Wisconsin Manufacturers & Commerce
501 East Washington Avenue
Management: James Buchen, Ed Lump, Dan Petersen, Earl Gustafson, Susan Haine
Labor: Phil Neuenfeldt, Dennis Penkalski, Red Platz, Mike Bolton
Chair: Daniel LaRocque
Department staff present: Hal Bergan, Bob Whitaker, Dick Tillema, Tracey Schwalbe, John Zwickey, Christopher O’Brien, Lutfi Shahrani, JoAnn Hium, Carla Breber, Ben Peirce, Laura Parker, Jason Schunk, Andy Reid, Brian Bradley, Troy Sterr, Tom McHugh, Robin Gallagher
Others present: Representative Mark Honadel, Jason Vick (Rep. Honadel’s office), John Metcalf (Wisconsin Manufacturers & Commerce), Larry Smith (UC Management Services), Bob Andersen (Legal Action of Wisconsin), Michael Metz (WI Independent Business), Lezlee Collier.
Mr. LaRocque calls the meeting to order at 1:00 p.m.
Mr. LaRocque introduces Representative Mark Honadel, Chair of the Assembly Committee on Labor and Industry. Representative Honadel introduces himself and shares his background with the UIAC.
Mr. Bergan provides a budget update. This is a good news/bad news story. The good news is that we will receive an increase next year of $2.7 million in our federal grant. This is considered a stop gain. This is 5%, which is the most we can get as an increase. Four years ago we were at the stop loss for a couple of years in a row and we were losing 5% each year. We worked hard to learn how the federal funding formula works and it has been successful. We had planned for $2 million and we got $2.7 million. The bad news is that our expenses have been mounting as far as what our day-to-day costs are. Salary expenses for FY 2008 are projected to be $1.2 million more than 2007 because of contract settlements, some which took place some time ago. Fringe benefits are up $1 million. There is a $1.5 million increase for 2008 for PRS or program revenue charges. This is the money we pay internally for IT services, administration, etc. Our postage bill is now scheduled to be about $1 million more than we will be reimbursed by the Department of Labor. The DOL used to reimburse all postage; a year ago they changed that policy and will reimburse a smaller amount. We have been looking internally at our mailings to see what we can do to reduce our postage expense. Some of our IT projects have the potential to do that as well. Finally, there was an unanticipated expense in 2007 of $470,000 relating to bond payments that had to do with funding retirement benefits from previous years.
At the end of the federal fiscal year, September 30th, we will still be in the black. We are much less certain about that for FY 2008 and 2009. Last legislative cycle we got authorization to spend some Reed Act funds for administration if they were needed. That authorization expires on September 30th. At that time we expect to have a balance of $700,000-800,000. We do not think it is appropriate to use the funds then, but it is entirely possible that we would have a need in 2008. I am asking that you reauthorize the ability to use those funds for 2008 and 2009 if needed. As we go forward, I would like you to keep in mind that we might need the flexibility to use those funds for 2008 and 2009 to make sure we can meet our administrative expenses.
Question (Gustafson): What is the percentage increase in the postage costs?
Mr. Zwickey indicates that the total postage costs for 2007 were $3.8 million. Mr. Bergan indicates that we will only be reimbursed $2.8 million for 2008, about 27% less, so we have an incentive to reduce our postage costs. Until we can reduce postage costs, there is a deficit.
Question (Buchen): Have postage costs been declining over time?
Mr. Bergan indicates that these costs have been steady. Now we are looking at all of our correspondence to see how much we do not need to do, and how much we can move to an electronic platform of some kind.
Comment (Buchen): My organization saw a savings by going to electronic format rather than printed materials. It was how people wanted the materials to be, but there can be down sides to that as well.
Comment (Gustafson): The paper industry has been involved in postal reform and controlling costs. An enormous segment of the paper industry’s business is cutting back. There is a cost to the paper industry.
