PA Dept. of Labor & Industry - Center for Workforce Information & Analysis - Mukherjee, Sue

Federal-State Unemployment Compensation (UC) Program Funding Goals for Interest-Free Advances: Proposed Rule Comments from the Pennsylvania Department of Labor and Industry There has been, notably, a lack of consistency among states as to the degree to which they replenish their UC Trust Fund. The establishment of funding requirements by the federal government establishing a minimum amount of reserves needed in the unemployment trust funds would go a long way towards resolving the state debate. However, even in good economic times it can be difficult for states to pass trust fund solvency legislation of any substance. State legislatures or, in Pennsylvania’s case, the Unemployment Compensation Advisory Council, can become deadlocked by opposing views which can delay or destroy legislation designed to improve trust fund solvency. The impact of the amount of taxes a state can or should place on employers is affected by the encouragement of labor groups and the federal government to expand benefits. This makes increasing the reserves in the UC Trust Fund extremely difficult. The proposed rulemaking seeks to set minimal levels of state trust fund solvency that apply only to those short term Title XII cash-flow loans which are repaid by September of the same year. As the proposal noted, raising employer taxes or decreasing benefits during recessions can have a negative impact on economic activity. Further, once this rulemaking is approved, the rule is set to be placed into effect in just two years. This rapid change to solvency requirements can and will have an adverse affect on states that have expansive benefits and coverage – Pennsylvania is one of those states. Pennsylvania, even during the State’s most recent peak in economic activity, did not meet the minimum funding level ETA proposes nor do we have a possibility of attaining that level in the foreseeable future, without putting undue additional financial burden on employers during a deep recession. The timing associated with this rule’s application forces all of the states which have been hit hard by the current recession into the position of being refused short term interest-free cash flow loans when their trust funds finally start showing some recovery and begin to regain solvency financial footing. It will take time to eliminate the debts of those states that are currently insolvent. Even legislation enacted within 2009/2010 is not likely to produce the level of solvency mandated by the rulemaking in the time required. Further, the states heavily hit by the recession are most likely to be the ones with the longer recovery times and most strapped for cash. The added burden of the timing of this rulemaking upon employers from whom interest tax is derived adds to the slowness of the recovery and seems to fly in the face of the acknowledgement in the rulemaking discussion of the negative impact of increasing employer taxes during recessions or even economic downturns. The federal minimum funding approach needs to be studied by states carefully in order to determine the best approach to be used which neither over inflates the trust fund nor leaves it too insolvent to withstand even mild recessions. While the Employment and Training Administration has long used the Average High Cost Multiple (AHCM) as a measure of fund solvency, there needs to be more interactive discussions with the states to get a broader view point. One of the ways this could occur would be through a joint ETA-states group who would discuss minimal trust fund levels overall and provide an agreed upon minimal funding level methodology. The states should be proportionally represented by those who can meet ETA’s current proposed levels and those who can not. All states should be kept apprised of funding level methodologies being discussed. Once a minimum funding level methodology has been agreed upon, it should not be put into place in the middle of a sharp recessionary cycle. Economists’ projections indicate a drastically different rate of growth among the states and the commencement of the rulemaking should be fair to all. States that will be going deeply into debt, of which Pennsylvania is regrettably one, will need time to pay off their loans and begin to build up their trust funds in concert with the economic recovery in their states. Current projections do not indicate this will be a robust recovery. Consideration needs to be given to those states which may be sustaining major long-term recessions due to catastrophic downturns in their economies. When such states finally reach the stage where they begin to climb out of debt, short-term cash flow loans may be all that are required. To impose interest tax as these states begin to improve their fund positions adds an undue burden on a recovering economy (employers) when the states should be recognized for attempting to achieve solvency. In summary, while a common required minimum funding level methodology may be desirable and overdue, it should be derived with the active input of states which have minimal unemployment compensation burdens and those who historically have larger burdens. Any implementation of said methodology should not be implemented during a recession or its immediate aftermath, although phasing-in the methodology as individual states pull into the recovery phase could be a consideration. And finally, states that continue to be the hardest hit by recessions should be eligible to receive short term interest free cash-flow loan interest payments waived.