Unemployment Insurance Advisory Council Meeting Minutes
Wednesday, December 16, 2009 – 9:30 A.M.
Offices of the State of Wisconsin Investment Board
Room 226 (Board Room)
121 East Wilson Street
Management: James Buchen, Dan Petersen, Ed Lump, and Earl Gustafson.
Labor: Phil Neuenfeldt, Dennis Penkalski, and Sally Feistel.
Chair: Daniel LaRocque
Department staff present: Hal Bergan, Andy Reid, Tom McHugh, Pam James, Tracey Schwalbe, Carla Breber, Jason Schunck, Dick Tillema, Robin Gallagher, Chris O’Brien.
Others present: Representative Mark Honadel, Jason Vick (Representative Mark Honadel’s office), Bob Andersen (Legal Action of Wisconsin), John Metcalf (WMC), Michael Metz (WI Independent Businesses), Tom Fonfara (DeWitt Ross), Jenna Weidner (Department of Administration), Ken Walsh (Martin Schreiber & Associates).
Mr. LaRocque calls the meeting to order at 9:55 a.m.
Mr. LaRocque recognizes Representative Mark Honadel.
1. Opening Remarks – Hal Bergan
Mr. Bergan notes that Thanksgiving is a very busy time for UI. The holidays are the time when UI has the biggest spike in claims. Last year we were in the eye of the hurricane from the claims standpoint. This year we continue to do well to meet the demands of people filing UI initial and continuing claims. So far this year, we have handled over 11 million continuing claims. In 2008 total we handled just over 5 million. Our adjudication load is high and is our primary focus right now.
Last week we paid out $61.5 million. About half of that was regular UI, and half was federal extensions. The federal extensions expire at the end of this year unless Congress acts. There may be a 2-month extension. Congress may act this week or next, followed in 2010 with an additional 4-month extension. If that happens, we will have no interruption in benefits or significant programming or administrative challenges. Otherwise, we will be scrambling with issues with claimants and our automated systems.
Tonight we will process the first batch of about 9,000 benefit extension checks. We have a particularly complicated set of circumstances with our IT system and the 5 UI programs, soon to 2 be 6. The money will go out starting tomorrow. It will continue on an automatic basis as people exhaust and become eligible for Tier 3 benefits.
Wisconsin’s loan balance as of today is negative $838 million. Our new
projections show a year end balance of $936 million which is $48 million less
than our projection based on the June 2009 DOR forecast. Mr. Bergan refers to a
handout with revised forecasts. The top table shows the
most recent forecast using the most recent forecast from the Department of Revenue (DOR). In the previous forecast for 2011, we were projected to max out at negative $2.77 billion and that is now projected to be negative $2.38 billion. This is still daunting but encouraging. We have revised some of the documents we sent out in advance of the meeting. In terms of the 2009 estimate, we improved on the revenue side by only $2 million, but improved on the benefit side because we are paying $46 million less in benefits than we projected. We see the volume of initial claims holding steady.
Last week Mr. Bergan spent one day in Washington DC with other states to focus on solvency issues. There is no consensus on a national strategy. The signals from Congress and the administration on the possibility of loan forgiveness were discouraging. That seems unlikely in part because of the fiscal cost and because states that are solvent would object to bailing out others. The task on solvency is ours.
Question (Penkalski): Was there any discussion on the issue of interest forgiveness?
Mr. Bergan responds that in the 1980s there was some flexibility on interest. The federal government could do that again. There is a belief that it has acted as a disincentive for states to act. The federal government seems less inclined to more interest forgiveness.
There was some discussion about possible the possibility of a substantial increase in the federal taxable wage base. It has been at $7,000 for a very long time. If raised, it would force the hands of states to do the same. That is one reform proposal under consideration.
3. Minutes of Meeting November 19, 2009
Motion (Penkalski), 2nd (Buchen), to approve the minutes of the meeting November 19, 2009, passes 7-0.
Presentation by Ken Walsh, Martin Schreiber & Associates
Ken Walsh, Martin Schreiber & Associates, represents the Forest County Potawatomi. The Potawatomi employ close to 3,500 people in Wisconsin, about 3,000 of whom are in Milwaukee and about 500 of whom are in Forest County. They are the largest employer in Forest County. He is here to talk about the bonding required of reimbursable tribal government employers, which is not required of other government employers. He hands out a written summary of his proposal.
