DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT - New Jersey Legislature

DEPARTMENT OF LABORAND

WORKFORCE DEVELOPMENT

FISCAL YEAR

ANALYSIS OF THE NEW JERSEY BUDGET

PREPARED BY OFFICE OF LEGISLATIVE SERVICESNEW JERSEY LEGISLATURE • MAY 2012

2012 - 2013

NEW JERSEY STATE LEGISLATURE

SENATE BUDGET AND APPROPRIATIONS COMMITTEE

Paul A. Sarlo (D), 36th District (Parts of Bergen and Passaic), ChairBrian P. Stack (D), 33rd District (Part of Hudson), Vice-ChairJennifer Beck (R), 11th District (Part of Monmouth)Anthony R. Bucco (R), 25th District (Parts of Morris and Somerset)Sandra B. Cunningham (D), 31st District (Part of Hudson)Linda R. Greenstein (D), 14th District (Parts of Mercer and Middlesex)Steven Oroho (R), 24th District (All of Sussex, and parts of Morris and Warren)Kevin J. O'Toole (R), 40th District (Parts of Bergen, Essex, Morris and Passaic)Joseph Pennacchio (R), 26th District (Parts of Essex, Morris and Passaic)Nellie Pou (D), 35th District (Parts of Bergen and Passaic)M. Teresa Ruiz (D), 29th District (Part of Essex)Jeff Van Drew (D), 1st District (All of Cape May, and parts of Atlantic and Cumberland)Loretta Weinberg (D), 37th District (Part of Bergen)

GENERAL ASSEMBLY BUDGET COMMITTEE

Vincent Prieto (D), 32nd District (Parts of Bergen and Hudson), ChairmanGary S. Schaer (D), 36th District (Parts of Bergen and Passaic), Vice ChairmanAnthony M. Bucco (R), 25th District (Parts of Morris and Somerset)John J. Burzichelli (D), 3rd District (All of Salem, and parts of Cumberland and Gloucester)Gary R. Chiusano (R), 24th District (All of Sussex, and parts of Morris and Warren)Albert Coutinho (D), 29th District (Part of Essex)Gordon M. Johnson (D), 37th District (Part of Bergen)Declan J. O'Scanlon, Jr. (R), 13th District (Part of Monmouth)Troy Singleton (D), 7th District (Part of Burlington)Bonnie Watson Coleman (D), 15th District (Parts of Hunterdon and Mercer)Jay Webber (R), 26th District (Parts of Essex, Morris and Passaic)Benjie E. Wimberly (D), 35th District (Parts of Bergen and Passaic)

OFFICE OF LEGISLATIVE SERVICES

David J. Rosen, Legislative Budget and Finance OfficerFrank W. Haines III, Assistant Legislative Budget and Finance Officer

Marvin W. Jiggetts, Director, Central StaffThomas K. Musick, Section Chief, Commerce, Labor and Industry Section

This report was prepared by the Commerce, Labor and Industry Section of the Office of Legislative Services under thedirection of the Legislative Budget and Finance Officer. The primary author was Robin C. Ford with additional contributions byGregory L. Williams.

Questions or comments may be directed to the OLS Commerce, Labor and Industry Section (609-847-3845) or theLegislative Budget and Finance Office (609-292-8030).

DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT

Budget Pages....... B-4, C-6, C-9, C-14 to C-15, C-22 to C-23, D-210, D-217 to D-234, D-361, D-379, D-381

Fiscal Summary ($000)

Expended FY 2011

Adjusted Appropriation

FY 2012 Recommended

FY 2013

Percent Change

2012-13 State Budgeted $193,004 $157,391 $159,789 1.5%

Federal Funds $443,245 $509,975 $520,175 2.0%

Other $184,145 $239,444 $240,421 0.4%

Grand Total $820,394 $906,810 $920,385 1.5%

Personnel Summary - Positions By Funding Source

Actual FY 2011

Revised FY 2012

Funded FY 2013

Percent Change

2012-13 State 445 448 484 8.0%

Federal 2,536 2,426 2,414 (0.5%)

Other 369 364 376 3.3%

Total Positions 3,350 3,238 3,274 1.1%

FY 2011 (as of December) and revised FY 2012 (as of January) personnel data reflect actual payroll counts. FY 2013 data reflect the number of positions funded.

Link to Website: http://www.njleg.state.nj.us/legislativepub/finance.asp

Department of Labor and Workforce Development FY 2012-2013 Highlights

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• The FY 2013 Governor’s Budget Recommendation for the Department of Labor and

Workforce Development of $920.4 million is a $13.6 million (1.5 percent) increase compared to the FY 2013 adjusted appropriation of $906.8 million. Over half of the department’s funding is from the federal government, $520.2 million (56.4%). The remainder consists of dedicated revenues, including transfers from special revenue and proprietary funds, $240.4 million (26.5%), and State General Fund and Casino Revenue Fund appropriations, $159.8 million (17.6%).

• The FY 2013 Budget Recommendation includes a $2.4 million increase in State funds.

This increase is primarily due to an increase of $2.6 million to support the Office of Workforce Initiatives and Employment Development, which according to information provided in the budget (footnote, page D-233), is expected to be transferred from the Department of the Treasury to the Department of Labor and Workforce Development.

• The FY 2013 Budget Recommendation includes a $10.2 million increase in anticipated

federal funds. The increase is primarily the result of a $9 million increase in federal funding for the Unemployment Insurance program and a $1 million increase in anticipated funds for the federal Workforce Investment Act of 1998 program.

• Information contained in the FY 2013 Budget Recommendation indicates that the Office

of Contract Compliance and Equal Employment Opportunity in Public Contracts was transferred from the Department of the Treasury to the Department of Labor and Workforce Development in FY 2012. The Office monitors contractors and sub-contractors who have been awarded publicly funded projects by State, county, or local government entities to ensure that minorities and women are afforded equal hiring opportunities. It is also responsible for ensuring State entities comply with P.L.2009, c.313 and P.L.2009, c.335, and transfer 0.5 percent of any public works contract in excess of $1 million to the Department of Labor and Workforce Development to fund training opportunities for women and minorities in construction trade occupations. The FY 2012 adjusted appropriation includes increased funding of approximately $375,000 for the Office which is continued in the FY 2013 Budget Recommendation.

