Unemployment Insurance Advisory Council Meeting Minutes
Wednesday, October 21, 2009 – 9:30 A.M.
Offices of the Wisconsin Department of Corrections
3309 East Washington Avenue (Colorado Room)
Management: James Buchen, Dan Petersen, Ed Lump, and Earl Gustafson
Labor: Phil Neuenfeldt, Dennis Penkalski, Sally Feistel and Patty Yunk
Chair: Daniel LaRocque
Department staff present: Hal Bergan, Andy Reid, Tracey Schwalbe, Tom McHugh, Troy Sterr, Pam James, Amy Banicki, Carla Breber, Dick Tillema, Chris O’Brien, John Zwickey, Robin Gallagher, Diane Kraft.
Others present: Mary Beth George (Representative Christine Sinicki), Jason Vick (Representative Mark Honadel), Bob Andersen (Legal Action of Wisconsin), John Metcalf (WMC), Michael Metz (WI Independent Businesses), Jane Pawasarat (Department of Administration), Tom Fonfara (DeWitt Ross).
Mr. LaRocque calls the meeting to order at 10:05 a.m.
1. Opening Remarks – Hal Bergan
Mr. Bergan thanks the Council for their action on the UI bill, AB 457. We will be well served by clearing the deck on smaller issues. AB 457 cleared the Assembly Labor Committee 9-0.
There will be a joint hearing of the Assembly and Senate Labor Committees in November. He will present a briefing on the reserve fund. They are looking for information on the dimensions of what we are facing, what is happening in other states, etc. It would be good to have representation from the Council to give assurance we are working on this. It is a high priority, and we will have something to propose before long.
There is still no action in Congress on extending benefits. It seems likely that Wisconsin will be in line for 13 to 26 weeks of additional benefits. Congress also has not acted on the provisions of the Recovery Act that are at least as consequential as an extension. This includes extending the deadlines for the Emergency Unemployment Compensation (EUC) and the federal share of extended benefits. The stakes are significant. Whatever they do will be a challenge for us. Whenever there are extensions, the phones light up. We will be administering another program. We will have to scramble to get programming done in order to provide the checks. Whatever they pass will not provide for retroactive benefits, but there will be a gap between when the bill is passed and when we can send checks.
For today, we have prepared information on solvency issues. The Division’s role is to provide as many options as we can and to provide the best and most timely information we can. We will answer questions regarding data needs and policy questions. We are well organized to get that accomplished and look forward to providing that information. We will also try to get a sense of how the various options fit together. Then we can re-run projections with changes that the Council wants to consider. We are prepared to do that reasonably quickly.
We are also spending more time trying to understand what other states are doing. The changes we are looking at are more significant than what we confronted 2 years ago. We may find something useful in looking at what other states do. We will start today with information about Iowa, which gets high marks from people who know tax systems.
We are acting in extraordinary times in terms of the sheer volume of claims. It is likely to stay high. The challenges are fiscal and operational. This is unprecedented. We have looked back at the 1980s, but this is a tougher nut to crack. As of yesterday, we owe the federal government $660 million. This will increase through spring with higher benefits and lower receipts.
The seasonally adjusted total unemployment rate (TUR) dropped .5 from 8.8 to 8.3. It has dropped for 4 months. It is significantly better than the national unemployment rate.
Question (Gustafson): Does the department have the challenge of claimants who qualify for some extensions and not for others? Or are they all automatically extended?
Mr. Bergan indicates that for federal extensions generally the qualifying requirements are different. About 10% of claimants eligible for regular UI are not eligible for extensions. For others, their benefit level might change. There are a lot of complications in these programs.
Ms. Carla Breber, Lead Worker for Disputed Claims, indicates that some complications involve which program should be paying first. Claimants cannot be paid extensions if they are eligible for regular benefits. We are in a constant checking mode; at quarter changes we need to check to see if we can continue to pay extensions or if they need to start a new regular benefit year. This involves other states as well. If they qualify in other states, then we cannot pay the extension.
Mr. Bergan indicates that it can be very confusing for claimants. They get a change in their status or benefit rate and do not understand. Some of the changes need to be done manually.
Comment (Lump): He expects we will get a lot of frustration and blow back about the new tax rates in Schedule A. He has already gotten a few calls. He has heard from one employer who indicated that he thought the increase was immoral.
Mr. Bergan indicates that we will move to the highest rates, Schedule A. The difference between B and A is more substantial than between the other schedules.
3. Minutes of Meeting October 5, 2009
Motion (Neuenfeldt), seconded (Petersen), to approve the minutes of October 5, 2009, passes by a vote of 7 - 0.
