AB416 is now 2015 Wis Act 86

As noted previously, three DWD proposals were quickly put into a bill, AB416, and that bill was passed by the legislature, signed by the Governor on November 11th, and published that same day as 2015 Wisconsin Act 86.

The three DWD proposals that make up this bill are:

• D15-02 — adding the ability to issue determinations against out-of-state employers in combined wage claims for being at fault for an erroneous benefit payment to a claimant,
• D15-03 — applying the Treasury offset program to employers, as described previously in this post, and
• D15-07 — changes to how work share benefits are calculated so as to comply with federal requirements for work share programs.

Given the quick passage of this bill, the Treasury offset of tax refunds against employers will be in effect for the 2015 tax year. Accordingly, employers who owe money because of unpaid employer employment taxes will have any 2015 tax refunds due them intercepted by the state in order to recover unpaid taxes that are due.

Income tax intercepts coming to employers

Tax intercepts against claimants for recovering over-payments have been occurring for numerous years now. That is, a claimant who owes money to the Department of Workforce Development because of an over-payment has seen the Department intercept federal and state tax refunds due the claimant in order to recover that over-payment. The official name for these tax intercepts is the Treasury Offset Program, or TOP.

The 2013 budget act at the federal level required states to implement treasury offsets for ALL unemployment debts. Wisconsin has previously only applied treasury offsets for collecting claimants’ debts. To continue to receive federal grants for administering unemployment law, Wisconsin needs to make treasury offsets applicable to employers’ debts as well.

To that end, at the February 19th Advisory Council meeting the Department prepared a proposal, D15-03, for implementing a treasury offset against employers. Besides setting forth new and changed statutory language, this proposal explained:

Impact: This proposal is expected to save the Trust Fund approximately $4.3M annually via additional employer state Ul tax collections.

Summary of the Proposal: The Treasury Offset Program (TOP) is a Federal tax intercept collection tool used to collect unpaid debts owed to various government agencies. DWD UI previously implemented TOP to recover fraud and wage non-fraud overpayment debts from claimants. This proposal expands the use of the TOP program to unpaid employer contributions when personal and corporate liability can be assigned. However, the Federal government does not have the functionality to collect from corporate tax accounts at this time. The proposal is written to include corporate accounts for future enhanced Federal capabilities. Expansion of TOP is mandated by the Federal government. Fees are charged by the TOP program directly to the participant and would not affect the UI Trust Fund.

Methodology: Employer tax debt that would be certifiable for TOP is mainly debt from preliminarily closed and closed employer accounts. From 2010-2014 the average yearly amount of delinquent debt due to preliminarily closed/closed accounts is approximately $43M of which approximately 38% is recovered by Ul collections.

In 2012, TOP for claimant benefit overpayments was expanded to include fraud and non-fraud wage overpayments. From 2012—2014 the average annual amount of benefit overpayment debt certifiable for TOP was $25.2M of which approximately $12M was recovered by UI collections, or 48%.

At a 48% recovery rate, approximately $20.6M of employer debt certifiable for TOP would be collected annually. Much of the debt UI already recovered would now be collected with TOP; however, it would be collected more efficiently. Since UI can already collect approximately 38% of TOP certified debt using other collection tools, adding TOP as an additional tool would increase employer debt tax collections by approximately 10% of the certified debt annually. Ten percent of the average $43M employer debt certified for TOP would result in Trust Fund savings of approximately $4.3M annually via additional employer tax debt collections.

Note that while a federal process for applying treasury offsets against corporations is not yet in place, these treasury offsets will certainly take effect against employers whose businesses are included in their personal tax returns, such as limited liability corporations. Accordingly, the Department acknowledges that these offsets will have an immediate effect of $4.3 million in additional collections for employer debts.

At its March 19th meeting, the Advisory Council approved this proposal. As a result, it will be included in the Department’s UI bill along with other changes approved by the council. That bill should be presented to the legislature this fall or winter. So, for the 2016 tax year and perhaps for the 2015 tax year (if the bill is enacted in 2015), employers will have to face the loss of their state and federal refunds if they have unpaid unemployment taxes.

