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    Document Summary
    - Report Published -

    Report Document No. 12
    PUBLICATION YEAR 2010

    Document Title
    Executive Summary of Interim Activity and Work of the Virginia Commission on Unemployment Compensation - January 12, 2010

    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, Samuel Nixon, Lionell Spruill, Lee Ware, and Joseph Morrissey. Senator Watkins chairs the Commission, and Delegate Purkey is its vice chairman.

    The Commission met on September 29, 2009, and December 17, 2009. This executive summary of the interim activity and work of the Commission is submitted pursuant to 30-224. This summary is submitted in lieu of an annual report.

    II. ACTIVITIES

    1. Solvency 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 paid by employers. The rate of the state unemployment tax paid by an employer depends on its experience rating, as well as such factors as the solvency level of the unemployment trust fund.

    At the December 17, 2009, meeting, the Virginia Employment Commission (VEC) reported that in 2009 unemployment rates statewide have averaged about 75 percent higher than the rates for the same months in 2008. The unemployment rate peaked at 7.3 percent in June, which was the highest rate experienced in the Commonwealth since March 1983. Unemployment rates, which have fallen to 6.3 percent since June, are projected to rise to seven percent early in 2010. Total initial year-to-date claims for unemployment benefits through October are up 61.9 percent from the same period in 2008 and up 96.7 percent from the same period in 2007. Initial claims are expected to increase from 356,220 in 2008 to 501,514 in 2009.

    First payments of unemployment benefits from January through October 2009 are up 77.7 percent compared to the first 10 months of 2008 and up 113.2 percent from the corresponding period in 2007. The average duration for receipt of unemployment benefits in November 2009 was 15.3 weeks, which has been exceeded in Virginia only by the 15.4 weeks average duration recorded in 1976. Final payments of benefits occurring during the first 10 months of 2009 are up 154.2 percent from the same period in 2008 and up 209.3 percent from the same period in 2007. The exhaustion rate, which reflects the percentage of unemployment compensation recipients who have used up all of the weeks of regular unemployment benefits for which they are eligible, was 52.4 percent in October 2009; in October 2008, it was 37.1 percent. The exhaustion rate does not reflect federally funded benefit extensions.

    Virginia's maximum weekly unemployment benefit is $378. The maximum weekly benefit reflects a weekly benefit replacement rate of 42 percent of the state's average weekly wage. In 2008, the same maximum weekly unemployment benefit amount provided a weekly benefit replacement rate of 44 percent. The Commonwealth traditionally has sought to maintain a replacement rate of 45 percent.

    The trust fund solvency level is determined by dividing the balance in the trust fund by the amount, determined in accordance with a statutory formula, that represents an adequate fund balance. The trust fund's solvency level on June 30, 2009, was 24.4 percent; one year earlier, the solvency level was 64.4 percent. The Fund's solvency level is projected to be -20.1 percent in June 2010 and -21 percent in June 2011. The solvency level is then projected to increase to 5 percent in June 2012, 30 percent in June 2013, 52 percent in June 2014, and 65 percent in 2015. The balance in the Unemployment Trust Fund on January 1, 2009, was $546.7 million. The balance is expected to fall to -$130 million at the end of 2009 and to -$545.7 million at the end of 2010.

    Title XII of the federal Social Security Act provides a mechanism by which states may borrow funds to offset shortfalls in their unemployment trust funds. Virginia has borrowed to meet its unemployment obligations on one prior occasion. In April 1983, the Commonwealth borrowed $45 million, which was repaid by September of that year. The prompt repayment allowed Virginia to avoid liability for interest on the loan.

    Governor Kaine initiated the process of borrowing funds from the federal government by submitting a letter on September 15, 2009, requesting projected amounts for a period of three consecutive months. The borrowings were expected to result in a cumulative total loan amount of $1.2667 billion. The borrowed funds will supplement available balances of regular unemployment insurance funds, if any. The VEC anticipates that Virginia will borrow a total of approximately $1.3 billion from the federal government. As of November 30, Virginia's federal loan balance was $44 million. Virginia is one of approximately 40 states that are expected to borrow from the Federal Unemployment Account.

    The incoming administration will be required to decide in 2010, whether to apply receipts of unemployment tax payments to pay down the balance of the federal loans or to retain the funds in the state's account and use them to pay benefits. The latter option may be preferable because the federal government has waived the requirement that states pay interest on borrowed funds for 2010. The VEC noted that there will be pressure on Congress to waive the requirement that states pay interest on such loans for 2011.

    The decline in the solvency level of the unemployment trust fund and the borrowing of federal funds will affect employers that pay unemployment taxes. Virginia is expected to be required to make interest payments of $22 million in 2011, $14.4 million in 2012, and $0.3 million in 2013. Interest owed to the federal government cannot be paid from the trust fund or federal administrative grants. Therefore, unless interest repayments are waived by Congress, Virginia's interest payments will be from state general funds. In order to accelerate repayment of borrowed federal funds, employers will lose 0.3 percent of the federal unemployment tax (FUTA) credit, which will increase the per-employee FUTA amount by $21, from $56 to $77. The estimated $87 million generated from the partial loss of the FUTA credit will be applied to the state's federal loan balance. Because the trust fund's solvency level has fallen below 50 percent, employers will be assessed a fund builder tax of 0.2 percent of the first $8,000 of each employee's wages. The state unemployment tax rate will be assessed on employers at the highest of the 15 existing tax tables. The 50 percent Social Security benefit offset automatically will be reinstated through calendar year 2014. In addition, the closure of many employers will result in an increased level of pool charges. These factors will combine to increase the average annual state unemployment tax per employee assessed on employers in Virginia from $95 in 2009 to $171 in 2010, to $234 in 2011, and to $263 in 2012 (which will total $284 when the $21 decrease in the credit now applied to the employer's FUTA liability is included).

