Joint Subcommittee Studying the Unemployment Trust Fund

June 11, 2002

2001 Legislation

The joint subcommittee studying the funding requirements of the Unemployment Trust Fund held its first meeting of the year on June 11, 2002. Staff briefed members on bills introduced during the 2002 Session that had a potential effect on the trust fund.

  • SB 127 would have added the failure of a drug test administered (i) by a probation agency or (ii) pursuant to a court order to the definition of employee misconduct, resulting in disqualification for unemployment benefits. The bill was carried over.
  • HB 943 and SB 45 would have eliminated the waiting week for benefits. These bills were both carried over.
  • HB 944, SB 72, and SB 141 codified the 37.3 percent increase in benefits provided by Governor Gilmore’s Executive Order 86. These bills were rolled into their respective counterparts, either HB 1336 or SB 663.
  • HB 1336 and SB 663, as passed, codified the 37.3 percent increase in benefit amounts for claims filed between September 9, 2001, and January 1, 2003. For claims filed in calendar year 2003, benefits increase by 18.65 percent above their pre-September 9, 2001, levels. After January 1, 2004, claimants will receive benefits at the pre-September 9, 2001, levels. These bills passed both houses and were signed by the Governor.

Trust Fund Status

The deputy commissioner of the Virginia Employment Commission presented a report of the status of the trust fund. The federal Job Creation and Worker Assistance Act provided temporary extended unemployment compensation (TEUC) and distribution of Reed Act funds. TEUC benefits equal up to 50 percent of state unemployment benefits, expiring December 31, 2002. Nearly $215 million in Reed Act funds was placed in Virginia’s trust fund, and $30.9 million was appropriated in the budget for administrative costs.

Benefits paid in 2001 through 2003 are projected to exceed $1.5 billion. The balance in the trust fund will decrease from $877 million on May 31, 2002, to about $300 million on March 31, 2004, before it begins to increase once again. The solvency level in 2002 will be below 100 percent, however, so employers will no longer pay the zero-tax rate that has been used since mid-1997. Despite the decrease in trust fund balances, solvency of the trust fund is not expected to drop below 50 percent in 2004, so the VEC does not expect employers to have to pay the statutory fund-building tax in 2005. The fund-building tax has not been paid since 1985. Between 2002 and 2005, the average tax based on taxable wages increases from $39 to $143. The average tax rate reached a record high of 2.5 percent in 1984, and is only expected to reach a high of 1.8 percent by 2005, before it begins to decrease again.

Members asked for additional information regarding job growth factors included in these projections, and the impact of eliminating the waiting week since the passage of HB 1336 and the Reed Act distributions. The information was promised to members of the joint subcommittee within a week or two.

Urban Institute Study

Dr. Wayne Vroman of the Urban Institute has been hired to conduct the actuarial study of Virginia’s unemployment compensation system, as authorized by HJR 611 (2001). Vroman indicated that the project is in its very early stages, but he expects a large amount of comparative data from other states to be included. He has studied the unemployment systems and trends in Florida, Georgia, North Carolina, and Washington, among others. The project will address each of the eight charges set out in HJR 611.

As part of the project, Vroman will examine the formula for determining the adequacy of the trust fund, including whether the 20-year lookback is adequate. He will use two models: the current model used by the VEC and a model Vroman is developing for comparison. Preliminary findings indicate that one of the reasons Virginia has had historically good solvency levels is its low level of benefit payments. This is due partially to the statutory formula for determining benefits, and partially to Virginia’s active administration of the statute in terms of enforcing eligibility requirements (e.g., the work search requirement). However, Virginia’s recipiency rate has been rising in the last five years, and regardless of the unemployment rate, costs will increase because a higher share of the unemployed will be receiving benefits.

Vroman stated that benefit ratio systems (such as Virginia’s) are an eminently sensible way to determine tax rates, because only those employers that have claims against them will pay unemployment taxes. Through the operation of the benefit ratio statutes, funds paid in benefits will replenish themselves. In a reserve ratio system, an employer’s tax rate may increase despite a lack of claims for benefits.

Members asked Vroman to examine the changes in Virginia’s industries as part of the study. The Chairman expressed concern that many jobs are becoming more and more agricultural, and this is changing the unemployment landscape in Virginia. Vroman indicated that the change from manufacturing to the service industries has had and will continue to have the greatest impact, and he will review these trends as part of his report. A preliminary draft of the report is due September 20, and the joint subcommittee will set its next meeting date for after that due date.


The Hon. John C. Watkins

For information, contact:

C. Maureen Stinger
Division of Legislative Services



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