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In this special edition issue:

• Alternative Funding Ideas
• Reed Act Funds
• Don't Forget Integrity Operations
• Return on Investment
• On Point Technology Can Help

Welcome to this special Financial Edition of BullsEye, the On Point Technology newsletter.

Letter from the President

As On Point Technology interacts with Unemployment Insurance (UI) staff from around the country we hear a continuous stream of concern about what needs to be done to improve UI program administration and integrity. Oftentimes these concerns go hand-in-hand with the lamenting shortfall in federal funding that has occurred over recent years.

Obviously, there is no one single approach that will solve all of the UI system's funding woes, but there are options that may work in your state. We wanted to do our part in getting some funding options exposure. Jerry Iyall, Vice President of Government Relations for On Point Technology, has assembled a collection of alternative funding approaches states have taken during these arduous economic times for the purpose of augmenting federal funding.

We don't contend to have included every possibility here, and I offer to publish in a future newsletter, any additional approaches which states have implemented. If you have an approach that has worked for your state and you would like to share it with your UI colleagues, please let us know about it. You can contact Jerry directly at 360-943-5598 or jerry.iyall@onpointtech.com.

In this issue, we also discuss the $110 million recently appropriated by Congress to make up for the Fiscal Year 2008 funding gap.

I and the staff at On Point Technology hope you find this information both informative and useful.

Sincerely,
Mike Lorsbach
President

Alternative Funding Ideas

In spite of the recent Congressional action to provide $110 million to states for UI workloads, many states are still struggling with budget challenges this year and likely into the foreseeable future. Furthermore, the Fiscal Year (FY) 2009 Planning Target Guidelines provide targets with an increase of $15.6 million over the FY 2008 level, due to anticipated workload increases. The increase is part of a $2.3 billion budget. This short-term increase for increased workload doesn't address the long-term funding challenges.

In addition, cuts to the Workforce Investment Act (WIA) and Wagner-Peyser programs have also hurt the UI program. WIA and Wagner-Peyser help fund the State Workforce Agency (SWA) infrastructure such as Human Resources (HR) staff, Information Technology (IT) staff, IT hardware and software, and the costs associated with operating the SWA facilities. UI may have to make up for some lost WIA and Wagner-Peyser funding to support the agencies' infrastructure. As a result, states are struggling to live with the reduced budget. The funding challenges have become a recurring concern for many states with no solution in sight. Many states are looking for a long-term solution. The time may be right for states to consider alternative funding approaches for UI program administration.

Over the years, many states have pursued alternative funding solutions to supplement their UI budget. The U.S. Department of Labor (USDOL) has compiled a list of alternative funding methods and the states that have used them. This list can be found at http://www.ows.doleta.gov/unemploy/uilawcompar/2007/comparison2007.asp under "Financing" starting at page 2-30. Any of these funding alternatives would require changes to your UI laws by your state's legislature. The three most common alternative funding sources that states have used are:

Penalty and Interest

All states have penalties and interest on overdue employer taxes. However, the employer penalty and interest usually goes into the state's general fund and rarely goes back to the UI program. Several states also charge interest on uncollected overpayments, while some states only charge interest on fraud overpayments. Again, for most states the overpayment interest collected goes into the state's general fund or penalty and interest fund and rarely goes back to the UI program.

How can a state access penalty and interest funds?

This can be a challenge due to the fact that your state legislature and Governor's office may already be spending these funds for a different purpose such as community colleges, re-employment activities, or worker retraining. However, you may be able to make a case for a one-time diversion or even a partial diversion of penalty and interest funds due to the loss of UI, WIA, and Wagner-Peyser funding as described in the paragraph below titled How do we build a case to justify such a change?

Are there other alternatives that would allow us to keep overpayment penalty and interest?