2. Financial Statements
Tom McHugh, Reserve Fund Treasurer, reports on the financial statements. The department ran 2010 tax rates for employers this week. He refers to the handout displaying pie charts. Charts numbered 1, 3, and 5 show information for large employers. Charts numbered 2, 4, and 6 show information for small employers. For large employers, Chart 1 gives the number of employers affected by tax rate changes and Chart 3 gives the percentage of employers affected. Chart 3 shows that 62.3% have a rate increase where the limiter did not play a factor, and 24.1% had an increase and the limiter came into play. About 86.4% of large employers will have a tax increase. For the smaller employers, Chart 4 shows that 45.2% of small employers will have a rate increase where the limiter was not a factor, and 14.7% have an increase where the limiter does come into play. About 60% of small employers will have a tax rate increase. Chart 2 shows that 71,834 small employers will have a tax rate increase.
Chart 5 shows the amount of the rate increase for large employers. This is the 2010 rate minus the 2009 rate. There will be 2,393 large employers with less than a 1% increase, 1,946 large employers with a 1-1.99% increase, 1,550 with a 2-2.99% rate increase, 390 with a 3-3.99% increase, and 136 with an increase of 4-4.99%. Chart 6 shows that there will be 44,223 small employers with a less than 1% increase, 14,871 with a 1-1.99% increase, 6,550 with a 2-2.99% increase, 5,096 with a 3-3.99% increase, and 1,094 with a 4-4.99% increase. It is interesting that 21.2% of small employers will have a decrease in tax rate, whereas for large employers, 6.8% will have a decrease in the tax rate. The new tax rates are going out to employers now. The staff that responds to employers questions has reported that employers seeing a rate increase from 1% to 2% as a 100% increase.
Question (Buchen): Is the percentage representing the amount of the tax rate increase or the percentage of the tax increase?
Mr. McHugh responds that it is the actual rate difference comparing 2010 to 2009. At the same time that we calculate the new tax rates, we calculate the 10% write off. Usually this is almost $200 million. This time is was $407 million.
Question (Yunk): Is the 10% write off an amount that is written off as uncollectible?
Mr. McHugh responds that the 10% write off is a process whereby we credit employers who have extreme negative reserve fund balances by writing down their reserve fund balance to negative 10% of the employer’s payroll. If 10% of an employer’s payroll was negative $800,000, and the account reserve fund balance was at a negative $1 million, we paid out a lot more in benefits than the employer paid in. If -10% of the payroll was negative $800,000, we would write off $200,000 of the employer’s negative reserve fund balance by charging the balancing account. There is no banking involved, we recharge the $200,000 benefits to the balancing account and credit the employer’s reserve fund balance.
Question (Buchen): If we wanted to make it less generous, we could provide that it is written down to 20 or 30% of payroll, correct?
Mr. McHugh responds affirmatively.
Question (Lump): What amount is usually written off?
Mr. McHugh responds that in 2008, it was almost $200 million. Mr. Bergan indicates that in 2008, the write off was a little more than usual. The write off was $178 million in 2007, $159 million in 2006, $154 million in 2005; and in the recession, 2003-04, it was about $197 million.
Question (Buchen): Could you please explain the 10% write off in detail, especially how much is being written off for an employer; is it 50% of payroll or 100%?
Mr. McHugh has not done a lot of analysis on the write off. We can analyze the 10% write off, including who it affects, the size of the employers, etc.
Comment (Petersen): He knows of one employer who was at $3 million and is now at $1.5 million after the write off.
Mr. Bergan indicates that the write off tracks the amount of benefits. As benefits are up about twice what they were last year, so are write offs. The policy advantage of the write off allows employers to return to a lower tax rate sooner. This is in theory; in practice, a lot of employers get the write off every year and do not drop to lower rates.
Mr. McHugh indicates that he analyzed this about 5 years ago. The employers that had a lot of write offs (10 or more) tended to stay in business and they were seasonal employers, for example, construction companies. Some employers in a recession will get the write off for the first time.
Question (Lump): To clarify, if I owed $100 and took $10 off, it would be $90. But what you are saying is that what the department does is say that what is owed is not $100, but $10. Is that correct?
Comment (Buchen): With a 10% write off, the department is saying they will not have anyone at more than 100% of payroll because they are overdrawing more than 100% of payroll. The higher the percentage of the write off, the less generous it is.
Mr. McHugh indicates that the reserve fund balance that the department keeps track of for each employer for rating purposes is written down so that it is no more than a negative 10% of taxable payroll. The 10% write off does not affect receivable balances or amounts owed.
5. Unemployment Reserve Fund Solvency
Mr. Bergan refers to an 11-page packet titled: “Meeting of the Unemployment Insurance Advisory Council, October 21, 2009, Contents:
- Unemployment Insurance Reserve Fund Forecast
(Based On Wisconsin Department of Revenue Economic Outlook June 2009)
- FUTA Credit Reduction
- Wis. Stat. §108.18 - Wisconsin Unemployment Tax Schedules
- Iowa Unemployment Tax Tables
- Wage and Tax Information by State – including Wage Base
- Alternatives for Strengthening the Reserve Fund”
Page 1 displays a forecast of the Reserve Fund balance based on the June 2009 Wisconsin Department of Revenue (DOR) economic forecast. The projections for the Fund extend to 2013 are estimates and the most accurate picture we have now.
