Unemployment Insurance Advisory Council Meeting Minutes

Wednesday, November 19, 2009 – 9:30 A.M.

Offices of the State of Wisconsin Investment Board
Room 226 (Board Room)
121 East Wilson Street
Madison, Wisconsin

Members Present

Management: James Buchen, Dan Petersen, Susan Haine, Ed Lump, and Earl Gustafson.

Labor: Phil Neuenfeldt, Dennis Penkalski, Anthony Rainey, Sally Feistel and Patty Yunk.

Chair: Daniel LaRocque

Department staff present: Hal Bergan, Andy Reid, Tracey Schwalbe, Brian Bradley, Tom McHugh, Pam James, Lutfi Shahrani, Carla Breber, Ben Peirce, Dick Tillema, Chris O’Brien, John Zwickey, Robin Gallagher.

Others present: Jason Vick (Representative Mark Honadel), Bob Andersen (Legal Action of Wisconsin), John Metcalf (WMC), Michael Metz (WI Independent Businesses), Tom Fonfara (DeWitt Ross), Tom Brien (UAW Local 95; Workforce Investment Council), Jenna Weidner (Department of Administration).

MINUTES

Mr. LaRocque calls the meeting to order at 10:02 a.m.

1. Opening Remarks – Hal Bergan

Mr. Bergan notes that the unemployment rate for October held steady in Wisconsin and nationally. The total unemployment rate (TUR) seasonally adjusted (SA) is the one that governs the trigger for most programs. The trigger for Tier 4 of EUC08 which provides the last 6 weeks of benefits is 8.5% TUR SA. Currently we are just above the trigger, but that may change. The important date will probably be the data for December that is announced in January. We know we will be eligible for Tier 3, which is up to an additional 13 weeks. The trigger for Tier 3 is 6% TUR SA.

All of the extensions of EUC08 (Tiers 1-4) and the federal funding of Extended Benefits (EB) and the $25 Federal Additional Compensation (FAC) expire December 31, 2009, even though Tiers 3 and 4 were recently enacted. It is likely that these will be extended beyond December 31, but we do not know to what date. If they are extended for one year, through December 31, 2010, the cost is projected to be $80 billion. In the absence of action by Congress, however, these programs will expire.

Comment (Neuenfeldt): The $80 billion is only 25% of what AIG got.

Question (Haine): Is there an analysis of how many households have x amount more income because of the extension programs and what effect that has had on the economy?

Comment (Yunk): Statistically, it is usually considered to be seven times the amount.

Mr. Bergan indicates that he has not seen that analysis. In general, the presumption is that UI is as efficient as any program. It is designed to be counter-cyclical and the money is generally spent immediately. In terms of eligibility for these programs, if we go below a trigger and someone is in an EUC08 Tier, they can finish that Tier of benefits. For the EB benefits, that program triggers off after 3 weeks when we no longer meet the trigger. If the deadline is not extended, there will be people who will not receive additional benefits.

Our loan balance is $734 million. We are currently spending 3rd quarter collections. However, that will end in a day or so, and then we will be back to funding benefits through borrowing.

The winter workload begins Thanksgiving week, a week with significant layoffs. The claims workload increases then. We have more resources in place, particularly on the claims side. The wait times might stretch out a little, but we are well situated to handle it. Adjudication is more difficult for staffing. We have also added resources there.

The UI bill passed the Assembly, but there are still discussions to be had before it is approved early next year.

Question (Neuenfeldt): At this point, should we have one bill or two? He does not want to go through the confusion of two separate bills.

Mr. Bergan indicates that is an option. For today’s meeting, the department has tried to fulfill some requests made at the last meeting. We are providing a narrative description of the steps taken in 1983 when the state borrowed to pay UI benefits the last time. We also have some broad alternative scenarios to describe what would be necessary to reach a particular balance by a particular date. These are ballpark numbers. We also looked at basic characteristics of states that are borrowing and the ones that are the most solvent. We also looked at other states with strong solvency and put together a “what if” scenario to see what a new tax table would look like if you chose that alternative. It is not a recommendation; it is a starting point for further conversation.

It does have some elements relevant to improving our current system. It has more tax schedules, and the schedules are not simply tied to the balance in the reserve fund. They are tied to the relationship of the balance in the reserve fund and the total taxable payroll. It is a more dynamic measure and it has some smoothing of averages which is important so it will not be subject to dramatic ups and downs. As you think about alternatives and timing, for 2010, if there is a revenue increase, a surtax likely would have to be collected later in the year, i.e., if you want to do a down payment on the debt this coming year. A surtax is about the only alternative available for us in 2010 given where we are in the year and the difficulty in making structural changes. Some benefit changes could be managed in 2010, depending on the changes. Generally, look for most changes to take effect in 2011 for long-term structural changes.