• The FY 2013 Budget Recommendation includes new language effectively freezing

workers’ compensation judges’ salaries beginning July 1, 2012. This language was also included in the FY 2010 and FY 2011 Appropriations Acts and was part of the FY 2012 Budget Recommendation, but was removed by the Legislature prior to the enactment of the FY 2012 Appropriations Act. The removal of the language in FY 2012 resulted in salary increases for workers’ compensation judges on July 1, 2011 totaling approximately $400,000.

Background Paper: Unemployment Insurance – Overview and Current Status…………..………………….page 11

Department of Labor and Workforce Development FY 2012-2013

Fiscal and Personnel Summary

AGENCY FUNDING BY SOURCE OF FUNDS ($000)

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Adj. Expended Approp. Recom. Percent Change

FY 2011 FY 2012 FY 2013 2011-13 2012-13

General Fund

Direct State Services $132,052 $90,439 $92,837 ( 29.7%) 2.7%

Grants-In-Aid 58,756 64,756 64,756 10.2% 0.0%

State Aid 0 0 0 0.0% 0.0%

Capital Construction 0 0 0 0.0% 0.0%

Debt Service 0 0 0 0.0% 0.0%

Sub-Total $190,808 $155,195 $157,593 ( 17.4%) 1.5%

Property Tax Relief Fund

Direct State Services $0 $0 $0 0.0% 0.0%

Grants-In-Aid 0 0 0 0.0% 0.0%

State Aid 0 0 0 0.0% 0.0%

Sub-Total $0 $0 $0 0.0% 0.0%

Casino Revenue Fund $2,196 $2,196 $2,196 0.0% 0.0%

Casino Control Fund $0 $0 $0 0.0% 0.0%

State Total $193,004 $157,391 $159,789 ( 17.2%) 1.5%

Federal Funds $443,245 $509,975 $520,175 17.4% 2.0%

Other Funds $184,145 $239,444 $240,421 30.6% 0.4%

Grand Total $820,394 $906,810 $920,385 12.2% 1.5%

PERSONNEL SUMMARY - POSITIONS BY FUNDING SOURCE

Actual Revised Funded Percent Change FY 2011 FY 2012 FY 2013 2011-13 2012-13

State 445 448 484 8.8% 8.0%

Federal 2,536 2,426 2,414 ( 4.8%) ( 0.5%)

All Other 369 364 376 1.9% 3.3%

Total Positions 3,350 3,238 3,274 ( 2.3%) 1.1% FY 2011 (as of December) and revised FY 2012 (as of January) personnel data reflect actual payroll counts. FY 2013 data reflect the number of positions funded.

AFFIRMATIVE ACTION DATA

Total Minority Percent Department 43.1% 44.2% 44.2% ---- ----

Civil Service Commission 36.6% 36.1% 36.6%

Department of Labor and Workforce Development FY 2012-2013 Significant Changes/New Programs ($000)

Budget Item Adj. Approp.

FY 2012 Recomm. FY 2013

Dollar Change

Percent Change

Budget Page

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ECONOMIC ASSISTANCE AND SECURITY FEDERAL FUNDS Unemployment Insurance $182,665 $191,665 $ 9,000 4.9% D-224

The FY 2013 Budget Recommendation anticipates an increase of $9 million in federal funds for Unemployment Insurance (UI) program administration. The majority of this increase is attributed to funding for “Services Other than Personal” and “Maintenance and Fixed Charges.” From December 2007 to December 2009, New Jersey experienced steadily increasing unemployment levels which reached a high of 10 percent in December, 2009. Currently, unemployment levels remain high at 9.0 percent but appear to have stabilized. The increased need for unemployment benefits necessitated the hiring of “intermittent workers” by the department to meet its increased administrative needs. The intermittent workers are paid using these federal funds. As the workload continues to decrease, the costs for these workers will likewise decrease. In FY 2013, the department anticipates a decrease in initial claims filed to an estimated 552,500 (down from a peak of 650,327 in FY 2010) for which the Governor’s Budget would appropriate $191.7 million in federal funds, an increase of $9.0 million (or 4.9%) over the current year adjusted appropriation. However, it is unlikely that the department will expend the total amount appropriated, primarily because the costs for UI should be decreasing in the coming year as initial claims decrease and federal extensions for UI will be ending midway through FY 2013. Moreover, in recent prior years, the department has not fully expended its federal appropriations for this purpose. In FY 2011, for example, a year in which initial unemployment claims were approximately 618,000, the State expended approximately $152 million for program administration, although $169 million had been appropriated. For more information, please refer to the background paper in this report, Unemployment Insurance – Overview and Current Status.

MANPOWER AND EMPLOYMENT SERVICES DIRECT STATE SERVICES

Public Sector Labor Relations 3,373 3,573 $ 200 5.9% D-228 Salaries and Wages 15,739 15,889 $ 150 1.0% D-229 Services Other than Personal 240 290 $ 50 20.1% D-229

Department of Labor and Workforce Development FY 2012-2013 Significant Changes/New Programs ($000) (Cont’d)


FY 2012Recomm.FY 2013

DollarChange

PercentChange

BudgetPage

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An overall $200,000 (5.9%) increase in the appropriation for the Public Sector Labor Relations program is recommended to cover additional costs related to mediation services provided by the Public Employment Relations Commission and is detailed as follows: $150,000 increase for Salaries and Wages and $50,000 increase for Services other than Personal. According to the commission, an increase in the number and length of mediations is the primary cause of these increased costs. The commission asserts that the increases are a result of the enactment of two laws, P.L.2010, c. 44, which reduced the school district, county and municipal property tax levy cap from 4% to 2% and P.L.2010, c. 105, which streamlined the procedure for resolving contractual impasses between public employers and their police and fire departments and imposed a 2 percent cap on arbitration awards under certain circumstances. The commission indicated that school districts, fire personnel representatives, police personnel representatives and public employers have exhibited an increased reliance on mediation since these laws became effective. The Public Sector Labor Relations Program provides services through the Public Employment Relations Commission which establishes policy, rules, and regulations concerning employer-employee relations in the public sector, and resolves disputes involving unit determinations, representation, unfair practices, and scope of negotiations. SPECIAL PURPOSE: Worker and Community Right to Know Act $38 $5 ($ 33) ( 86.8%) D-229