Comment (Lump): There has to be some caution here because a lot of small businesses are not ready to be cut off from mail from the train. There is a segment of business that has not been responsive to the move to electronic communication and they may not be ready for a while.
Motion (Neuenfeldt), seconded (Lump), to approve the Minutes of the July 16, 2007, meeting. Minutes are approved unanimously.
Mr. Bergan presents department proposal D07-05 Continue administrative assessment. Mr. Bergan hands out a memo regarding the administrative fee. The fee was first established in 1998 to provide funds for the improvement of IT systems. It is scheduled to expire on December 31, 2007. The fee is one-one-hundredth of one percent of taxable payroll and is built into the existing solvency tax rates. Currently the fee generates about $2.4 million each year. In recent years, virtually all of the funds were used to fund the tax and accounting system modernization program, SUITES, which is scheduled for deployment in December 2007 and spring 2008. This is distinct from our IT maintenance charges, which are the costs for keeping our systems running. For the most part, we have been able to fund maintenance charges out of Wisconsin’s federal grant. Those costs have been rising, primarily as a result of increases for IT services. We are optimistic that the federal grant will continue to cover them, but it is not a sure thing.
The administrative fee is used to fund enhancements to the system. In the past we also have used federal grants and Supplemental Budget Requests for enhancements. These are special funds provided by the federal government for particular programmatic purposes. In recent years the annual carryover of federal grant funds has been significant, and we have used that to fund our IT systems. Those carryover funds have decreased dramatically over the past few years. In practice, the administrative fee is now our primary revenue source for system enhancements. Without that fee our modernization efforts would slow dramatically.
After suspending EnABLES in February, the Bureau of Information Technology Services, our Chief Information Officer, and the Division embarked on a planning process to reset our IT modernization process. For the most part, we will be modernizing through small, incremental changes and those would be done focusing on DWD platforms wherever possible. More broadly, the purposes of those changes would be to create cost-effective efficiencies for Division staff and our customers, and to improve ease of use for all of these programs.
The one exception for this strategy is that we may switch our data base program from the existing IDMS system, which has been out-of-date for some time, to a different data base called DB2. This would be a larger project, though not as large as the projects we have been doing. We are now in the process of taking an in-depth look at whether that is a good option for us. We are talking to other jurisdictions and enterprises that have undertaken this change. This was a very expensive proposition when we first thought of it years ago, but the technology has since evolved and it is less expensive now, but we will not know how expensive until we complete our market study.
In the meantime, we have other pending business in terms of improving our systems. We want to create internet inquiries for claimants so they can get information about their claims. We want to improve internet fact-finding for high-volume, high-value adjudications. We want to collect specific discharge information during the initial claim which could really speed things up. We need to move toward more automated appeals scheduling. We want to increase the ability of claimants to complete their applications either over the telephone or the internet without talking to a claims specialist. For quite a few years we have had the capability to do real time verification of Social Security numbers which is a key quality check for us. We are now being required by the federal government to move to a different system that does not have that capability. It is important to us, so we need to do some programming to reestablish that capability. We also want improved online access for employers. We will do this with SUITES, but if there are other things possible once we get SUITES in place, we want to be able to do that.
This short list describes just a few of the high value enhancements that we would like to make. Our thought is we would scale the pace and size of these improvements to match up to what revenue would be available through the existing administrative fee. It would be hard to do these enhancements without the administrative fee. We are asking you to remove the sunset. We are in a business that is very much driven by technology and not improving it is not an option if we want to continue to provide the best possible service. The inevitable changes that occur as technologies age require ongoing program and software changes. That will be an ongoing process. I hope you keep this in mind as you move to making final decisions and act to remove the sunset of the administrative fee.
Question (Platz): Why was the sunset put into the statute?