3.  Minutes of Meeting October 21, 2009

Motion (Yunk), seconded (Lump), to approve the minutes of October 21, 2009, passes by a vote of 10-0.

2. Financial Statements

Tom McHugh, Reserve Fund Treasurer, reports on the financial statements. He provides handouts. One handout shows the gross wages and taxable payroll reported to us for the first three quarters. Gross wages were down 8.36%, or about $5 billion compared to the same time period in 2008. That is a big decrease in gross wages. Taxable payroll is up slightly 2.03% or $443 million.

The financial statement balance sheet numbers 1 and 2 show our receivable balances for claimant overpayments and employer receivables. Compared to the prior year, they have gone up quite a bit. Number 3 is the outstanding loan balance. As of October 31, it was $722 million. Number 4 shows the equity in the fund. The prior month the reserve fund was $51 million positive and negative $589 million. We did the 10% write off to the balancing account where we charged the balancing account and credited employers. This switched drastically. The balancing account has a negative $1 billion.

On the receipts and disbursements statement, the tax receipts were $466 million and solvency receipts were $158 million. Our receipts are about the same as they were last year. We put more in the solvency account and less in employer accounts, but together it is about the same as last year despite the wage base increase. Number 6 is the federal program receipts of $1 billion. Number 7 shows the charges to taxable employers is over $1 billion. Number 8 shows the noncharges such as quits. They have increased significantly since 2008. Number 9 shows how we are paying out the EUC08, FAC, and EB. The FAC is $187 million, the EUC08 is $602 million, and the EB funded 100% by the federal government is $92 million. The balancing account summary number 10 shows increased charges to the balancing account with the 10% write off. Number 11 shows that we went over negative $1 billion in the balancing account.

Question (Gustafson): Could you explain the difference between the gross wages and taxable payroll and why one is negative and the other is positive?

Mr. McHugh indicates that Dick Tillema looked at that and suspects that this is because the higher wages in manufacturing have declined. Gross wages have gone down. It is has not hit as badly in the lower paying jobs, so taxable payroll is up. Mr. Bergan indicates that the wage base change affects that as well.

Question (Penkalski): Would this also be caused by fewer people putting money in 401(k)s to reduce their taxable wages?

Comment (Haine): Anecdotally, people are doing this.

Mr. McHugh indicates that the taxable wages are based on the first $12,000 in wages, so it is not likely that the 401(k)s have an impact on that.

4. Unemployment Reserve Fund Solvency

Brian Bradley (department retiree and temporary employee), presents the narrative summary of the changes enacted in 1983 Wisconsin Act 8. Between 1982 and 1987, we borrowed a total of $988 million. The peak outstanding loan balance during that time was $737.5 million. We hit the peak in April 1984. The interest paid on the outstanding loans was over $124 million. The interest rate at the time was about 9%; this time it is 4.65%.

Question (Buchen): Is the interest still computed based on the average of all outstanding treasury obligations?

Mr. Bradley responds affirmatively.

Question (Buchen): We were in debt for 5 years. Did we have any FUTA credit reduction?

Mr. Bradley indicates that there was no FUTA credit reduction at that time. Most of the changes enacted in 1983 Wis. Act 8 were done with the intent of avoiding the FUTA credit reduction. The requirements to avoid the FUTA credit reduction are the same today as they were back then.

Question (Buchen): Is it true that you have to pay back the previous years’ borrowed amount to avoid the FUTA credit reduction?

Mr. Bradley responds affirmatively and indicates that we did that in the 1980s. In addition to paying back the previous year’s borrowing, states also have to make sure they will not borrow to pay benefits in November, December, and January of the subsequent period.

Question (Buchen): Would we have to pay back $900 million in 2010 to avoid the FUTA credit reduction?

Mr. McHugh indicates that we would need to pay back one year’s worth of borrowing plus the amount of benefits for November, December and January, plus the amount of the FUTA credit that would have been collected by the federal government which is estimated at $51 million. If the state has borrowed for two January 1sts in 2010 and 2011, then in early 2012 when employers pay their 2011 federal UI taxes, the FUTA credit reduction would apply. To avoid this, we would have to make the payment in November 2011. Mr. Bradley indicates that the calculation for the year of borrowing would be between November of 2010 and November of 2011. Mr. McHugh indicates that if you are serious about avoiding the FUTA credit reduction, you would need to raise about $1 billion.