The FY 2013 Budget Recommendation proposes a decrease of $33,000 (86.8%) to the appropriation for the administration of the “Worker and Community Right to Know Act,” P.L.1983 c.315 (C.34:5A-1 et seq.). The recommended FY 2013 appropriation is consistent with previous expenditures for this program. The department has not expended the full amount appropriated for the Worker and Community Right to Know Act program in recent years, having expended $6,000 in FY 2008 and $5,000 in FY 2010, FY 2011 and anticipated in FY 2012. The appropriations are used to fund the costs of implementing the department’s responsibilities under the Worker and Community Right to Know Act, including the collection of fines, and investigations of any claims of a violation of worker’s rights under this act. The FY 2013 Budget Recommendation contains language which authorizes the appropriation be funded out of the Worker and Community Right to Know Fund (page D-230) and further provides that if receipts are less than anticipated, the appropriation shall be reduced accordingly.




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PercentChange

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All three State agencies involved in the administration of the “Worker and Community Right to Know Act” are recommended for reduced appropriations for this purpose, due to the decrease in revenue to be transferred to the General Fund from the Worker and Community Right to Know Fund. Public Employees Occupational Safety $378 $0 ($ 378) ( 100.0%) D-229

According to the department, the proposed elimination of the appropriation for Public Employees Occupational Safety reflects a shift in funding from “on-budget” to “off-budget” revenue. Language included in the FY 2013 Budget Recommendation (page D-230) authorizes the department to appropriate any excess receipts collected by the Workplace Standards program, as well as unexpended balances, to the same program, subject to the approval of the Director of the Division of Budget and Accounting. According to the department, the program will now be funded through “off-budget” revenue generated by receipts from the issuance of licenses, conduction of inspections and the imposition of fines and penalties by the Division of Workplace Standards. The department collected revenue of approximately $15 million in FY 2011 and anticipates collecting $12.6 million in FY 2012 and $10.6 million in FY 2013 (pages C-6 and C-14) from these activities. The reduction is also referenced as “savings achieved through department efficiencies” on page B-4 of the FY 2013 Budget Recommendation.

GENERAL GOVERNMENT SERVICES

DIRECT STATE SERVICES General Administration, and State and Local Operations, and Selection Services $14,226 $16,835 $ 2,609 18.3% D-234

The recommended FY 2013 increase to this program classification is primarily due to the impending transfer of the Office of Workforce Initiatives and Development from the Department of the Treasury to the Civil Service Commission located in, but not of, the Department of Labor and Workforce Development in FY 2013 (page D-379). The total amount of increase equals the appropriation for the Office in FY 2012. The Office of Workforce Initiatives and Development compiles information on the human resources and training needs of State government; provides online training courses to employees of State government agencies; offers basic guidance and referrals through the




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PercentChange

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Employee Advisory Services; and investigates and hears appeals related to Equal Employment Opportunity and Affirmative Action requirements for public employers and employees. The Office generates revenue through fees paid by other State departments and municipalities to utilize the services of the Office. ALL OTHER FUNDS General Administration, and State and Local Operations, and Selection Services $1,665 $2,642 $977 58.7% D-234

The FY 2013 Budget Recommendation anticipates an increase of $977,000 in revenue generated through administration of the Civil Service System and other workforce services. According to the department, this increase reflects the fees paid by other State departments and municipalities to utilize the services, principally workforce training through the Human Resources Development Institute, provided by the Office of Workforce Initiatives and Employment Development. As discussed above, the Budget Recommendation includes information indicating that the Office will be transferred to the Civil Service Commission in FY 2013.

Department of Labor and Workforce Development FY 2012-2013 Significant Language Changes

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Law Against Discrimination Fines

Addition 2012 Handbook: 2013 Budget: p. D-221

Fines and penalties collected pursuant to violations of N.J.S.A 10:5-1 et seq. are hereby appropriated for program costs.

Explanation

The FY 2013 Budget Recommendation includes new language which appropriates fines and penalties collected pursuant to violations of the Law Against Discrimination, N.J.S.A. 10:5-1 et seq., for program costs. According to the Office of Management and Budget (OMB), this language is added to the department’s budget due to the FY 2012 transfer of certain functions of the Office of Contract Compliance and Equal Employment Opportunity in Public Contracts (the Office) from the Department of the Treasury to the Department of Labor and Workforce Development. The Office was newly created as a result of the FY 2012 reorganization of the former Division of Public Contracts Equal Employment Opportunity Compliance. The Office is responsible for monitoring and enforcing contractors’ compliance with the State’s minority and women employment goals for procurement and construction contractors. This language will dedicate any revenue collected from fines and penalties related to Affirmative Action violations on a construction site to administrative costs. However, as currently administered by the Department of the Treasury, no fines have been imposed or collected in recent years.

Division of Workers’ Compensation Judges’ Salaries

Addition 2012 Handbook: 2013 Budget: p.D-225

Notwithstanding the provisions of R.S. 34:15-49 to the contrary, including the reference therein to salaries of judges of the Division of Workers’ Compensation determined as a percentage of the annual salary of judges of Superior Court, there shall be no increase paid from appropriations made herein for an annual salary increase for judges of the Division of Workers’ Compensation.

Explanation

The FY 2013 Budget Recommendation includes new language effectively freezing workers’ compensation judges’ salaries beginning July 1, 2012. According to the department, the language in the FY 2013 Budget Recommendation will maintain all of the workers’ compensation judges’ salaries at the July 1, 2012 level and will not permit judges to receive increases for tenure and length of service.

