HJR 249

Joint Subcommittee Studying the Funding Requirements of the Unemployment Trust Fund

August 22, 2000, Richmond

The Joint Subcommittee Studying the Funding Requirements of the Unemployment Trust Fund met for the first time during the 2000 interim on August 22, 2000. The meeting consisted of a report of JLARC's technical assessment of the trust fund and the Virginia Employment Commission's (VEC) response to the assessment and analysis of the current solvency formula.

JLARC Report

In light of the projected decrease in the trust fund balance by 2003, as well as the number of bills introduced in 2000 that would have tapped into the balance, Delegate Rust asked JLARC staff to conduct a technical assessment of the trust fund during the 2000 Session.

The Code of Virginia requires the VEC to maintain a "solvent" unemployment trust fund. The current formula for determining trust fund solvency involves calculation of the adequate fund balance. The amount required for an adequate fund balance is obtained by multiplying the assumed duration of 1.38 years by the product of (i) the average of the three highest ratios of benefits to total wages in the past 20 years and (ii) total wages paid by taxable employers for the year ending June 30. The solvency level is determined by dividing the June 30 balance in the trust fund by the amount required to meet the statutory test for an adequate fund balance.

JLARC staff identified two concerns with the adequate fund balance formula. First, the assumed duration is arbitrary and unrelated to past experience in Virginia. Second, the assumed magnitude of demand is projected to decrease because the 20-year window for calculation will include almost all economic expansion years by 2003. The adequate fund balance will shrink, while the Virginia economy continues to grow. Higher population, workforce size, total wages, and inflation can increase demand on the trust fund in the event of a recession. Each recession causes a sharp increase in demand, and after each recession, demand settles out at a level higher than that prior to the recession.

The JLARC examination identified an alternative formula for calculating the solvency of the Trust Fund. An alternative solvency determination could consider the amount of money to be paid out during periods of high unemployment, divided by the revenue coming into the trust fund during the same period.

Benefits paid = (assumed duration) X (assumed magnitude) X (current wages)
Revenue = (assumed duration) X (current revenues)
  • The duration of past high-unemployment periods can be observed, considering the periods in 1975-77, 1980-83, and 1990-92. Those benefits can be compared to a 20-quarter moving average, representing the average business cycle. That comparison is the assumed duration.
  • The magnitude is represented as the average ratio of benefits to total wages within each high-unemployment period.

Policymakers need to decide what kind of downturn against which the trust fund should be protected. Economists may predict the probability of each style of downturn that of the 1970s, 1980s or 1990s. The magnitude of each type of downturn can then be multiplied by the duration and the weighted probability of each to determine the average duration and average magnitude needed for JLARC's alternative formula. The balance needed to maintain the solvency of the trust fund using this formula may be higher or lower than that required under the current adequate fund balance calculation, depending on the policy decisions made regarding the weighted probability.

VEC Response

The commissioner of the VEC presented to the joint subcommittee a history and analysis of the statutory adequate fund balance determination. In 1981, the General Assembly enacted legislation that required reserves equal to 1.5 years of benefits based on the average in the past 25 years of the three highest ratios of benefits to total wages. The Federal Advisory Council on Unemployment Compensation (ACUC) recommended in its 1995 report that states accumulate reserves equal to one year of benefits based on the average in the past 20 years of the three highest ratios of benefits to total wages. Virginia then amended its statute in 1997 to require reserves equal to 1.38 years of benefits based on the three-highest-ratio average in the past 20 years. In doing so, the General Assembly considered the ACUC standard, the trust fund balance, economic forecasts, and other policy considerations.

According to the U.S. Department of Labor, Virginia's trust fund is financially sound. The standard exceeds ACUC's by 38 percent, and Virginia has 73 months in reserve. North Carolina and Tennessee have only 32 months in reserve, and South Carolina has 47 months. As opposed to the JLARC alternative formula, the current formula in Virginia assumes no revenues coming into the Trust Fund for 16.5 months. The current solvency formula is a widely recognized method for determining solvency and greatly exceeds the ACUC recommendation. If the trust fund were depleted, no legally qualified claimant would go unpaid, due to the availability of no-interest/low-interest loans from the U.S. Department of Labor. The source of these funds is part of the FUTA tax that is put in a reserve account. The VEC commissioner cautioned that any solvency threshold that increases the required fund balance would decrease trust fund solvency and, therefore, increase employer taxes.

Subcommittee Discussion

Delegate Rust pointed out that in the 1974 recession, Virginia was paying out 1.8 percent of the total wages in the Commonwealth in unemployment benefits. With wages approaching $100 billion now, at the peak of a similar recession the trust fund would be paying $1.8 billion a year, almost twice the current trust fund balance. Delegate Rust also mentioned the tool for increasing the trust fund balance: when the trust fund drops to 50 percent of the adequate fund balance, employer taxes will increase to balance the trust fund. With the VEC projections to 2003, the trust fund would have to drop to $370 million before the correction would kick in. If the trust fund were at this level in 2003, Virginia would have only 2 ½ months of reserves at the 1975 recession rate.

Other members of the joint subcommittee expressed concerns regarding the use of federal FUTA reserve funds to balance the federal budget, the trust fund projections based on legislative changes to benefit amounts in 2000, and the methods used by other states to determine solvency of their unemployment trust funds. Delegate Rust asked the VEC to present the latest figures regarding the status of the trust fund at the next joint subcommittee meeting, including the 2000 legislative changes. Staff was asked to present information on how other states determine their trust fund solvency. Delegate Rust also expressed that Delegate Bloxom would like all of this information, along with any legislative recommendations, to be presented at the Labor and Commerce carryover session.

Next Meeting

The next meeting of the joint subcommittee is scheduled for Monday, October 30, 2000, at 2:00 p.m. in House Room C, General Assembly Building.

The Honorable John H. Rust, Chairman
Legislative Services contact: C. Maureen Stinger