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Congressional Testimony

TESTIMONY OF RAYMOND J. UHALDE
SENIOR ADVISOR
OFFICE OF THE SECRETARY
U.S. DEPARTMENT OF LABOR
BEFORE THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT
U.S. HOUSE OF REPRESENTATIVES

April 23, 2009

Good morning. Chairman McDermott, Ranking Member Linder and distinguished members of the Subcommittee, thank you for this opportunity to discuss the provisions related to Unemployment Insurance (UI) in the American Recovery and Reinvestment Act (Recovery Act).

The Recovery Act is without a doubt the single most significant piece of Federal UI legislation in over 30 years. As you are well aware, the total unemployment rate in the United States is 8.5 percent. Experts anticipate that it will rise. Indeed, if this recession follows historic patterns, unemployment will not peak until after the recession ends. The Recovery Act brings urgently needed wage replacement to workers who are unemployed because their jobs have vanished.

In addition to addressing the urgent needs brought on by the recession, the Recovery Act brings long overdue recognition to the fact that, since the 1930's, when the UI program was created, the economy has changed, the workforce has changed, and the way we work has changed. I would like to thank you, Mr. McDermott, for your efforts leading to this legislation.

BACKGROUND

I would like to begin by providing some background information relevant to the UI program. Enacted in the Social Security Act nearly 75 years ago as a federal-state partnership, UI is the primary source of temporary, partial wage replacement for the nation's laid-off workers who are seeking jobs. It helps put food on the table and helps pay the rent.

It is also the nation's leading automatic economic stabilizer during downturns, returning $2.15 to national output for every $1.00 spent on UI benefits. To emphasize its role as an automatic stabilizer, I note that in calendar year 2007 – the recession began in December of 2007 – the system paid $32.4 billion in regular benefits. Last year, the amount paid jumped to $43.0 billion. This year we are on track to pay $74.4 billion, including the permanent extended benefits program. These figures do not include Federal provisions enacted last year, or the provisions in the Recovery Act. Including those, we paid a total of $50.8 billion last year and project to pay $113.7 billion this year. As noted, the stimulative effect of these payments is over twice that amount. There are few stimulative tools that are as effective as the UI program during a downturn.

I would now like to turn to the Recovery Act. The Department of Labor (Department) promptly executed agreements with states, as needed, and issued implementing guidance within only a few days after the Recovery Act became law. States have worked very hard to implement the provisions of the Recovery Act as quickly as possible and, in turn, get the Recovery Act's money out to beneficiaries. I will briefly discuss implementation of the UI provisions.

EMERGENCY UNEMPLOYMENT COMPENSATION

The Emergency Unemployment Compensation (EUC) program, created in June 2008 and expanded in November 2008, provides up to 20 weeks of benefits to eligible jobless workers in all states and up to 13 additional weeks of benefits in states with high unemployment. It was set to expire on March 31, 2009. The Recovery Act extended the date for new EUC claims to December 31, 2009, with payments on those claims ending on May 31, 2010.

All states (including the District of Columbia, Puerto Rico, and the Virgin Islands) are paying EUC. Currently, 42 states meet the high unemployment criteria, under which 33 weeks of EUC are payable to eligible jobless workers. Through March, 3.7 million beneficiaries had been paid a total of $12.2 billion.

FEDERAL ADDITIONAL COMPENSATION

The Recovery Act created a new Federal Additional Compensation (FAC) program, which provides a 100 percent federally-funded $25 add-on to all weekly UI payments. Jobless workers can enter the FAC program until January 1, 2010, and can continue to receive benefits until June 30, 2010. All states signed agreements to pay FAC effective February 22, 2009 — the first week for which FAC was payable.

Despite being a technical challenge for states, thirty-seven were able to begin payments of FAC on or before March 16, 2009. As of today, all but 2 states have begun making FAC payments.

UI MODERNIZATION INCENTIVE PAYMENTS

The Recovery Act made available $7 billion for states that have updated their UI programs to reflect the nature of the 21st century economy. These provisions are not novel or radical. In fact, many state laws contained qualifying provisions prior to the passage of the Recovery Act. These provisions treat part-time workers and recent entrants to the labor force more equitably and recognize that many individuals must balance work and family. Recent entrants in particular have been disadvantaged because, for administrative reasons, their earnings in the most recent calendar quarter are not used to determine their eligibility, even though unemployment taxes have been paid on these earnings. Individuals with a substantial history of part-time work are also disadvantaged because in many states they are denied benefits when they seek the same part-time hours they have always worked. Again, this denial occurs even though taxes have been paid on their wages.

The UI Modernization eligibility provisions should have a modest overall impact on benefit costs. Research shows that using more recent wages increases benefit outlays by 4 to 6 percent. Actual costs will vary from state to state since labor markets vary. Also, some states may need to add entirely new provisions while other states needed only relatively minor changes. Of states obtaining enactments this year, we note that South Dakota estimated that using more recent wages would add only $700,000 per year. Arkansas estimated that adding the necessary provisions to qualify for its full share of UI Modernization payments would cost $5.75 million per year. Similarly, Iowa estimated that adding such provisions would cost $20.2 million per year. Minnesota, which had already had some provisions that were similar to the modernization provisions, estimated that upgrading its law to qualifying for incentive payments would cost only $1.5 million per year.

