STATEMENT OF RAYMOND J. UHALDE
DEPUTY ASSISTANT SECRETARY
EMPLOYMENT AND TRAINING ADMINISTRATION
BEFORE THE
SUBCOMMITTEE ON HUMAN RESOURCES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES

September 7, 2000

Madam Chair and Members of the Subcommittee:

Thank you once again for the opportunity to address the Subcommittee on reform of the unemployment insurance (UI) and employment service (ES) programs. Although your last hearing on this topic was not very long ago -- just February 29^th -- there have been positive developments since that time. As you can see, we are all sitting together today instead of on separate panels. I believe that the last hearing and the efforts of this Subcommittee contributed greatly to the progress that has been made, and I would like to acknowledge and thank you for that.

I am here today to testify on a proposal developed by a broad group of stakeholders in the UI and ES system that I believe was presented to you early last month and now is in the process of being converted to legislative language. With me today is Grace Kilbane, Administrator of the Office of Workforce Security, who was the Department of Labor's principal participant in the discussions that resulted in this agreement.

I am extremely pleased to be here today because this is an historic event -- an event that many believed could not happen. On June 27, the Interstate Conference of Employment Security Agencies (ICESA), UWC, and organized labor, with the participation of the Department of Labor, reached agreement on the elements of a comprehensive reform proposal that they believed could garner bipartisan support. I realize that there is a long way to go, but the Administration believes that the hard work and policy accommodations made by the parties who worked on this proposal have resulted in a package that meets the objectives established for the reform effort, and we are committed to working with Congress to move this forward and work out the technical details.

I will begin with some brief background comments on the importance of the UI and ES programs for America's Workforce Network -- which is the brand name we use to identify workforce investment activities administered through the Department -- and then discuss the reform effort.

BACKGROUND ON THE UI AND ES PROGRAMS

UI is the primary source of temporary, partial wage replacement for eligible unemployed workers -- it literally helps put food on the table. It is also the Nation's leading automatic stabilizer during economic downturns - according to our analysis for every $1.00 spent on benefits, the economy gains $2.15. Even in this unprecedented economic expansion, the UI system helps about 7 million workers annually bridge the financial gap between jobs, and will pay an estimated $22 billion in benefits in fiscal year (FY) 2000. During recessions, these benefit payments soar as UI plays its role of stabilizing the economy in communities hard hit by unemployment.

The UI program operates as a Federal-State partnership under which Federal law defines broad requirements for the UI program and State law sets forth most benefit provisions and the State tax structure. The UI program is administered in connection with the ES program which helps unemployed workers and others find jobs and assists employers in finding new workers. In program year 1998 (the latest data available), 17.3 million job seekers contacted ES offices to obtain services.

The UI and ES programs are major partners in the One-Stop delivery system that was established by the landmark, bipartisan Workforce Investment Act of 1998. This new system was designed in partnership with employers, labor organizations, education, and community groups. Each of the participating One-Stop partner programs make certain applicable core services (e.g., skill assessments and job search assistance) available through the One-Stop system. As a result of WIA, the labor exchange services provided by the ES have been revitalized and integrated into the One-Stop system. In fact, ES is the "backbone" of the One-Stop system. Its services are available to all jobseekers and employers. It provides a major share of the operating costs of One-Stop centers nationwide. Finally, the ES offers electronic tools that were unimaginable just 10 years ago. For example, America's Job Bank provides the public with access to about 1.7 million job vacancies on a daily basis, allows job seekers to develop and post resumes on the Internet and employers to review those resumes.

REFORM EFFORTS

Reform of the UI and ES systems has been a topic of discussion at the national level for some time. As you know, Congress authorized the bipartisan Advisory Council on Unemployment Compensation in 1991. The Council issued findings and recommendations in 1994, 1995, and 1996 that concerned many of the same issues addressed by this reform proposal.

This Administration's efforts to reform the UI and ES programs began in early 1998 with legislation proposed by the Administration as a "down payment" on more comprehensive reform and we were pleased that the legislation was introduced on a bipartisan basis by Representatives Levin, English, and Rangel. But these reform efforts, like others initiated by only one of the partners or stakeholders of this system, were not successful because they were neither sufficiently comprehensive nor did they have sufficiently broad-based stakeholder support.

