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    Document Summary
    - Report Published -

    Report Document No. 49
    PUBLICATION YEAR 2011

    Document Title
    Executive Summary of Interim Activity and Work of the Virginia Commission on Unemployment Compensation - January 12, 2011

    Author
    Commission on Unemployment Compensation

    Enabling Authority
    30-224

    Executive Summary
    I. BACKGROUND

    Chapter 33 ( 30-218 et seq.) of Title 30 of the Code of Virginia establishes the Commission on Unemployment Compensation (Commission). The Commission is charged with:

    • Evaluating the impact of existing statutes and proposed legislation on unemployment compensation and the unemployment trust fund;

    • Assessing the Commonwealth's unemployment compensation program and examining ways to enhance effectiveness;

    • Monitoring the current status and long-term projections for the unemployment trust fund; and

    • Reporting annually its findings and recommendations to the General Assembly and the Governor.

    The Commission's membership is comprised of Senators John Watkins, Donald McEachin, and Phillip Puckett and Delegates Bob Purkey, Lionell Spruill, Lee Ware, Joseph Morrissey, and Kathy Byron. Senator Watkins chairs the Commission, and Delegate Purkey is its vice chairman.

    This executive summary of the interim activity and work of the Commission is submitted pursuant to 30-224, and is provided in lieu of an annual report.

    II. MEETINGS

    The Commission met on August 9, 2010, December 13, 2010, and January 11, 2011. Issues addressed at the meetings include:

    1. Status of the Unemployment Trust Fund

    The Commission is charged with monitoring the current status and long-term projections for the Unemployment Trust Fund. The Trust Fund is funded by state unemployment taxes, which are paid by employers at a rate that varies depending on the solvency level of the Trust Fund and each employer's claims experience. The solvency level of the Trust Fund is calculated by dividing its balance on June 30 by an amount, determined in accordance with a statutory formula, that represents an adequate balance.

    The Trust Fund's solvency level on June 30, 2008, was 64 percent, and on June 30, 2009, was 24.4 percent. The solvency level on June 30, 2010, was negative 8.1 percent. The solvency level is projected to be about negative 10 percent in June 2011, and then return to a positive balance of eight percent in 2012, 29 percent in 2013, and 51 percent in 2014.

    The balance in the Trust Fund on January 1, 2009, was $546.7 million. On January 1, 2010, the balance was negative $122.4 million, which included a $62.8 million Incentive Distribution from the federal government. The balance is projected to fall to negative $338.4 million at the end of 2010. State unemployment tax revenue is projected to rise from $327.7 in 2009 to $524.2 million in 2010. The amount of unemployment compensation benefits paid in 2009 was almost $1.074 billion; it is projected to fall to around $740.2 million in 2010.

    The average annual state unemployment tax (SUTA) per employee assessed on employers in Virginia for calendar year 2010 was $162, up from $103 in 2009. The 2009 average tax per employee was the lowest among the six Fourth Circuit jurisdictions. The corresponding national average for the 2009 was $262. The average annual SUTA assessment per Virginia employee is projected to rise to $202 in 2011 and $225 in 2012, after which it will decline to $221 in 2013, $193 in 2014, and $145 in 2015.

    2. Borrowing Federal Funds

    The negative balance in the Trust Fund requires Virginia to borrow from the Federal Unemployment Account to pay benefits. Since October 2009, the Commonwealth has borrowed $346 million from the federal government. The VEC anticipates that Virginia will borrow an additional $838 million through April 2013; in August 2010, the VEC estimated that the state would need to borrow an additional $613 million over the same period.

    If pending federal legislation that would waive the requirement that states make interest payments for 2011 is not enacted, Virginia will be required to pay $11 million in interest on the federal loans by September 30, 2011, and an additional $9.2 million will be due in 2012. Interest payments cannot be made from the Trust Fund or federal grants; it must be repaid either from general funds or a tax on employers. Failure to repay the borrowed federal funds will result in the loss of 0.3 percent of the 5.4 percent credit against the federal unemployment tax (FUTA) rate of 6.2 percent levied on employers. The reduction in the FUTA credit in 2011 will increase the employer's tax by $21 per employee. For each year beyond 2011 that Virginia has an outstanding loan balance, an additional 0.3 percent reduction in the FUTA tax credit will occur.