Comment (Buchen): This was done at the outset of the SUITES effort and it was considered a supplemental means of funding that effort in addition to the federal reimbursement money that we get. We thought it was necessary to do the job. The theory was that when the system was up and running, it was paid for and the fee was done. As we went along, EnABLES was proposed and this was used to pay for that. I think we extended the sunset more than once on the theory that the department would be done with those projects. This proposal is different because it is not for a program per se but maintenance and continuing upgrades, and making it permanent. When we set it up, we did not increase the solvency tax, we just dedicated a portion of it to this tax. In some sense, this is $2.4 million that we forego each year in the balancing account. It was not a tax increase.
Question (Penkalski): Do you want a separate motion on this?
Mr. Bergan responds that we do not have a formal motion ready but can have that ready for the next meeting.
Question (Lump): Before we do this, I want to see what the estimated differences are in the costs in what you are trying to do. Also, is this to be permanent? There is reticence to move forward with temporary tax efforts that may be made permanent because they are there. I am not saying the proposal needs to be redone, but we should talk about it. I feel more comfortable if we are talking about this in terms of expenditures.
Mr. Bergan responds that this represents a change in philosophy and a movement away from the large project model to doing things on a more incremental basis. The rationale is different than when it was originally proposed. The assumption then was that we were looking at one or two major projects. SUITES is still ongoing and the need to modernize continues, especially for benefits. The thought was just to say that this is the course the Division is on. We are going to modernize at a pace that is reasonable and manageable. From that basis, removing the sunset would be our preference. If there is a need to revisit it, we are not opposed to doing that.
Comment (Buchen): Conceptually the program was to be funded out of some of the money paid in federal taxes by employers. There are no other state taxes that are paid that fund the Division. This does not come out of a federal pot of money, it comes from taxes paid by employers that go to the federal government. Those monies are set aside for loans, budget, and some are returned to the state, the amount of which varies each year. I think it is tied to the level of unemployment.
Mr. Bergan indicates that for the most part it is driven by the resource justification model and we have learned how to maximize that. In the past we managed our maintenance budget out of the federal grant. Here we are concerned with the ability to keep improving the systems and provide better service. We have done this over the past several years, and this is one reason we have been able to reduce staff as much as we have over the past decade. This has been technology-driven. As we see more internet applications, we realize we can make this process better for employers and claimants.
Comment (Buchen): It is a departure from how we have funded the administrative fee. If we make it permanent, it may be a precedent-setting act, though the precedent may have been set when we originally dedicated part of the tax.
Comment (Gustafson): I agree with Mr. Lump’s comments. I do not have enough information to ask intelligent questions. Before I would be ready to vote on something, I would need something more than this initial memo, describing some of the whats and wherefores in the realm of what you would be looking at, how those would be prioritized or ranked. The bullet points look good, but it is abstract to me now. Maybe you can walk me through this so I understand better what some of those improvement items are. You are not asking for a vote today, but maybe we could get this when it is part of the motion or with the whole package. I am not looking to micromanage or have staff go through a lot of hurdles with a portfolio or power point. I would like a better handle on it. Some of the problems that you incurred may have been a result of the UIAC not being as aggressive in oversight and may need a little more here, and that is what is being reflected in my comments in wanting to take a closer look at the various activities.
Mr. Bergan indicates that we can do that with the understanding that we can give you an idea of what some of these might cost, but those would be high level estimates because we have not made a decision to go forward with them.
Question (Lump): I see that it may make sense to do these things, but EnABLES made sense, too. I just want to know the difference between these projects.
Mr. Bergan indicates that if we made the choice to go with the DB2 database change, we would be foreclosing some of the other improvements in terms of total cost. We do not know the cost, but we can get a pretty good fix on that as the study goes forward. If we made the choice to use the DB2 data base program, this would be a substantial decision that we would bring to the UIAC.
Question (Haine): If you moved your smaller improvements in the direction of the DB2 platform, would that be more consistent with more of the applications you have in the department? For efficiency purposes it is better to have your IT people handle fewer kinds of data base structures. I am generally in favor of things that move the Division to more consistent platforms that make it easier for IT personnel to manage the various applications you already have.
