HB 215-EMPLOYER'S UNEMPLOYMENT INSUR RATE  3:51:23 PM CHAIR SPOHNHOLZ announced that the next order of business would be HOUSE BILL NO. 215, "An Act relating to unemployment insurance contribution rates; and providing for an effective date." 3:51:57 PM PATSY WESCOTT, Director, Division of Employment and Training Services, Department of Labor & Workforce Development, informed the committee that employer rates are provided for in Title 23, Chapter 20, the Alaska Employment Security Act. The act itself is designed to promote employment and economic security and provide a partial wage replacement to qualified, unemployed workers through the collection of unemployment insurance tax contributions. Currently, the applicable statute provides for a minimum contribution rate of one percent for all employers in all rate classes one through twenty. The only exception is rate class twenty-one, which is the penalty rate. HB 215 seeks to lower the minimum contribution rates for employers in rate classes one through nine and set the minimum rates to correlate with an employer's experience rating. The current minimum of one percent notably affects the rate for employers with a year- round consistent work force. These employers contribute at a disproportionate rate when compared to employers who have inconsistent employee payroll from quarter to quarter. An employer's experience rate is based on how consistent their work force is throughout the year. The more stable an employer's work force, the less need there is for their employees to draw unemployment insurance benefits. Since these employers have fewer employees in need of benefits, it is appropriate that their rates should not be expected to carry the same contribution burden as their counterparts in higher rate classes. At this time, approximately 4,700 employers are paying more contributions than are necessary. The proposed legislation would establish lower minimum rates, beginning January 1, 2021. 3:54:56 PM LENNON WELLER, Economist/Unemployment Insurance Actuary, Research & Analysis Section, Department of Labor & Workforce Development, provided a PowerPoint presentation, entitled "Unemployment Insurance Financing Metrics in Alaska 1980s to Current." He noted that, in general, the unemployment insurance (UI) financing system has essentially been in its current form since the early 1980s and has served the state "fairly well." He said it's a well-functioning system. Both through the 1980s recession and the 2009 recession, Alaska never borrowed money to pay benefits - unlike a majority of other states - which, he said, is a testament to the system's well-functioning nature. He explained that the system is self-adjusting, in that it looks to recapture costs born by the system as its primary objective. It's also countercyclical, meaning it attempts to do that post the high cost period through a three-year averaging of cost in relation to covered wages when implementing tax rates in the following years. The UI financing system has two primary objectives, cost recovery and recession readiness, which are the two main drivers of rates at any given year. He directed attention to a graph on slide 3, entitled "UI Trust Fund End-of- Year Balance, Benefit Costs, and Payroll Contributions, 1981- 2019." He said it shows the relationship between benefit costs at any given year, net contributions, and the resulting trust fund balance. Over time, in nominal terms, the trust fund balance should grow because it is kept within a relative ratio to wages in the economy. Essentially, as wages grow the balance of the fund should grow. 3:58:05 PM REPRESENTATIVE HANNAN asked if benefit cost is what is paid out in benefits. MR. WELLER answered yes. REPRESENTATIVE HANNAN pointed out that in 1986 more money was spent on unemployment insurance than was taken in. She asked where that money came from, more specifically, if it was a draw on the general fund. MR. WELLER said all revenues, or net UI contributions, come from the payroll tax, which is assessed on all wage and salary employment in the state. REPRESENTATIVE HANNAN said the graph shows that the trust fund balance wasn't high enough to pay the benefit cost in 1986. She asked what happens when the benefit costs are higher than the trust fund balance. MR. WELLER explained that while in any given year more benefits might have been paid out than the amount received in contributions, the actual net value of the fund was never negative. He said in 1986 it fell to a low of $60 million and began to recover thereafter. He noted that several years prior, the fund was built up to have the cushion necessary to absorb those benefit costs higher than contributions. 