Question (Buchen): Does that mean we would have to come up with $1 billion more than we are collecting now?

Mr. McHugh responds affirmatively. We may borrow less depending on what the changes are for tax increases and benefits.

Comment (Haine): Michigan has already had two January 1sts with an outstanding loan balance. FUTA taxes are on people’s mind now.

Question (Buchen): In the early 1980s, what amount did they have to come up with to avoid the FUTA credit reduction?

Mr. Bradley indicates that it is all summarized by how much was borrowed and repaid year by year. You can see what the dollars were that we had to come up with.

Question (Gustafson): Do we have a narrative on what the federal government requires for full repayment?

Mr. McHugh indicates that this was provided at the last meeting. Mr. Bradley indicates that some of it is provided in the summary of law changes.

In the early 1980s, one objective was to do everything we could do to avoid the FUTA credit reduction. We also did what we needed to do to reduce our interest rate by 1% and to qualify for interest payment deferrals. The changes in Act 8 allowed us to qualify for all of those deferrals. The changes did not reduce the interest payment, but allowed us to pay it off over a longer period of time with less of a hit on employers initially. The first page of the handout summarizes the law changes made in Act 8. On the tax side, we increased the taxable wage base from $6,000 to $8,000 in 1983. This was in part required because the federal government increased their wage base at the time to $7,000. The wage base then increased to $9,500 in 1984 and 1985 and to $9,700 for 1986. The old law had one rate schedule with rates ranging from 0-7.4%. Act 8 provided for 4 rate schedules with the highest rate schedule having rates ranging from .4% to 8.5%. We increased the limit that rates could increase in one year for an individual employer from 1% to 2%. We put a moratorium on write offs for 1984 and 1985. An employer that had a write off in the last 5 years was not permitted to make a voluntary contribution, which is still the case today. Prior to Act 8, an employer could make a voluntary contribution to reduce their rate by any number of tax brackets. Act 8 limited this to one rate bracket, which is still the case today. The state’s share of extended benefits (EB) prior to Act 8 were noncharged; Act 8 charged those benefits to the employer accounts. That has an effect on rates that employers pay. The new employer rate prior to Act 8 was in effect for 3 years; this was reduced in Act 8 to 2 years. A new employer rate was created for construction employers based on the average rate for all construction employers. Act 8 also provided for an 8% increase in employers’ basic tax rates for 1984 to generate additional revenue needed to avoid the FUTA credit reduction for taxes paid by employers in January 1985.

Question (Buchen): Was the 8% added to every tax bracket?

Mr. Bradley responds that 8% of an employer’s basic rate was added to the basic rate in every tax bracket.

Question (Haine): When did the new employer tax rate go back up to 3 years?

Mr. Bradley indicates that it was changed back about 12 years ago. We were finding that with 2 years, employers were not paying enough to get into a favorable tax bracket. We went back to 3 years so they had a chance to reduce their rate. There also were changes on the benefits side in Act 8. We reduced the duration of benefits from 34 weeks to 26 weeks. We increased the number of weeks of covered employment required to qualify for benefits from 15 to 18 weeks in 1984 and to 19 weeks in 1986. In addition a claimant would have to earn wages of at least 30% of the state average during the qualifying period.

Question (Buchen): What is the percentage requirement today?

Mr. Ben Peirce responds that the mechanism used to compute eligibility is different today.

Question (Gustafson): Was there a similar qualifier prior to 1983 for the requirement that the claimant have wages of at least 30% of the state average during the qualifying period?

Mr. Bradley responds that he is not sure. Act 8 required that in order to requalify an employer must work 7 weeks and earn 14 times the weekly benefit amount instead of 4 weeks and a total of $200. The minimum and maximum benefit rates were frozen until further action by the legislature. Prior to Act 8, the law provided for indexing the maximum benefit rates. It was set at 2/3 of the average weekly wage and it went up every 6 months based on the increase in the state’s average weekly wage. The indexing was removed and now any change in the maximum benefit rate must be done by statute.

Question (Gustafson): Had the indexing amount of “2/3” changed prior to that?

Mr. Bradley responds that this was before his time, but it is possible. Act 8 provided that gross self-employment earnings would reduce benefits in the same manner as wages from partial employment. Also, Act 8 mandated a work search and included an express requirement that claimants be able and available to work. In summary, all of the tax law changes were estimated to increase fund solvency and revenue by 81.6% in 1985, and by 82.6% in 1986. The benefit changes were projected to increase fund solvency and reduce benefits by 19.2% in 1985 and 22.7% in 1986. There were fairly significant law changes that helped Wisconsin to qualify for federal incentives on FUTA credit reductions and interest rate deferrals and allowed us to get out of debt by the end of 1986.

