The 2nd meeting of the Interim Joint Committee on Labor and Industry was held on Thursday, August 20, 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, Julie Denton, Denise Harper Angel, Ray S. Jones II, Gary Tapp, Jack Westwood, and Ken Winters; Representatives Will Coursey, Bill Farmer, Richard Henderson, Charlie Hoffman, Joni L. Jenkins, Thomas Kerr, Adam Koenig, Mary Lou Marzian, Tom Riner, Charles Siler, and Jim Stewart III.
Guests: Secretary Helen Mountjoy, Education and Workforce Development Cabinet.
LRC Staff: Linda Bussell, Carla Montgomery, Adanna Hydes, and Betsy Bailey.
Chair Nelson welcomed members of the committee and guests to the second meeting of the interim. A moment of silence was observed by those in attendance in honor of Representative Siler’s wife who was hospitalized. Representative Henderson made a motion to adopt the minutes of the July meeting, Senator Harper Angel seconded the motion and the minutes were approved. Chair Nelson reminded the members that the meeting in September will be held at Kentucky Dam Village during the Labor Management Conference. Chair Nelson introduced Secretary Mountjoy to present another update on the progress of the Task Force on Unemployment Insurance, information on the Unemployment Insurance Modernization Provisions of the 2009 American Reinvestment and Recovery Act (ARRA), and to address questions from members submitted after the July meeting.
Sec. Mountjoy reported that Kentucky’s unemployment rate reached 11% during the month of July, with 227,431 people without employment. The highest unemployment rate was 11.3% in 1983. Sec. Mountjoy explained that the Governor’s Unemployment Insurance Task Force is working towards establishing a model for Kentucky’s unemployment insurance program that will be stable, solvent and sustainable. The model will be developed by the consultants to the Task Force and is expected by mid- September. The model will be the basis for establishing employer tax rates, the taxable wage base, and the essential and basic elements of an unemployment insurance system. The Task Force has been divided into small groups that will meet outside of regular Task Force meetings to discuss elements that do not necessarily have a significant financial impact on the system but are nevertheless important to discuss. These elements include the appeals process, employer charging methods, eligibility requirements, a waiting week period before benefits are paid, work search requirements, employer experience rating system, reemployment provisions, and voluntary contributions. The Task Force hopes to meet the deadline of October 31st for recommendations so that the General Assembly has ample time to consider the recommendations and to draft appropriate legislation.
Sec. Mountjoy said materials were included in members’ folders that include answers to questions from the members submitted after the last meeting and other information. She said she would not go over the questions individually but would address them in a narrative way.
Regarding a question about the status of the work of the consultants to the Task Force, Sec. Mountjoy said the consultants will make recommendations on employer tax schedules which will be based on recommendations on the taxable wage base. The taxable wage base for Kentucky is set at $8,000. The minimum by federal statute is $7,000. One of the anticipated recommendations is indexing the taxable wage base. The current system bases revenue upon the fixed taxable wage base that was set in 1982 when $8,000 represented 50% of the average annual wage in Kentucky. Due to inflation, wages have risen and so have the levels of benefits that are required to be paid out. The rate at which revenues are generated is fixed, but the rate at which benefits are paid out is changing. Many states have moved towards indexing their taxable wage base according to inflation or the previous year’s wages in order to sustain the level of benefits that is required. The consultants are also conducting a cost benefit analysis of the elements of ARRA’s modernization provisions. The consultants are under contract until June 30, 2010 and will be available to respond to members’ questions.
Sec. Mountjoy said the goal of the Task Force is to design an unemployment insurance system that will be stable, solvent, and sustainable. The current system has worked fairly well for 27 years which is remarkable considering the changes that have occurred in the economy and workforce. The system began to falter because it has a fundamental imbalance and that is the major issue the Task Force will try to address. Sec. Mountjoy said her hope is that the changes the General Assembly will make next year based on the recommendations of the Task Force will be as far-reaching as those made by the General Assembly in 1982.
One topic currently being discussed by the Task Force is voluntary contributions. Employers are permitted to make voluntary contributions or payments in order to obtain a lower unemployment insurance tax rate. The voluntary contributions are made in a lump sum to the unemployment insurance trust fund during the first 120 days of the calendar year that will “buy down” the tax rate for the coming year. In 2009, 197 Kentucky employers took advantage of this opportunity. Employers invested $2.6 million in voluntary contributions, which resulted in a rate savings of $5.7 million. Some states limit the amount of voluntary contributions that can be made because of the effect on their trust funds. Some employers’ voluntary contributions resulted in a 300% savings. In Kentucky, the $3.1 million that was saved by the employers making voluntary contributions was money that would have gone into the trust fund. Less money filtered into the trust fund may result in higher tax rates.