    3. Federal Programs for Emergency and Extended Benefits

    Virginia's unemployment compensation program provides a maximum of 26 weeks of regular benefits. The federal government has enacted emergency unemployment benefits programs that extend the period that claimants may receive payments. The Tier I emergency benefits program provides for up to 20 extra weeks of benefits, and the Tier II program allows up to 13 weeks, plus one week added in November 2009, of benefits in "high unemployment states," defined as those with an unemployment rate exceeding six percent. Those who have exhausted Tier II benefits and extended benefits are eligible in high unemployment states for 13 weeks of Tier III benefits. If a state's unemployment rate equals or exceeds 8.5 percent, Tier IV benefits can provide another seven weeks of benefits. In addition, the extended benefits program provides up to 13 weeks of benefits for claimants who have exhausted their regular benefits and Tier I and Tier II emergency benefits. Another seven weeks of extended benefits are available at a state's option to claimants in states when unemployment exceeds 8.5 percent. As a result, unemployed Virginians may be eligible for a maximum of 86 weeks of benefits. Of these, 26 weeks are financed through the Unemployment Trust Fund; the balance is funded by federal appropriations.

    4. Benefits Overpayments

    Delegate Donald Merricks introduced House Bill 252 and House Joint Resolution 49 in an effort to address the issue of overpayments of unemployment compensation benefits occurring due to an administrative error by the VEC. These items of legislation were carried over to the 2011 Session, and were examined by the Auditor of Public Accounts (APA) as part of its audit of the VEC.

    Data generated through the Benefits Accuracy Measurement (BAM) Program conducted by the U.S. Department of Labor for 2009 indicates that Virginia had an overpayment error rate of 14.6 percent, which represents $165.8 million in overpayments. Two-thirds of the errors (9.7 percent of the state's 14.6 percent total overpayment error rate) reflected errors related to Virginia's work search requirements. Over half of the errors were attributed to cases where a claimant contacted a potential employer by telephone, in violation of Virginia's requirement that a claimant's contact be in person. Virginia is one of four states that requires in-person contacts by unemployment benefits claimants. The other leading sources of overpayment errors relate to the reasons for a claimant's separation from employment (accounting for 1.8 percent of overpayments) and to benefit year earnings issues (accounting for 1.5 percent of overpayments). A common benefit year earnings issue occurs when a claimant obtains new employment but does notify the VEC and thus improperly continues to receive benefit payments.

    The U.S. Department of Labor also calculates each state's operational overpayment rate, which excludes certain types of errors, including work search requirements, in order to allow a meaningful comparison of states' error rates. Virginia's operational overpayment rate for 2009 was 3.32 percent, which is notably lower than the national rate for 2009 of 4.91 percent. The amount of estimated overpayments in 2009, excluding errors related to the work search requirements, was $37.7 million.

    The VEC's Benefit Payment Control Unit established $26 million of overpayments in 2009, of which sum $7.4 million was recovered. The VEC has built into the eligibility determination process controls to prevent overpayments. However, inaccurate and untimely information from claimants and employers affects the effectiveness of these controls. The VEC's ability to address overpayments may be limited by funding issues, system limitations, and impacts on employers.

    The APA report identified changes that the VEC may consider in order to reduce the BAM overpayment rate. These include reviewing procedures for verifying the weekly work search requirement, increasing the staff in its Benefit Payment Control Unit, and developing new methods for estimating and analyzing overpayments.

    5. Deputy-Level Adjudications

    Delegate R.G. Marshall introduced House Joint Resolution 23 in the 2010 Session. The measure was tabled in the House Commerce and Labor Committee, and the Chair asked this Commission to examine the issue. The resolution would have directed the Joint Legislative Audit and Review Commission to study the effectiveness of deputy-level hearings on claims under the Virginia Unemployment Compensation Act.

