Legislature(2019 - 2020)BELTZ 105 (TSBldg)
03/05/2020 01:30 PM Senate LABOR & COMMERCE
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Audio | Topic |
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Start | |
Confirmation Hearing(s) | |
SB156 | |
SB195 | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
+ | TELECONFERENCED | ||
*+ | SB 156 | TELECONFERENCED | |
*+ | SB 195 | TELECONFERENCED | |
+ | TELECONFERENCED |
SB 156-EMPLOYER'S UNEMPLOYMENT INSUR RATE 1:47:47 PM CHAIR BISHOP announced the consideration of SENATE BILL NO. 156, "An Act relating to unemployment insurance contribution rates; and providing for an effective date." He noted that this is the first hearing and public testimony is scheduled. 1:48:08 PM CATHY MUNOZ, Deputy Commissioner, Department of Labor and Workforce Development (DOLWD), Juneau, Alaska, introduced SB 156 on behalf of the administration by paraphrasing the following prepared statement: [Original punctuation provided.] Good afternoon Chairman Bishop and members of the Committee. For the record, my name is Cathy Mu?oz Deputy Commissioner of the DOL/WD With me is Economist Lennon Weller, and in the audience, Employment Security Analyst Chalise Fisk. Thank you for the opportunity to present SB 156 an act relating to unemployment insurance contribution rates. Alaska's Employment Security Tax is a state tax on wages. Employer rates are found in Title 23, Chapter 20 of the Alaska Employment Security Act. The act is designed to promote employment security and provide a partial wage replacement for qualified unemployed workers. The national Unemployment Insurance system was created in 1935 by the Social Security Act. Congress chose to create a national system of compensation for the unemployed based on an insurance model, rather than an entitlement program. Currently, the Alaska statute for employer contribution rates requires a minimum rate of 1% for all rate classes. SB 156 seeks to lower the minimum contribution rate for employers in rate classes 1 through 9 and set the minimum rates to correlate with an employer's experience rating. An experience rating is assigned to an employer based on their experience with the program and the consistency of their payroll. For example, a business with 2 or 3 year-round employees with low employee turn-over over-time would have a lower experience rating to reflect this stability in their workforce. Employers who experience large fluctuations in their workforce and payroll are assigned higher experience rates. For businesses in rate classes 1 through 9, the current minimum 1% tax is significantly greater than the experience factor for those businesses. These lower experience rated businesses produce fewer unemployed workers in need of Unemployment Insurance Benefits, and thus have lower impacts on the UI Trust Fund the fund which pays the benefit. At this time, approximately 4700 employers pay more contributions than necessary. The proposed change will not impact the weekly benefit amounts payable to unemployed workers, but will result in more proportionate contributions for employers in all rate classes. The proposed change will also not adversely impact the sustainability of the UI Trust Fund. I appreciate the Committee's consideration of this legislation. Mr. Weller has additional information on the Unemployment Insurance Trust Fund, and how it works, and we both are available for questions at the end of his presentation. Thank you Chairman Bishop. 1:51:47 PM CHAIR BISHOP summarized his understanding that businesses in the UI tax rate classes 1-9 are those who provide year-round employment. MS. MUNOZ answered yes. CHAIR BISHOP related that Alaska has a high seasonal population, but since employees in classes 1-9 work are year-round workers, their experience rate should be lower. MS. MUNOZ answered that is correct. The experience factor of the business over time is also considered, so several quarters of tax submissions are reviewed when making the determination. 