The states of Oregon and Washington have language in their UI laws that specify that overpayment interest collected can only be used for the "detection and collection of overpayments." A few years ago, Washington was able to further strengthen the language as follows: "The interest penalty shall be used, first, to fully fund either Social Security Number cross match audits or other more effective activities that ensure that individuals are entitled to all amounts of benefits that they are paid and, second, to fund other detection and recovery of overpayment and collection activities." Washington was able to pass this law change after working closely with its stakeholder community and showing the effectiveness and productivity of Washington's fraud detection and overpayment collection operations.

Washington funds 20 or more full-tme employees (FTEs) with overpayment interest collected. They are able to do this by aggressively establishing fraudulent overpayments and collecting fraud and non-fraud overpayments.

All recovered overpayment interest is deposited in an administrative contingency fund and spending those funds must be approved by the state legislature. Copies of both Oregon and Washington laws are available on On Point Technology's website at www.onpointtech.com/uiadminlaws.htm.

You can pursue this type of law change with your state legislature by putting together data to show the effectiveness of your fraud detection and overpayment collection operations and describing your budget challenges as explained in the paragraph below titled How do we build a case to justify such a change? Again, the challenge you may face is that your state may already be spending the penalty and interest on something else such as community colleges, re-employment activities, worker retraining, etc.

Another alternative is to work with your legislature to pass the increased penalties included in the Integrity Bill proposed by USDOL. USDOL proposed a penalty of 15% of the fraud overpayment amount. Washington establishes an increased penalty of 25% of the fraud overpayment amount for a second fraud overpayment, and 50% for a third fraud overpayment. If you work with your legislature to pass these penalties, you can specify that any new revenue generated by these penalties be used only for the "detection and collection of overpayments."

Taxes for UI Administration or for Non-UI Purposes

Thirty states have additional taxes ranging from 0.025% to 3.0%. These taxes are used for such things as job search and placement, training, to pay for non-charged benefits, improving the quality of nonmonetary decisions, research and economic development, and UI administration. These taxes are not deposited in the state's unemployment trust fund, but in another fund designated by state law. Since federal grants for the administration of the UI program may not be used to collect non-UI taxes, such legislation must provide that a portion of the revenues generated will be used for payments of costs of collecting the tax.

Montana recently passed a law imposing a 0.05% tax on taxable wages. As justification for this bill, they said in part, "In the past several years, Congress appropriated less than Montana needs to administer the UI program. This has resulted in Montana and 37 other states requesting supplemental funding." Missouri also recently passed a bill that creates an "automation surcharge" of .005 while reducing employer contributions by .005. Funds from the "automation surcharge" go into an "Unemployment Automation Fund." The new law states in part that "... money in the fund shall be used solely for the purpose of providing automated systems, and the payment of associated costs, to improve the administration of the state's unemployment insurance program." Copies of Missouri's HB 2041 are available at www.onpointtech.com/uiadminlaws.htm.

Copies of Washington's law which provides funding for re-employment assistance for UI claimants and Arkansas' law which provides funding for training and UI Administration and a summary of Montana's 2007 legislative changes are available at On Point Technology's website at www.onpointtech.com/uiadminlaws.htm.

The following is an example of how this would work and is intended for illustration purposes only. Your state's taxable wages and the percent you choose as an administrative tax would determine how much money goes into this fund each year. The state in this example collects 0.02% on its taxable wages (approx. $56 billion) for a total of $11 million annually to provide re-employment assistance to UI claimants.

Arkansas has an additional tax of 0.025% of the employers' taxable wages for a "Training Trust Fund" and 0.025% for a "UI Administration Trust Fund," with a cap of $2.5 million annually in its Training Trust Fund and $2.5 million annually in its UI Administration Trust Fund.

Your state can pursue this type of funding by making your case based on your budget circumstances as described in the paragraph below titled How do we build a case to justify such a change?

Reserve Taxes or Reserve Funds

There are currently four states with a reserve tax - Idaho, Iowa, Nebraska, and North Carolina. Reserve taxes are deposited in a reserve fund established under state law. The principal of a reserve fund is that it is used for UI purposes such as paying benefits or paying interest on federal advances. Any interest earned on the reserve fund is deposited in another fund where it is used for other purposes such as UI administrative costs or job training.

