This report was written under terms of a contract with the Virginia Employment Commission (VEC). Opinions expressed in the report are the author's and not necessarily shared by the Urban Institute or the Virginia Employment Commission. Several staff at the VEC are thanked for supporting the project at all stages in a variety of ways, including James Ellenberger, Lyn Coughlin, Woody Tucker, Otis Dowdy and especially James Wilson. Pamela Holcomb was the principal author of parts of Chapter 4. Kenneth Soucher executed the simulations reported in Chapter 3. Several readers provided he lpful comments on an earlier draft report completed in October 2002. The usual caveat about errors being the sole responsibility of the author applies.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Note: The Portable Document Format (PDF) of this report contains all tables and charts.
Table of Contents
Executive Summary
Chapter 1. Introduction
Chapter 2. Unemployment Insurance Benefits in Virginia
A. Historical Overview
B. The Costs of Benefit Payments
C. Applications for UI and Entry into Benefit Status
D. The Level of Weekly Benefits
E. Unemployment Benefit Duration
F. Summary
Chapter 3. Analysis of UI Benefits Based on Micro Data
A. Details of the Sample
B. A Summary Breakdown
C. Entry Monetary Eligibility
D. A Comparison of Three Groups of Eligible Claimants
E. The Linkage Between Base Period Earnings and the Maximum
Benefit Amount
F. Changing the Maximum Weekly Benefit
G. Eligible Nonbeneficiaries
H. Summary
Chapter 4. Substate Benefit Issues
A. Substate Differences in Unemployment, Wages, UI Recipiency
and Average Benefits
B. Other Transfer Programs with Substate Components
1. The Workforce Investment Act (WIA)
2.Temporary Assistance for Needy Families (TANF)
3. Medicaid
4. Three Program Summary
C. Issues in Program Administration
1. Substate Differentials in Potential Benefit Duration
2. Substate Differentials in Maximum Weekly Benefits
D. Summary
Chapter 5. Employer Taxes and Experience Rating
A. Experience Rating Systems
B. UI Tax Rates and Experience Rating in Virginia
C. Cost Experiences and Firm Size
D. Experience Rating and the Taxable Wage Base
E. Summary
Chapter 6. Program Financing and Trust Fund Adequacy
A. Taxable Wages
B. Average Tax Rates
C. Aggregate Revenues, Other Flows and the Trust Fund Balance
D. Trust Fund Adequacy
E. Is the Funding Mechanism Adequate?
F. A Simulation Model and Analysis of UI Funding in Virginia
G. Summary
Chapter 7. Legislative Charges, Summary and Recommendations
Topic 1. The current formula for determines the solvency of the
Unemployment Trust Fund
Topic 2. Employee benefit eligibility criteria
Topic 3. The rationale for benefit levels
Topic 4. The propriety of regional or extended benefit triggers
Topic 5. The appropriateness and sufficiency of pool charges
Topic 6. The propriety of diversion of revenue to job training or
economic development programs
Topic 7. The current tax schedules for employers
Topic 8. The means of calculating the weekly amount of unemployment
compensation for displaced employees
References
Appendix A. Unemployment and UI Benefit Duration in Virginia
Appendix B. A Simulation Model of the Virginia UI Trust Fund
A. Description of the Model
B. Individual Modules
1. The Labor Market
2. UI Benefits
3. UI Taxes
4. Interest Income
5. The Trust Fund Identity
C. Summary
Appendix C. Virginia Model Equations
Tables and Charts
Executive Summary
House Joint Resolution (HJR) 611 of the Virginia General Assembly directed that a comprehensive review of the Virginia Unemployment Compensation system be undertaken. This
report, prepared under a contract between the Virginia Employment Commission and the Urban Institute, is the response to the General Assembly's directive. The analysis was directed by Dr.
Wayne Vroman, the principal investigator. Close cooperation and strong support was provided by the staff of the Virginia Employment Commission (VEC). The report undertakes a review of
the important aspects of benefit payments, employer contributions and unemployment insurance (UI) trust fund solvency in Virginia. Chapters 2, 3 and 4 focus on benefit payments while chapters 5 and 6 examine contributions and trust fund adequacy. The final chapter, Chapter 7, speaks directly to each of eight topics specified in HJR 611 and gives recommendations related to each topic.