Department of Labor and Workforce Development FY 2012-2013 Significant Languages Changes (Cont’d)

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This language was also included in the FY 2010 and FY 2011 Appropriations Acts and was part of the FY 2012 Budget Recommendation, but was removed by the Legislature prior to the adoption of the FY 2012 Appropriations Act. The removal of the language in FY 2012 resulted in salary increases for workers’ compensation judges on July 1, 2011 totaling approximately $400,000. Workers’ compensation judges’ salaries are statutorily established as a functional percentage of Superior Court judge salaries, adjusted for years of service and satisfactory annual evaluations pursuant to N.J.S.A. 34:15-49, and N.J.S.A. 2B:2-4. As a mid-year cost saving measure, P.L.2009, c.22 froze the workers’ compensation judges’ salaries at 2008 levels, amending the Appropriations Act for FY 2009 and continuing an Executive Order. This freeze was maintained through budget language in the FY 2010 and FY 2011 Appropriation Acts, effectively keeping workers’ compensation judges’ salaries at the 2008 level, regardless of length of service. (See language on pages B-125 and B-188 in the FY 2011 Appropriations Handbook.)

Previously, P.L.2007, c.350 had increased the Superior Court judges’ salaries over a two year period. The first increase was effective January 1, 2008 and the second on January 1, 2009. However, due to the timing of the freeze effectuated pursuant to P.L.2009, c.22, the workers’ compensation judges’ salaries were maintained at the level they were after the first increase in 2008. Since 1990, all administrative costs of the Division of Workers’ Compensation are funded by the Second Injury Fund (SIF), also known as the Special Compensation Fund, established pursuant to R.S.34:15-94. Revenue is provided for the SIF through an assessment on workers’ compensation insurance for both self-insured and privately insured employers. State and municipal self-insured employers are exempt from the SIF assessment.

Workplace Standards Receipts Designated For State Match

Addition 2012 Handbook: 2013 Budget: p. D-231

Any excess receipts that are appropriated to the Workplace Standards program and that are available may be used by the Department as match for any federal programs requiring a State match.

Explanation

The FY 2013 Budget Recommendation includes new language to provide the department with greater flexibility to provide the State match for federal programs from the receipts from fines and penalties received by the Workplace Standards program. The Workplace Standards program generated approximately $15 million in receipts in FY 2011, and anticipates collecting $12.6 million in FY 2012 and $10.6 million in FY 2013 (page C-6 and C-14). Workplace Standards is responsible for administering and enforcing a wide variety of labor laws and regulations including the minimum wage law, overtime wage rates and employment of

Department of Labor and Workforce Development FY 2012-2013 Significant Languages Changes (Cont’d)

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minors rules as well as the Prevailing Wage Act. Revenue generated includes fines and penalties assessed by the department in the enforcement of these laws, as well as licensing and renewal fees for businesses which are statutorily required to be licensed by the department and inspections fees for certain commercial equipment.

Workforce Initiatives and Employment Development Receipts

Transfer of Language 2012 Handbook: p. B-186 2013 Budget: p. D-234

Receipts derived from Workforce Initiatives and Employment Development and any unexpended balance at the end of the preceding fiscal year are appropriated for costs related to that program, subject to the approval of the Director of the Division of Budget and Accounting.

Explanation

The FY 2013 Budget Recommendation transfers, from the Department of Treasury to the Department of Labor, language authorizing revenue generated from training fees paid to the Office of Workforce Initiatives and Employment Development to be appropriated for the cost of the Office’s activities. Information included in the FY 2013 Budget Recommendation (pages D-233, and D-379) indicates that the Executive plans to move the Office from the Department of the Treasury to the Civil Service Commission in, but not of, the Department of Labor and Workforce Development (page D-379). The Office compiles information on the human resources and training needs of State government; provides online training courses to employees of State government agencies; offers basic guidance and referrals through the Employee Advisory Services; and investigates and hears appeals related to Equal Employment Opportunity and Affirmative Action requirements for public employers and employees. State departments and municipalities pay fees to the Office to utilize its services. The Office instituted an annual fee for State agencies, based on the number of personnel the agency employs, for utilization of its online training system (in FY 2012). Additionally, agencies pay on a fee for service basis for the Employee Advisory Service, a confidential assessment, counseling and referral health services available to State and municipal employees. Approximately $977,000 in revenue is anticipated from these fees in FY 2013.

Department of Labor and Workforce Development FY 2012-2013 Background Paper: Unemployment Insurance - Overview and Current Status

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Budget Pages.... C-23, D-217, D-222 to D-224

HISTORY/OVERVIEW

The Social Security Act of 1935 authorized a federal-state unemployment insurance (UI)

system to provide temporary partial wage replacement to individuals who lose their jobs through no fault of their own. New Jersey’s unemployment insurance system, established by the “unemployment compensation law,” R.S.43:21-1 et seq., began paying benefits to laid off workers in 1939. The main goals of the UI system are to alleviate the hardship of involuntary unemployment on workers and their families and to stabilize the economy. As stated in the New Jersey “unemployment compensation law,” the system is designed to meet these goals by facilitating "the systematic accumulation of funds during periods of employment to provide benefits for periods of unemployment, thus maintaining purchasing power and limiting the serious social consequences of poor relief assistance." Nationally, the UI system operates as a federal-state partnership. The federal program provides broad requirements for eligibility and states determine the details of the operation and administer their programs within the minimum requirements established by federal law. CURRENT STATUS

The UI system has experienced very high volumes of benefit claims due to steadily rising unemployment, from 4.6%, in January, 2008, to a high of 10% in December, 2010 and has more recently begun to decline to a current rate of 9%. As a result, the State’s unemployment insurance compensation trust fund account (UI trust fund) was completely depleted as of March 5, 2009. On this date, the State commenced borrowing from the federal Unemployment Trust Fund to pay State UI benefits and, as of April 23, 2012, has an outstanding loan balance of $1.83 billion. Employers are currently paying higher federal and State UI taxes and an additional annual assessment to reimburse the federal government for the principal and interest of the loan. Relying upon the additional payments and increased tax revenue (both to be discussed in more detail in this paper), the department estimates that the State will pay off the entire loan balance by June 30, 2013.

States are permitted to borrow from the federal Unemployment Trust Fund to pay state

UI claims, but must return the funds on a scheduled basis and must pay interest on this loan. The federal American Recovery and Reinvestment Act (ARRA) of 2009 contained a provision that waived the accrual of interest on loans issued from the federal Unemployment Trust Fund to states until December 31, 2010.