The reform effort continued in mid-1998, with the Department of Labor convening 65 dialogue sessions throughout the country to provide the public opportunities to offer suggestions for reform; over 3,800 individuals participated. What we heard from employers, workers, and State officials in these sessions informed development of principles for reform which were articulated in the President's proposed budgets for FY 2000 and 2001.

In these budgets, the President committed the Administration to working with stakeholders and Congress to develop a comprehensive, bipartisan legislative proposal of system reforms centered on the following five principles:

•  expand coverage and eligibility for benefits;
•  streamline filing and reduce tax burden where possible;
•  emphasize reemployment;
•  combat fraud and abuse; and
•  improve administration.

To meet this considerable challenge, ICESA convened a workgroup comprised of employer and worker representatives, State agency and Department of Labor officials which has been meeting for over a year. Subsequent to the Subcommittee's February 29 hearing on reform, the ICESA-convened workgroup was joined by another group representing a coalition of States and employers, and since that time group members made intensive efforts to reach a comprehensive agreement.

THE REFORM AGREEMENT

On June 27, a group representing the ICESA-convened workgroup and the State-business coalition reached agreement on a comprehensive proposal for UI and ES reform. This proposal sets a sound framework to secure program reform and adequate funding for services to workers and employers because it addresses the major concerns of the partners and stakeholders and, we anticipate, will garner broad and bipartisan support. This is a unique agreement in the history of these programs. The advantages of this proposal include:

•  helping about 600,000 more of today's workers, especially women and low-wage workers, access unemployment benefits -- without increasing State taxes in the near term;
•  ensuring that about 600,000 more unemployed workers receive the reemployment services they need;
•  improving the recession readiness of the UI program;
•  cutting employers' Federal unemployment taxes by $1.75 billion per year -- nearly $13 billion over the next seven years; and
•  providing adequate resources to fund the program service needs for UI and ES within America's Workforce Network.

We believe that the proposal addresses all of the principles presented in the President's budgets for FY 2000 and 2001, and I would like to take a few moments to tell you why the Administration believes this proposal meets the objectives laid out for the reform effort.

• Make extended benefits available sooner during recessions. The proposal lowers the extended benefit (EB) trigger rate to 4 percent insured unemployment from the current 5 percent threshold. This trigger rate was increased from 4 percent to 5 percent in 1982, and in the recession of the early 1990s only 10 States met that 5 percent trigger. In reaction to this limited economic response, a special Federal program was enacted that made benefits available in all States, not just those that had higher unemployment. We believe that this reform element will improve the responsiveness of EB in future economic downturns, will target benefits where they are most needed, and as a result will also be less costly to the Federal budget.
• Expand benefits to part-time workers. This element will ensure that most part-time workers who lose their jobs will be able to qualify for benefits while they seek new part-time work. In most States laid-off part-time workers are not eligible for benefits solely because they are not looking for full-time work. We believe that this does not reflect the importance of part-time work in today's labor market and is inequitable since unemployment taxes have been paid on these workers' wages. These workers must meet the same requirements with respect to their wages and work history as other workers who qualify for benefits under this proposal. We believe this provision, in combination with the next, would help 600,000 workers gain access to unemployment benefits.
• Make more recent wages available for determining benefit eligibility. This element would require that States use wage data for the most recently completed quarter in making benefit eligibility determinations when unemployed workers would not otherwise qualify for benefits and when the data have been received by the State agency from employers. Currently in many States some unemployed workers do not qualify for benefits simply because their work and earnings are too recent and, although reported to the States, are not entered into automated systems. We believe that this time lag should not result in denial of benefits and that improved technology will help to make wage data available more quickly.
• Repeal the 0.2 percent Federal Unemployment Tax Act (FUTA) surcharge. The 0.2 percent FUTA surcharge long ago fulfilled the purpose for which it was originally enacted - to pay back loans that were made to States in the 1974-75 recession. The remaining permanent 0.6 percent tax aligns program revenue with program need and avoids build up of balances in the Federal accounts in the unemployment trust fund (UTF) beyond apparent need. We believe that in the context of this comprehensive proposal the 0.2 percent should be eliminated in 2001. This change would save employers $1.75 billion annually.
• Improve funding for UI and employment services. The proposal would establish statutory funding formulas for UI, ES and Veterans' Employment and Training Services, which would determine the national total amount available each year for these activities. The formulas would reflect projected workloads and make adjustments for inflation. This funding would be moved from the discretionary to the mandatory side of the budget.