In 2000, Congress passed a law that required states to require tribal governments to participate in the UI program. In 2001, Wisconsin passed a law that required tribes to participate in the UI program, including through the reimbursement basis. In addition to requiring tribes to participate in the UI law, there was a requirement for reimbursable tribes to post a bond or certificate of deposit in the amount of 4% of the tribe’s wages. The Potawatomi is asking for the bonding 3 requirement to be removed. In Wisconsin, governments other than tribes in are not required to post a bond.
The core reason for this request is that tribes are sovereign governments like other governments and the statute should reflect that. Wisconsin would not be alone in not requiring a surety bond. Minnesota, Illinois and Iowa do not require a surety bond, and Oklahoma, Arizona, Oregon and North Carolina are states that have a similar make up of tribes and tribal businesses to Wisconsin and do not require a surety bond of reimbursable tribes. Every year the tribes pay the state about $7 million per year in gaming compact funds. For the Potawatomi, the average payment is about $30 million per year. This is substantially more than the UI obligations, but the Division of Gaming in the Department of Administration does not require a surety bond. Since 2001, he states that the tribes and Potawatomi in particular have demonstrated an ability to participate in the UI program without a surety bond. They have proven their credit-worthiness and responsibility.
He does not know the history of why the surety bond was put in place but he was told that it was put in place because coverage of tribes was uncharted territory. The state wanted some bonding requirements to make sure the tribes lived up to their obligations. The state still would have leverage over the tribes should they fail to meet their obligations. The state could report to the federal government that the tribe is delinquent in payments and then the federal government would require tribes to pay under their rates which are 6%, substantially larger than what the state requires. The state has the ability to revoke the reimbursement method of paying for UI benefits, which would be a significant change.
The surety bond is something that other governments are not required to do in Wisconsin. It is analogous to treating tribes like a nonprofit. Nonprofits, unlike tribes, do not have the cash flow to meet obligations they might have under the UI law. He hopes the Council could recommend this change to the legislature.
Question (Neuenfeldt): Is this proposal revenue neutral?
Mr. Bergan responds that the department recognizes that tribes have a unique relationship and the question is where under our law is the best place to put them. There is not a departmental position on the proposal right now. He is interested in looking at the proposal in more detail. We would want to do something that reflects the unique status of the tribes. They are in a category of their own.
Question (Lump): Have there been any problems or has the department ever had to use the surety bond?
Mr. Bergan responds the department has not had to use the surety bond.
Question (Neuenfeldt): Does the department have a level of hesitancy about the proposal?
Mr. Bergan responds that he is officially neutral on the issue.
Question (Buchen): How much is involved in the surety bond?
Mr. Walsh indicates that he does not know the exact number but has been told it is over a million dollars for which the Potawatomi have to get a letter of credit or surety bond. That capital is tied up and could be used in better places.
Question (Gustafson): From a strategy standpoint, are you intending that this would be part of a package going forward with the UI bill or are you looking for support for a separate bill?
Mr. Walsh indicates that he would prefer that it be endorsed by the Council and be part of the package put forward.
Ms. Schwalbe indicates that there are only 2 tribes, which have 6 entities, that are reimbursable employers. Under chapter 108, if a state or local government does not pay, the department certifies that final amount to the Department of Administration and they withhold the money from funds for the government and pay it to UI. There is a different mechanism in place for recovery of funds from state and local governments.
Question (Gustafson): Which is the other tribe?
Ms. Schwalbe responds that Lac Courte Oreilles has 2 entities that are reimbursable employers.
Mr. Walsh indicates that his proposal takes into account how the state could recover delinquent amounts from tribes. He suggests that the state use a similar process and report to the Department of Administration the delinquent amount and have that department withhold grants and other state money from tribes. While the tribes do not receive shared revenue, they receive other grants and state moneys that the department could withhold.
Comment (Neuenfeldt): He has no objection to moving forward on the proposal.
Comment (Buchen): On its face, it does not appear to be a problem, but there is no rush. He would like to review it.
4. Legislative proposal: Office of Worker Classification Compliance
Mr. LaRocque indicates that this proposal for an office of workforce classification compliance has been the subject of a task force and has been reported to the Council. The Council is given a bill draft and a one-page summary. The draft is close to what the department would intend, but it is not final.