    The VEC cautioned that if Virginia's economy recovers from the recession at a slower rate than has been forecast, the federal loans could reach $1.44 billion, or $140 million more than is now anticipated. Such an increase in borrowing would increase the state's interest obligation to the federal government form $36.7 million to $44 million, and would trigger the loss of another 0.3 percent in the federal unemployment tax credit, thereby raising the annual per-employee FUTA liability by an additional $21.

    2. Federal Programs for Emergency and Extended Benefits

    In addition to the maximum of 26 weeks of regular benefits available to eligible claimants under Virginia's unemployment compensation program, the federal government finances several emergency unemployment benefits programs. The Tier I emergency benefits program provides for up to 20 extra weeks of benefits at 80 percent of regular benefit amounts. The Tier II program allows up to 14 weeks of benefits in "high unemployment states" at 50 percent of regular benefit amounts, of which one week of benefits was authorized in November 2009. The Tier III program also allows up to 13 weeks of benefits at 50 percent of regular benefit amounts. In addition, Congress has funded increases in weekly benefits payments of $25 for the period February 28, 2009, through July 3, 2010.

    The extended benefits program provides up to 13 weeks of additional benefits at 50 percent of regular benefits for claimants who have exhausted their regular benefits and emergency benefits. These benefits are available in states that have certain total rates of unemployment. As a result of these state and federal programs, at projected levels of unemployment Virginians may be eligible for a maximum of 86 weeks of benefits.

    3. Availability of Federal Stimulus Funds

    The American Recovery and Reinvestment Act of 2009 (ARRA) is a package of economic stimulus measures enacted by Congress in February 2009. One feature of ARRA made states' unemployment trust funds eligible for $7 billion in Reed Act distributions if they "modernized" their laws to expand eligibility for unemployment benefits. ARRA made Virginia eligible for $188 million, of which $62.8 million was distributed because the Commonwealth had previously enacted legislation to provide for an alternate base period. Virginia could have received up to an additional $125.5 million by making two of four changes to its unemployment laws. The four options are providing (i) benefits to workers who left work voluntarily due to certain compelling family reasons, (ii) benefits to certain unemployed workers enrolled in approved training programs, (iii) benefits to workers who wanted to maintain their history of part-time employment, and (iv) payment allowances for dependents of claimants.

    During the 2009 Reconvened Session, Governor Kaine proposed amendments to Senate Bill 1495 that, if adopted, would have made Virginia eligible for approximately $125.5 million in ARRA funds. The proposed amendments would have expanded eligibility for unemployed workers enrolled in approved training programs and for unemployed workers with a history of part-time employment. The Governor's proposed amendments were accepted by the Senate but rejected by the House of Delegates. Because the ARRA funds remain available at the present time, the General Assembly's rejection of the Governor's proposal does not prevent the 2010 Session from revisiting the issue.

    One issue raised during debate on the proposed amendments to Senate Bill 1495 was whether the amendments to state law expanding benefit eligibility could be undone at a future legislative session. ARRA requires that the statutory changes be permanent. The U.S. Department of Labor has interpreted this requirement as prohibiting the enactment of state laws with a sunset or "trigger off" provision. The Department has stated that a law change will be deemed to be permanent if it is not subject to change except by future legislative action. Delegate Nixon observed that some members were concerned that it was inconceivable that the General Assembly within a few years would reverse its decision and limit or reduce benefits. He also mentioned a concern that the Commonwealth would be incurring a long-term obligation that would be paid for after the ARRA funds were spent. The VEC's analysis of the Governor's proposed amendments to Senate Bill 1495 indicates that over an eight-year period their adoption would increase employers' average tax per employee by $2.44. The average annual increase in state unemployment taxes triggered by the measure over the period 2011 through 2018 was estimated at $9.5 million. Over the same period, the average annual increase in benefits was projected to be about $21 million.

    4. Legislative Proposals for the 2010 Session

    At its December meeting, the Commission received information regarding several items of unemployment legislation that may be introduced in the 2010 Session.

    Delegate Nixon announced that he plans to propose a bill to defer, from July 2010 to July 2011, the proposed increase, from $2,700 to $3,000, in the minimum amount that a claimant must have earned in order to be eligible for unemployment benefits. A similar measure postponing the scheduled increase by a year was enacted in the 2009 Session.

    Delegate Morrissey stated his intention to reintroduce House Bill 1816 from the 2009 Session. This measure would have disqualified certain seasonal or temporary employees from eligibility for unemployment compensation benefits.

    Senator McEachin indicated that he plans to carry a bill to revisit the issue of making Virginia eligible for the $125.5 million of ARRA funds.

    Three items of possible legislation address concerns with the overpayments of benefits that result from VEC administrative error. One would authorize the VEC to negotiate the terms of repayments by recipients of such overpayments. Another would require the VEC to waive an individual's obligation to repay overpayments resulting solely because of an administrative error if repayment is not demanded within the six months and if requiring the individual to repay the overpayment would be inequitable. The third measure calls on the Joint Legislative Audit and Review Commission to study the issue of overpayment of unemployment compensation benefits resulting from administrative errors and recommend measures to prevent them.

    III. RECOMMENDATIONS

    The Commission did not take any position with respect to unemployment legislation that may be introduced in the 2010 Session. It will continue to monitor the status of the unemployment trust fund and the borrowing of federal funds.