The Virginia economy has provided generally strong performance in recent years as indicated by the state's unemployment rate which has averaged about three quarters of the national average unemployment rate since 1967. Unemployment duration has also been measurably shorter in Virginia than nationwide. Wage growth has exceeded the national average for several decades, and Virginia's statewide average weekly wage now roughly matches the U.S. average.
At present there are short term uncertainties regarding Virginia's economy and its UI funding, largely associated with the slow pace of the national economic recovery observed during 2002 and economic prospects for 2003. There are other uncertainties related to temporary across-the-board benefit increases paid to all Virginia UI claimants since late 2001 and slated to remain operative throughout 2003. One certainty is that the state's UI trust fund balance at the end of 2002 will be more than $300 million lower than at the end of 2001, even including the infusion of roughly $200 million in March 2002 from a one-time Reed Act distribution. It is also certain that Virginia's employers will be paying higher UI contributions in 2003 and subsequent years due to the higher payouts of 2001 and 2002 even more if existing benefit statutes are altered in ways that increase benefit duration and/or benefit eligibility.
Benefit recipiency and benefit levels
Virginia's UI program has traditionally operated with a low rate of benefit payouts, low employer taxes and a sizeable trust fund. Its annual benefit cost rate, i.e., benefit payments as percentage of covered payroll, has been among the very lowest during most of the past 50 years.
Benefit costs in any UI program are determined by three factors: the state's unemployment, its benefit recipiency rate and the replacement rate (the ratio of weekly benefits to weekly wages). Since 1967 Virginia's unemployment has been about three fourths of the national average, benefit recipiency has been about half of the national average and the replacement rate has been slightly less than the national average.
Chapter 2 documents developments of these benefit cost factors, providing summary information for Virginia and comparative information from other UI programs for the period 1967 to 2002. Part B presents an accounting framework for examining issues of costs and recipiency and summarizes Virginia historical record. The next three parts (C, D and E) respectively examine the details of entry into benefit status, weekly benefits and benefit duration.
Following the onset of unemployment, a very low fraction of workers become UI beneficiaries. This is the result of both a low initial application rate and a low first payment rate among those who do apply. The initial application rate has averaged 0.43 since 1977, 17 percent below the national average of 0.52. The first payment rate for the same period in Virginia averaged 0.67, 10 percent below the national average. Compared to other states Virginia has traditionally operated with monetary eligibility requirements that are more difficult to satisfy than in most other states. While this differential has narrowed since 1997, it remains somewhat more difficult for claimants to satisfy monetary eligibility requirements than in other states. The nonmonetary aspects of UI program administration do not appear to be unusually stringent in Virginia. Determination rates and denial rates on separation issues, i.e., quits and misconduct, appear to be roughly in line with national averages. Misconduct determinations have increased somewhat faster than in the U.S. but voluntary quit issues occur at less than the national rate.
While the analysis could easily document the persistently low application rate and first payment rate it did not identify a clear explanation for these phenomena. Analysis of micro data undertaken in Chapter 3 added useful information about the low first payment rate, but it did not
yield a convincing explanation. Among claimants who filed for benefits in the first six months of
2002, only 65 percent received a first payment. About 5 percent of the remaining 35 percent
could be explained by monetary ineligibility and about 15 percent could be attributed to VEC
administrative denials on the issues of voluntary quit, misconduct and the presence of
disqualifying and/or deductible income. The remaining 15 percent, roughly 16,000 claimants,
were monetarily eligible, were not disqualified but did not receive a first payment. While some
may have returned to work, this factor seems unlikely to explain most of the 16,000.
Because no satisfactory explanation was apparent, it seemed this question should receive
further attention by VEC. The report suggested two follow-up analyses: 1) a match with new hire
data to determine how may secured new jobs immediately after filing for benefits and 2) a
personal interview survey to find the explanation (or explanations) for not pursuing these claims.