Comment (Neuenfeldt): Given the economy, any projections are risky.
Mr. Bergan indicates that it is risky but we have to make a run at it. We use the projections that DOR uses. Global Insight develops the economic forecast with DOR. It predicts a slow recovery for unemployment. In 2010 we start at a higher level of indebtedness than previously. Our benefit payouts doubled from 2008 to 2009.
Page 2 explains the FUTA tax credit reduction. In 1983, the Legislature and the Council sought to avoid the FUTA credit reduction. A baseline question is whether this is an important consideration. This handout gives a sense of what is necessary to avoid the FUTA credit.
Mr. McHugh explains page 2. The box at the bottom of the page shows how the credit reduction is applied. If a state has a loan balance outstanding on two consecutive January 1sts, there is a the credit is reduced by 0.3%. There is an additional 0.3% reduction for every following January 1st that loans are outstanding. In addition to the 0.3% reductions, an additional credit reduction may be assessed in year 3 and subsequent years. The maximum FUTA credit reduction is 5.4%.
Wisconsin would be borrowing for its first January 1st on January 1, 2010. Our second January 1st borrowing would be January 1, 2011. This means that when employers file their 940 forms for 2011 in early 2012, employers could have a reduction in the FUTA credit. The FUTA tax is 6.2%, and the usual credit is 5.4%, so generally the overall FUTA tax for employers is 0.8%. If we do nothing, for the payment due for 2011 in January 2012, employers would lose 0.3% of the credit and have only a 5.1% credit against the 6.2% FUTA tax. Eventually, employers would lose the whole credit. The FUTA tax would be 1.1% instead of 0.8% the first year, 1.4% the second year, etc., until you lose all 5.4% of the credit and employers would pay the full 6.2% FUTA tax.
The rules for avoiding the reduction are stated at the top of the page. A state would have to repay loans in an amount equal to what the FUTA credit reduction would have generated plus any loans taken during the year, have funds adequate to pay benefits during November, December and January, and have a net increase in UI funds solvency equal to or greater than the amount that would be generated by the FUTA credit reduction due to law changes.
The middle part of the handout shows that in 2011, we would need to come up with interest due on September 30 of about $100 million. The interest due has been waived for 2009 and 2010 in the Recovery Act. The amount of the FUTA credit reduction is estimated to be $51 million or 0.3%. The amount borrowed in the prior year we are estimating at about $606 million. For benefit payments, so we do not have to borrow at the end of the year, this would be $287 million. The total we would need to raise to avoid the FUTA credit reduction is $944 million. We adjusted that to $1.04 billion to add 10% to ensure the estimate is high rather than low. That would compute to about 4.4% of taxable wages (assuming $24 billion in taxable wages and a $12,000 taxable wage base) if we wanted to do that in one special assessment.
Comment (Buchen): It is hard to believe the state was able to do this in the 1980s if we had to pay back what we borrowed in the prior year.
Mr. McHugh indicates that Brian Bradley prepared a history of the changes made at the time and it was a pretty drastic increase or surtax. Mr. Bergan indicates that it is a steep climb to avoid the credit reduction this time.
Question (Petersen): By paying the state and reducing the debt that way, is it better than paying the tax to the federal government?
Mr. McHugh indicates that the amount that is the FUTA credit reduction is used to pay down the loan. If we lose the FUTA credit, it is not all for naught, because it will be used to pay down our loan. Mr. Bergan indicates that the credit reduction is a 0.3% tax increase every year but it is used to pay down the debt. It is a way for the federal government to say that if the state will not pay down the debt, the federal government will do it for you.
Comment (Buchen): The FUTA credit reduction seems gentle compared to what we would have to do to avoid it.
Question (Neuenfeldt): Are you saying that if the Council does not resolve the loan issue, the federal law will do it for us? Could you explain the FUTA tax credit?
Mr. Bergan indicates that the Federal Unemployment Tax Act (FUTA) provides a federal UI tax on employers. Employers are able to receive a credit against this federal tax based on the taxes they paid to the state if they paid their state taxes timely. The federal tax rate is 6.2%, but if you paid your state UI taxes timely, you get a 5.4% credit. The federal tax then is 0.8%. The federal tax is paid on the first $7,000 in taxable wages.
Question (Buchen): The money is not lost to the federal system; it goes to pay off the loan. The credit reduction is not wasting money. If we were borrowing in 2010 and 2011, when would the credit reduction first apply?