Comment (Buchen): In the 1980s, they increased revenue by 80%. You indicated that we would need to raise another $1 billion over what we raise today, which would be an increase of 150%.

Mr. McHugh indicates that this is correct. The interest would need to be repaid by September 30, 2011, and the amount borrowed and FUTA credit amount paid by November 9, 2011.

Question (Neuenfeldt): How much would we need to increase taxes to get to where we can pay the $1 billion?

Comment (Buchen): Responds that this is the 150% increase. That is what is necessary to avoid the FUTA credit reduction, but we may be better off taking the FUTA credit reduction. That is credited to our account.

Mr. Bergan indicates that the amount of the FUTA credit reduction in the first year is $51 million and it doubles the next year. It is a flat surtax on all employers.

Comment (Neuenfeldt): The first question then is whether you want to avoid the FUTA credit reduction.

Comment (Haine): The FUTA tax now is $56 per employee per year.

Comment (Neuenfeldt): We have a lot of decisions to make in a short time. We should get a figure of where we need to be and identify the decisions we need to make to get there. The first decision may be do we want to repay the loan over a shorter time or repay it over a longer time and pay a penalty.

Comment (Buchen): All of the changes have to be considered together. It is important to hear all of the options and ramifications to understand it all before we can make decisions.

Mr. LaRocque directs the Council to the handout with six scenarios. This gives six choices of target numbers over time and goes to what Mr. Neuenfeldt is looking for. Mr. Bergan indicates that the scenarios show what the balance in the reserve fund would be by 2014 if additional funds of $250 million, $350 million, $450 million, etc. are added each year. If an additional $250 million is added each year, by 2014, the fund would have a negative balance of $998 million. If an additional $450 million is added each year, the fund would be about even but positive by 2014. Other scenarios add larger increments.

Comment (Buchen): There is a FUTA credit reduction in every scenario. In the scenario with raising $450 million per year, there is only one year with a FUTA credit reduction. Does this mean that in this scenario we are otherwise raising enough money to pay back the borrowed amount?

Mr. McHugh introduces Pam James, Section Chief for UI Tax and Accounting. She took over the position Brian Bradley held until he retired. She comes to UI from CUNA Mutual, where she worked as a senior financial manager for 13 years and also worked as a financial analyst for Wisconsin Power & Light.

Ms. James responds that Mr. Buchen’s suggestion is correct. The borrowing is decreased in the subsequent years so the amount needed is less. Benefits are also dropping in the subsequent years so the three months would also be slightly less. We would have enough money to pay back the prior year’s loan, the FUTA credit and the final three months. If we were to collect the tax earlier, or accelerate the collections and not spread it over the 5 years, we could avoid the FUTA credit reduction.

Question (Gustafson): Do these scenarios assume only increases in taxes?

Ms. James responds affirmatively. The annual amounts could be achieved by taxes or benefit reductions. It would depend on the benefit changes and if they would be persistent throughout the time period.

Question (Buchen): If the changes are on the benefit side, it would affect how employers move up and down the schedule and this would affect the revenue amounts, correct?

Ms. James responds that if you could guarantee an equal reduction in benefits in each year as opposed to an increase in taxes, then that would not have an impact. For example, in the first scenario, it does not matter if you raise taxes by $250 million per year or decrease benefits by $250 million per year. It is a matter of guaranteeing that the benefits would be reduced. Mr. Bergan indicates that one of the changes on the tax side might be a change in the wage base and that has a variable effect year by year. That is not as true for other tax changes.

Question (Gustafson): Are the scenarios factored with the current wage base or are the legislative changes we already made factored in?

Ms. James indicates that the scenarios take into account the current taxes which take into account the anticipated increases in the taxable wage base. These are from Dick Tillema’s estimates.

Question (Buchen): Is the line in each scenario that indicates the tax rate on taxable wages an average?

Ms. James indicates that the top box shows that this number is based on total wages in 2009 of approximately $84 billion, and assumed $24 billion in taxable wages across all years. That may be a little inaccurate, but it was used for comparison purposes.

Question (Haine): Is the tax rate on total wages a percentage of total wages?

Ms. James responds affirmatively.

Question (Haine): The tax rate on the taxable wages is the tax rate on the base, correct?