Unemployment benefit payments continue to decline

The Advisory Council met yesterday, September 17th, and much information was put forward, including current financial reports for the state’s unemployment system.

As noted previously, unemployment taxes are slated to decline. Next year, 2016, will see a reduced tax schedule for employers, as the reserve fund had $735.4 million at the end of July 2015 and should meet the requirements for a reduced tax schedule next year.

The most stunning news, however, is that benefit payments continue to decline markedly. The Department’s Financial Outlook Report released in April 2015 reported that “UI benefit payments in 2014 were the lowest since 2000.” See Report at 21. Now in September 2015, the Department reports that: “Benefit payments charged to the reserve Fund were $371.2 million through July compared to $445.4 million last year.” See UI Reserve Fund Highlights at 1. This level of benefit payments is “$90 million below what is expected” and “has not been seen in Wisconsin since the 1990s,” the treasurer for the state’s unemployment funds told council members. In support of this observation, the financial report included this graph on the last page.

This chart shows that all benefits paid to claimants are taking a deep dive since the recession. Part of the decline is the end in 2010 of federal extended unemployment compensation benefits. But, if the end of those federal benefits told the whole story, then the decline in benefits should level off and possibly increase as employers go through cycles of hiring and layoffs. But, there has been no leveling off in Wisconsin. Rather, benefit payments continue falling off of a cliff. Keep in mind as well that these dollars are not adjusted for inflation or cost of living increases. So, this drop in benefit payments is even more devastating to claimants trying to pay rent and buy groceries than pictured here.

For why this decline in payments is occurring, the main reasons appear to be the Department’s efforts at charging concealment against claimants for their mistakes and the new substantial fault disqualification standard. See Why employer UI taxes are down: concealment and substantial fault. The Department is essentially making it harder for those losing their jobs to qualify for unemployment benefits. And, those that do qualify are increasingly facing concealment charges six to nine months after their claims have ended, forcing them to repay all benefits previously received, pay additional penalties for their mistakes mislabeled as concealment, and then forfeit years of future unemployment benefits as an additional penalty. In short, unemployment benefits do not really exist anymore for those who lose their jobs, and this outcome is by design.

Why employer UI taxes are down: concealment and substantial fault

A previous post noted that unemployment taxes for employers are going down because the reserve fund’s cash balance is currently and expected to remain more than $500 million.

This success is remarkable, especially since it did not come about because employers’ taxes have been raised substantially. To be sure, the higher unemployment during the Great Recession led to the highest tax schedule — Schedule A — being implemented. And, for three years, 2011 to 2013, the FUTA tax credit available to employers was reduced.

But, recall the UI debt hole Wisconsin was in during the Great Recession. In March 2011, Wisconsin owed just over $1.6 billion because of borrowing to cover unemployment benefits being paid out. Only eleven other states ever owed more during this recession.

One point six billion dollars is a big hole to climb out of. As noted in a recent GAO report, some states reduced the number of weeks claimants were eligible for benefits as a way to fix their UI debt problems. In short, rather than making employers pay more, these states limited the ability of claimants to collect benefits in the first place. With less benefits being paid out, the taxes employers paid went further.

Other than the introduction of a waiting week before unemployment benefits begin being paid out, Wisconsin did not shorten the total weeks of unemployment eligibility. But, Wisconsin did other things on the benefit side of the equation that have starkly reduced the amount of benefits being paid out to claimants.

As noted previously, Wisconsin has been exceptionally aggressive on charging claimants with concealment and is proposing both increased penalties and stricter compliance standards to be applied to claimants that would effectively charge them with fraud when making honest mistakes on their claims. As the Department’s own fraud report shows, DWD has been taking in over $20 million a year the past two years in over-payment collections alone. Forfeiture penalties and charges against future unemployment benefits add significantly to the amounts flowing back into the reserve fund from claimants.