Mr. Bergan indicates that the summary and the draft language give a good sense of what is intended. He reminds the Council about the background for this proposal. He was charged to put together a task force from industry and labor to look at the questions of worker misclassification. This is looking at those working as independent contractors as opposed to employees, and those operating in the underground economy. Misclassified workers are not covered by UI, workers compensation or tax withholding. Contractors that play by the rules are disadvantaged in a competitive market place. This legislation is in the interest of both workers denied coverage and businesses that are meeting their obligations. This topic has been before the UI division for a long time. Our auditors spend about half their time determining who is an employee and who is not. For now, the most serious problems are in construction. The bill language applies solely to the construction industry because that was the focus of the task force. It is an issue elsewhere as well but for now the most serious problems are in the construction industry. The bill represents a consensus of the task force, both the labor and management side, that it represents a good set of steps. The bill is a close reflection of the deliberations and recommendations of the task force.
We have been confronting misclassification for a long time but our processes are cumbersome and time consuming. For the worst of the operators, by the time you identify them, they are gone. We want to respond in a way that is more timely and aggressive.
The bill creates an office of worker classification compliance. That office will be the focus of intergovernmental efforts. Several agencies would be involved, including the Department of Commerce, the Department of Revenue, and the Department of Workforce Development, including the Workers Compensation Division and the UI Division. We would focus the effort. It would be located in DWD and most likely in the UI division under its anti-fraud efforts. It would give us the ability to move faster.
Staff would have the authority to go to worksites and determine whether the contractors and employees working there are in compliance with existing Wisconsin law as it relates to workers compensation coverage, UI taxes, and providing wage information to their employees. There is not a lot of new law here. It is an effort to provide a more streamlined, focused interdepartmental approach to the problem.
The basic enforcement tool is a stop work order (SWO). Agents of the department would visit a worksite and ask for proof that the workers were properly documented, whether there was workers compensation coverage, etc. If the employer fails to provide the proof, the agent would have the authority to issue a SWO.
The SWO could be appealed on site. The SWO would put the burden on the employer to prove they were in compliance with the state’s classification laws. The appeal hearing would be prompt. They could provide the information before the hearing and have the SWO lifted.
The idea is to provide a quicker, more efficient, and more clear cut enforcement mechanism than we have now. The focus is on compliance. There are some penalties, but they are relatively modest. The bill aims at compliance, not penalizing people or putting them in jail.
Comment (Penkalski): The department has done a good job on this. It has been a long time coming. It will help legitimate businesses and help our fund. There is a lot of misclassification going on.
Comment (Petersen): The bill is generally focused in the right direction. He is concerned about the SWOs. People are not going to be able to demonstrate on site whether they have workers compensation. There is a lot of potential for a SWO that could hold up a project for 2-3 days, assuming people could act that fast. He thinks it is a good enforcement tool. He is just concerned about how quickly a SWO might take place if the department jumps right to a SWO. He has seen that with insurance companies and owner policies. The insurance company can stop work if there is an unsafe situation. 90% of the time it is not a problem, but every now and then someone sees a ladder not tied down and wants to stop work on the job. The SWO needs to be reasonably applied.
Mr. Bergan indicates that the SWO is appealable on the spot. There were proposals to make this more complicated in terms of what people had to produce. We tried to keep the list short and germane and we tried to make it easy to produce on a worksite. If an employer is subject to a SWO and appeals immediately, they can keep working. The clock starts to run, however, and they have 21 [edit: or fewer; see draft bill] days to get their information together and appear at a hearing or provide the proof before the hearing. While it is under appeal, they can continue to work.
Part of this effort is education. We will make it clear for the industry what the rules are. There will be a process that holds them accountable and lets them know someone is watching. The sentinel effect is an important part of this. Because our compliance system is so cumbersome and audits take a long time, this provides a tool that is particularly effective against people most egregiously violating.
Question (Neuenfeldt): Do you like the recommendation?
Mr. Bergan responds that he does very much.
Comment (Petersen): He supports the recommendation as long as there is a reasonable way around the SWO.
Question (Buchen): How will this work in practice? It says that any employing unit that files a request for a hearing shall be granted a hearing in 14 days. What do you have to do to file an appeal? Is it filed with the person on the site?
Mr. LaRocque indicates that it could include a verbal request. Requests for hearings in other contexts are very simple. A one line statement that says “I want to appeal” is regarded as an adequate written request. The bill can be made more explicit on how to request an appeal hearing.
Question (Buchen): Where will this be located?
It does not substantively affect chapter 108, though UI would be in charge of making it work.