3:59:43 PM MR. WELLER directed attention to a graph on slide 4, entitled Unemployment Insurance Trust Fund Reserve Rate the Measure of Solvency 1981-2020." He discussed how the trust fund balance is viewed in terms of the financing system. He said the more important aspect, as opposed to the nominal value of the fund, is its relation to the total wages covered in the economy. The target for the reserve ratio is between 3-3.3 percent of covered wages and the fund seeks to return to the relative portion of covered wages. In periods it will be below that which is accounted for by cost recapture and a solvency adjustment. He said that the reserve ratio is the balance of the fund as a percentage of wages in the economy. He pointed out that in the last several years, it has gone above the target high point reserve ratio of 3.3 and is currently at 3.8 reserve ratio. He further noted that the target reserve ratio is a result of looking at history, benefit costs under high-cost periods, and deemed acceptable to meet a vast majority of potential large cost periods. MR. WELLER turned attention to a graph on slide 5, entitled "U.S. DOL, Measures of Trust Fund Adequacy." He said, generally, the state will meet the average high-cost multiple, which is a more generous measure. It looks at a three-year average of the highest cost periods as a percentage of wages. That high-cost rate is 22.6 percent. He explained that the high-cost multiple looks at the highest cost 12-month period in the program's history, which was in 1958 at 4.34 percent of covered wages. The point of this graph, he said, is to show how far the reserve ratio has come in the last several years. It is now running at 60 percent higher than the main federal DOL measure of full solvency - 160 percent of what they would deem necessary to meet the most likely recessionary cost period. MR. WELLER continued to a graph on slide 6, entitled "Unemployment Insurance Average Benefit Cost Rate, ABCR, 1985- 2020." He stated that the Average Benefit Cost Rate (ABCR) is the main driver of tax rates in any given year - it is the cost recover element. Three years of benefit cost is used as a percentage of wages to replenish the fund in relation to those wages covered. Since the mid-1980s, there has been a significant decline in the relative ratio of benefits paid to the general size of the potential pool of wages in the economy. Furthermore, 2020 is the first year where ACR fell below the threshold at which the one percent statutory minimum met the average rate classes 10 and 11. MR. WELLER directed attention to a graph on slide 7, entitled "Alaska, UI Contribution Rates Employer and Employee, CY1981 - CY2020." He said it shows the average employer tax rate and the uniform employee rate. The past four years has steadily remained at the statutory minimum one percent, which signifies that tax rates have bottomed out. He continued to a graph on slide 8, entitled "1985-2020 Count of Tax Classes at Statutory Min. 1 [percent] in a given tax year Total of 20 Tax Classes subject to 1 [percent] Min." He stated that there's at least one or two tax classes that become subject to the minimum because rate class one equates to 40 percent of the average benefit cost rate of portion two employers. 4:06:23 PM The committee took a brief at-ease. 4:06:27 PM CHAIR SPOHNHOLZ noted that something is wrong with the visuals on the projector. 4:07:24 PM MR. WELLER said on average, there are several tax classes that are subject to the minimum rate; however, in the past several years it has steadily crept up to the point where currently, 18 of the 20 rate classes that subject to the minimum are at that one percent minimum. 4:07:50 PM REPRESENTATIVE FIELDS asked how many employers HB 215 would affect. MS. WESCOTT answered approximately 4,700. CHAIR SPOHNHOLZ sought clarification on the variation in tax classes. MR. WELLER said the average benefit cost rate becomes the primary component for all employers' rates. Classes 10 and 11 are currently the median of the class structure. That is multiplied by something either lesser or greater than that to essentially experience rate employers. He further noted that tax classes 9 would be subject to 90 percent of that, 8 would be 80 percent and so forth, all the way down to rate class one, which has an experience factor of .4. That means they should ideally pay 40 percent of what those in the average tax classes 10 and 11 would pay. CHAIR SPOHNHOLZ asked for an even more elemental description of what a tax classification is and how individual jobs are ascribed to tax classifications. 4:09:36 PM MR. WELLER explained that federal law mandates that employers are experience rated. The department does that through a peril decline method, which means employers are assigned with a lesser experience a lower rate and those with a higher experience a higher rate. This is done by looking at average decline in the employers' payroll. He noted that they must have at least four quarters of payroll to be subject to an experience rating. CHAIR SPOHNHOLZ asked what an experience rating is. MR. WELLER said an experience rating is the relative share of the average rate that they would pay based on their payroll decline portion. 