But, forfeiture over-payments and collections only tell part of the story. Department staffers have publicly noted that benefit payments are now at historically low levels. Indeed, at the May 19th Advisory Council meeting it was noted that Wisconsin has not seen such low levels of benefit payments since 2000, fifteen years ago. The big question is why benefit payments in Wisconsin are so low right now.

A look at 2013 and 2014 financial reports to the Advisory Council show large declines in 2014 in benefits being paid to claimants. The benefits charged to taxable employers for the past three years when employees were discharged are:

2012 - $788,019,106.15

2013 - $714,257,663.70

2014 - $580,681,613.52

The ratio of current year benefit payments to benefits paid the previous year, are 0.91 in 2013 but 0.81 in 2014. In other words, there was a nearly 20% decline in benefit payments in 2014 when compared to 2013, nearly double the decline in benefit payments from 2012 to 2013.

Benefits being paid to employees who quit also declined sharply in 2014.

2012 - $85,799,497.23

2013 - $81,861,854.13

2014 - $69,388,417.56

The 2013 ratio of benefit payments relative to the previous for quits was 0.95. That ratio in 2014 declined to 0.85, nearly three times the decline seen in 2013.

These declines in benefit payments in 2014 directly arise from changes in unemployment law contained in the 2013 budget act — 2013 Wis. Act 20 — regarding the elimination of numerous quit exceptions and the adoption of a new, substantial fault standard for discharges (see this previous post about these changes being included by the Joint Finance Committee in the budget bill). Understand that the original estimates presented to the Joint Finance Committee for these changes in unemployment law were a reduction of $14.1 million in benefit payments during the first fiscal year and a $23.1 reduction in benefit payments during the second fiscal year. As noted above, the actual decline for quits alone in 2014 was just over $12 million, and for discharges the decline was approximately $134 million.

NOTE: The financial reports given to the Advisory Council lack specific data about the number of claims at issue. The recent report about the activities of the Advisory Council, however, states that the new substantial fault standard led to “4,654 denied cases in 2014. See p.7 of the activities report. Using the average claim duration of 15.3 weeks and the average weekly benefit amount of $285 from the Department’s 2015 financial report, see pp. 37 and 38, each substantial fault disqualification amounted to $4,360.50. Adding up all of the denied cases in 2014 means that $20,293,767 in benefits were NOT paid out that year, $4 million more than what the Department estimated in its 2015 financial report, see p.33 of the financial report.

Because the decline in benefit payments is significantly more than what can be pieced together from available data, using a ratio of benefit payments from one year to the next to track these changes indicates at least how extraordinary the declines in 2014 were and, as indicated below, provides a mechanism for predicting what will happen in 2015 using currently available data.

Estimates for 2015 show that the decline in benefits being paid pursuant to discharges will continue. Using data for the first four months of each year, the total amount of benefits estimated to be paid in 2015 to discharged employees will be just over $480 million, $100 million less than in 2014. And so if current trends continue, the estimated level of benefits going to discharged employees in 2015 will only be 83% of the already record low amount that went to discharged employees in 2014.

On the other hand, estimated benefit payments in 2015 for employees who quit will only be $3 million less from what claimants who quit received in 2014. That is, benefits paid to employees who quit are expected to be within 97% of the 2014 numbers. Accordingly, it appears that the application of the new quit standards to claimants has stabilized and subsequent declines in benefits pursuant to quits are unlikely.

The Department has yet to acknowledge the impact the substantial fault disqualification has had on the benefits being paid out to claimants. The Department’s estimates set forth in its 2015 annual Financial Outlook Report call for a $16 million reduction in benefits to discharged employees because of substantial fault (much less than the $100 million estimated here for 2015) and an $11.5 million reduction in benefits through the elimination of various quit exceptions (nearly $9 million more than estimated here for 2015 but similar to the decline in quit benefits seen in 2014). See pp. 32-3 of the report.