Mr. McHugh indicates that the reduction would apply for FUTA taxes for 2011 that would be due to be paid on the form 940 by January 31, 2012. Brian Bradley’s summary of tax changes indicates that the Council in the 1980s did not want to have the FUTA credit reduction because it was a flat tax on all employers. The tax law changes then were projected to increase solvency by 81.6% in 1985 and 82.6% in 1986. The taxable wage base was increased in 1986 from $6,000 to $9,700, they created new tax schedules, they increased the rate limiter to 2%, discontinued the 10% write off for 2 years, limited the effect of voluntary contributions to one rate bracket, changed Extended Benefit (EB) charging so employers picked up 50%, changed the new employer rate to apply for 2 years instead of 3, imposed an 8% rate increase for employers in 1984 to generate revenue needed, and did benefit law changes to freeze the benefit rate, including changing the qualifying requirements and reducing benefit duration from 34 to 26 weeks.
Comment (Gustafson): It was a legislative panel that came up with the tax changes in the 1980s.
Mr. Bergan indicates that page 3 of the handouts is for reference as to the changes in the rate schedules. This is how the rates change as you move though the schedules, as determined by the reserve fund balance. We are moving to Schedule A in 2010 for the first time.
Question (Yunk): Could you walk us through an example?
Mr. Bergan indicates that each employer has a reserve percentage for the individual employer’s account. Each line represents a tax bracket and is determined by what the employer’s reserve ration is.
Question (Yunk): How does the write off we talked about get factored into the employer’s tax rate?
Mr. McHugh indicates that the write off is done after the tax rates are calculated. The write offs we did this year will apply to the tax rates the following year. Most employers with the write offs are at highest bracket. Mr. Bergan indicates that for most of those employers, their tax rates will be the same with or without the write off because they are paying at the highest rate. What will be different is that their prospects for some day paying less than the top rate improve with the write off.
Question (Lump): What is the history of the write off? The philosophical statement is that these employers are in this position and if we do not write it off, they will never get in a positive balance, but it would be interesting to know the history of the provision and what the effect has been.
Comment (Buchen): This was largely about manufacturers. The idea was not that employers would never get to a lower tax rate without the write off. They are not permanently in that position. Some times are robust and other times are not; it is cyclical. If they had to lay off a lot of people and pay a lot of benefits on occasion, we would let them write it down. It was not intended for construction employers who were seasonal and would never get out of a negative balance.
Comment (Lump): How many employers get back to a positive balance with the write off?
Mr. McHugh indicates it was studied in 2005. The largest group stayed at the maximum rate. If an employer had a negative10% reserve percentage [which means negative 10% of taxable payroll], that employer would be at the maximum tax rate on the table. We write down their reserve fund balance to negative 10% of payroll. At negative 10%, that employer is still at the maximum tax rate. Most of the employers remained at the maximum rate even after the write off. Most employers with 8 or more write offs stayed in business. Some smaller employers with a history of 1 or 2 write offs made their way back to lower rates. Without the 10% write off, the employer may move to a lower rate but would do so more slowly than with the 10% write off.
Comment (Lump): He understands the idea of helping out the employers with this when needed, but he would like to see if they ever do get out of the negative. He would like to know more about it.
Mr. McHugh indicates the department can analyze this for the Council.
Comment (Buchen): The nature of manufacturing has changed so much. For the better part of a century, layoffs and call backs were a feature of the landscape. In last 20 years, when the economy turns down, people do not necessarily go back to the old jobs. Companies get more efficient, do without, move operations. They resist lay offs because of training issues and expenses. It is a totally different picture than when some of these concepts and policies were put in place.
Comment/Question (Neuenfeldt): He agrees with Mr. Buchen. When you look at the number of employers laying off versus closing, there are more closing. A lot of the problem is off-shore strategies. Is it safe to say that small employers are carrying the load for the larger employers?
Mr. Bergan indicates that it is more like the stable employers are carrying the load for the less stable employers. In terms of the whole system, if you look at the bottom third of employers in terms of size, there is just not that much money there in terms of how much they contribute to the fund. Whereas at top end with larger firms, they have more revenue and things like write offs have a more dramatic effect. When small employers have a write off, the amount of the write off may be trivial; for large firms it has a more significant effect on the fund.
Comment (Neuenfeldt): It is interesting philosophically that when large firms outsource off-shore, they are really making money but at the same time everyone else is caught holding the bag.
Question (Buchen): It is useful to look at the chart of the rate schedules. How many employers and how much payroll are in each category?
Mr. Bergan provides a handout with that information.
Question (Gustafson): Is it fair to say that firms getting write offs may move to a lower tax rate but it is unlikely that they ever get to the positive balance, i.e., that there is more cycling through the higher tax rates?
Mr. McHugh indicates that Dick Tillema did a projection on this. In a recession it is different because in normal times such as 2002-2004, it seemed that the employers stayed at the top rate. There was a constant group with write offs and nothing changed. In a recession, some employers will get higher rates and make their way down.