Federal law provides that, when a state has borrowed from the federal government, if

the loan is still outstanding two years after the state first borrowed the money, then a reduction to the employers’ Federal Unemployment Tax Act (FUTA) credit is initiated to pay back the principal of that loan. The current FUTA tax rate is 6.2% on the first $7,000 in wages. This rate is offset with a credit of 5.4%, yielding a net tax of 0.8%. However, since New Jersey is in deficit to the federal government, the 5.4% credit is gradually phased out (at 0.3% per year) and

Department of Labor and Workforce Development FY 2012-2013 Background Paper: Unemployment Insurance - Overview and Current Status (Cont’d)

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employers have begun to pay more federal UI taxes as of January 1, 2012. This additional cost equals approximately $21 per employee in 2012 and will increase each year until the principal on the loan is repaid. The department anticipates the additional federal tax will equal $42 per employee in 2013 and $63 per employee in 2014.

Additionally, the State can pay back the principal of the loan through State UI taxes or

disbursements from the State General Fund. The State has chosen to rely on the excess revenue collected from the State UI taxes to repay loan principal. Therefore, as the State UI trust fund collects revenue in excess of the benefits it is paying to the unemployed, the State pays that excess revenue to the federal government to pay down the principal of the loan. Information on these loan repayments appears at www.treasurydirect.gov/govt/reports/tfmp/tfmp_utf.htm.

Title XII of the Social Security Act (42 U.S.C. s.1322) prohibits the State from paying

back the interest on the loan with State UI tax revenue. State statute establishes a system for paying back any interest accrued on federal UI loans. Section 16 of P.L.1984, c.24 (N.J.S.A.43:21-14.3), provides that the Commissioner of Labor and Workforce Development must, on or before June 30 of each year, review the amount of interest owed to the United States Treasury for advances made from the federal Unemployment Trust Fund to pay State UI benefits and determine if the Unemployment Compensation Auxiliary Fund (UCAF) has the needed funds to repay the interest to the federal government by September of that calendar year. If it is determined by the commissioner that the UCAF has insufficient funds to repay the accrued interest, then the statute provides for a special assessment on employers, except governmental entities and nonprofit organizations. The assessment is determined by the department as a ratio of the amount of interest owed to 95 percent of the total employer contributions payable for UI on taxable wages during the preceding calendar year. This ratio is then applied to the individual employer’s amount of unemployment contributions payable in the previous year to determine the amount of assessment.

N.J.S.A.43:21-14.3 also establishes the “Unemployment Compensation Interest

Repayment Fund” to “be used solely for the purpose of paying interest due on any advances made from the federal Unemployment Trust Fund under Title XII of the Social Security Act (42 U.S.C. s.1321 et seq.)” should the commissioner determine that there are insufficient funds in the UCAF. As stated above, the money borrowed from the federal government was interest free until January 1, 2011, but after this time the loan accrued interest and the first interest payment was due on September 30, 2011. The interest due equaled approximately $48 million and in June, 2011, the commissioner determined there were not enough funds in the UCAF and an assessment on employers was made.

Federal Loan Interest Assessment Statements were mailed in July, 2011, to 230,000

employers in the State. The average cost of the assessment, according to the department, was approximately $23 per employee and was due to the State on August 14, 2011. According to the department, although a majority of the employers paid the assessments, the entire $48 million was not collected; the uncollected portion was borrowed from the General Fund. The next interest payment will be due on September 30, 2012 and, according to the department, will equal approximately $60 million.


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In addition to the cost of the interest assessment and the increased federal taxes charged employers in FY 2012, the State UI tax rate has also increased over the past year. As is discussed in more detail below, the payment of State UI benefits are generally supported through the taxes collected from employers and employees which are deposited in the UI trust fund. The tax rate is variable and dependent upon the amount of funds available in the UI trust fund. If the fund is low, the statute requires an increase in taxes to increase revenue and replenish the fund. Due to the low level of funds in the UI trust fund, the UI tax rate was automatically increased on July 1, 2009, garnering an additional $340 million in employer contributions in FY 2010. Because of continued high unemployment and the effects of the recession, the tax rate was scheduled to reset to its highest rate on July 1, 2011. To prevent a large tax hike in FY 2011 and FY 2012, there were several legislative actions that limited the tax increase and made certain changes to the UI system. P.L.2010, c. 37 and P.L. 2011, c.81 were both enacted to provide tax relief for employers during FY 2011 and FY 2012. The laws amended N.J.S.A.43:21-7 to impose lower tax rates for FY 2011, FY 2012, and FY 2013 than would have been imposed under statute. The laws also amended the tax columns to allow for the accumulation of larger reserves in the UI trust fund, and established a UI Task Force charged with conducting a comprehensive review and assessment of the State’s UI system.

In summary, the current UI trust fund is in deficit to the federal government, but the Legislature has acted to restore the UI trust fund with the needed revenue through changes in the tax structure described in more detail subsequently in this paper. A UI Task Force has been established and has issued two reports on the status of the fund and recommendations to stabilize the fund and improve the UI system. The changes to the tax structure and the UI system should replenish the UI trust fund and restore a surplus in the next several years to prevent the depletion of the fund in a future recession. Until the UI trust fund is again in surplus, the employers of the State will continue to pay both the interest assessment and the additional federal tax. The department has estimated that both of these additional payments should be complete by 2014.

FUNDING

UI is funded jointly through the federal unemployment tax, more commonly referred to

as the FUTA tax, for the act under which it was established, levied on employers, and a State UI tax levied on employers and employees. All of the revenues collected from these taxes are deposited into a variety of specific fund accounts in the federal Unemployment Trust Fund.

Federal Funding

FUTA is used primarily to finance administrative costs of the system, fund loans to states

and cover extended benefits. Revenues collected from FUTA are deposited into the employment security administration account (ESAA), the extended unemployment compensation account (EUCA) and the federal unemployment compensation account (FUA) located in the Federal Unemployment Trust Fund.