1:52:32 PM SENATOR STEVENS asked if the rates for seasonal industries, such as the salmon fisheries, would remain high but would not be increased to a higher rate. MS. MUNOZ answered that is correct. She explained that currently, the minimum unemployment tax rate is one percent, but in rate classes 1-9, the experience factor is closer to .4 to .9 percent. However, this change will not impact the sustainability of the Unemployment Insurance Trust Fund (UI Trust Fund). The rates for the other businesses would remain comparable to the current rates. SENATOR STEVENS related that industries that make greater use of unemployment insurance would be asked to pay more of their fair share. MS. MUNOZ replied those employers would pay the same rate as they are currently paying. The bill addresses the disparity of payment for the lower classes, who are currently paying more than their impact on the UI Trust Fund. She explained that employees in those rate classes draw fewer unemployment benefits, so they do not impact the sustainability of the fund. 1:54:13 PM SENATOR REVAK asked if the issue is that the employers with more experience are overpaying and therefore causing the UI Trust Fund to have surplus funds. MS. MUNOZ answered that there are 20 rate classes plus a penalty class, rate 21. Those businesses rated in classes 1-9 tend to have a more stable employment base and fewer fluctuations in their payroll, yet they pay a greater proportion of [unemployment insurance] taxes than the impact their employee base has on the UI Trust Fund. SENATOR REVAK asked if that is causing the UI Trust Fund to grow. MS. MUNOZ answered yes. She deferred further comment to Mr. Weller. 1:55:26 PM LENNON WELLER, Economist, Research and Analysis Section, Division of Administrative Services, Department of Labor and Workforce Development (DOLWD), Juneau, Alaska, stated that SB 156 would lower the floor for minimum tax rates specifically for rate classes 1-9. Currently, by statute the DOLWD cannot assign a rate less than one percent, even if the projected cost calculations warrant it. SENATOR REVAK asked if tax rates are reduced if there would still be enough to cover unemployment liabilities. MR. WELLER answered yes; the system would still be able to respond to any costs and fluctuations. Also, the department can adjust tax rates to meet the costs and achieve the department's target for full solvency. This bill would simply allow the department to have greater flexibility at a greater range of costs than allowed by the current structure. 1:56:45 PM SENATOR GRAY-JACKSON summarized her understanding that SB 156 will not affect the weekly benefit amounts, that the UI Trust Fund is sound, and that the bill will decrease the balance in the UI Trust Fund. She reminded everyone of what happened years ago when the state underfunded the Public Employees Retirement System and expressed concern that SB 156 could adversely affect the future soundness of the UI Trust Fund. MS. MUNOZ responded that the presentation would show why the proposal is justified and why the department believes the fund can sustain the reduction. 1:57:48 PM MR. WELLER added that the department issues an annual actuarial report that provides a comprehensive financial analysis of Alaska's UI system. The latest report reflects the calendar year 2018 data. It is a great source for those interested in the various metrics of the system and how it is faring, he said. He read the first two paragraphs of the unemployment insurance financing since it provides a nice introduction on how the system functions: Every state has a trust fund designed solely to pay unemployment insurance liabilities and to meet those liabilities, a UI system must function well and maintain its solvency. In 1980, the Alaska legislature implemented the bulk of the current system. Tax rates adjust annually to reflect changes in benefit costs, wages, and the trust fund reserve ratio while the base in which taxes are assessed adjust to changes in statewide average wages. He explained that this essentially means that the current structure of the financing system is designed to respond to a very wide range of costs. This is built in by the main component, which is the cost recapture portion of tax rates reflected in any given year. There is also a targeted reserve ratio, which is based on historical experience from the program. He offered his view that the presentation will show it is quite adequate in meeting most of any potential liabilities. 