Mr. Bergan indicates that the DB2 would become the new standard. Mr. Peirce indicates that the department standard for mainframe applications is DB2. The department standard for client server applications is Oracle.
Question (Penkalski): For the verification of Social Security numbers, have you checked with the Department of Revenue if they have this capability so you are not reinventing the wheel? There was cooperation in the past with audits; is there cooperation on this?
Mr. Peirce indicates that we need to verify SSNs with the Social Security Administration, not Department of Revenue, and they provide a mechanism for us to do that today. They are providing a new alternative to verify the numbers and it will work, but not with our current automated system. We want to explore a system-to-system communication as opposed to a human-initiated query. We can do it real time with a human-initiated inquiry, but we are working with the Social Security Administration and DOL to investigate this. Mr. Bergan responds that we have a need to do the interaction in real time that is somewhat different from the needs of the Department of Revenue.
Question (Petersen): Did we discuss funding some of this out of Reed Act funds last year? I am not suggesting we do this, but I would like clarification.
Mr. Bergan indicates that we talked about administration that way and we have used Reed Act funds in the past for IT purposes. Mr. Zwickey indicates that in the 2003-2005 biennium, $5 million was set aside for automation and we spent about $4.2 million of that. We plan to use the balance to finish the CEDARS employer information data base.
Comment (Gustafson): I would be more inclined to a continuation of the sunset than a removal of it. I see this as not necessarily business as usual so it would not be a complete removal of the sunset and have to revisit it, but set it at some time in the future and revisit it. I might be persuaded otherwise, but that is my first thought on it.
Question (Buchen): The Reed Act versus this approach is a horse a piece in the sense that the Reed Act is in the fund and every dollar you take out of that you have to replace some other way.
Mr. LaRocque notes that the department will defer this item to the next meeting.
Mr. Bergan indicates that the Division has had discussions internally on this but we have not reached consensus on it. We expect to make a modest and targeted recommendation on this.
Question (Haine): Has there been an ongoing discussion on this topic?
Mr. LaRocque indicates that this came up in the form of a constituent comment from Mike Klein at the UIAC. This is the same as the “independent contractor” issue.
Mr. LaRocque indicates that this agenda item is to update the UIAC that some proposed rules have advanced. DWD 123 which has to do with benefit reports files by employers and DWD 130 which has to do with wages for benefit purposes were submitted to the Legislature on July 17th. These are not major items. Once this is assigned to a committee, the committee has 30 days to review the rules or it is deemed approved. This is to let you know that something is in the legislative hopper in case you should hear any questions about it. Also, DWD 133 is the temporary help rule which becomes effective August 1st.
Mr. LaRocque indicates that at the last meeting there was some question about the funding mechanisms for the trust fund.
Mr. Bergan supplies a hand out to address the general query at the last meeting about how much is enough and what do we need to do. The first objective is to build the reserve fund resources to withstand a recession like that of 2001. The last steep recession was in 1982. Since that time, the recessions have tended to be not as deep. For planning purposes, we thought we should focus on that as a realistic objective but recognize these are high level estimates. We would like to maintain a balance of at least $1.3 billion as a guard against the type of recession in 2001. We would not get there is one year, but this would be a goal.
The second objective is to pay as you go and stop growing the deficit in the balancing account. The deficit has been growing the past couple of years at a rate of about $130-140 million per year. At a minimum we would like to stop the bleeding in this account.
The third objective is to pay down the existing deficit in the balancing account of approximately $350 million.
With these objectives in mind, Mr. Bergan presents four possible alternatives. There are other alternatives that have been outlined previously. The first option is to increase the wage base on a one-time basis. This would provide significant revenue in the short run, which is good. It would have a smaller effect on low wage employers and more of an impact on high wage employers. If you are running a business now where a lot of your employees do not meet the current taxable wage, raising it will not affect that employer. If we decrease charges to the balancing account as a result of increasing the wage base, the negative balances affected reduce the 10% write-off and that improves the status of the balancing account. The positive effects on the overall balance diminish in subsequent years, but the positive effects on the balancing account endure.
