key findings include the following:

• PFML Utilization and Duration: Studies show that both unpaid and paid family leave significantly increase the utilization and length of parental bonding leave. Paid family leave also boosts caretaking leave for ill family members. Program design variables, such as wage replacement rate and maximum leave allowance, affect utilization and leave length.

• Parental Leave Labor Market Outcomes: State PFML programs generally have positive short-term effects on maternal labor force participation and employment. PFML programs are also associated with increased earnings for mothers. However, some studies find negligible or negative long-term effects on maternal employment and earnings.

• Economic Security and Savings Behavior: PFML programs improve the economic security of mothers, especially for vulnerable groups. PFML can also reduce precautionary savings, particularly for higher income families.

• Enhanced Health Outcomes for Families: PFML programs are linked to improved infant and child health outcomes, such as better feeding practices, improved vaccination rates, and reductions in low birth weight. PFML programs also improve parental mental and physical health. Evidence for the effect of PFML programs on long-term effects on child health and development is more varied.

• Employer Impacts: Studies generally suggest that the impact of PFML programs on employers is relatively small. Most firms report no significant effects on profitability, productivity, or employee turnover. However, smaller firms may face higher administrative costs and challenges in managing employee absences.

• Caretaker Labor Market Attachment: PFML programs have been shown to improve labor market attachment for unpaid caregivers, particularly women and those with higher education levels. Caregivers are more likely to remain in the labor force and maintain employment while providing care for ill or disabled family members.

Economic Analysis: Impact of PFML Scenarios

Weldon Cooper Center staff conducted economic impact analyses of various PFML scenarios using REMI PI+ software. Ten scenarios were modeled, including the four actuarial study options and additional scenarios exploring different payroll tax burdens and potential secondary economic and demographic outcomes. Key results of the analysis are as follows:

• Baseline Scenarios (Options 1-3 and 1A): The program scenarios have negative economic impacts initially due to the need to build reserves. However, the long-term effects are smaller and minimal relative to the size of Virginia's economy.

• Alternative Tax Burden Scenarios: Shifting the payroll tax burden entirely to workers or employers affects the magnitude of economic impacts and state tax revenues. Negative economic impacts are mitigated somewhat if the payroll tax burden is shifted to employees.

• Secondary Economic and Demographic Scenarios: These scenarios show the potential positive impacts from increased female labor force participation, higher birth rates, and lower infant mortality rates, but negative impacts from reduced labor productivity.

Recommendations

Develop Fund Balance Requirement Formula: An analysis by Milliman indicates that competing interpretations can be made from the Virginia PFML legislation fund balance requirements. The choice of formula can make a significant difference in initial target fund levels and initial contribution rates required to fund the program. Lower fund balance requirements would also reduce the initial negative economic impact of program introduction. The General Assembly could provide further clarification on this issue in future legislation.

Revenue Bond for Startup Costs: Negative economic impacts are most concentrated in the first year of the program because of the need to build the trust fund without an associated payout in benefits. To avoid this disruption to state economic activity, the General Assembly may want to consider issuing a revenue bond to smooth startup program costs over time.

Consider Return-to-Work Program: Few states offer return-to-work programs as part of the PFML benefits. These programs can provide financial incentives, therapeutic services, and workplace accommodations to help workers transition back to work, potentially reducing short-term disability leave lengths and costs. The General Assembly may want to consider these services as part of a PFML program.