Sec. Mountjoy said people asked if an employee can receive unemployment benefits if the employer does not pay into the unemployment insurance system. In most instances, they can. If the employer is a contributing employer, the eligible employee will receive benefits. If the employer failed to pay the required taxes, the process of investigation begins and the employer will be subject to paying the tax, interest and penalties. Some employers are not contributing employers. They are reimbursing employers. These employers only reimburse the amount of benefits paid to a former employee. Federal law requires that state and local government entities and 501(c)(3) nonprofit organizations be given the option to be reimbursing, rather than contributing, employers. Employees of reimbursing employers have the same right to benefits as other employees, except that federal law excludes 501(c)(3) nonprofit organizations with fewer than three employees from receiving unemployment insurance benefits.
Sometimes questions arise about illegal aliens and whether they can claim benefits. Illegal aliens are not eligible. Non-citizens with legal work cards must provide an identification number from their alien registration card when they file for benefits. If this card is expired or not legitimate, the claimant will be further investigated and the claim will not be paid.
During this recession, questions and complaints have been received about the length of time it takes for decisions on initial claims for benefits and the time it takes for the appeals process. There are two levels of appeals within the unemployment insurance program. If a former employee is denied benefits or an employer wishes to challenge a former employee who is receiving benefits, they may appeal the decision to a referee. The referee’s decision may be appealed to the Unemployment Insurance Commission. A decision of the commission may be taken to the circuit clerk in the county of employment. The Education and Workforce Development Cabinet (cabinet) has hired a number of federally funded time limited (FFTL) employees to deal with the influx of unemployment claims and appeals. As a result, in July 75% of first level appeals were resolved within the first 30 days.
Returning to the issue of reimbursing employers, Sec. Mountjoy said because these employers only pay into the system only when a claim is charged against them, the unemployment insurance trust fund does not earn interest. States are permitted under federal law to impose service charges or processing fees, or take other steps to make up for the loss in interest not generated by reimbursing employers. There are 1,423 reimbursing employers in Kentucky, which makes up 1.66% of all employers. Reimbursing employers represent about 25% of all the wages that are paid in Kentucky.
One of the most important strategies to restore the unemployment insurance program is to get people back to work. Pre-recession, the average length of time a claimant received unemployment insurance benefits was 14.1 weeks, rather than the maximum of 26 weeks. This meant people were going back to work. During this recession, federal funding has been provided to increase services to assist people in getting back to work. A variety of services is provided by the cabinet. Job search services assist with such things as designing resumes and providing access to job openings. There is a mechanism that permits a person to seek a job with particular characteristics. Connecting the unemployed with retraining is another service provided to help the unemployed acquire new skills or skills necessary for existing jobs or jobs that might become available in the area.
There are still questions about extended benefits. The maximum number of weeks of regular unemployment benefits is 26 weeks. Extended benefits are an additional 20 weeks of benefits after regular (26 weeks) and extended unemployment compensation (33 weeks) benefits have been exhausted. Sec. Mountjoy said it is possible that someone who applies for benefits today may not receive extended benefits even if they are still unemployed. The reason for this is because federal funding for extended benefits will expire on December 31, 2009.
Two bills have been filed in Congress to extend the Extended Benefits program so that benefits will continue to be fully funded by the federal government. At this time there is no cost to Kentucky’s unemployment insurance trust fund for the extended benefits. Extended benefits paid to former employees of contributing employers or reimbursing nonprofit employers are paid 100% by the federal government. Extended benefits paid to former employees of state and local government are paid by the state or local government employer.
Sec. Mountjoy said Kentucky is still borrowing from the federal government to pay benefits and this will probably continue for an extended period of time. To date, Kentucky has borrowed $338,800,000. No interest will be accrued on the federal loans until December 31, 2010. When Kentucky last borrowed and had to pay back interest along with principal, the interest was paid from Federal Unemployment Tax Act (FUTA) tax contributions, employer surcharges, and the penalty and interest account. Interest cannot be paid from employer contributions to the unemployment insurance trust fund. In 1983, 1984, and 1985 a statutory provision was in place that imposed a surcharge on employers in any year when there were insufficient funds in the penalty and interest account to pay the interest required. In Kentucky, employers pay a FUTA tax in addition to the state unemployment tax. The FUTA tax rate is 6.2%, but employers receive credits against that tax rate which results in an effective FUTA tax rate of .8%. If a state borrows money and has not paid accrued interest and principle for two years, the federal government may reduce the tax credits and raise the effective tax rate of .8% by .3% annually. The funds resulting from the increased FUTA tax is reserved solely for repayment of the state’s loan. Most states are considering surcharges as a strategy for restoring solvency to their unemployment insurance trust funds. Sec. Mountjoy said the cabinet is well aware that imposing a surcharge on employers is a policy decision that has long-term implications.