Mr. LaRocque indicates that it straddles multiple areas of labor laws. It is drafted for chapter 103. It involves chapter 108 only insofar as there is one element of the bill language that incorporates chapter 108. The department agent would investigate whether the employer is engaging individuals that would make the employer what is called a “subject employer” under the UI law. It is a light touch as far as UI is concerned. The department would not be stopping work based on whether contributions went unpaid last quarter or whether the employer failed to file a UI wage report. The department would be looking at the circumstances on the day of investigation to determine whether a stop work order is necessary. It is hard to image the department would issue a SWO on the issue of UI alone.
Comment (Buchen): There are no substantive changes in chapter 108.
Mr. LaRocque indicates that the bill, as drafted, makes no substantive changes to chapter 108 or to any of the other employment laws either.
Comment (Buchen): This almost has a separate life of its own. Is it something that would be in the UI bill?
Mr. Bergan indicates that it is an option to put it in the UI bill, though that might require an amendment to the bill. UI is looking at ways to strengthen its misclassification efforts and this bill does that. He asks that the Council keep an open mind about it and consider that it might be part of the mix in the UI bill.
Question (Buchen): Are the contractor groups satisfied with this?
Mr. Bergan indicates that he has not heard from them specifically on the draft language. It is a step he can take.
Question (Neuenfeldt): Who was on the task force?
Mr. Bergan indicates that the following were on the task force, not including department agency personnel: Lyle Balistreri, President of the Milwaukee Building and Construction Trades Council; Jeffrey J. Beiringer, Attorney with Cook and Franke, representing small contractor groups; Don Garner-Gerhardt, Governmental Affairs Director Teamsters Joint Council 39; James Macejkovic, Executive Vice-President of Building Service, Inc.; Mark Reihl, Executive Director of the Wisconsin State Council of Carpenters; and James M. Steele, President of the Steele Construction Corporation. The contractor groups monitored the task force. They listened to the deliberations and were invited to participate. They were a part of the conversation. He did not hear any major objections from them on the recommendations.
Question (Gustafson): If someone receives a SWO, would they be informed at that time of their appeal rights?
Mr. Bergan responds that they would.
Comment (Penkalski): This will bring money into the fund. It is all about the definition of who is an employee. Some of these companies take advantage of illegal aliens and say they are independent contractors. Some of this is even happening on military bases.
Comment (Neuenfeldt): Labor has had discussions with the industry and labor on this. They are comfortable with this and open to having it in a UI bill.
Comment (Buchen): He understands that the task force has worked on this for a long time. He has talked with the contractor association people about the task force. He would like to see if they have any outstanding issues.
Comment (Penkalski): He would like to see this put it in the UI bill and be done with it.
Comment (Buchen): He is not necessarily adverse to it or putting it in the UI bill, but he wants to “run the traps.”
Mr. LaRocque indicates that the draft is as close as the department could get it without more guidance on the fine points. We tried to reflect very closely what the task force recommended and did not go beyond that. We consciously eliminated some things that were discussed by the task force, such as additional penalties, but were not specifically endorsed by the task force. We tried to make sure that there was an outlet for the employers to seek relief immediately. It could be more explicitly stated that the employer can appeal on site.
Comment (Buchen): The issue of appeal rights, how and to whom, could be spelled out more clearly without too much difficulty or doing damage to what you are trying to accomplish and would increase his comfort level.
5. Council Committee recommendation to improve definition of “employee”
Mr. LaRocque indicates that the Committee met with representatives of the trucking and logging industries, who expressed interest in something other than the repeal of the rules that deal with those industries. The department agreed to try to draft something that would be a compromise between the current rules and repeal. The department’s hesitancy at this moment has to do with a matter before the court of appeals that deals with DWD 105. We are uncertain what the court will do with DWD 105. There are a lot of parts of DWD 105 at issue in the case. It is a little hard to know what the court will do in applying or interpreting those rules. If we were to repeal the rules as was recommended, the court decision may not matter because it deals with the old rules. The thought is that we should wait to see what the court of appeals does with the DWD 105 before amending it.
The Committee also recommended changes to the 7-of-10 test.
Comment (Penkalski): He is interested in passing the revised 7-of-10 test and holding off on the other issues and dealing with those separately, such as truckers, loggers, mystery shoppers, and home care workers.