The analysis of UI benefit levels and replacement rates identified three factors that
determine the payment levels and how Virginia compares to other states. The three are: 1) the
statutory replacement rate, 2) the procedure for computing the weekly benefit and 3) the ratio of the maximum weekly benefit to the weekly wage. For the first two, Virginia's determination of
weekly benefits matches national practice, i.e., the statutory replacement rate of 52 percent equals the national average and use of two high quarter earnings yields intermediate benefit
levels for a given statutory replacement rate. For the third, however, its maximum benefit
relative to the average weekly wage has declined over the past 25 years. The current ratio is below 0.40 (based on the permanent maximum of $268, not the temporary maximum of $368 operative during 2002) while the national average is roughly 0.50. This downtrend is responsible for the decrease in the replacement rate (termed the Handbook replacement rate in Chapter 2). To restore the replacement rate to the nationwide average, a maximum of about $360 (roughly half of the weekly wage in 2002) would be required. Even with a lower maximum, the state's replacement rate in recent years has been only modestly lower than the national average. In 2000, the last year of data unaffected by recent temporary benefit increases in Virginia, the Handbook replacement rate was 0.308 in Virginia versus 0.329 in the U.S., a downward deviation of 6 percent. Restoring the maximum weekly benefit to 50 percent of the weekly wage would move the replacement rate back to the national average.
The average duration of UI benefits in Virginia consistently falls below the national average. This reflects both the state's strong labor market where unemployment duration is short and the statutory linkage between base period earnings and the maximum benefit amount (BPEMBA). The BPE-MBA linkage in Virginia falls into the 0.24-0.26 range whereas the national average linkage is roughly 0.33. Because of this low ratio, new claimants on average are entitled to some 21-22 weeks of potential UI benefits while the average nationwide is 24-25 weeks.
Benefit recipiency in Virginia is below-average due to three factors: 1) a low application
rate, 2) a low first payment rate and 3) short benefit duration. Of these three factors, short benefit duration is probably the least troubling. Even with its short average potential duration, benefit exhaustion rates in Virginia have fallen consistently below the national average in recent years. Only about one in four exhaust their benefits compared to one in three nationwide. Nevertheless the low BPE-MBA linkage undoubtedly increases hardships for some UI beneficiaries because it shortens their potential benefit duration. Chapter 3 explored the consequences of changing this linkage and found that potential duration did increase to national-average levels (24-25 weeks) when the present 0.24-0.26 linkage was increased to ratios such as 0.30 or 0.33.
Chapter 3 explored ways to raise benefit recipiency by changing monetary eligibility statutes. Three alternatives were explored: 1) changing the two high quarter earnings requirement from its present $2,500, 2) allowing an alternative monetary eligibility calculation for those with less than $2,500 in their two high quarters and 3) instituting an alternative base period (ABP). The latter was found to be most effective. Nearly half of those monetarily ineligible under the regular base period (the earliest four of the five past completed quarters) became eligible under
an ABP that spanned the past four completed quarters. Because those newly eligible under the ABP were disproportionately low wage workers, the cost of instituting an ABP was estimated to be modest. Simulations suggested an added 2.5 percent would become monetarily eligible but the increment to costs would less than 1.0 percent. Since having an ABP would probably increase applications for UI, costs would be higher, perhaps as much as a 2.0 percent increment over present costs.
Chapter 4 examined two substate benefit issues. Should there be differentials by geographic area in maximum weekly UI benefits? 2) Should maximum benefit duration be different in different areas of Virginia? The first question is most directly of concern to Northern Virginia where wage levels are nearly 40 percent higher than the statewide average. Except for Northern Virginia and areas along the Washington-Richmond corridor, average wages elsewhere in the state are typically some 20-35 percent below the statewide average. The second question is most pertinent to counties and cities along the Virginia's southern and southwestern borders. Unemployment in these areas has been from two to three times the statewide average. Thus it is easy to identify the distinct areas that would benefit from substate differentials in the maximum weekly benefit and/or unemployment rate-related potential benefit duration.
Chapter 4 argued against instituting substate differentials. Such differentials would add to UI benefit payouts and to administrative burdens on the VEC. Increments in benefit costs would
arise from two sources. 1) Substate programs would likely be implemented with hold-harmless provisions, i.e., areas not favored by proposed differentials would likely not experience benefit
reductions. 2) Behavioral responses could be expected. People would try to claim benefits from
favored areas. Interstate claims against Virginia could be expected to increase. Benefit durations could be expected to increase among those receiving higher weekly benefits and those with longer potential benefit entitlements. If it were deemed desirable to increase the maximum
benefit in some areas this could be done on a statewide basis while much of the increase in payouts would be concentrated in high wage Northern Virginia. In light of current funding problems, it was argued that decisions to institute substate programs should be deferred.