Mr. Tillema indicates that generally some employers work their way back to lower rates. If there were no write off, they would pay higher taxes off in the future because they would be paying at the higher rates. The higher rates would move them down to lower rates. There is a handout on alternatives. When we did a simulation of these, we found that ending write offs would not have an immediate impact on revenue. Although employer accounts would become more negative, they are already overdrawn. Employers that receive the write off usually get the maximum tax rate. If we eliminate the write off, we could get increased revenue after a recession in which benefits were sharply higher for employers that do not usually have layoffs. The simulation is based on the DOR forecast; if we eliminate the write off in 2010 it does not have any significant impact on revenue through 2013. If the economy improves in 2014 and 2015, eliminating the write off would increase the revenue by $10 million in 2014 and $19 million in 2015. There is some payback by eliminating the 10% write off, but it is not a huge amount. Given where we are with the trust fund, however, any contribution to improving the revenue situation would be helpful.
Mr. Bergan indicates that the write off acts like a benefit that is paid and noncharged. If we have as a goal to reduce charges to the solvency account, reducing the write off is the single most beneficial thing we can do for that. Mr. Bergan provides a handout showing Employer Accounts – Revenue and Expenditures 2001-2009 and Solvency Revenue and Charges 2001-2009. The Solvency Revenue and Charges chart shows that for 2009, the 10% write off was a $407 million solvency charge. Other solvency charges are $252 million for quits or circumstances where benefits are paid but not charged to an employer. It is a large part of the equation.
Question (Gustafson): For the tax schedules, is the new employer rate included on page 3 of the handouts?
Mr. McHugh indicates that the new employer rate is 3.6% and is not included in the handout.
Question (Buchen): We define large and small employers because we tax them differently. Small employers have less than $500,000 taxable payroll. If we do the math, 93% of all employers have 41 employees or less. They employ 36% of the workforce. The remaining 7% of large employers employ 64% of employees. We are making the assumption that the $500,000 divided by the $12,000 taxable wage base means that employers with 41 or fewer employees are small employers.
Comment (Petersen): The last page shows that 106,000 employers have fewer than 100 employees.
Mr. McHugh indicates that with the larger taxable wage base, who is considered a large employer should shift for some employers. Mr. Bergan indicates that the question of who is in what category is a big question. We should be asking who is paying their way and who is not.
Comment (Neuenfeldt): He wants to deal fairly with employers. Does this include public sector employers?
Mr. Bergan indicates that this includes only the taxable employers. Most public sector employers are reimbursable employers. Cliff Miller was more or less the author of the tax schedules. When the tax schedules were set up, they were looking at where the money was with the different tax brackets. The reality may be different now than it was then.
Question (Buchen): It is interesting that for both large and small employers the category just below the negative accounts has the biggest payroll dollars. The money is bunched up at 0-3.5% reserve ratio. The basic rate is 3.37% and goes to 5.3% if they become overdrawn. That is by far the biggest increase. We may have a lot of employers at the brink of a huge tax increase. With the solvency tax, it goes to 6.6%.
Mr. Bergan notes that the solvency tax is uniform and lower for negative balance employers.
Comment (Gustafson): The 1981-1982 recession did not affect the paper industry. The recession seemed to affect more of the manufacturing sector. It is different now for the paper industry and it may be for other industries as well.
Break 11:21 a.m. to 11:40 a.m.
4. Assembly Bill 487
Motion (Neuenfeldt), seconded (Buchen), to seek a legislative amendment of AB 487 and if necessary the companion Senate bill, to amend the date of initial applicability of the disqualification of benefits contained in section 10 of the bill [amending Wis. Stat. 108.05(3)(b) regarding “full-time”] such that the date of initial applicability would be July 1, 2011. This resolution would be to seek legislative amendment of section 28 of the bill, which determines initial applicability of section 10.
Discussion on the motion:
Mr. Bergan indicates that in 2006 as part of the UI bill, we expanded the idea of what constitutes full-time work. It used to be 35 hours and it was changed to 32 hours. This broadened coverage in the program. We changed it in one provision, but did not go back to deal with other provisions that had 35 hours provisions. This proposal relates to disqualifications and synchronizes it with the earlier change to 32 hours. When we presented this change [in AB487] we described the fiscal effect as minimal and it still is very minimal. However, since earlier in the year when this was proposed, furloughs have come up in state and local government and elsewhere. The effect of the change to the disqualification is that some people who otherwise have been eligible for a small check and who are laid off or furloughed for one day may be disqualified instead of receiving the small check. The number of people who are on furlough who file for unemployment is very low. For the first statewide furlough day last week, there was a small number of people who filed. Some people who have been filing, however, might think this was aimed at them, and it was not. It has that unintended consequence. The motion is to suggest a friendly amendment during consideration in the Senate since the Assembly has already acted.
Question (Gustafson): How many furlough days are state employees required to take? Is the effect still de minimis?
Mr. Bergan indicates that the state employees are required to take 8 furlough days in each of two state fiscal years. When the agencies take the days may vary. The fiscal effect as it relates to the state is very minimal and in general it is relatively small.
Motion is approved by a vote of 8-0-0.