Comment (Lump): He also is interested in dealing with the 7-of-10 test, but they need to talk more on the management side. They have not spent a lot of time on the employee definition. There are things that need to be clarified. He also can see setting aside loggers and truckers. He would like more discussion on the home care workers and mystery shoppers.
Comment (Neuenfeldt): Labor is ready to roll on the tribal, misclassification and employee definition issues.
2. Financial Statements
Tom McHugh Reserve Fund Treasurer, reports on the financial statements. He provides updated handouts. There is not a lot new in November. On the first page or Balance Sheet, he points out the reserve fund balance. It is listed in red as $315 million. A year ago it was at $1 billion. Now the balancing account is a negative $1.006 billion; a year ago it was negative $668 million. We did do the 10% write off of $407 million which we recharged to the balancing account and credited the employers’ reserve fund balance. The 10% write off does not impact how much an employer owes. If they owed $100 before the write off, they owe $100 after the write off. It is just recharging benefits to the balancing account.
On page 2, the Receipts and Disbursements Statement, A and B show the tax receipts and solvency receipts. Combined they are roughly the same from 2008 to 2009. In 2008, together they were $628 million; in 2009, combined they were $630 million. We had the expanded wage base, but the 9 taxable payroll went down. For C, so far we have borrowed $1 billion, but we paid back $236 million with first quarter receipts. The charges to taxable employers are shown by letter D. They are about double what they were last year. The three red Es show the amount of federal money, the Federal Additional Compensation, the EUC08, and the EB. Total disbursements this year were $3 billion. We will send out over 500,000 1099s to claimants who have received some UI benefit.
Question (Buchen): How large is the workforce?
Pam James indicates that it is about 2 million.
Comment (Buchen): This means that 25% of the workforce has collected UI.
Question (Lump): What would the ballpark be in a normal year for this?
Mr. McHugh indicates that last year was a little high but about 400,000. Typically it would be about 300-350,000. Mr. McHugh notes that at the last meeting someone asked about 401(k)s and if that would have an effect on reported taxable wages. He checked into this and it has no effect on what is reported on a wage report. There is no impact on the quarterly report. If he earned $1,000 and $100 went to a 401(k), $1,000 would still be reported on the quarterly wage report.
6. Unemployment Reserve Fund solvency
Tom McHugh and Pam James, Section Chief for UI Tax and Accounting, hand out revised tables. Mr. Bergan notes that the scenario sheet is one the Council received previously but it is updated with the revised DOR projections. The Council was focused on scenario 3. In the prior version, scenario 3 was priced at $450 million per year and would get us to a $0 fund balance by 2014. With the new forecast, the $450M has gone down to $365 million per year to get to solvency.
It is for the Council to decide when we get down to zero. The $365 million per year is in addition to the current projected taxes. The tax revenue will go up about $154 million between 2009 and 2010 because we are moving into Schedule A. The figures show the $154 million built into system. If there was a choice to try to raise revenue in addition to this amount, a surtax could be built into the system for later in 2010. The surtax could be any amount and could be done in any number of ways. It could be done as an across-the-board increase in the basic rate. It could be an increase in the solvency side. It could be across-the-board or a surtax on a graduated basis depending on employers’ reserve ratios. There are a variety of ways to do it if you do it in 2010.
The same rationale would apply if you wanted to do a new schedule. Mr. Buchen had asked what a new schedule could look like that would be in effect while the state is borrowing. One way to do that would be to add a surtax on the solvency side. It would help to alleviate the deficit. In the packet is a version of what Schedule AA could look like. It is one version and reflects a focus on solvency taxes. The solvency add-on would be from .5% for high reserve fund ratio employers, to 2.5% for negative balance employers. This schedule was prepared at Mr. Buchen’s request and the idea was to have a table that would generate $300 million. It is not the only way to do it, but we were asked to give an example.
Question (Gustafson): Is the solvency tax increase in Schedule AA reflected in the updated scenarios?
Ms. James indicates that they are not. Mr. Bergan indicates that we could run a scenario with a Schedule AA and see how long it would take to get to solvency. The Schedule AA is designed to raise $300 million per year, so it would be between scenarios 2 and 3.
Question (Petersen): As far as the tax rates are concerned, the tax would be the base rate plus the solvency tax plus the Schedule AA solvency surtax, correct?
Mr. Bergan responds affirmatively.
Question (Gustafson): Absent any action by the Council from this point forward, there should be about $154 million in revenue in 2010, correct?