The incentive payments are available to states that have expanded eligibility for UI benefits in specific ways. States receive one-third of their share when they use recent wages when determining UI eligibility. Research shows this "base period" provision is critical for low wage workers and individuals who are recent entrants to the labor market.

States receive the remaining two-thirds of their share when they also provide for two of the following four eligibility provisions.

  • Pay UI to individuals seeking only part-time work.
  • Ease qualifying requirements for workers who quit because of certain family responsibilities. These relate to workers who leave work to escape domestic violence, to care for an ill family member, or who quit to follow a spouse who moves to a new job.
  • Extend benefits to workers in training who exhaust regular UI.
  • Add dependents' allowances to weekly benefits.

These provisions are particularly important to women, who often require flexible work arrangements as they balance their families' needs with their professional responsibilities. Incentive payments may be used for unemployment benefits or to improve states' ability to get benefits out to eligible workers quickly and to help them find a good job. The training benefit will assist in creating a skilled workforce, which will benefit employers who need these workers.

New Jersey was the first state to apply and receive its entire share of the incentive payment -- $206.8 million. Connecticut, Illinois, Massachusetts, New Hampshire, and South Dakota's applications for the first 1/3 of their share of the incentive payment have been approved, and these states have received a total of $200.3 million. Minnesota's application for its entire share, and applications from New York, Hawaii and Virginia for their first 1/3 shares, are currently under review by the Department. Sixteen more states use recent wages when determining UI eligibility, and we are awaiting receipt of their applications. In their applications, all states have advised us that they plan on using the incentive money for the payment of benefits and strengthening their trust fund accounts.

Several states have enacted new legislation that would enable them to receive incentive payments. I note that one of the approved states - South Dakota - added the base period provision. Minnesota enacted several UI Modernization provisions this year prior to submitting its application. Other states have introduced bills in their state legislatures, and the Department's staff is providing technical assistance to assure that these bills result in state laws that qualify for incentive payments.

The Department is pleased that so many states recognize that UI modernization isn't a partisan issue — it's an issue of fairness, and it makes the UI program more responsive to the modern workforce. The Department encourages states to update their UI programs to qualify for incentive payments as it is beneficial to both workers and states' economic recovery.

The Recovery Act also provided a $500 million special administrative distribution. Each state's share was deposited in the state's account in the Unemployment Trust Fund on February 27, 2009, where it is available for implementing the state's incentive provisions, improving outreach to individuals potentially eligible under the state's UI Modernization provisions, improving UI tax and benefit operations, and the provision of staff-assisted reemployment services. Most state laws require appropriation of these funds by the state legislature. At this stage, it is too early to report on state use of this money.

EXTENDED BENEFITS

The Extended Benefits (EB) program is a permanent federal-state program that provides up to 13 additional weeks of unemployment benefits to eligible jobless workers in states with high and rising unemployment. At state option, workers in states with very high total unemployment rates (TUR) are eligible for an additional 7 weeks for a total of 20 weeks of EB. Costs of EB are generally split equally between the Federal government and the states.

The Recovery Act provides for 100 percent Federal funding of EB (where EB is federally reimbursed) for weeks of unemployment beginning before January 1, 2010. This gives states an incentive to add the optional "trigger" based on the state's three-month average TUR. It is easier for many states to trigger on using the TUR.

Prior to the Recovery Act becoming law, 12 states already had this optional TUR trigger in their laws. Twenty-six states are currently triggered "on," either using this trigger or a mandatory trigger based on the insured unemployment rate. Since the Recovery Act became law, California, the District of Columbia, Georgia, Michigan, Nevada and Ohio have amended their laws to provide for this optional "trigger" for the period during which 100 percent Federal funding is available. Fourteen additional states could be triggered "on" if they added the TUR trigger.

The Recovery Act affected EB eligibility in another way. Generally, an individual must establish eligibility for EB within 52 weeks of first filing a claim for regular state benefits. Given that some workers can collect up to 26 weeks of state benefits and 33 weeks of EUC, some workers would not be eligible for EB since 59 weeks have passed. The Recovery Act permits states to expand EB eligibility to individuals who exhaust EUC while EB is payable in their state for weeks of unemployment beginning before January 1, 2010 with phase out for beneficiaries in payment status ending on June 1, 2010. Of the states currently triggered on EB, almost all have indicated that they are taking advantage of this expansion.

As you may know, due to longstanding concerns about the responsiveness of the EB program, the Administration will set forth a proposal to reform the program. As part of this effort, we will certainly review the program's triggers. Among the other EB issues we would like to address are work search provisions that are difficult to administer since they differ from regular state work search requirements. They are also paper-intensive since the requirements were designed in a time when state systems were not highly automated. States have told us they would like to see these requirements modified to reflect the way they currently implement their state law work search requirements. While we have tried to provide the states with flexibility, this has been difficult because the Federal EB requirements are very specific. We look forward to working with the Subcommittee to address this and other issues related to the EB program.

ADVANCES TO STATES

The Recovery Act also provides relief to states that need to borrow from the Federal government to keep paying state unemployment benefits. It does so by suspending the provisions that require states to pay interest on these loans through the end of 2010.

Currently, 14 states have borrowed a total of over $9 billion. Due to the increase in benefit payments, we project increased borrowing with the result that the Unemployment Trust Fund will need to borrow $16 billion from General Revenues in FY 2010 to cover these loans to states.

CONCLUSION

Thank you for the opportunity to talk to you about the UI provisions in the Recovery Act. I will be glad to respond to any questions you may have.