    At the Commission's August meeting, testimony was presented that described instances where a deputy's decision granting benefits to a claimant was overturned on appeal. Discussions focused on whether there was a trend of deputy decisions in the claimant's favor being overturned on appeal, and whether such a pattern reflected bias or lack of training and supervision and the deputy level.

    The VEC provided an overview of claims adjudications by deputies. The VEC has conducted a comprehensive self-study focusing on organizational design, business processes and workflow, staffing, training, and examining best practices from other states. Data indicates that approximately one quarter of claims decisions were reversed on appeal in 2008, with the percentage falling to 22.6 percent in 2009. When claims involving issues related to separation from employment are examined, the percentage overturned on appeals rose to 29.5 percent in 2008 and 28.8 percent in 2009.

    At the December meeting, the VEC reported on the agency's review of its claims adjudication process. Of 279 initial decisions by deputies between May and November 2010, 129, or 46 percent, of these decisions were reversed on appeal. Of the decisions reversed, employers or their agents participated in 51 (40 percent), and claimants participated in 76 (59 percent), of the fact-finding interviews. When appeals hearings were held in the appealed cases, the level of participation by employers or their agents rose to 67 percent, while the participation level by claimants fell to 53 percent. Of the 108 cases appealed by employers, 52 (48 percent) were reversed in their favor. Of the 171 cases appealed by claimants, 43 (25 percent) were reversed in their favor.

    One of the factors contributing to reversals on appeal was the failure of a claimant, employer, or employer's agent to participate in the fact-finding interview conducted by a deputy. A related reason for decisions being overturned on appeal involves situations where a third party presents a case on an employer's behalf before a deputy and is not aware of the specific facts surrounding an employee's separation. In such a case, the information that was not available at the first level of hearing may be provided when it is heard de novo at the second hearing. Participation at the appeals hearings often provided explanations and documentation that were missing at the lower level hearing. In addition, some deputy-level determinations were found to result from inadequate fact finding, even when both parties participated. A principal finding of the VEC's study on organizational design was the importance of implementing a comprehensive training program in ensuring consistency of hearing outcomes. Decentralized management and supervision of deputies has contributed to inconsistencies in training and performance oversight.

    The VEC has been awarded a federal grant to study its adjudication and appeals processes. The grant funds have been used to retain a consultant who has been asked to make recommendations regarding the VEC's structure, business processes, and laws. Actions taken by the VEC to date that address the issue include the creation of a separate Unemployment Insurance Division within the agency. The Division is directed to provide a greater emphasis on overall agency performance. The VEC is also developing a comprehensive training program for all adjudicators and their supervisors.

    6. Social Security Offset

    Pursuant to amendments to Virginia Code 60.2-604 that were adopted in 2005, Virginia has reduced the unemployment compensation benefits of claimants by 50 percent of the amount of their Social Security retirement benefits in any calendar year following a year when the solvency level of the Trust Fund falls below 50 percent. The solvency level of the Trust Fund fell below the 50 percent level in 2009. As a result, for the first time in over four years, in January 2010 the VEC began offsetting unemployment benefits by an amount, converted to a weekly amount, of 50 percent of the amount of a claimant's Social Security benefit payment. This automatic reinstitution of the Social Security offset, coupled with the fact that the offset is required with respect to extended and emergency unemployment benefits that are entirely federally funded, prompted the Commission to revisit the issue. The VEC reported that in the first nine months of 2010 the Social Security offset requirement resulted in 3,915 claimants receiving no unemployment benefits and 27,799 claimants receiving a reduced unemployment benefit. Eliminating the provision was projected to increase state unemployment taxes by $0.64 per employee per year.