Benefit financing and trust fund solvency
Chapters 5 and 6 examined issues of UI program financing and trust fund solvency. Chapter 5 studies primarily the setting of tax rates for individual employers while Chapter 6 examines aggregates affecting the trust fund balance, e.g., benefits and employer contributions, and the question of trust fund adequacy.
Since 1982 Virginia has utilized benefit ratio experience rating. Tax rates for a given year are set using four year benefit ratios (the ratio of benefits charged to individual employers relative to their UI covered payroll) for the 48 months ending on June 30th of the preceding year. For a given benefit ratio, the exact tax rate applicable depends upon which of 15 statutory tax rate schedules is operative in the year. The designation of the tax rate schedule depends upon the UI trust fund balance as of the June 30th computation date. Higher fund balances trigger lower tax rate schedules.
The assignment of UI benefit charges to employers is imperfect as some benefits are not assigned to individual employer accounts (termed noncharged benefits) while other charges are not collectible either because the charges exceed the maximum tax rate (ineffective charges) or because the employer has ceased operations (charges against inactive accounts). In most years, Virginia covers these ineffectively assigned charges with interest earnings from its trust fund, but in some years (years of low trust fund balances) it uses a flat rate tax (termed a pool charge) to defray these benefit costs. Since 1988 Virginia has operated its benefit ratio experience rating with a comparatively low volume of ineffectively assigned benefit charges when compared to the average for other UI programs. Between 1988 and 1997, for example, Virginia effectively assigned 69 percent of benefit charges to individual employers whereas the corresponding national average was only 62 percent.
Virginia derives UI contributions from only a fraction of covered wages. Currently the tax base for employer contributions is $8000, a level first effective in 1991. As in many other states, the UI tax base in Virginia has grown much more slowly than average wages. This has meant that the share of wages that are taxable has declined with the passage of time. Whereas the taxable share of covered wages averaged about 60 percent during the 1960s, the share was only
about 0.24 in 2002. This low contribution base means UI taxes that are levied at a flat rate bear most heavily on low wage employers. The low tax base can also slow the speed of recovery of the UI trust fund following a recession.
In any given year, Virginia's tax statute authorizes VEC to levy a scheduled tax based on one of its fifteen tax rate schedules. Two flat rate taxes may also be operative: pool charge taxes are levied when the volume of ineffectively assigned benefit charges exceeds trust fund interest
earnings and solvency taxes are operative when the trust fund balance falls below 50 percent of
the level deemed adequate. The three taxes combined provide a wide range of potential tax rates so that tax revenues can respond strongly to recession-related trust fund drawdowns and restore the trust fund balance to the level deemed "adequate."
Virginia uses a variant of a high cost multiple to determine trust fund adequacy. The fund balance deemed adequate is determined using three factors: 1) total covered payrolls, 2) the
average of the three highest cost years of the twenty years ending on preceding the June 30th computation date and 3) a multiplier of 1.38. Since the high cost average is now about 0.62
percent, the adequate balance is about 0.86 percent of covered payroll or roughly $900 million.
Tax rates are set based on the ratio of the actual trust fund balance to the adequate balance. During 2003, for example, the tax schedule for the 80 percent fund balance adequacy ratio will be operative. A pool charge tax rate of 0.16 percent will also be operative in 2003. Chapter 6 notes that Virginia's taxing mechanism has a wide range of potential tax rates achieved through taxing according to one of fifteen tax schedules and revenues that can be collected through pool charge taxes and the fund building tax. Their combined rates can reach 2.5 percent of taxable payroll.
Chapter 6 examined the Virginia's funding mechanism and found it adequate and not in
need of fundamental changes. The analysis included simulations with a model developed for the
project. The model indicated that following the current recession and using likely assumptions
about future unemployment and wage growth, the trust fund balance will increase as
unemployment decreases and higher tax rate schedules come into play starting in 2003.