1:59:50 PM MR. WELLER began the PowerPoint presentation, "Unemployment Insurance Financing Metrics in Alaska 1980's to Current." He displayed a chart of the UI Trust Fund End-of-Year Balance, Benefit Costs, and Payroll Contributions, 1981 -2019. He explained that slide 3 shows the interaction between benefit costs, which is the payment of UI benefits, net contributions, i.e., tax revenue directed to the program, and the resulting UI Trust fund balance. He pointed out that the net UI contributions or tax revenues fluctuate normally in accordance with benefit costs. There is a counter cyclical function to the tax rates, such that as benefit costs rise, the tax rates will rise in order to recapture the amount paid out above and beyond the revenues during those periods. This will also bring the UI Trust Fund balance into the statutory target range for full solvency before the next recession. 2:01:11 PM SENATOR STEVENS asked why the fund balance shows such remarkable ups and down, particularly the decline in 2009. MR. WELLER replied it was the result of the national Great Recession in 2009. The unemployment insurance program is designed to compensate for loss of wages, so it tracks with the cyclical changes in the economy. As unemployment rises, unemployment claims increase during those times, which results in accelerated benefit costs. This results in a drop in the UI Trust Fund balance, he said. The system responds. As costs increase, tax rates, based on a three-year moving average, start to respond and as the balance moves outside the target range, an additional solvency adjustment is made to help return the fund balance to its ideal target SENATOR STEVENS noted that the benefit costs are much more stable than the contributions but questioned why the fund balance showed such a precipitous decline from $350 million to $250 million. MR. WELLER explained that on an annual basis during 2009-2013, the UI fund paid out $180 million more in benefits than it collected in tax revenue. He emphasized that this is by intention because the system is not meant to shock employers from one year to the next. In addition, since the fund has a reserve ratio target between 3.0-3.3 percent of covered wages, the nominal value of the fund tends to grow over time. With those components in place, it allows the system to absorb these large shocks and to subsequently recover. 2:04:44 PM CHAIR BISHOP remarked that the reason the system works is because David Teal helped to design it. 2:05:30 PM MR. WELLER reviewed slide 4, the Unemployment Insurance Trust Fund Reserve Rate the Measure of Solvency 1981 - 2020: He said this slide shows the UI Trust Fund balance reflected as the reserve ratio, which is the balance of the fund as a percentage of wages covered at any given point in time. He directed attention to the shaded gray line that shows the targeted range of 3.0-3.3 percent. Ideally, the blue line would run right through it. However, the system is built to withstand fluctuations in benefit costs, so it finds itself outside of the range as often as not. For example, it fell as low as 1.6 percent in 1988 and reached as high as 4.75 percent in the mid- 1990s. Right now, the reserve ratio is 3.82 percent, which is nearly a half of a percentage point beyond statutory and historical targets for full solvency. He said the financing side of the system is stuck and unresponsive to the low costs. 2:07:32 PM MR. WELLER reviewed slide 5, U.S. DOL, Measures of Trust Fund Adequacy: He stated that the U.S. Department of Labor (DOL) has its own metrics for solvency. Ideally, the state would like to be at 100 percent of the U.S. DOL recommendation for reserves to cover recessionary costs, but the reserve amount is currently 160 percent of the recommendation. He directed attention to the terms on the graph, the high cost multiple and the average high cost multiple. The high cost multiple is a high-water mark that represents a benefit cost rate of well over 4 percent, but this is not the state's statutory target. However, the state is getting close to 80 percent of that rate he said. He offered his view that the average high cost multiple is the measure more widely used as the appropriate metric of solvency to give the fund the ability to weather recessionary costs. 