    III. RECOMMENDATIONS

    At its January meeting, the Commission considered seven items of legislation that may be introduced in the 2011 Session. The items of legislation, and the Commission's recommendation with respect thereto, are as follows:

    1. Eligibility for Extended Benefits; Sunset to 2009 Amendments

    This proposal repeals a sunset clause to legislation enacted in 2009 that provides that changes to sections of the Code of Virginia will expire three weeks prior to the last week for which federal sharing is authorized. It clarifies the effect of provisions that expanded the criteria for a state "on" indicator, during which unemployed individuals are eligible for extended benefits to include weeks when the unemployment rate equaled or exceeded 6.5 percent and was more than 110 percent of the average for either or both of the corresponding three-month periods ending in the two preceding calendar years. The revised eligibility criteria will apply to weeks beginning not later than the week ending three weeks prior to the last week for which federal sharing is authorized by 2005(a) of the federal American Recovery and Reinvestment Act of 2009, including weeks for which such sharing is authorized by an extension of or amendment to the federal law.

    RECOMMENDATION: The Commission endorsed the proposal on a vote of 7-0.

    2. Postpone Increase in Minimum Earnings Requirement

    This proposal postpones the scheduled increase, from $2,700 to $3,000, in the minimum amount of wages an employee must have earned in the two highest earnings quarters of his base period in order to be eligible for unemployment benefits. The increase will apply to claims filed on or after July 1, 2012; it is currently scheduled to apply to claims filed on or after July 3, 2011.

    RECOMMENDATION: The Commission endorsed the proposal on a vote of 7-0.

    3. Statements on Bills Enhancing Unemployment Compensation Benefits

    This proposal requires that bills enhancing unemployment compensation benefits payable to a claimant contain a statement reflecting the projected impact on the solvency level of the unemployment trust fund and the average increase in state unemployment tax liability of employers. Currently, such bills are required to contain an estimate of potential revenue losses in the form of decreased tax revenues, attributable to the bill.

    RECOMMENDATION: The Commission endorsed the proposal on a vote of 7-0.

    4. Expanded Eligibility for Unemployment Benefits

    This proposal provides that certain individuals who have exhausted eligibility for unemployment benefits and who are enrolled in approved training programs are eligible for up to 26 weeks of additional benefits. The measure also provides that an individual who voluntarily separates from employment is not disqualified from receiving unemployment compensation benefits if the separation is for a compelling family reason, which is defined as domestic violence, the illness or disability of a member of the individual's immediate family, or the need for the individual to accompany such individual's spouse to a place from which it is impractical for such individual to commute and due to a change in location of the spouse's employment. A provision allowing individuals to receive unemployment benefits if they voluntarily leave employment to follow a military spouse assigned to a new duty station, which provision will become effective only if the federal government appropriates adequate funds specifically for the purpose of paying benefits to such individuals, is repealed. If enacted, this measure would provide Virginia's Trust Fund with $125.5 million in federal Stimulus Act funds.

    RECOMMENDATION: The Commission endorsed the proposal on a vote of 5-2.

    5. Repealing the Social Security Offset

    This proposal repeals the offset for Social Security and Railroad Retirement Act benefits. Current law requires that unemployment compensation benefits be reduced by 50 percent of the amount of the claimant's Social Security Act or Railroad Retirement Act retirement benefits in years when the solvency level of the unemployment trust fund is less than 50 percent.

    RECOMMENDATION: The Commission endorsed the proposal on a vote of 7-0.

    6. Repealing the Social Security Offset with Offset in Benefit Amounts

    This proposal is based on Utah legislation that repeals the offset for Social Security benefits and, in order to make the measure revenue neutral to Virginia's Trust Fund, reduces the weekly benefit amount paid to all claimants. It is estimated that a $3 reduction in all weekly benefits would be required to offset the cost to the Trust Fund of eliminating the Social Security offset.

    RECOMMENDATION: No motion was made on the proposal.

    7. Repealing the Social Security Offset for Federal Extended and Emergency Benefits

    This proposal excludes unemployment compensation benefits that are paid under the extended benefits program or emergency unemployment compensation benefit program from the requirement that unemployment benefits be reduced by an amount equal to 50 percent of Social Security Act or Railroad Retirement Act retirement benefits received by such individual during periods that the trust fund balance factor is below 50 percent. The 50 percent Social Security offset would continue to apply to the 26 weeks of benefits that are funded through Virginia's Trust Fund.

    RECOMMENDATION: No motion was made on the proposal.