5. Unemployment Reserve Fund solvency (continued)
Question (Buchen): On the last page of the handouts, there is a list of the number of employers by size. It indicates there are 109,000 employers. Are these all private sector employers? Hospitals are reimbursable and would not be included, correct? They are the largest employers in the state.
Mr. McHugh indicates that the table represents just taxable employers. Taxable hospitals would be included.
Question (Yunk): Can nonprofits elect to be taxable or nontaxable?
Mr. McHugh indicates that nonprofits are set up initially as taxable, but they may elect to be reimbursable.
Question (Buchen): Are there a lot of nonprofits that are taxable?
Mr. McHugh indicates that about 75% of nonprofits are taxable. He will check the numbers and report that back to the Council. [Edit: 11/11/09 actual percentage is 62% taxable and 38% reimbursable.]
Mr. Bergan: handout page 4 shows Iowa’s tax table. Iowa has 8 schedules compared to Wisconsin’s 4. They have substantial variation from the most aggressive to the least aggressive schedules. One alternative to consider is a new tax table, to make it more uniform and consistent. The ones we have now served well at the time they were constructed but it is hard to figure out what they had in mind when they did what they did. We may want to see what an alternative schedule might look like. At the same time, we may want to think about how triggers work to move from one schedule to another. Now we move based on the balance in the reserve fund. Most other states use a different ratio that takes into account the benefits paid and the taxable wages. They use a ratio between what is in trust fund and taxable wages. They are different and the topic of triggers and number of schedules is something we should consider. Iowa is presented as an example. We are not proposing this schedule.
Question (Buchen): The first column is for the benefit ratio rank. What does that mean?
Mr. McHugh indicates that Wisconsin is a reserve ratio state. Iowa is a benefit ratio state; there are many fewer benefit ratio states. They compute a percentage of average annual benefit charges for the last five years that company had divided by its average annual payroll for the last three years. They compute a percentage and that determines their tax rate in that table.
Question (Buchen): Is there a particular benefit to doing that compared to what we do?
Mr. McHugh indicates that most states use the reserve ratio. It is a different approach.
Question (Lump): Is the benefit ratio experience-based?
Mr. Bergan indicates that it is a measure that ties the tax rate closer to what is paid out in benefits. The connection in a reserve ratio system is not as directly tied to benefits paid as in a benefit ratio. One of the things that is problematic for our system is that there is not a strong connection between the benefits paid and the tax rate. There is some tie, but it is not as direct as in the benefit ratio system.
Question (Buchen): One of the policy choices we made when we set this up was to consider the prospect of hitting people with higher taxes in the middle of a recession, which is the worst time to do it, versus paying more in the good times and having a balance to pay benefits in bad times on the theory that people cannot bear those increases during the bad times. It seems to generalize about employers’ ability to pay.
Mr. Bergan indicates that Iowa uses the 5-year average benefit charges and averages payroll over 3 years. That is a classic strategy for smoothing. They would not tick up so fast but when times got better it would not go down too fast. Mr. McHugh indicates that the benefit ratio is too responsive unless it is averaged out. This is one reason why states do not use it as much. They rank all of their employers based on the benefit ratio, but the table used is determined by the high cost multiple or the fund’s balance related to the benefits paid. As the fund goes down, the tax table goes up. It looks a lot like a high cost multiple. If you have an Iowa Cost Multiple of 1.5, you can quickly go down a bunch of tables to the lowest tax rate table. They take their employers from low rated to high rated and slot them equally by taxable payroll in each bracket. They have the same amount of taxable payroll in each bracket. This is helpful to predict what the fund balance will be. They can figure out from the tables what the average tax rate will be. They figure what they want the average tax rate to be for table 1 and then it is a question of figuring what rates they want to apply to employers at each ratio. It works out to an average of 3.51% for the first column.
Question (Buchen): The second column showing cumulative taxable payroll is the percentage of employers in each category, correct?
Mr. McHugh responds affirmatively.
Mr. Bergan: page 5 shows the taxable wages in each state and marks with an “x” those states that use an indexed wage base. The first column shows total wages by employers in billions. This is for the second quarter, April-June, 2009. It shows total wages for Wisconsin of $22 billion. The next column shows the taxable wages in billions. Mr. Tillema indicates that this is taken from the 2nd quarter summary, which is taken from the data from the 4th quarter 2008. There is a six-month lag in the time for the data to come out.
Mr. Bergan: this is a useful comparison with other states. The states with higher taxable wage bases are more solvent and better match benefits and taxes.
Alternatives for Strengthening the Reserve Fund. (Handout)
Increase taxable wage base. Mr. Bergan: as the taxable wage base increases, you get a lot of the increase in the first couple of years but then it tapers off. There is a permanent increase but it is relatively smaller after the first 3 or 4 years.
Question (Buchen): Is it also fair to say that there is a falling off because reserve ratios become higher and they are not paying benefits?
Mr. Bergan responds affirmatively. He indicates that the taxable wage base is $12,000 this year, $13,000 in 2011 and 2012 and $14,000 after 2012. One option is to consider accelerating that increase.