The amount of tax levied under FUTA is established in Section 3301 of the Social

Security Act. Section 3301 imposes a payroll tax for every “covered service,” equal to a specified percentage of total wages paid during a calendar year. FUTA currently provides that


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the tax rate is 6.2 percent. Wages subject to the tax are defined in Section 3306(a) of FUTA as the first $7,000 paid to an employee in a calendar year. However, FUTA provides for a tax credit of up to 5.4 percent for employers who pay state taxes on time for “covered services,” as defined under FUTA, in an approved State UI program. Thus, the effective FUTA tax rate is 0.8 percent or $56 ($7,000 x 0.008) per employee. However, when the State is in arrears to the federal government, the offset is reduced by 0.3 percent per year. Thus the current effective FUTA tax rate for New Jersey is 1.1 percent or $77 per employee and is expected to rise to 1.4 percent in 2013. The total amount of FUTA tax collected from wages in New Jersey for 2010 was approximately $198.2 million.

State Funding

In addition to the federal tax, state governments also levy payroll taxes on employers

and in three states, including New Jersey, payroll taxes on employees. These taxes are deposited into the State UI trust fund within the federal Unemployment Trust Fund. Each state has its own UI trust fund account within the federal Unemployment Trust Fund. For reports of these accounts, please see http://www.treasurydirect.gov/govt/reports/tfmp/ tfmp_utf.htm.

The New Jersey “unemployment compensation law” establishes the State tax rate for

both employers and employees. The tax rate is applied to income earned up to the statutorily defined taxable wage base (N.J.S.A.43:21-7). The taxable wage base is 28 times the statewide average weekly wage (SAWW) for all covered workers. The SAWW is calculated annually by the Department of Labor and Workforce Development. The taxable wage base for 2012 is $30,300.

Employee Contribution

In New Jersey, the tax rate on the employee is levied at a rate of 0.3825% on the first

$30,300 of income earned. Thus, in 2012, the maximum employee contribution is approximately $116 per employee (0.003825 x 30,300). The total amount of employee contributions in New Jersey in FY 2012 is estimated to be approximately $306 million.

Employer Contribution

In New Jersey, the tax rate on an employer is determined by that employer’s experience

and the annual experience of the State UI trust fund. The experience rating tax table (following, N.J.S.A. 43:21-7), dictates the tax rate of the employer. The tax rate is dependent upon the annual experience of the State UI trust fund, as calculated through the determination of the overall fund reserve ratio. The overall fund reserve ratio is determined on March 31 of each year by dividing the fund balance on that date by the taxable wages from the previous calendar year. The fund reserve ratio is used to determine the tax column that will be applied to employers in the next fiscal year. The tax columns are denoted “A” through “E, with “A” being the lowest tax rate and the most advantageous to the employers and “E” being the highest tax rate.


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The tax rate is currently in the “D” column and will shift to the “E” column on July 1, 2012. From July 1, 1998 to July 1, 2009, the tax rate was in the “A” column and system wide tax increases were avoided. Tax increases were avoided partially because of legislative enactments (P.L.1984, c.24, P.L. 1996, c.30; P.L.1997, c.263; P.L.2001, c.152; P.L.2002, c.13; P.L.2003, c.107; and P.L.2004, c.45) amending the experience rating tax table. Each new tax table authorized by these enactments established a lower reserve ratio in order to maintain the lowest tax rate for employers. The current prolonged high unemployment along with diversions from the UI trust fund led to a depletion of the UI trust fund. In order to prevent a similar problem in any future recession, the Legislature enacted P.L.2011, c. 81 to amend the experience rating table.

P.L.2011, c. 81 increased the UI trust fund reserve ratios which are used to set employer

UI tax rates to require larger reserves in the UI trust fund before employer UI taxes are reduced. The intent of these changes is to build up the UI trust fund reserves sufficient to reduce the likelihood that any future recession will result in the deep UI trust fund deficits. Following is the current experience rating table, pursuant to P.L.2011, c.81:

EXPERIENCE RATING TAX TABLE

Fund Reserve Ratio1 Employer 3.50% 3.00% 2.5% 2.0% 1.99% Reserve and to to to and Ratio2 Over 3.49% 2.99% 2.49% Under Tax Column A B C D E Positive Reserve Ratio: 17% and over 0.3 0.4 0.5 0.6 1.2 16.00% to 16.99% 0.4 0.5 0.6 0.6 1.2 15.00% to 15.99% 0.4 0.6 0.7 0.7 1.2 14.00% to 14.99% 0.5 0.6 0.7 0.8 1.2 13.00% to 13.99% 0.6 0.7 0.8 0.9 1.2 12.00% to 12.99% 0.6 0.8 0.9 1.0 1.2 11.00% to 11.99% 0.7 0.8 1.0 1.1 1.2 10.00% to 10.99% 0.9 1.1 1.3 1.5 1.6 9.00% to 9.99% 1.0 1.3 1.6 1.7 1.9 8.00% to 8.99% 1.3 1.6 1.9 2.1 2.3 7.00% to 7.99% 1.4 1.8 2.2 2.4 2.6 6.00% to 6.99% 1.7 2.1 2.5 2.8 3.0 5.00% to 5.99% 1.9 2.4 2.8 3.1 3.4 4.00% to 4.99% 2.0 2.6 3.1 3.4 3.7 3.00% to 3.99% 2.1 2.7 3.2 3.6 3.9 2.00% to 2.99% 2.2 2.8 3.3 3.7 4.0 1.00% to 1.99% 2.3 2.9 3.4 3.8 4.1 0.00% to 0.99% 2.4 3.0 3.6 4.0 4.3 Deficit Reserve Ratio: -0.00% to -2.99% 3.4 4.3 5.1 5.6 6.1 -3.00% to -5.99% 3.4 4.3 5.1 5.7 6.2 -6.00% to -8.99% 3.5 4.4 5.2 5.8 6.3 -9.00% to-11.99% 3.5 4.5 5.3 5.9 6.4 -12.00% to-14.99% 3.6 4.6 5.4 6.0 6.5 -15.00% to-19.99% 3.6 4.6 5.5 6.1 6.6


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-20.00% to-24.99% 3.7 4.7 5.6 6.2 6.7 -25.00% to-29.99% 3.7 4.8 5.6 6.3 6.8 -30.00% to-34.99% 3.8 4.8 5.7 6.3 6.9 -35.00% and under 5.4 5.4 5.8 6.4 7.0 New Employer Rate 2.8 2.8 2.8 3.1 3.4 1Fund balance as of March 31 as a percentage of taxable wages in the prior calendar year. 2Employer Reserve Ratio (Contributions minus benefits as a percentage of employer's taxable wages).