Ms. James responds affirmatively and the base we are assuming is a straight $24 billion. Mr. McHugh indicates that it is an average tax, some employers have higher or lower tax rates. Ms. James indicates that the $24 billion is a conservative estimate. It is currently about $24 billion and she left it flat in the scenarios for comparison purposes. It is likely to go up.

Comment (Haine): She agrees with that approach. It is unlikely that the $24 billion figure would go down and we would hope that it would go up.

Mr. McHugh indicates that it may have gone down if the taxable wage base had not gone up. Mr. Bergan indicates that if the Council is looking for a proportionate percentage, if you look at the tax rate on total wages in terms of the tax impact, from 2009 to 2010, we are talking about moving from .7% to 1.1% which would be more than a 50% increase.

Comment (Neuenfeldt): In looking at the six scenarios, it looks like scenario 3 is probably the most workable.

Question (Buchen): The choice of average tax rate on taxable wages is based on what, for example, in scenario 3? The average tax rate goes from 2.6% to 5.0% to 5.9%. How do you estimate the revenues in each scenario?

Ms. James indicates that in scenario 3, the 2.6% is the total taxes collected of $634 million divided by the $24 billion. The 5.0% is the $1.2 billion divided by the $24 billion. The top box shows the current taxes expected each year under the current model. In 2010, this is estimated at $753 million. For each scenario, this amount was incremented each year by the incremental amount, $250 million, $350 million, $450 million, etc.

Question (Buchen): The top box is what would be if we do nothing, correct?

Mr. James responds affirmatively.

Comment (Buchen): The percentage tax rate increases look large in the scenarios, but a lot of the increase will happen anyway if we do nothing.

Comment (Neuenfeldt): There are other things we can think about building around scenario 3. If we can get the independent contractor language down, that could bring more people into the system, which will bring in more revenue. Looking at wage base, maybe we could bring that up more to $14,000 or $15,500. This will bring in more with the economic recovery. In the next bill cycle we could tweak some things. The wage base is an easier thing to change in people’s minds. We could at least bring it up to the minimum wage amount where there is a certain rationale. We have had these discussions before. I think we could find something workable around that. I do not understand why we do not have it at least at the minimum wage. It is a very defendable amount. People can relate to the minimum wage as an amount.

Comment (Buchen): It is nice to compare to minimum wage, but it is not necessarily tied to it.

Comment (Gustafson): A rationale could also be whatever the federal taxable wage is. It is $7,000. He is not suggesting this amount, but it would also have a rationale.

Question (Haine): What would the taxable wage base be if it was based on the minimum wage?

Comment (Petersen): About $16,000.

Comment (Penkalski): We tried 6 years ago to index it to the minimum wage. If it is indexed, the monkey is off the Council’s back; it rises automatically. Over the last 15 years, inflation has eaten away at the wage base amount.

Question (Petersen): How did you get to the revenue numbers in the scenarios? Are they revenue numbers that we need or is that based on raising tax rates?

Ms. James indicates that she did this a couple of ways. Hal had suggested two stages for this by looking at getting the system solvent first and then paying back the debt. She picked a time frame of 5 years and picked a target of staying at negative $900 million. What is it going to take to raise revenue of that amount? It is going to take $250 million per year to get there. For scenario 1, she arrived at the revenue numbers by taking the current year projected taxes of $753 million for 2010 and incremented it by $250 million each year through 2014. By 2014, we are still $1 billion in the hole, but we are keeping up with our current benefit obligations.

Question (Petersen): You end up with an average tax rate. We would still need to determine how much the rate should be for each employer unless we came out with a flat rate.

Ms. James responds affirmatively that this is another decision that would need to be made. Mr. McHugh indicates that we could look at who is in each tax bracket and look at changes the rate schedules. Mr. Bradley indicates that the scenarios do not anticipate any particular way of raising the additional incremental revenue. This is just the effect that the additional revenue will have on our balance going forward. There are a lot of options for how you get there. You could raise the additional revenue with a flat 2% surtax on the taxable payroll for all employers.

Mr. Bergan indicates that the department has prepared an example of an array model that is meant as representative and shows how tax rates could be assigned to different employers. That might be useful for purposes of today to determine if a new tax schedule is something that you may want to do. He will have that available for the Council.

Motion to meet in closed session

Motion (Buchen), seconded (Penkalski), to go into closed session pursuant to section 19.85(1)(ee) of the Wisconsin Statutes, for purposes of discussing unemployment reserve fund solvency issues and potential legislative solutions for those issues. Motion passes 10-0-0. Closed sessions by the management and labor members of the council, respectively, begin at 11:24 a.m.

Meeting adjourned when caucuses ended.

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