2:08:50 PM MR. WELLER reviewed slide 6, Unemployment Insurance Average Benefit Cost Rate, ABCR 1985-2020: He explained that the main driver of tax rates in any given year is the average benefit cost rate. It is technically three years of benefit costs as a percentage of three years of covered wages, or a three-year moving average that drives the primary portion of tax rates in any given year. This shows a long-term downward trend in the cost rates. The red line signifies the threshold when the average tax classes (classes 10 and 11) hit the minimum 1 percent rate. In 2020, the rate for the employers' share is .93 percent, which is the first year it has fallen below the 1 percent threshold. CHAIR BISHOP remarked that the state is on the right side of the ledger. 2:10:22 PM MR. WELLER reviewed slide 7, Alaska, UI Contribution Rates Employer and Employee, CY1981-CY2020: He stated that this slide shows how costs are borne into rates. It shows a long-term downward trend. Rates fluctuate in every year, consistent with the system goals to respond to changes in costs as tax rates rise and vice versa, as costs drop the rates also drop. In the last four years the average rates class 10 and 11 have been stuck at the minimum of 1 percent. 2:11:11 PM MR. WELLER reviewed slide 8, 1985 2020, Count of Tax Classes at Statutory Min. 1% in a given tax year, Total of 20 Tax Classes subject to 1% Min: He said that from the 1980s on, at least one rate class or two is subject to the statutory minimum because of the experience rating system in statute. He explained that 40 percent of the employer's share becomes a very small value. Therefore, 1 percent tends to be higher than the calculation. However, since 2017, the number of tax classes subject to the minimum 1 percent has risen precipitously, which is primarily a driver of reduced costs, the trust fund balance recovers, and the tax rates have not been able to respond. In 2020, 18 of 20 rate classes subject to the 1 percent minimum were at that level. 2:12:37 PM MR. WELLER reviewed slide 9, 2020 Rate Classes 1-9 Current Statute V. Proposed Change: He explained that the final slide projects how SB 156 would impact tax rates in 2020 if it had been in place, using current calculations. The red line shows the 1 percent statutory requirement and what the rates classes 1-9 paid. He related a scenario in which no minimum was in place. He said given the state's costs, including the solvency adjustment, the projected rate class one would be paying -0.02 percent. This is because 40 percent of the employer portion of the benefit cost rate calculates to .38 percent, but there is currently a .04 credit adjustment for solvency since the fund is beyond its target rate so rate class 1 would be in negative territory. He said he would not suggest doing that. Under the bill, .04 of a percent would be applied, such that by using a new minimum rate, the class 1 rate would receive a 60 percent decrease on employer taxes for 2020. 2:14:39 PM MR. WELLER summarized stating that the DOLWD views the change in SB 156 as trying to bring the UI tax rate in line with the statutory goals. It would essentially lower the floor, such that tax rates will be allowed to adjust to the statutory targets. 2:15:15 PM SENATOR STEVENS directed attention to the employer and employee chart [on slide 7]. He asked what would happen to the chart if SB 156 goes into effect. MR. WELLER answered that it would not have changed anything up until 2017 because the rates are above the threshold. However, costs are so low, the system cannot respond. He said the average tax for rate classes 10 and 11, which is reflected in the gray bar, would not be affected since this bill would only affect rate classes 1-9. Employees must pay the current rates of a minimum of one-half a percent and employers must pay a minimum of 1 percent. 2:17:05 PM CHAIR BISHOP reported that under the bill 13 employers would save more than $100,000, and 177 employers would save between $10,000 and $100,000. He offered to provide members the chart that shows the scope of the change for employers under SB 156. 2:18:41 PM MS. MUNOZ reviewed the sectional analysis for SB 156. Section 1: Amends Alaska Statute 23.20.290 tax rate contributions for employers in rate classes 1-9. The applicable minimum tax rate is reduced from the current minimum 1% to correspond to the employer's experience factor set out in column C. The amended tax rates are found in column D. Section 2: Provides for an effective date of January 1, 2021. 