The Chapter 6 analysis also examined some potential changes that would strengthen Virginia's funding mechanism. Under all simulations, the average tax rates to be paid by Virginia employers will increase sharply between 2003 and 2008 compared to 1998-2002. Simulations with an indexed taxable wage base indicated that the trust fund balance would recover more fully with even a low indexation percentage (21 percent of average annual earnings). Under a 21 percent ratio to average wages, the taxable wage base grows from $8,000 in 2002 to $9,733 in 2008 (or by 22 percent). Most important, the trust fund balance at the end of 2008 was at least $100 million higher with indexation when compared with the balance that assumes continued reliance on the present tax base.
Recommendations
As noted, HJR 611 directed the report to examine eight specific topics. These are listed below in their order of appearance in HJR 611. The eight topics are examined in Chapter 7, and, based on the analysis of Chapters 2-6, a number of recommendations are made. Several recommendations are to leave Virginia's present statutory provisions unchanged. In fact, seven of the report's 16 recommendations are to leave present arrangements unchanged. The UI program as currently constituted has a number of sound features that do not need to be changed.
The set of recommendations pertaining to benefits would increase benefit availability both to current beneficiaries (through an increase the BPE-MBA ratio and by raising the maximum weekly benefit amount) and to those who do not receive benefits (through an ABP). Since the trust fund balance is going to be low for the next few years, the implementation of benefit increases should be deferred or implemented only selectively until the fund balance is restored to a level closer to an "adequate" level. The report recommends ending as soon as possible the temporary across-the-board benefit increases still slated to be operative during 2003.
There are also recommendations for further research in two areas: 1) the reason (or reasons) why such a high share of those monetarily eligible do not receive a benefit payment and 2) and possible need for and alternative ways to fund job training and economic development.
Two recommendations will affect employer UI taxes. The report recommends increasing the taxable wage base to $12,000. While this would increase taxes in the short run and speed the recovery of the trust fund balance, it would improve the equity of UI taxes paid by low-wage
employers vis-a-vis their high wage counterparts. Also recommended is an increase in the maximum solvency tax from its present 0.2 percent of taxable wages to 0.4 percent when the trust fund balance reaches very low levels. All eight topics and associated recommendations are listed below. As noted, Chapter 7 discusses each of the eight topics specified in HJR 611 and provides details behind the various recommendations that appear in the following lines.
Topic 1. The current formula for determining the solvency of the Unemployment Trust Fund
Recommendation 1. Retain current procedures for determining the level of the adequate
trust fund balance.
Recommendation 2. Virginia should raise its taxable wage base to $12,000.
Topic 2. Employee benefit eligibility criteria
Recommendation 3. Virginia should raise the BPE-MBA linkage from its present 0.24-0.26
range to a uniform ratio of 0.30.
Recommendation 4. VEC should undertake two separate new analyses of the low first
payment rate that focus on persons monetarily eligible who did not receive a first payment.
Recommendation 5. Virginia should institute an alternative base period (ABP).
Topic 3. The rationale for benefit levels
Recommendation 6. Do not change the basis for computing weekly benefits.
Topic 4. The propriety of regional or extended benefit features
Recommendation 7. Do not institute a substate differential in the maximum weekly benefit
amount.
Recommendation 8. Do not institute a substate differential in the maximum duration of
benefits.
Topic 5. The appropriateness and sufficiency of pool charges
Recommendation 9. Do not change the method for assigning pool charges.
Recommendation 10. Virginia should consider raising the maximum rate for fund building
taxes.
Topic 6. The propriety of diversion of revenue to job training or economic development
programs
Recommendation 11. A proposal to divert revenue to job training or economic
development programs should be deferred.
Recommendation 12. At that future date there should be a careful analysis of alternative
ways to fund training and/or economic development activities.
Topic 7. The current tax schedules for employers
Recommendation 13. Do not change the current tax schedules
Topic 8. The means of calculating the weekly amount of unemployment compensation benefits
for displaced employees
Recommendation 14. End the temporary across-the-board increases in weekly benefits
operative during 2002 and 2003 as soon as practicable.
Recommendation 15. Restore the maximum weekly benefit to a level that represents 50
percent of average weekly wages.
Recommendation 16. In the long run, Virginia should implement an indexed weekly benefit
maximum.
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