Increase maximum tax rate. Mr. Bergan: if you increase the maximum tax rate by 1%, it increases revenue by $17 million.
Change lowest solvency tax rate. Mr. Bergan: the purpose of the solvency tax is to pay benefits not paid otherwise. How do you set the solvency tax? When it is very low, you forego significant revenue. Generally we want to pay particular attention to the funding of the solvency account.
Adopt a solvency surtax on all employers. Mr. Bergan: this would be a uniform surtax, everyone paying the same. This could be set at any level.
Question (Neuenfeldt): What is the target number of funding that we are trying to achieve? It would be helpful to know this to work backwards and find the changes that could meet that number.
Mr. Bergan: Last year we paid $1 billion in benefits. The difficulty with the question is that we need to make assumptions about what the unemployment rate will be. If you structure a system that is closely linked to benefit payouts, it is not as important. However, whatever figure you pick will need to embed assumptions about what the unemployment rate will be.
Comment (Buchen): What would be helpful is going back to after the 9/11 recession and before this recession, in 2005 and 2006, according to the handout on employer accounts for revenue and expenditures, we were taking in about $67 million less than we were paying out in those years. After the recession it would probably be worse, and in good years we need to be building. We are talking about $200-250 million in some combination of taxes and benefit reductions.
Mr. Bergan: The benefit payouts are projected at $753 million in 2010. Starting from next year, we need to determine what a reasonable amount is where you think benefits might normalize. A reasonable number might be based on 2008, which was about $1 billion in benefits. Benefits are not projected to drop to that level until 2013.
We are looking for a long-term solution. Suppose we build a system to be solvent and pay $1 billion in benefits per year. You still have the deficit. We can project a deficit with that change. The debt may require a different strategy. To pay back the debt, the solvency surtax may be a logical choice. We could pick a number and choose the policy options that we think will get us there and run the numbers and see if we want to revisit it.
Comment (Neuenfeldt): If we are going to solve the problem, we need to know what the target is. We need to know what is needed to make the fund solvent and then to pay off the debt. If there is some federal move around for debt forgiveness, we could target changes for that. That has to be the starting point. Then we can figure out what is smart for claimants, employers, politically, etc.
Mr. Bergan: another way to think about this is to pick a target and pick a date. This year we want to have this much. We may decide not to do it all at once because it is pretty strong medicine and will come on the heels of the 2010 tax increases. In 2010 there will be a significant tax increase with Schedule A. As we construct something, we should think about making it a system that is tied to the economy and responsive to changes in the economy.
Comment (Buchen): There are a lot of variables to consider.
Question (Yunk): Where does the $250 million figure come from?
Mr. Bergan indicates that $250 million would be the difference between revenues expended in 2010 and a base of benefits of $1 billion.
Comment (Buchen): The official forecast shows benefit payments of $905 million in 2013. That is anticipating lower benefits than the prior years. This is relevant to how the business cycle is going to look under the current structure before it can move forward. Is the 2013 estimate of benefits what we can expect to be based on full employment at that point?
Mr. Tillema indicates that generally the forecast is projecting a fairly slow recovery. He can bring the unemployment rates that those projections are based on. Full employment may imply more unemployment than it has in the past 20 years.
Comment (Buchen): We may consider 5% as being full employment. That is a moving target for us to consider. It would be helpful to know what the assumptions are in the projections. We want to be well informed on this.
Question (Yunk): If increasing the maximum tax rate by 1% could increase revenues by as much as $17 million, are we proposing an additional rate or is it that the top rate would be increased by 1%?
Mr. Tillema indicates that it could be done either way.
Eliminate the distinction between solvency rates for large and small employers. Mr. Bergan indicates that we currently have distinctions between large and small employers for their solvency rates. This option would be raising solvency rates for small employers. Mr. Tillema still needs to figure out the fiscal effect of this.
Eliminate “quit” charges to balancing account. Mr. Bergan indicates that for many situations where benefits are allowed on exceptions to the quit disqualification, the employers are not charged based on a policy judgment that the employer is not responsible for the quit.
Comment (Lump): This has a large effect on small businesses. When someone quits to take a better job and then is laid off by the new employer, it hits small employers. First, they lose the employee and then they have to pay UI. We need to deal with this issue with sensitivity to small employers.
Eliminate miscellaneous charges to the balancing account. Mr. Bergan indicates that this relates to the same general principle as quits. They are benefits paid that are not the responsibility of the employer and should be charged elsewhere.
Eliminate 2nd benefit year charges to the balancing account. Mr. Bergan indicates that 2nd benefit year charges would be charged the same as the first. These would be moved from the balancing account back to charges to employer accounts.
Question (Petersen): Would the increased amounts be due to the employers’ rates going up because they would have more charges in the long run?
Mr. Bergan responds affirmatively.
