HJR 589

Joint Subcommittee Studying the Funding Requirements of the Virginia Unemployment Trust Fund

November 23, 1999, Richmond

The joint subcommittee met for the first time in the 1999 interim to hear an overview and update on the Virginia Unemployment Trust Fund, as well as to hear comments on three bills introduced in the 1999 legislative session.

Current Status of the Fund

Dr. Thomas Towberman, Commissioner of the Virginia Employment Commission, presented a thorough overview of the operation of the Unemployment Trust Fund and an update on the trust fund's current status. Throughout most of the Commonwealth, unemployment rates are at or below 1998 rates. The rates are higher in certain areas, including the Eastern Shore, Northern Neck, Southside, Southwest, and Tidewater areas of Virginia. Unemployment claims are down almost five percent from last year because of a better economy and a relatively mild winter. The average period for unemployment has been 10 weeks.

Unemployment benefit levels are set by the General Assembly; the current minimum is $50 per week, and the maximum is $230 per week. Benefits are determined by earnings in the first four of the last five completed calendar quarters. Unemployment taxes are paid by employers with a minimum rate of zero percent and a maximum rate of 5.4 percent on the first $8,000 of each employee's wages. The trust fund solvency level and the employer's experience over the last four years determine tax rates. The commission may also levy a pool tax, used to recover benefits that cannot be charged to a specific employer, and a fund-building tax, used to bring solvency levels above 50 percent. A portion of the federal FUTA tax is used to pay the administrative costs of the commission.

The current balance in the trust fund is in excess of $1.037 billion. The trust fund's solvency is determined by the average cost rate (three highest annual ratios of benefits to total wages in the past 20 years) multiplied by total wages paid by taxable employers for the year. These figures are multiplied by 1.38, a factor that builds into the fund sixteen and one-half months of benefits with no tax revenue. Even with the recent legislative changes increasing benefits, the trust fund balance is increasing because of an unexpectedly good economy. The trust fund is expected to be up by $22 million by the end of the year, but the solvency level decreased by seven percentage points from 1998 due to employment growing faster than revenues from taxes.

When asked whether the current formula for solvency increases risk for the fund's solvency, Dr. Towberman replied that there is greater exposure because of increases in the number of people working and increases in individual wages. That is the reason for the sixteen and one-half months of benefits with no tax revenue built into the solvency formula. The tax cut changed the projected fund balance to levels below the required levels for solvency for the years 2001-2003, but the commission has not attempted to project solvency beyond the year 2003.

AFL-CIO Proposals

Dan LeBlanc of the AFL-CIO gave comments to the joint subcommittee and presented two proposals: (i) urging the joint subcommittee not to tap the trust fund to give tax deductions to employers and (ii) recommending increasing benefit levels relative to a percentage of the average weekly wage. Benefit levels have been raised in the past during times of economic health. We are currently in the longest continual upside in modern times but have not examined employee benefits in a comprehensive way. LeBlanc stated that he is willing to sit down with the commission to develop an appropriate formula for increasing benefits. He would like to see Virginia approach the North Carolina formula, which is an index at 50 percent of the average weekly wage. According to LeBlanc, the last benefit increase did not do justice to workers.

HJR 752

Delegate Jeannemarie Devolites spoke regarding her proposed HJR 752, which requested a study of unemployment tax audits for small businesses. A number of small businesses hire consultants, rather than employees, and commission criteria are explicit and difficult for small businesses to understand. Del. Devolites would like to pull together criteria to protect small businesses, because the penalties for noncompliance are so great that most small businesses cease to operate following the negative results of an audit.

Dr. Towberman responded to the issue by outlining two areas of concern. The first, the process of audits, is governed somewhat by the U.S. Department of Labor. The commission is required to do a minimum of 3,100 audits each year, including 50 audits of businesses that have a payroll of less than $1 million. Businesses are given as much notice as possible, and audit results yield as many employer overpayments as underpayments. The second area of concern to small businesses is the dilemma surrounding companies that hire independent contractors. The commission looks at what kind of services the contractor provides, whether the contractor has his or her own business, and how much control the employer has over the work of the contractor. The criteria are not clear-cut, so these audits are time-consuming.

The businesses that are audited are chosen from a computer database of employers filing tax and wage information. If a business does not have employees, it would not be part of that database. In the last set of audits, 967 businesses were found to be over- or underpaying unemployment taxes. Commission representatives indicated that they would look into providing additional information to employers regarding the statutory and regulatory requirements for unemployment taxes.

HB 1573 and HB 1574

Delegate Robert D. Hull presented two of his bills from last session to the joint subcommittee, HB 1573 and HB 1574. These bills attempt to address a problem experienced by citizens who collect Social Security benefits and also file for unemployment compensation. Under the current statutory framework, the amount of unemployment compensation paid is reduced by the amount of any pension or Social Security benefit. Congress passed a retroactive Social Security benefit increase, and certain individuals were told they owed money to the commission for their unemployment benefits. After some discussion regarding the fiscal impact of these bills, it was agreed that a claims bill would accomplish the goals of HB 1574 with little fiscal impact.

The joint subcommittee discussed continuing this study for another year, but the meeting did not have a quorum, so no vote was taken.

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