Sec. Mountjoy explained that a proposed federal rule could make future loans from the federal government more problematic. The purpose of the proposed rule is to close a loophole that allows states to borrow within a calendar year and repay the loan before the end of the federal fiscal year without incurring interest charges. Several states have used these short-term interest free loans to cover cash-flow difficulties.
Regarding the unemployment insurance modernization provisions in the 2009 ARRA, Sec. Mountjoy said handouts provided to the members contain summaries of the modernization options a state could adopt in order to receive federal incentive funds. If the General Assembly enacted the modernization provisions by legislation, Kentucky could receive approximately $90 million for the unemployment insurance trust fund. Looking at our contiguous states, Indiana has not yet adopted the modernization provisions. Missouri, Tennessee, Virginia, Ohio, and West Virginia have adopted or are considering adoption of some or all of the provisions. The consultants to the Task Force are looking very carefully at the long term cost implications of the modernization provisions. In addition to legislation that will be necessary to adopt the modernization provisions, legislation will also be necessary to adopt other recommendations of the Task Force.
Sec. Mountjoy said the Task Force is working diligently and the work is very challenging. There is no doubt that both employers and employees will have to sacrifice in order to have an unemployment insurance system that works effectively, and the burden will be on the General Assembly to make very difficult decisions.
Sen. Westwood asked Sec. Mountjoy if federally-funded-time-limited employees are considered state employees and whether they will receive benefits when their position ends. Sec. Mountjoy explained that FFTL employees are employed through the cabinet for a limited time with federal funds and they will not receive unemployment insurance benefits when their jobs expire. Sen. Westwood asked how many FFTL employees have been hired. Sec. Mountjoy said she would provide those numbers at a later time.
Rep. Farmer asked if a monthly average growth of $30 million dollars in the federal debt is to be expected. Sec. Mountjoy said a quarterly request is provided to the federal government and the funds are placed in an escrow account which is drawn from as needed. Rep. Farmer asked if a set minimum level in the trust fund would possibly be part of the new system. Sec. Mountjoy said the consultants will be providing a recommendation on this. Rep. Farmer asked how Kentucky is staying competitive with other states dealing with the same issues. Sec. Mountjoy said that other states’ measures to reconcile their financial difficulties are being taken into account by the Task Force.
Chair Nelson asked if public school districts and colleges are reimbursing employers. Sec. Mountjoy said all governmental employers are reimbursing employers.
Rep. Hoffman referred to information given at a previous Task Force meeting about various loopholes employers find to avoid unemployment insurance payments, such as misclassifying employees as independent contractors, and asked if the Task Force will make recommendations relating to this issue. Sec. Mountjoy said the Task Force would address other issues that affect efficiency and fairness of the system.
Rep. Riner commented that he has spoken with several employees of 501(c)(3) organizations who are not aware of the unemployment insurance provisions and how they apply for benefits. Sec. Mountjoy replied that local one-stop facilities and local unemployment insurance offices are dispersed throughout the state to provide information about the program.
Chair Nelson asked why the number of unemployed is much greater than the number of unemployed receiving benefits. Sec. Mountjoy said in some cases, drawing unemployment insurance benefits is perceived as a stigma and some people choose not to apply. In other situations, the benefits are simply not utilized because they are not needed or because the person does not qualify to receive them. It is estimated that only about 50% of qualified people actually apply for benefits.
Sen. Jones asked what the average number of weeks a person draws unemployment insurance benefits is. Sec. Mountjoy said she would get that information, but currently an unemployed worker can potentially receive a maximum of 79 weeks of benefits.
Rep. Henderson said he was alarmed by voluntary payments and asked how much of a rate reduction an employer could receive. Sec. Mountjoy responded that a formula is used to derive the tax rate reduction. Rep. Henderson requested that the Task Force look at that issue and eliminate or limit the amount of voluntary payments because the amount of the savings by employers making voluntary payments is not going into the trust fund. He said there might be some legislation on that issue.
Chair Nelson asked if the number of employers making voluntary payments has increased. Sec. Mountjoy responded that the number had decreased from the peak number of 300 employers a few years ago.
Chair Nelson recognized guests from the National Federation of the Blind.
The meeting adjourned.