2:19:42 PM CHAIR BISHOP opened public testimony on SB 156. 2:20:04 PM DON ETHERIDGE, Lobbyist, Alaska AFL-CIO, Juneau, Alaska, spoke in opposition to the SB 156. He expressed concern that there has not been any increase in over ten years in the weekly unemployment benefit to the worker, yet this bill would cut the fund. He drew a parallel with the PERS/TRS [Public Employees' Retirement System/Teachers' Retirement System]. He expressed concern that people are leaving the state because they cannot live on their weekly benefits, so before cutting the UI rate, it the state should consider increasing benefits to retain workers in the state. He agreed with Senator Gray-Jackson about the PERS/TRS fiasco. He recalled that at one time the PERS/TRS was funded at 110 percent, so excess funds were used elsewhere, and the system got in trouble. Alaska is only one of two states where the employee pays into the UI benefit and it is time to give back to the employee, he said. 2:22:50 PM HEIDI DRYGAS, Consultant, Alaska State Pipe Trades Association, Fairbanks, Alaska, spoke in opposition to SB 156. She echoed the concerns Mr. Ethridge articulated. She said that the fund is healthy. In fact, the formula has worked for decades, she said. She offered her view that any bill that addresses unemployment insurance that does not increase the maximum weekly benefit amount is an incomplete bill. The maximum weekly benefit amount is stagnant at $370 and it has not been increased in over 11 years. 2:23:59 PM SENATOR STEVENS asked what happens if nothing is done and the fund keeps growing. He also asked how the weekly employee unemployment insurance benefit could be increased. MS. DRYGAS answered that it would be done by introducing a bill, such as the one the Walker administration introduced. Her opinion is that the statute needs to have an automatic adjustment because the legislature does not touch it very often. She reported that Alaska is eighth in the nation for weekly wages, but the replacement ratio is 52nd, behind all the states and some territories. She said that Alaska used to be one of the leaders in the maximum weekly benefit amount, but it is now 38th in the country. As Mr. Ethridge said, it is a significant problem and one reason Alaska is losing seasonal workers in the pipe trades. 2:26:13 PM SENATOR GRAY-JACKSON commented that it seems that increasing weekly benefits would be a good idea. MS. DRYGAS agreed. 2:26:48 PM CHARLES MCKEE, representing self, Anchorage, Alaska, expressed concerns about SB 156. He said he is the beneficiary of the McKee Trust. He noted that he submitted five pages of written testimony. He said that he was an injured worker who was denied workers' compensation. He provided some details of his case. 2:31:16 PM CHAIR BISHOP asked where Alaska is ranked for wage replacement by state. 2:31:52 PM MS. MUNOZ answered that Alaska is ranked 39th in the nation for its weekly benefit amount of $370.00, 46th for its average weekly benefit amount of $249.00, 18th for its average weekly wage of $885.00, and 52nd for its replacement ratio of 32 percent. 2:32:32 PM CHAIR BISHOP held SB 156 in committee for further consideration.
Document Name | Date/Time | Subjects |
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L&C Pharmacy Board Ruffridge #1.pdf |
SL&C 3/5/2020 1:30:00 PM |
Confirmations |
L&C Physical Therapy and Occupational Therapy Radley#1.pdf |
SL&C 3/5/2020 1:30:00 PM |
Confirmations |
L&C Marital & Family Therapy Green #1.pdf |
SL&C 3/5/2020 1:30:00 PM |
Confirmations |
L&C Public Accoutancy Viera #1.pdf |
SL&C 3/5/2020 1:30:00 PM |
Confirmations |
SB 156 Sectional Analysis.pdf |
SL&C 3/5/2020 1:30:00 PM |
SB 156 |
SB 156 Presentation.pdf |
SL&C 3/5/2020 1:30:00 PM |
SB 156 |
SB 156 Letter NFIB 2-11-20.pdf |
SL&C 3/5/2020 1:30:00 PM |
SB 156 |
SB 195 Sponsor Statement.pdf |
SL&C 3/5/2020 1:30:00 PM SL&C 3/10/2020 1:30:00 PM |
SB 195 |
SB 195 Sectional Analysis ver. A.pdf |
SL&C 3/5/2020 1:30:00 PM SL&C 3/10/2020 1:30:00 PM |
SB 195 |
SB 195 DRAFT Fiscal Note DCCED-DOI 02-28-2020.pdf |
SL&C 3/5/2020 1:30:00 PM SL&C 3/10/2020 1:30:00 PM |
SB 195 |
SB 195 Letters of Support 3-04-2020.pdf |
SL&C 3/5/2020 1:30:00 PM SL&C 3/10/2020 1:30:00 PM |
SB 195 |