End 10% write off and/or the rate increase limiter. Mr. Bergan indicates that historically, these provisions were suspended for a while. As we think about options, we should consider other steps to cause provisions to take effect in certain circumstances and not in others.
Change the order of charging. Mr. Tillema indicates that this would mean that any employer that laid off an employee would be charged for their portion of the benefits before the balancing account would be charged. Now employers and the balancing account are charged at the same time from dollar one.
Question (Buchen): If you make a couple of changes, do they affect one another or can you add them up?
Mr. Tillema indicates that to some extent they are interactive. We could compute the effects from various combinations. These are presented as amounts with changes in isolation.
Retain reserves by implementing a one week waiting period. Mr. Bergan indicates that Wisconsin is one of 14 states that do not have a waiting week. In general, this means that for someone who is laid off for only one week, they would not receive benefits. For someone who exhausts benefits, the beginning is delayed, but they would get the same amount of benefits. For someone who receives less than 26 weeks of benefits, they would lose a week of benefits. Mr. Tillema indicates that it would be the first week in the benefit year that is not paid. Someone laid off for 3 weeks would receive 2 weeks.
Question (Yunk): Would they still receive the total amount?
Mr. Tillema indicates that someone may be eligible for the full entitlement of 26 weeks. That entitlement would be available throughout the entire benefit year. If the person was not laid off enough to receive 26 weeks, they would lose one week of benefits.
Question (Gustafson): With an example of three 3-week layoffs, then they would receive 8 weeks of benefits, correct?
Mr. Tillema responds affirmatively.
Question (Buchen): The system is in trouble at least temporarily. We need to look at what is the fundamental need here for someone to pay the mortgage and feed their family. The first week is not the hardship for everyone. There is a reasonable policy basis for the waiting week even in a recession.
Retain reserves by increasing qualifying requirements. Mr. Tillema indicates this can be done in a number of ways, but he uses 3 examples. The current requirement to qualify is to have total wages equal to 35 times the claimant’s weekly benefit rate; and the wages outside the quarter when wages are highest must be 4 times the weekly benefit rate. If we change the outside high quarter requirement to 12 times the weekly benefit rate, then we would have a reduction in expenditures of $11 million. Alternatively, we could increase the requirement for total wages from 35 to 40 times the weekly benefit rate, while leaving the outside high quarter requirement at 4 times, and we would have an estimated expenditure reduction of $25 million. These are in the context of the forecasts. It is also possible to do both, which would be an expenditure reduction of $26 million.
Mr. Bergan indicates that the department prepared a matrix of the history of tax changes over the past 25 years. The department has done that for benefit changes for the past 25 years, too. The handout of benefit changes history is distributed. This is to give the Council a broader context of the changes over the years. This does not include the fiscal effects of all of the changes because the effects would be different now.
Comment (Neuenfeldt): He would appreciate some simple analysis of the magic number to get to before the next meeting.
Comment (Buchen): It is hard to say just plug in $250 million. It has to do with how you get the money. That is the issue. We may need $250 million now, but when the recession is over, it does not need to be that much. It is hard to get a clear fix on that.
Comment (Buchen): The Fund forecast figures that Mr. Tillema is operating from are the result of a set of dynamic factors. People are moving through the rates and across the tables. We need to know how $250 million more in 2009 will affect the figures for 2013. We cannot answer that without knowing where the money is coming from.
Mr. Tillema indicates that we need to know what preferences the Council has for raising revenue. Otherwise there are an infinite number of possibilities. The Council needs to narrow it down and let the department know the kinds of things it is interested in looking at and then the department can run further scenarios.
Comment (Buchen): If we pick $250 million and model that in 2009 or 2010, assuming everything that is current and it is distributed uniformly. Everyone’s rate increases a proportionate amount to get the $250 million in 2009 or 2010. If you ran the same thing out to see what it does, it will give us a feel for how the changes may work. Use 2010 when we are in Schedule A for the whole year. Then see how it would look if we are raising $1 billion instead of $250 million and what happens in later years based on how employers are moving through tax tables.
Comment (Gustafson): You could hold most things constant and make one change at a time and see what happens. That would be valuable.
Comment (Yunk): Then we would be saying let’s look at what you want to have and based on that, what would we have to do and what would the tax table look like.
Comment (Buchen): He is trying to get a sense of how this number would affect the system over a continuum of time and different places in the business cycle. It would be helpful to know the unemployment rate projections for those future years. It would help to answer if the $250 million is the right number to shoot for now.
Mr. Bergan indicates that the department will try some things.
The next meetings are scheduled for November 19th and December 17th.
Comment (Buchen): The department should provide the data before the meeting.
Comment (Neuenfeldt): It would be helpful to get the information for understanding the financial forecasts and then talk through the caucus system.
Mr. Bergan indicates that if there is any further information the department can provide, please let him know. We do not have a higher priority than working on this.
Motion (Yunk), seconded (Gustafson) to adjourn passes 8 - 0.