Significant changes to Pa.’s unemployment compensation

July 29, 2011

Northeast Pennsylvania Business Journal

Many of Pennsylvania’s long-term unemployed may see their benefits terminated during early 2012 due to changes in unemployment compensation law brought about by legislation sponsored by State Senator John Gordner (R-Columbia/Northumberland).

The changes, which have been signed into law, require recipients of unemployment compensation benefits to demonstrate that they are actively looking for work. The specifics of the new process are yet to be hammered out by Harrisburg.

Other facets of the law include employer post-relief from compensation charges when a former employee does not qualify for benefits, and adjustments to the process where severance pay and unemployment benefits are being paid at the same time.

The bill also creates a voluntary “work share” agreement that will allow employees to qualify for partial benefits, freezes the maximum weekly benefit rate for one year, and limits annual increases to no more than 1.5 percent over five years. Additionally, the amount of wages needed to earn a “credit week” for benefits is being increased and, through variable claim duration, claimants will not be able to qualify for more weeks of benefits than weeks worked.

Fiscal conservatives are hoping that the changes will begin to address the $3 billion to $4 billion debt facing Pennsylvania’s unemployment compensation trust fund. According to some estimates, the compensation reform will save the system up to $150 million. Supporters of the measure say it will help make solvent the Pennsylvania Unemployment Compensation Trust Fund, which has borrowed $3.8 billion from the federal government since 2009 in order to continue to pay workers who are unemployed through no fault of their own. The Pennsylvania Unemployment Compensation Trust Fund pays out up to 26 weeks of regular benefits before any federally funded extensions kick in.

Depression-era roots
Geoff Moomaw, president of Interstate Tax Service in Mechanicsburg, operates a consulting service that specializes in unemployment compensation issues. His grandfather was an original sponsor of the nation’s unemployment compensation system during the Great Depression.

Moomaw notes that the process changes within the law will require benefit recipients to register with the state’s CareerLink system, and then post a resume if applicable. They also must apply for jobs with wages similar to those from their previous job, within a 45-minute commute.

“These are all reasonable steps,” says Moomaw.

He explains that Pennsylvania’s compensation system ran solvent from its launch in 1936 until the 1970s, when recession and subsequent debt begin to appear. During the 1980s, debt as high $3 billion was incurred, but “fixes” and a brightening economy allowed a return to the black.

Early in the 21st century the system had rolled up a $3 billion surplus, but as the nation’s economy stagnated the number of claims mounted. In 2008, then-Gov. Ed Rendell analyzed the trust fund and announced trouble was imminent even before the Great Recession formally began.

The original mission of the unemployment system, according to its authors in the 1930s, was to provide temporary and partial wage replacement to those who became unemployed through no fault of their own.

“To some degree, the present system has gotten away from that,” says Moomaw.

Process changes
During the early 1990s, Harrisburg ended the system that required beneficiaries to visit the state’s Job Centers weekly. A phone-based system, later followed by a virtual process via the Internet became the norm, and Pennsylvania became the only state without an active “job search” requirement.

"One of the reasons for this was that employers complained that the unemployed were applying for jobs en masse and wasting the employers’ time,” says Moomaw.

All 50 states are required by the federal government to financially partner with Washington and have an unemployment compensation program in place. The Department of Labor and Industry estimates that in 2010, Pennsylvania’s system paid out $3.8 billion in regular benefits.

“This new law is a step in the right direction, but will not correct the insolvency of the system,” adds Moomaw. “The fund’s deficit will continue to grow, and taxes will continue to be high or increased.”

Gene Barr, vice president of government and public affairs with the Pennsylvania Chamber of Commerce, says that the large debt owed to the federal government is something that must be addressed.

“The new legislation is a good start, and we look forward to efforts that will continue to bring solvency and additional reforms to the system,” says Barr.

He comments that, during the past two years, Pennsylvania has endured the nation’s highest percentage of unemployment compensation spending after California. The Keystone State also ranks in the top 10 for unemployment compensation taxes paid per employer.

“It’s actually better for a worker to get back to work as soon as possible,” says Barr. “From a human resources standpoint, it looks bad when someone is out of work for a long time.”

Legislative by-product
While acknowledging that the measure was necessary to prevent people from losing up to 13 weeks of federal benefits, (a possibility, due to Pennsylvania's recently improving unemployment rate), Stephen Herzenberg, Ph.D., executive director of the Keystone Research Center, says that the legislation cannot fix the fiscal situation with the trust fund, and that even modest benefit cuts are bad for working-class families that are struggling with unemployment.

Preventing the loss of the federal benefits required a small, technical change in state law or as many as 45,000 people would have been dropped from the UC immediately, and another 90,000 by year's end would not be eligible for the additional weeks of benefits. The 13 weeks of unemployment compensation are available to people who have received benefits for 72 weeks.

Despite heading off this contingency, Dr. Herzenberg is critical of the overall measure. He specifically points out that unemployment compensation funds are supposed to be built up by the government during good financial times, and then spent when the economy declines.

“Unfortunately, this didn’t happen,” says Dr. Herzenberg. “This recession has been deep, and unemployment has been high for a long time. It’s a very dark economic storm.”

He specifically points out that Pennsylvania’s maximum benefits make up only one-half of lost wages, and that lifetime earnings drop when unemployment strikes. The money paid through the unemployment compensation is therefore an automatic stabilizer, and helps to soothe economic downturns.

“Cuts in benefits are like kicking people when they’re down, and cutting benefits is the wrong way to fix the trust fund,” says Dr. Herzenberg. “Our unemployment system is one reason why economic downturns, since the 1930s, are not as long or deep as they were before the system was created.”

State Rep. Bill Keller (D-Philadelphia) explained his opposition to the measure when he penned an op-ed piece in May opposing the changes. He wrote, Employers in Pennsylvania have benefited from one of the lowest taxable wage bases in the nation. Since 1984, employers only pay UC taxes on a small percentage of the first $8,000 of an employee's wages. While UC is historically an employer-funded benefit, Pennsylvania is one of only three states where workers also pay taxes into the fund, and workers pay a rate on their entire wages.

Furthermore, Pennsylvania employers received significant UC tax breaks in the 1990s during good economic times, so the fund was not prepared to cope with bad economic times, like now, when there is one job opening for every five applicants in this state.

If the taxable wage base for employers had been indexed properly since 1984 and during good economic times, the wage base would now be more than $17,000 and the trust fund would not be bankrupt.

To truly make the fund solvent, reform would have to include reasonably reduced benefits, contributions from workers and an increase in the taxable wage base for employers.