In addition to determining what column will be used to calculate the tax rate on all

employers, the employer’s individual reserve ratio (left hand column in table) is calculated through an experience rating system to determine that employer’s particular rate. To determine the employer’s ratio, the benefits paid out on account of the employer are subtracted from all the contributions an employer has attributed to the State UI trust fund and then that amount is divided by the amount of the employer’s taxable wages (average of all payroll over the previous three years). The more charges against the account, the higher the tax rate; the fewer claims against the account, the lower the tax rate. The purpose of the experience rating system is to ensure an equitable distribution of costs of the system among the employers and to encourage employers to stabilize their workforce.

Depending on their experience rating, New Jersey employers are taxed (in FY 2012) on

a scale from 0.06% to a maximum of 6.4% on the first $30,300 (2012) paid in wages, a range from a minimum of $182 to a maximum of $1,939 per employee. New employers, since they have no experience, begin at a tax rate of 0.31%, or $939 a year, per employee. The average tax rate on taxable wages ($29,600) in 2011 was 2.91%, or $861 per employee. The total amount of employer contributions in New Jersey for FY 2012 is estimated to be $2.4 billion.

Although the majority of employers in the State contribute to the UI trust fund, there are

some noteworthy exemptions. The State and any of its governmental entities, including schools, municipalities and local governments, and a majority of non-profit entities do not pay into the UI trust fund on a forward basis through taxes but rather are “reimbursable” employers (N.J.S.A. 43:21-7.2 and 7.3). These entities reimburse the UI trust fund for any charges on their account in the previous calendar year.

ELIGIBILITY

UI is available to individuals in New Jersey, who, in most instances, have lost their jobs through no fault of their own. Persons who are not eligible for UI include those who: voluntarily left their employment; were terminated for “gross misconduct;” are not employed in a “covered service,” as defined in FUTA; certain corporate officers and owners of businesses; and those who have not worked enough hours or for a sufficient amount of time to qualify.

Additionally, individuals must have earned at least 20 times the minimum wage for at least 20 weeks or earned at least 1,000 times the State hourly minimum wage during their base year. The base year is either: the first four calendar quarters of the last five completed quarters before the date of the claim; the four most recently completed calendar quarters before the date of the claim; or the three most recently completed calendar quarters before the date of the claim and the weeks in the filing quarter up to the date of the claim.


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BENEFITS

Once an individual’s eligibility for UI is established, the level of benefits must be

determined. In New Jersey, weekly UI benefits are 60 percent of a laid-off worker’s weekly wages (plus dependent allowances of up to 15 percent for 3 or more dependents), up to 57 percent of the Statewide average weekly wage (SAWW) for all workers, or a maximum weekly benefit of $611 in 2012. The average New Jersey weekly benefit was $393 in 2011, fourth highest in the nation, but twenty-sixth in the nation as a percentage of average wages. The total amount of regular benefits paid to workers in New Jersey in 2011 was $2.65 billion.

Duration of Benefits

Individuals may continue to collect unemployment benefits for up to 26 weeks in New

Jersey. To remain eligible for benefits during this time, the individual must: report to the local One-Stop Career Center as scheduled; be able and available to work; actively seek work; not refuse any offer of suitable work and claim the weekly unemployment benefits on the Internet or by telephone. In New Jersey, in 2011, 216,464 individuals (57% of all claims) exhausted their regular benefits, seventh highest in the nation. The average claim duration was 20 weeks, sixth longest in the nation. Extended Benefits

There are four means by which an individual can access unemployment benefits beyond the regular 26 week duration. All of these benefits are cumulative and are in addition to the original 26 weeks of benefits. Two are permanently established in statute: the jointly funded federal-state extended benefits program and the state funded additional benefits during training program. Two are temporary in nature and are generally issued as a result of either an act of Congress or an enactment at the State level: Federal Temporary Extension of Unemployment Benefits and the State Emergency Unemployment Benefits Program. Federal/State Extended Benefits Program

The joint federal-state extended benefits (EB) program is triggered when states reach

certain levels of unemployment. The regular EB program provides for 50 percent of regular benefits or an additional 13 weeks of benefits, whichever is less, for workers. The “high EB” program provides for 80 percent of regular benefits or an additional 20 weeks of benefits. These benefits are equally funded from a State UI trust fund and from the federal extended unemployment compensation account (50/50). In New Jersey, the trigger for regular EB is an unemployment rate of at least 6.5% in each of the most recent three months, which must also represent at least 110% of the rate for the corresponding three-month period in either of the previous two years. If the average total unemployment rate reaches 8% and is at least 110% of the rate for the corresponding three-month period in either of the previous two years, New Jersey qualifies for “high EB,” 20 weeks or 80% of regular benefits.

Most recently, New Jersey initially met the qualifications to trigger 13 weeks of regular

EB in the week ending March 7, 2009. However, due to high unemployment, effective May 3,


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2009, New Jersey qualified for 20 weeks of “high EB.” As discussed in the above paragraph, the requirements for the State to qualify for, or “trigger,” high EB is a comparison between the current UI rate and the UI rate two years prior. However, due to the prolonged high unemployment rates in the State, this qualification definition no longer made the State trigger “high EB” and would cease the payments of EB to claimants in the State. Because many states were also faced with the expiration (or “trigger off”) of their EB programs, federal legislation was enacted (Public Law 111-312) allowing states to change their laws and provide a longer period of “look back” or comparison for UI rates. As it currently stands, New Jersey can “look back” and compare its current UI rate to that which existed three years prior, as opposed to two years prior.

The department estimates that, using the three year “look back,” New Jersey will

“trigger off” EB during May, 2012. At that time, EB payments will be phased out over three weeks.

In order to provide greater relief to the states, the American Recovery and Reinvestment

Act (ARRA) of 2009 includes a provision that eliminates the required State contribution for EB. Pursuant to the original language contained in ARRA, the 100 percent federal payment would have ended January 1, 2010; however, subsequent legislation, most recently Public Law 112-96, the “Middle Class Tax Relief and Job Creation Act of 2012” extended the 100 percent federal funding until December 31, 2012. The total amount of extended benefits paid to workers in New Jersey in 2011 was $692.4 million. Previously, workers received $535 million in 2009 and $607.4 million in 2010 through EB, all of which was fully funded with federal dollars.

