CS FOR SENATE BILL NO. 289(L&C) "An Act establishing and relating to the Alaska Board of Technical and Vocational Education; and providing for an effective date." This was the second hearing for this bill in the Senate Finance Committee. At the previous hearing, the Committee adopted a committee substitute, 1-LS1525\M and Co-Chair Torgerson asked the Department of Labor and Workforce Development to detail how the program works and its relation to language of the committee substitute. AT EASE 9:33 AM / 9:35 AM TOM WYLIE, Unemployment Insurance Actuary, Research and Analysis, Division of Employment Security, Department of Labor and Workforce Development, gave a presentation using a handout. [Copy on file.] He addressed the "Basic Parts of Unemployment Insurance (UI) Tax Rate Calculation" flowchart. He detailed the "First Stage: Affects Employers and Employees" shows the relationship of unemployment benefit costs to total wages and taxable wages, and the "Second Stage: Affects Employer Only" details the solvency of the trust fund and if necessary either adds to or subtracts from the UI tax rate. Mr. Wylie explained that the calculations takes total benefit cost over a three year period and defines them by payroll tax cost, which then provides a ratio. He continued that the ratio is then multiplied by the relationship between taxable wages and the wage of pay by employers. He noted that only certain portion of wages is taxable. He established that the portion is $24,800 per year as set in state statute. Once that average is produced, he said the amount is divided into an employer tax and an employee tax with the employer paying 80 percent and the employee paying 20 percent of that tax. Mr. Wylie then detailed the second stage saying the trust fund is examined to determine its solvency in relationship to total payroll in the state. He told of a state UI statute that sets out a process of dividing the trust fund by total payroll and comparing it to a schedule. If the trust fund has fallen below 3.3 percent of total payroll, Mr. Wylie said an add-on tax is placed on top of the employer's tax, but if the fund is above 3.3 percent, the employer's tax is reduced. He noted that the employee tax is not affected by the trust fund solvency. Co-Chair Parnell asked when the last adjustment was made to the employer's tax rate. Mr. Wylie replied that the rate was adjusted downward in the previous year and that there was no need for an adjustment in the current year. Co-Chair Torgerson asked the reason anyone would receive a higher rate and whether experience was a factor. Mr. Wylie explained how employers were placed into one of 21 rate classes depending on their experience with unemployment, half of which were above the actual tax rate and half were below. Mr. Wylie then stated that the committee substitute does not interface with the UI tax rate. Instead, he explained it proposes a new tax of .15 percent on both the employer and the employee using the UI mechanism to set the taxable income amount and also using the UI office to collect the taxes. At the request of Co-Chair Torgerson, Mr. Wylie then explained the STEP program. He told how current statute requires diverting 0.1 percent of the employee's taxable wages from the trust fund into the STEP program. The employee's UI tax rate is then credited and the employee has met the UI contribution requirement. This information was detailed on the second page of the handout. Co-Chair Torgerson asked if an amount would be collected for vocational training assessment separately from the usual UI mechanism. Mr. Wylie affirmed and stated that the UI tax office would collect this tax because it is the most convenient method, but that the funds would not be deposited into a separate account than the UI trust fund. He described how the money would be diverted into this account. Co-Chair Torgerson asked for verification that the employee's deduction would not be affected. Mr. Wylie assured him that was correct. Co-Chair Torgerson began to address where the adjustment would be made to allow for the vocation training assessment fund. Mr. Wylie stated that further implications of this additional fund would be the resulting diversion away from the UI trust fund and the lower collection into the trust fund. He noted the impact would not be seen during the first stage of the tax collection, but would be seen in the second because the calculations would show a need to increase the employer's tax rate to build up the balance of the trust. RONALD HULL, Deputy Director, Division of Employment Security, Department of Labor and Workforce Development, noted the committee substitute is not like the STEP program because there is no credit and requires an additional add- on tax. He stated there are two different options to fund the vocational training assessment program, one that does not affect the UI tax rates and the other that does. Co-Chair Torgerson said that the UI tax rate would not necessarily be affected by the add-on tax if 0.2 percent of the employee's tax was used and depending on the strength and solvency of the fund. Mr. Wylie agreed and explained the likelihood that once the program was established the tax for the vocational fund would be indiscernible from the many other factors influencing the amount of the total UI tax. Senator P. Kelly asked how the credit was calculated for the employee portion of the tax. Mr. Wylie clarified this bill has no credit and he explained the current STEP process. He said that Co-Chair Torgerson approach, as proposed in the committee substitute, was to fund the vocational training component differently. There was further discussion between Senator P. Kelly and the witness regarding the current calculation of the UI taxes. Senator Phillips referred to page 6 of bill and asked if state or federal law prohibited private schools from receiving funds generated from this source. Co-Chair Torgerson stated that the money collected this year would be disbursed under the current method and the money collected the next year would go to accredited institutions. He stressed that there were no limitations on private schools receiving the funds other than that they must be accredited. Senator Phillips then asked why there was a special provision for a transitional period. Co-Chair Torgerson responded that he used his discretion as chair in making that decision. Senator Phillips asked the witness to look into whether there were any state or federal laws restricting which schools received these funds. Senator Wilken referred to the flowchart and asked that even with the decrease of 0.2 percent funding the trust fund, if the balance went down and total wages increased, there would be no difference to the amount taxed. Mr. Hull replied that because the Alaskan economy varies greatly over time, many of the changes to the tax amount could be "overwhelmed by economic forces within the state." Therefore, he said Senator Wilken's question couldn't be answered unless all other factors were equal. He used the current year as an example of how the proposed provisions would affect the tax amount. He stated that if employment greatly increased and unemployment was reduced, the trust fund might then increase on its own and there would be no need to increase the tax. Tape: SFC - 00 #74, Side B 9:55 AM Mr. Hull continued explaining how different factor affect the trust fund. Senator Wilken commented that as a small business employer he was not interested in imposing a higher tax rate, but at the same time, wanted a fully trained workforce. He noted that this legislation does not necessarily increase the tax rates automatically and that they could actually decrease. Mr. Wylie agreed. Co-Chair Torgerson ordered the bill HELD in Committee and announced his intention to amend the bill to mirror the STEP program. He stated it was not his intent to jeopardize the trust fund.