Mr. Bergan responds affirmatively. This is a projection and also takes into account any anticipated improvement in the economy.
Question (Buchen): Looking at the projections with the revised forecast, we basically have higher taxes and lower benefits. The lower benefits are a function of fewer people collecting benefits. What are the higher taxes a function of?
Mr. Tillema indicates that there would be somewhat more employment that would result in higher taxes. There would be fewer people laid off.
Question (Penkalski): What would the surtax rate be?
Mr. Bergan refers to Schedule AA and indicates that the rate would depend on the status of the solvency of the employer’s account. For overdrawn accounts, this would be up to 2.50% on taxable wages. This is just a version of an option for a surtax.
Question (Neuenfeldt): Does this include any change in the taxable wage base?
Mr. Bergan indicates that the scenarios so far take into account current changes in the taxable wage base that are already in the law. The taxable wage base is another variable that could be changed. You could accelerate the current increases in the taxable wage base. One of the characteristics of states that are solvent is that most of them have a pretty substantial taxable wage base.
Question (Neuenfeldt): What is “substantial” for other states? Are the states in trouble with borrowing the ones with lower taxable wage bases?
Mr. Bergan responds that he considers $25-26,000 to be a substantial taxable wage base. They go as high as $35-36,000. We are at the middle of the pack. Most of the solvent states have a much higher taxable wage base. There is a significant relationship between those states that are solvent and a higher taxable wage base.
Comment (Buchen): Would it be fair to say that revenues increase $50 million per $1,000 increase in the taxable wage base?
Mr. Tillema responds that a $1,000 increase in the taxable wage base generally raises $44 to $66 million. Mr. Bergan indicates that it tends to be spread out. It starts at $57 million and then goes down. On a permanent basis, you add $20 million. It is significant revenue. Virtually all of the states with a high taxable wage base now got there through some kind of indexing provision. There are a variety of those.
Comment (Buchen): We have bumps in the taxable wage base taking effect in 2011 and 2013.
Mr. Bergan indicates that one alternative would be to accelerate the increase in the taxable wage base. It is too late to do anything for 2010, but we could do something for 2011.
Comment (Petersen): We could make the increase bigger in 2011 as well.
Mr. Bergan indicates the department is happy to consider options for wage base changes. The handout identified as Proposed New Tax Tables represents the department looking around the country and looking at solvent states and trying to do a best practices exercise. This is a worthwhile exercise to reflect on our current system. We have 4 tax schedules now. We moved through those schedules in the last few years. For the move from D to C and C to B, the increments of additional revenue are small, about $35 million. The move from B to A is an increase of about $90 million. Looking at this whole system, our system can only raise $195 million moving from D to A in the best case. That is as much flexibility as we have and as much as it can do. When you see that we are now $840 million in the hole and we are still not in the highest schedule, it is an indication that some adjustments are needed. As designed, our tax tables can only accommodate an increase of $195 million in the best case and our need is much greater than that.
For this proposed schedule, it is different than what we do now, but it is an interesting and rational system. First, you establish a revenue target for what you need for benefits next year. This is determined using a 5-year average of benefits paid to smooth out the impact. When you have a year like we have had in 2009 where the benefits have doubled, you do not get that whole tax impact the next year. When you have your revenue target, you use a benefit adjustment factor that is a multiplier that takes into account how much you have in your reserve fund and the total taxable wages. If the state reserve fund is not doing well, you want to collect something a little more. The factor can go up to 1.2 times the 5-year average benefit rate. On the other hand, if the reserve fund is healthy, then the adjustment factor can go down to as low as .8, calculated on the 5- year benefit average.
The idea is to have a system that is dynamic enough to reflect the circumstances you are in but rather than just look at the amount in the trust fund, it looks at the more important thing which is the relationship of the amount in the trust fund to the total wages paid. That is the way most states do it. Most states make that relationship the key rather than simply the balance in the fund. Then we set up a rate schedule. The reason behind the schedule here is that we needed to have a larger number of rate schedules to make the system more responsive. We looked back and said the low end of what we will need for benefits will be $800 million per year. The high end is 2009, which is $2 billion. From this, we prepared a set of schedules that can generate amounts in $100 million increments. When you calculate which tax rate schedule to use, you use the reserve fund ratio for the state’s fund. Sometimes we talk about reserve fund ratios for individual employers, but in this case we are talking about the whole trust fund balance to total wages paid. If the trust fund is super-solvent, the adjustment factor goes down.