These estimates severely under count the impact substantial fault has had on claimants. In its Financial Outlook Report, the Department presents for the first time a public description of the new substantial fault standard:

Substantial fault essentially means that if an employer establishes a reasonable job policy to which an employee can conform, failure to conform constitutes substantial fault.

See p.33 of the report. According to the Department, then, employees are disqualified whenever they fail to follow a reasonable employee policy. Given how steep the decline in benefits has been for discharged employees in 2014 and the first four months of 2015, it is obvious that the Department has begun applying this broad conception of substantial fault.

And so, with less money being paid out as unemployment benefits, employers’ taxes could that much more quickly fill the hole in the reserve fund created by the Great Recession. There simply has been no need in Wisconsin to reduce the number of weeks claimants are eligible for benefits when those claimants are likely to be disqualified in the first place from receiving any benefits at all.

Finally, it should be noted that even though Wisconsin now has a positive reserve fund balance, the unemployment fund is still not all that healthy. Based on standard UI fund metrics, a recent Trust Fund Solvency Report shows that Wisconsin still fares about as well as most other states do — that is, not so well (see p.56 of the report). The fund’s solvency is rated at 0.13 and a minimum of 0.60 is needed for Wisconsin to be eligible for interest free loans to cover future benefit payments. For how Wisconsin compares to other states, see p.59 of the solvency report. Among mid-western states, Wisconsin fares worst except for Indiana and Ohio, which both still have outstanding debt. Presentations by the Department to the Advisory Council have described the reserve fund’s financial problems in detail. See, e.g., the presentation contained in the Advisory Council activities report, pp.16-44. But, raising employers’ unemployment taxes appears to be unnecessary when benefit payments to claimants continue to decline markedly.

Substantial fault equals negligence

In just two weeks time (a record turnaround), the Labor and Industry Review Commission issued a decision in the substantial fault case I just posted about a few days ago.

The decision deserves careful reading. There is no surprise here that the Commission found no misconduct. In failing to secure a wheelchair passenger, the Commission explained, the “employee did not willfully disregard this responsibility; it was an act of negligence” and that this “negligence was not of a severity to willful disregard of the employer’s interests.”

But, the Commission did find that this negligence constituted substantial fault. The Commission maintained in this decision: (1) that the reasonableness of the employer’s requirements is established as articulated (that is, on its face) and (2) that the employee has to demonstrate that the action at issue was beyond his or her reasonable control. For the Commission, the employee failed to satisfy this requirement. “The evidence does not show that the employee’s failure was a minor infraction, that the error was merely an inadvertence, of that she lacked sufficient skill, ability or equipment to perform her responsibility.”

There are two problems here with the Commission’s reasoning. First, the Commission is placing the burden of proof on claimants to demonstrate they satisfy one of the three caveats to avoid a finding of substantial fault rather than having employers first show that the action at issue truly is something the employee should be expected to have reasonable control over. Second, and more troubling, the Commission is holding here that a negligent act disqualifies someone from unemployment benefits. As a result, this decision could possibly threaten the tax credits employers currently qualify for.

There are a few but very important federal requirements that state unemployment systems must satisfy in order for the employers in those states to qualify for tax credits. See 6 U.S.C. § 3302 (federal tax credits for employer’s contributions to state unemployment funds). One of these requirements is that:

(10) compensation shall not be denied to any individual by reason of cancellation of wage credits or total reduction of his benefit rights for any cause other than discharge for misconduct connected with his work, . . .

6 U.S.C. § 3304(a).

If the Secretary of Labor finds that a state is not meeting this requirement, then that lack of compliance means the tax credit goes away. So, the Commission, by holding that substantial fault is in actuality substantially less stringent than the misconduct standard, may have effectively ended a vital tax savings for employers. For a measure originally intended to reduce the unemployment benefits being paid out, the new substantial fault standard may now cost employers much more through higher taxes.