4:10:41 PM MS. WESCOTT, in response to Chair Spohnholz, explained that experience rating is a long-used term by the U.S. Department of Labor. Essentially, employers whose payroll has large fluctuations from quarter to quarter indicates that their employees were laid off, filing for benefits, or using the system. Therefore, that employer is experiencing the benefits of the trust fund and the benefits of the system, as are their employees. This is contrary to an employer whose payroll is consistent from quarter to quarter, which indicates their employees are not being laid off and not drawing benefits from the system. This employer's experience would be much lower than an employer whose payroll fluctuates greatly. 4:12:14 PM REPRESENTATIVE HANNAN surmised that in the context of unemployment insurance, a high experience rating is bad, and a low experience rating is good. MS. WESCOTT replied she wouldn't use the term "bad." She said the unemployment insurance system exists to provide that partial wage replacement during periods of time where an employee can be laid off. Nonetheless, from an employer's perspective, the lower the rate class they're in the better it is for that employer because they are paying out a lower rate. 4:13:00 PM REPRESENTATIVE FIELDS noted that some of this is sectoral - the construction of industry waxes and wanes with season. He asked if that is correct. MS. WESTCOTT confirmed that. 4:13:13 PM REPRESENTATIVE HANNAN said she assumed that there are other states that have seasonality to their incomes. In Alaska, for example, there are huge swaths of industry - from construction to fisheries - that are always going to be high experience. She asked if the ranking, rating, and payment rate account for any industry differences or if seasonality is irrelevant. MR. WELLER acknowledged that there is a strong correlation between seasonality and the rate class - the more seasonal the industry the higher the rate class. He added that less seasonal more stable employers all find themselves in the lowest rate class one. REPRESENTATIVE HANNAN asked if seasonal employers are penalized by the slower seasons. MS. WESCOTT said there is nothing in statute that provides for any waiver or relief to any particular industry. 4:16:57 PM MR. WELLER resumed his presentation on slide 9, entitled "Average Benefit cost rate, ABCR/Employer Rate Share/Min one percent Rate." He explained that the graph depicted on this slide displays the relationship between the total ABCR and the employer share. He said at an ABCR of 1.37 or lower the average rate classes 10 and 11 would be subject to this statutory minimum. Currently, for 2020 there was an ABCR of 1.28 percent, which would make the average rate class .82. Under HB 215, the absolute minimum take would be .82 as opposed to the current 1 percent statutory minimum. He continued to slide 10, entitled "2020 Rate Classes 1-9, Current Statute V. Proposed Change." He said that this slide demonstrates how the new experience rated minimums would affect rate classes 1-9 for the current calendar year. If there was no minimum in place and included the solvency adjustment, there would be a negative tax rate for rate class 1 in 2020. However, if the solvency adjustment were to be disregarded, the experience rated rate class 1 would be at .38 percent in 2020. 4:20:36 PM REPRESENTATIVE FIELDS said an employer might pay in more in a given year than their employees take out when they get laid off. He asked if that changes from year to year, meaning one year an employer's employees getting laid off may take less and then the next year they might take more. He asked if that's generally accurate. MR. WELLER answered yes. REPRESENTATIVE FIELDS asked if Alaska is 50th in the nation in terms of UI payments. MS. WESCOTT said Alaska is currently 37th. REPRESENTATIVE FIELDS asked how much below average Alaska is in terms of weekly or bi-weekly payments. MS. WESCOTT said she would follow up with requested information. REPRESENTATIVE FIELDS explained that he would like to understand where Alaska is relative to the average in terms of amount of dollars workers are not getting when they get laid off. CHAIR SPOHNHOLZ said the entire committee would be interested in knowing what Alaska's UI payments are and how they fit into the national context, as well as what wages are in the state of Alaska. 4:22:23 PM REPRESENTATIVE HANNAN sought clarification on whether the state ranking accounts for the number of people being paid as well as the dollars they are receiving or just the dollars they are receiving. MS. WESCOTT explained that the state ranking compares Alaska's maximum weekly benefit amount to that of the rest of the states. REPRESENTATIVE HANNAN asked if it disaggregates for the time of year and job type. MS. WESCOTT said there are a number of measures that the department reports on. She noted that Alaska's average weekly benefit amount in a given year is much lower than 370. 4:24:33 PM REPRESENTATIVE FIELDS said he would be interested in learning Alaska's maximum and average compensation over time and adjusted for inflation to understand if workers today are getting paid more or less than 20 or 30 years ago. CHAIR SPOHNHOLZ agreed. [HB 215 was held over.]