State administration of the UI and ES programs have been under-funded for too long due to Federal budget rules and constraints. Under-funding is affecting services to unemployed workers in a number of ways: benefit payment and appeals timeliness have declined; benefit overpayments have increased; and services were provided to only one-third of UI beneficiaries who were identified as likely to exhaust benefits and in need of reemployment services under State worker profiling systems. In addition, States are spending an increasing amount, about $250 million a year, to supplement Federal funding to keep local offices open and UI and ES services available statewide - especially in rural communities. We believe that these programs -- which are of vital importance to the labor force and the economy -- should be adequately funded.

Expanded services and improved administrative funding would include:

•  new tools to detect and prevent fraud and overpayments;
•  ability to provide universal core services through the One-Stop system so that more WIA funds can be targeted to intensive and job training services;
•  increased audits of employers, eligibility reviews of claimants, and other integrity activities;
•  the provision of a significant proportion of the reemployment services necessary to meet the President's commitment to make such services universally available to all who need them; and
•  adequate funding for the administration of UI, ES, and Veterans' Employment and Training Services.

Changing the budget structure presents challenges for both the Congress and the Administration, but we recognize, as you do, that these programs have unique features:

•  A separate, dedicated Federal payroll tax is levied to fund their administration.
•  When Federal accounts in the UTF exceed their ceilings, these "surplus" funds are distributed to State accounts in the UTF, can be used for administration, and are from the mandatory side of the budget.
•  The benefit side of the UI program is self-financing through State taxes; many other federally supported social benefit programs are fully financed by Federal taxes.

We believe these unique features justify moving the funding for these programs from the discretionary to the mandatory side of the budget for purposes of the Budget Enforcement Act.

I would also note that the Senate Appropriations Committee acknowledged the problem of UI benefits being classified as mandatory while operational costs are discretionary, including report language in the FY 2001 budget seeking a solution to this problem.

Clearly this is an ambitious package of proposals, and we recognize the challenges that face us in making these reforms a reality. Time is short, and there is much legislative business to be completed, but with bipartisan support, we believe that it should be possible to achieve enactment this year. We recognize the budget challenges this proposal faces. However, we believe that these challenges can be met successfully, and the Administration is committed to achieving these reforms within a balanced fiscal framework.

I believe I have touched on the five major provisions in the package, but there are changes that we have not discussed today. We look forward to working with Congress on these issues as well, which include topics such as: needed privacy protections as we address fraud and abuse, particularly related to access to the National Directory on New Hires; streamlined tax filing; and improved administrative procedures.

In sum, we believe this proposal sets a sound framework for securing reform and meets the Administration's objectives for reform of the employment security system. We pledge to work with the Congress in crafting legislation to secure these reforms. I am encouraged by the workgroup's enthusiasm and your leadership, and sincerely hope that we will cap this historic event with the passage of a reform bill by year's end.

Before closing, I want to thank you, Madam Chair, and Representatives English, McCrery, Cardin, and Levin for your request to Appropriations Subcommittee Chairman Porter urging the Subcommittee to provide increased funding for the administration of our Nation's employment security system. Funding a larger portion of each State's projected total workload in the base grant at the beginning of the year will certainly enhance State operations. We would also like to thank the members of the Subcommittee for the bipartisan interest you have shown in the sponsorship of a reform bill that reflects the efforts of the workgroup.

Madam Chair, this concludes my formal remarks. I look forward to the testimony of my colleagues, and I will be glad to respond to any questions you or Members of the Subcommittee may have.