Reserve funds can be used for any purpose enacted into law by your state's legislature. They are not protected by the federal withdrawal standard which restricts the use of contributions to the payment of benefits and other specified purposes. This is the risk with reserve funds. Your state legislature can use the funds for anything they choose. A major advantage of the reserve fund is that it does not increase taxes on employers.

Sample language for a reserve fund from North Carolina is available at www.onpointtech.com/uiadminlaws.htm. North Carolina uses the reserve fund for worker training, but states can modify the language to use the reserve fund for "UI Administrative costs."

How would a reserve fund work?

An example of how a reserve fund would work is as follows. This example is for illustration purposes only. Assess a tax of 0.12 on taxable wages for a UI Administration fund. Reduce contribution paying employers' taxes by 0.12. Specify that the proceeds from the new tax and interest earned will go into a UI Administration reserve fund. This fund will be managed by your agency's Treasurer. The principal in this fund will only be used to pay UI benefits or to repay interest on advances from the federal government. The interest earned by this fund will be used solely for the administration of the UI program. You may or may not want to put a "cap" on how much can accumulate in this fund. You may also want to put a qualifier in your law that if the balance in the UI Trust Fund goes below a specified level, the taxes and interest will go into the UI Trust Fund and not the UI Administration reserve fund.

The mechanics for this example would work as follows. The UI Administration tax of 0.12 times a state's taxable wages for the most recent twelve month period, in this example, $56 billion = $67.2 million. In this example, $67.2 million would go into the UI Administration reserve fund in the first year and a similar amount for each subsequent year. Using the federal fund rate for Calendar Year (CY) 2007 (5.02) to calculate the interest earned, $67.2 million times 5.02 = $3.37 million. This example would give you $3.37 million of new funding for UI Administration each year. You can modify the tax amount higher or lower, based on your state's UI budget needs and your taxable wages.

You also need to take into account your state's trust fund solvency. In the example above, the $3.37 million that is going into the UI Administration reserve fund is money that will not go into your state's trust fund. If the loss of this $3.37 million is an issue for the solvency of your state trust fund, a reserve fund may not be the right choice for you. Another important factor to keep in mind is that the interest on a reserve fund can be used for any purpose put into law by your state's legislature. That's why it is important for you to make a strong case to justify the change, as explained in the paragraph below titled How do we build a case to justify such a change?

Where can I get copies of the state laws?

Copies of all of the laws referenced in this article are available at On Point Technology's website at www.onpointtech.com/uiadminlaws.htm. The URL for Idaho's reserve fund laws is http://www3.state.id.us/idstat/TOC/72013KTOC.html. The specific laws for Idaho's reserve fund are 72-1347, 72-1347A and 72-1347B.

How do we build a case to justify such a change?

Every state has its own unique story to tell about its budget challenges. You can start by showing the budget you have received from USDOL for the last three to five years. In most states the budget has either remained flat or has declined. You can show your increased costs. Salaries have increased due to pay raises granted by state legislatures and in Collective Bargaining Agreements. These increases can range from a few percentage points to as much as 15% to 20%. In addition to salary increases, the costs for employee benefits have also gone up. Very likely, your infrastructure costs such as rent, utilities, heating, and transportation have all increased as well.

Most states have also had to increase their IT costs to improve efficiencies and keep up with customer expectations. States may also have had to lay off staff and have either closed offices or are considering it. These are all tangible and measurable costs and impacts you can show to your stakeholders and legislature to support your request.

Reed Act Funds

Reed Act Funds are another source of funding and the use of Reed Act Funds does not require a law change by your state. However, Reed Act Funds have to be appropriated by your state legislature. Most states still have Reed Act money available from the 2003 distribution. You can make a strong case to justify the use of Reed Act Funds, as explained in the previous paragraph.

Reed Act Funds were put into states' UI trust funds. States with trust fund solvency issues will need to assess the impact to the trust fund of the appropriation of Reed Act Funds, before pursuing this alternative.

