The 1st meeting of the Interim Joint Committee on Labor and Industry was held on Thursday, July 16, 2009, at 10:00 AM, in Room 131 of the Capitol Annex. Representative Rick G. Nelson, Chair, called the meeting to order, and the committee assistant called the roll.
Present were:
Members: Representative Rick G. Nelson, Co-Chair; Senators Julian M. Carroll, Denise Harper Angel, Jerry P. Rhoads, Katie Kratz Stine, Gary Tapp, and Jack Westwood; Representatives C. B. Embry Jr., Bill Farmer, Tim Firkins, Richard Henderson, Charlie Hoffman, Dennis Horlander, Joni L. Jenkins, Thomas Kerr, Adam Koenig, Mary Lou Marzian, Tom Riner, Charles Siler, Jim Stewart III, and Brent Yonts.
Guests: Secretary Helen Mountjoy, Education and Workforce Development Cabinet; and Elizabeth Woerner, Education and Workforce Development Cabinet.
LRC Staff: Linda Bussell, Carla Montgomery, Adanna Hydes, and Betsy Bailey.
Chair Nelson welcomed members and guests to the first meeting of the Interim Joint Committee on Labor and Industry. He informed the members that Senator Kerr, the Senate co-chair could not attend the meeting and Senate Vice Chair Tapp would co-chair on the Senate side for the meeting today.
Chair Nelson informed the members that our unemployment insurance program is in a crisis situation and the governor appointed a task force to address the problems in the program. He introduced Secretary Helen Mountjoy, Education and Workforce Development Cabinet, to give a presentation on the status of Kentucky’s Unemployment Insurance program and an update on the work of the task force. Elizabeth Woerner, a summer employee of the cabinet hired to assist the task force, was introduced by Secretary Mountjoy and assisted in the power point presentation by the secretary.
Secretary Mountjoy explained that the unemployment insurance system in this country was established in 1935 during the Great Depression as part of the Social Security Act. It was created to stabilize the economy. It does this by providing assistance to workers’ who become unemployed through no fault of their own and who are receiving training or looking for another job. Unemployment benefits totaled more than $500 million in Kentucky in 2008.
Unemployment insurance is based on a federal-state partnership. Federal law established certain conformity requirements for state unemployment insurance programs. As long as states conform to the federal requirements, states are granted a great deal of flexibility to establish the employer tax structure that funds benefit payments, employee benefit levels, and benefit eligibility requirements. The federal government’s role in the partnership is to guarantee that it will provide loans to states during economic downturns to enable the states to meet their unemployment benefit obligations to eligible workers.
Unemployment insurance is financed through employer contributions. The contributions are actually taxes paid by employers. In Kentucky, an employer pays a tax on the first $8,000 of each worker’s wages. When unemployment is low and wages are stable, more money comes into the system than is paid out. The excess money is placed in a trust fund maintained in Washington, D.C. for Kentucky. Theoretically, enough money will accumulate in the trust fund to enable the state to meet its benefit payment obligations during economic downturns in the economy.
Since 2002, Kentucky’s unemployment insurance program has paid out more in benefits than it has collected in taxes. This occurred, in part, from a structural imbalance in the financing structure. The statutory financing mechanism is based on a limited taxable wage base of $8,000 while the statutory formula for establishing weekly benefit levels is based on gross wages. Revenue rises with job growth while benefits increase with inflation. The taxable wage base of $8,000 was established in 1982 and, at that time, represented approximately 50% of a worker’s average annual wages. Today, that percentage has dropped to approximately 25%.
In 2000, the trust fund balance was $700 million, but had dropped to $82 million by the end of 2008. On January 28, 2009, current employer contributions plus money accumulated in the trust fund were no longer sufficient to meet the benefit obligations of the program. On that date, Kentucky became the 6th state to begin borrowing funds from the federal government in order to pay benefits. As of July 13, 2009, Kentucky had borrowed $298,497,000. Several more states have started borrowing federal funds to pay benefits, and more than half the states are projected to begin borrowing by the end of this year.
Secretary Mountjoy said we often hear that unemployment taxes are high in Kentucky. While the maximum tax rate can be 10%, the average employer tax rate for 2008 was 2.79%. An employer’s tax rate is based on the amount the employer pays into the trust fund and the amount paid out in benefits to the employer’s former employees.
Federal law requires that the taxable wage base be at least $7,000, but states are permitted to set the taxable wage base as high as the state legislature decides to make it. Some states have established taxable wage bases as high as $30,000. States contiguous to Kentucky have taxable wage bases ranging from $7,000 to $12,000.
Unemployment insurance claimants receive no less than $39 per week and no more than $415 per week, plus an extra $25 per week is provided by federal stimulus money. In May 2009, the average weekly benefit in Kentucky was $309.81 which is not too far out of line with our contiguous states.
A recipient is eligible to receive state unemployment insurance benefits for a maximum of 26 weeks. Another 33 weeks is provided by the federal Emergency Unemployment Compensation law, and an additional 20 is provided under the federal Extended Benefits law. The additional weeks of benefits will be funded by the federal government through December 31, 2009.
Kentucky’s rate of unemployment as of June 2009 was 10.9%, the highest rate since August, 1983. Currently, 226,122,000 workers in Kentucky are unemployed.