The second option is to index the wage base to growth in wages. It provides smaller, more regular increases in revenue and it mitigates the diminishing returns of the one-time increase.
The third option is to increase solvency rates for all employers. This is efficient as it relates to the balancing account because it affects revenue to the balancing account dollar-for-dollar. This treats all classes of employers the same. The revenue effects are consistent over time. This has significant revenue potential; a .5% increase across the board in the solvency tax would raise about $120 million per year.
The fourth option is to increase just the minimum solvency rates. This also has some significant revenue potential and the effects are consistent over time. It is efficient. The largest effect would be on those who pay minimum solvency rates but take advantage of the balancing account where there are quits and other non-charged benefits. An approach could be a combination of these options. The system is complex enough that there are a lot of ways to approach this. A combination may make sense given the particular problem we are having with the balancing account.
Comment (Haine): In looking at the wage base, it helps to think about the cost to the employer. Take a 3% average rate and the difference between the current $10,500 taxable wage and the labor’s proposal of $13,500, it is about $90 per employee per year, assuming that most full-time employees meet the $10,500 threshold.
Mr. Tillema confirms that the average tax rate is 2.9%.
Question (Representative Honadel): For every $1,000 above the $10,500 figure, how much do you generate per thousand?
Mr. Bergan indicates that over the course of five years, it would be $216 million. If we stay on the current schedule B, the average for the first five years would be $44 million per year, but the amount of actual additional revenue peaks in the second year. The taxes go up and employers get more money in their accounts and then their tax rates go down. Over the longer term, you retain about half of what the increase is on an ongoing basis. If the fund goes under $300 million, you would generate $51 million per year.
Question (Neuenfeldt): Barring a major recession, and using today’s unemployment rate, how many years would it take us to get back up to where we need to be?
Mr. Bergan indicates that this will depend on what the wage base would be and would be dependent on what other changes would be made. We will run the number using labor’s proposal of $13,500. Mr. Tillema indicates that we will probably have to work with the UIAC on an interactive basis to simulate what the effects are based on the combination of proposals the UIAC comes up with. We can give you an idea what the figures are if you do nothing else, but there is an interactive effect on these proposals. We can put that all together when we have a better idea of what the proposals are.
Question (Buchen): How much were we in the red at the close of 2006?
Mr. Bergan indicates that in 2005, the balance was $750 million. Between 2005 and 2006, it dropped $28 million, but it had done the same thing the year before. The projected drop for the next year is over $100 million.
Question (Buchen): Is unemployment slightly higher?
Mr. Bergan indicates that unemployment is slightly higher. Claims are up about 8.5% for the year, and there were benefit increases. These are what essentially drive that number. The revenue side stays flat, and that is the heart of the matter.
Question (Buchen): What has been the average weekly wage growth?
Mr. Tillema indicates that from 1990 to 2005 it is an average of 3.7%. Benefit growth has been 2.6-2.7% so benefits have not been rising as quickly as wages.
Question (Representative Honadel): Is the 26 week period defined by the federal government?
Mr. Tillema indicates that it is a state requirement. Some states have more weeks; no states have fewer than 26 weeks.
Mr. LaRocque indicates that binders have been provided to the UIAC with the department proposals and some information on some of the other proposals.
The next meeting will by Monday, September 10th, at 9:30 a.m., for the full day.
Motion (Buchen), seconded (Neuenfeldt), is passed unanimously to go into closed session to discuss all proposals for changes to the unemployment insurance statute and rules pursuant to section 19.85(1)(ee) of the Wisconsin Statutes. Closed sessions by the management and labor members of the Council, respectively, begin at 2:15 p.m.
Meeting is adjourned when the caucuses end.
March 25, 2013
Unemployment Insurance Division, Bureau of Legal Affairs (BOLA)