On page 4, we created an example using Wisconsin data to determine a tax target and rate schedule. If this was in place now, because we are in a deficit, we would be at the highest benefit adjustment factor until 2014. For 2011, if we do nothing, we would generate $1.016 billion; with this system, would generate $1.5 billion. It is more aggressive. This is meant as an example. We can adjust the tables to reflect what we want to accomplish. Page 5 shows the proposed tax table. At the top of the schedule is the average tax rate, which is what you need for an average tax rate to raise the targeted revenue amount. By comparison, this year our average tax rate is 2.7-2.8%. It will go up because we are moving to Schedule A, but this shows what the average tax rate is that would be needed to reach our tax revenue target to pay the 5-year average benefit amount. They are obviously higher numbers because of the size of the deficit we are dealing with.
Question (Gustafson): Is there a meaning to the bold-faced lines?
Ms. James indicates that they are not significant. Mr. Bergan explains that we then looked at where we would be in 5 years with this tax system. This shows we would be solvent in 2013 and $800 million in the black in 2014. It is perhaps an outcome more aggressive than we need. But it gives an idea of how this type of schedule would work. It is tied to the previous 5 years of benefit expenditures and has enough schedules to move quickly and raise revenue. In practice, Wisconsin would be concentrated in the middle of the schedule for quite some time. We would have to have 5 years in a row of $2 billion benefit payments to get at the high end of the schedule. We expect we would be in schedule 8 or 9 and if the economy improves, it would start to go down. That is an approach that reflects what we think is the best practice, provides an implicit critique of our system now, and tries to remedy the things about our system that have caused problems.
Question (Neuenfeldt): Are all of these projections based on a benefit rate freeze?
Mr. Bergan responds affirmatively.
Question (Penkalski): How frequently would the schedule changes be made?
Mr. Bergan indicates that it would be an annual change. We currently set tax rates now using where our fund is on a June 30th cutoff date. Our systems are better now and we could move that date back. We have the technology and could push it back another 3 months. It is common for other states to set their tax rates in October or November. He encourages the Council to look less literally at the numbers, but if you think the approach is a good one, we can make some adjustments.
Question (Lump): This essentially is designed to solve the solvency problem over a 5-year period. We could do a variety of things, such as change the taxable wage base or 10% write off. How do you fold those other possible changes into this type of schedule?
Mr. Bergan responds that this schedule is designed to deal with the problem we have but more consequentially, it is designed to keep the problem from recurring. We had to start some place 13 with the proposal and decided to stay with current law. We could recalculate this with other changes. This presumes no increase in benefits though we may want to increase benefits because we do lag behind the norm.
Question (Buchen): With this schedule, even at the highest schedule, it would not be enough if the taxable wage base is not raised. Eventually you would run out of this being sufficient, correct?
Ms. James responds that in another schedule handed out, she indexed the wage base.
Comment (Buchen): That would fix it permanently.
Mr. Bergan indicates that as the Council thinks about this, it should give the department some indication of what it thinks is appropriate and we can run the numbers on those things. We used assumptions of current law only. If other things change, obviously the revenue generated by the schedules would change. If you have options you would like to see, let us know. This new tax schedule can seem kind of complicated hearing it for the first time, but it is rational and makes a lot of sense.
Comment (Gustafson): We will need to sit down and ruminate on this. On the schedules that exist now and the idea of having more logic to them, he did a survey of 21 members to ask their 2009 and 2010 rates. It never occurred to him that there was a firm at the lowest rates, but there was. Their reserve ratio stayed the same, but their tax rate is going up 7 times and they have had no layoffs or not enough to have changed their reserve ratio. That is one of the problems with going from Schedule B to Schedule A.
Mr. Bergan indicates that sometimes with such large percentage increases, the employers are going from a negligible tax to a small tax. We have some employers that pay almost nothing. They may go from paying almost nothing to paying a small tax.
Comment (Gustafson): This employer went from paying .1% to .7%. They understand it is an insurance program, but the schedules could be fairer. The tax increase also was compounded with the increase in the taxable wage base.
Mr. LaRocque indicates that Council member should hold January 8 and 15, 2010, for meetings until further notice.
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 other potential changes to the unemployment statute. Motion passes 7-0-0. Closed sessions by the management and labor members of the council, respectively, begin at 11:40 a.m.
Meeting adjourned when caucuses ended.