In January of this year, Governor Beshear announced that he would appoint a task force to address the chronic problems in our unemployment insurance system. The Unemployment Insurance Task Force was appointed with Secretary Mountjoy as the chair. Members include representatives from management and labor and legislators. The task force has met five times since April and its charge was to conduct a comprehensive study of the unemployment insurance system and to recommend strategies for legislative and administrative action necessary to retool system, restore solvency and stability, build reserves to ensure that funds will be available for benefit payments during economic downturns, as well as to assist displaced workers while ensuring that employers are treated fairly and are not competitively disadvantaged. The task force will also consider the issues of voluntary contributions, establishing a waiting week, and procedural and statutory changes. Nationally recognized experts in unemployment insurance were hired as consultants to assist the task force. The consultants, Dr. Wayne Vroman and Dr. Chris O’Leary, will assist the Task Force in developing a model for employer contributions and employee benefits.
After the Task Force determines the appropriate model for employer contributions and employee benefits, it will consider modernization strategies that will make Kentucky eligible for an estimated $90 million in unemployment insurance incentive funds from the federal government through 2011. The 2009 federal stimulus package provided incentive funds to states that make permanent changes in their unemployment insurance laws relating to benefits and eligibility requirements. If Kentucky adopts an alternative base period to determine a claimant’s monetary eligibility, approximately $30 million in incentive funds will be provided by the federal government. An additional $60 million in incentive funds could be received if Kentucky makes two of the following four changes in its law: provide an additional monetary allowance to claimants for dependents; extend the benefit period for claimants engaged in approved training programs; make part-time employees eligible for benefits when they seek part-time rather than full time work; or provide benefits to employees who leave work for compelling family reasons, such as to care for an ill family member or because of domestic violence.
The 2009 federal stimulus package (American Recovery and Reinvestment Act) has already benefitted Kentucky by providing the additional $25 to a claimant’s weekly benefit payments and relief of interest payments on the federal loans until December 31, 2010. Also, $50 million has been received for the Office of Employment Training to upgrade technology, hire temporary employees, improve administrative programming, and increase training opportunities for displaced workers.
Secretary Mountjoy thanked members of the committee and the General Assembly for enacting legislation during the recent special legislative session that allowed Kentucky’s unemployed workers to receive federal extended benefits. The 2009 federal stimulus package provided federal funding for up to 20 weeks in federal extended benefits if the state’s extended benefit trigger was based on the total unemployment rate rather than the insured unemployment rate. Kentucky will participate in the federal governments’ extended benefit program as long as 100% of the funding is provided by the federal government. Funding is scheduled to terminate on December 31, 2009.
Senator Tapp commented to Secretary Mountjoy that if the Task Force recommends an increase in the taxable wage base, the impact on small employers should be considered because of the possibility of another tax imposed by Congress for healthcare reform. He also asked why unemployed workers who are receiving Workforce Investment Act funds for training are exempt from the normal job search requirements. Secretary Mountjoy explained that participation in job training for full time permanent jobs is considered an investment opportunity because the trained worker is more likely to obtain a better job for a longer period of time.
Representative Yonts asked if legal issues will arise from withdrawal of the emergency regulation that included language relating to extended benefits and that language was subsequently referenced in statutory language included in the budget bill. Sec. Mountjoy said she didn’t expect a problem because the federal government approved the language and methodology.
Representative Yonts also asked if the federal loans will ultimately be the responsibility of employers. Secretary Mountjoy said interest accrued on the debt cannot come from regular contributions made by employers; it must come from unemployment insurance interest and penalty funds or another source such as the general fund. If the debt is not paid back within 2 years of the date due, there are consequences that will affect an employer’s credit against the federal unemployment tax.
Senator Stine asked if there are proactive employment programs in place by the Education and Workforce Investment Cabinet to assist unemployed workers to find jobs. Secretary Mountjoy explained that regionally located programs are available to the unemployed for assistance in finding employment.
Senator Stine also asked how soon an unemployed worker would become available for other assistance programs like K-Chip. Secretary Mountjoy said she did not know but would obtain the information.
Representative Hoffman asked if the Task Force will recommend safeguards that will prevent inadequate contributions for the trust fund in the future. Secretary Mountjoy said the Task Force will make such recommendations and that many states tied their rates to inflation.
Representative Nelson asked how much is being lost by the trust fund because reimbursing employers do not make regular contributions to the fund as the contributing employers do. Secretary Mountjoy said she did not know but that is being evaluated by agency staff. She also said that federal law mandates that certain nonprofit and public employers be given the option to be reimbursing employers.
Representative Farmer asked if the Task Force would be able to meet the October deadline for submitting recommendations. Secretary Mountjoy said the Task Force is working toward that date and that the recommendations will be provided to the General Assembly with sufficient time for review and consideration.
Representative Farmer asked when interest on the federal loans will be due and how long borrowing from the federal government will be necessary to pay benefits. Secretary Mountjoy said the interest would become due at the end of 2010 and it is unknown how long borrowing will be necessary. She said in 1982, the state had to borrow for 3 years and it took 6 years to repay the loan with interest.
Senator Stine asked what impact the provision in the budget that prohibits expansion of programs based on stimulus funds would have on the recommendations of the Task Force. Secretary Mountjoy responded that legislation would be required to adopt the modernization programs contained in the stimulus package.
Representative Koenig asked if the maximum number of weeks an unemployed worker could receive benefits is 79. Secretary Mountjoy responded that it is.
Representative Henderson asked if the additional $25 on the weekly benefit amount was sunset. Secretary Mountjoy said it would end on December 31 of this year.
Representative Siler asked why employees of some nonprofits were ineligible to receive unemployment benefits. Secretary Mountjoy said generally employees of nonprofits are eligible to receive benefits, but that a 501(c)(3) organization with 3 or fewer employees is prohibited from participating in the unemployment compensation system.
Senator Harper-Angel commended Secretary Mountjoy for the work she is doing on the Task Force and for utilizing her agency’s funds to hire the consultants to assist the Task Force.
The meeting adjourned.