If you are considering any of these funding alternatives, you may want to contact one of the states who already have them in place. You can gain valuable insights from the other states' experiences.

Don't Forget Integrity Operations

If you consider any of these funding alternatives, it is important to also consider the needs of your integrity operations. Too often, integrity operations do not get the funding or the attention they need to be successful. Investing in technology can maximize the resources you do have in your integrity operations.

Why invest in technology for Integrity Operations?

Nationwide, the lack of funding for Integrity Operations has created significant performance issues. More than $3 billion are overpaid nationwide each year according to Benefit Accuracy Measurement (BAM) data. Many of these overpayments are caused by people working while collecting UI (approximately $877 million). BAM refers to these overpayments as "Benefit Year Earnings" overpayments.

The Congressional Budget Office estimates that as a result of the recently passed Emergency Unemployment Compensation (EUC) 2008 program, an additional $14 billion will be paid out during the life of the EUC program. Using the most recent BAM Annual Overpayment rate of 9.99%, this would mean an additional $1.4 billion will be overpaid in 2008 and 2009.

The USDOL just issued UIPL 19-08 which is the "Call Memo for the FY 2009 UI State Quality Service Plan (SQSP)." The SQSP includes states' plans to record and manage improvement as part of UI Performs, the comprehensive performance management system. Additionally, it is the grant document through which states receive federal UI administrative funding. One of the key measures is "Detect Benefit Overpayments" with a "Government Performance and Results Act of 1993" (GPRA) goal that requires, "Overpayments established will be at least 56.2% of the estimated detectable, recoverable overpayments." The UIPL goes on to say that "states are expected to submit a Corrective Action Plan (CAPs) for reporting an overpayment detection rate below 50% ..."

Based on the most recent BAM data, seventeen states will have to submit CAPs because they have an overpayment detection rate below 50%. Eight additional states fall below the GPRA goal, but don't yet have to submit CAPs.

For those states that must submit a CAP, why not make On Point Technology products a part of your solution?

On Point Technology products such as Barts and Aware can be a key part of your state's CAP. Barts has a proven record of improving the detection of overpayments. Aware is also a very effective tool for detecting organized fraud. There is no other tool available that can detect organized fraud schemes or identity theft rings as effectively as Aware.

Return on Investment

On Point Technology products provide a high return on investment. For example, in the mid 1990's, Washington State purchased Barts. Later, Washington also purchased a number of enhancements that were unique to the State. In total, Washington paid less than $1 million. This original investment has been returned many times over. Recently, Washington established more than $60 million in overpayments over a five-year period (2003 to 2007) using the Barts application.

States recently received some good news that Congressional action has provided $110 million to make up for the Fiscal Year 2008 funding gap. The question now is - Will you be able to spend your entire Unemployment Insurance budget this year? And, what are the implications if you don't?

Another challenge many states have faced is a "hiring freeze" that applied to all state agencies because of budget shortfalls in state funding. Working under a "hiring freeze" may leave your agency with a number of unfilled vacancies for an extended period of time, which can make it even more difficult to spend your entire UI budget. Again, under RJM, any unspent UI budget this year will reduce your UI budget for future years. One way of responding to a hiring freeze is investing in technology to increase the efficiency of existing staff.

On Point Technology Can Help

Instead of losing your unspent UI budget, why not spend it on technology for improving Integrity Operations. Because of ongoing funding challenges, many states' Integrity Operations have not been and are not now adequately funded. On Point Technology offers a number of proven solutions to improve the efficiency of your Integrity Operations.

For more information about these products, visit On Point Technology’s website at http://www.onpointtech.com/solutions.htm.

To arrange for printed materials or to schedule an on site demonstration contact Bob Yokavonus at 908-526-0426 or robert.yokavonus@onpointtech.com.

If you have questions about this document contact Jerry Iyall at 360-485-7143 or jerry.iyall@onpointtech.com.

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