Federal Temporary Extension of Unemployment Benefits

The second means to provide additional UI benefits are temporary extensions of unemployment compensation (TEUC) through an Act of Congress. Most recently Congress enacted the “Middle Class Tax Relief and Job Creation Act of 2012” resulting in the four currently active TEUCs, more commonly known as “Tiers.” The total amount of TEUC benefits paid to workers in New Jersey in 2011 was $2.9 billion. Additionally, workers received $2.7 billion in 2009 and $4.0 billion in 2010 through TEUC benefits, all of which was fully funded with federal dollars.

The Tiers are of varying duration with various qualifying requirements, as follows: Tier I is for 20 weeks of additional benefits, for claims filed prior to September

2, 2012 and for 14 weeks for claims filed between September 2, 2012 and January 2, 2013;

Tier II is for 14 weeks of additional benefits for individuals in all states for claims filed prior to June 1, 2012, but, for claims filed between June 1, 2012 and January 2, 2013, only individuals in states in which the unemployment rate reaches or exceeds a three month average of 6.0% qualify for benefits (New Jersey will most likely continue to qualify for Tier II until January 2, 2013);

Tier III is for 13 weeks of additional benefits for individuals in all states in which the unemployment rate reaches or exceeds a three-month average total unemployment rate of at least six percent for all claims filed prior to June 1,


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2012, but for claims filed after June 1, 2012, the act increases the three month average unemployment rate states must meet from 6.0% to 7.0% and, from September 2, 2012 until January 2, 2013, the act reduces the weeks paid to individuals in the qualified states from 13 weeks to nine weeks (New Jersey will most likely continue to qualify for Tier III until January 2, 2013);

Tier IV also extends additional benefits for claims filed until January 2, 2013; however, there are varying qualifications for individuals in different states. In New Jersey, individuals will be able to access six weeks of Tier IV benefits, until at least September 1, 2012. However, for claims filed between September 2, 2012 and January 2, 2013, individuals will receive 10 weeks of benefits only if New Jersey still has an unemployment rate of 9% or more. If New Jersey dips below this percentage, no new Tier IV claims will be approved after September 1, 2012.

State Emergency Unemployment Benefits Program

The third means by which individuals can continue their benefits beyond the initial 26

week period are State emergency unemployment benefits programs. While such a program is not currently active, in the past, the State has statutorily authorized additional benefits through these emergency programs. This has occurred twice in the previous 15 years, from December 30, 2001 to March 9, 2002 and from June 2, 1996 to March 1, 1997. During the 2001/2002 extension, benefits were granted for 10 weeks, while the 1996/1997 extension provided up to 50% of the original benefit amount or 13 weeks, whichever was less. Additional Benefits during Training

The fourth means by which individuals can continue their benefits beyond the initial 26 week period is the State-funded Additional Benefits during Training program (ABT). If approved by a State counselor, eligible individuals may enroll in an approved training program and receive their UI benefit for an additional 26 weeks. These funds are provided from the State UI trust fund. The total amount of ABT paid to workers in New Jersey in 2011 was $27.67 million, significantly more than the $15.1 million in ABT benefits paid in 2010 and the $5.2 million paid in 2009, but more in line with the expenditures for ABT in the years prior to 2009 before the recession, which were as high as $45.7 million in 2004. Current Status of Benefits

All of these extensions, EB, TEUC, and ABT, are cumulative and are provided to an individual in the following order: TEUC first; then EB; then ABT. Therefore, an individual who became unemployed in January, 2010 would be eligible for, in addition to the original 26 weeks of regular UI benefits, an additional 53 weeks of TEUC, then 20 more weeks of “high EB,” for a total of 99 weeks of successive benefits. Additionally, certain individuals are eligible for an additional 26 weeks of ABT. These individuals can access up to 118 weeks of successive benefits, so long as they are enrolled in an approved training program. However, individuals who filed an unemployment claim on any date past July, 2010, may not access the 99 weeks of benefits, due to the State “triggering off” EB and the changing qualifications for all Tiers of the TEUC.


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CONCLUSION The unemployment compensation program is a state/federal partnership that has operated since 1935, the midst of the Great Depression. The federal government establishes the parameters of the program and the states develop, implement, administer and monitor each program. The costs of the States’ programs are funded jointly by federal and State taxes.

Currently, due to the recent prolonged economic recession and its aftermath, the unemployment compensation system is under financial stress nationwide, including in New Jersey. State UI programs nationwide are relying on federal dollars through the extension of benefits and the borrowing of federal dollars to support their state trust funds. New Jersey is one of 29 states, plus one territory, that owe the federal UI account almost $41 billion as of April, 2012. In all likelihood, even with the decrease in unemployment that the State and the nation has experienced in the past few months, the State will continue to borrow and repay the federal UI account for at least two more years through continued higher taxes on employers, continued assessments to repay the interest owed on the borrowed funds and an increase in the federal effective tax rate. It is presumed that the State will then begin to replenish the UI trust fund, and changes made by the Legislature to fortify the fund will enable it to achieve and maintain a surplus.

OFFICE OF LEGISLATIVE SERVICES

The Office of Legislative Services provides nonpartisan assistanceto the State Legislature in the areas of legal, fiscal, research, bill

drafting, committee staffing and administrative services. It operatesunder the jurisdiction of the Legislative Services Commission, a biparti-san body consisting of eight members of each House. The ExecutiveDirector supervises and directs the Office of Legislative Services.

The Legislative Budget and Finance Officer is the chief fiscal officer forthe Legislature. The Legislative Budget and Finance Officer collects andpresents fiscal information for the Legislature; serves as Secretary to theJoint Budget Oversight Committee; attends upon the AppropriationsCommittees during review of the Governor's Budget recommendations;reports on such matters as the committees or Legislature may direct;administers the fiscal note process and has statutory responsibilities forthe review of appropriations transfers and other State fiscal transactions.

The Office of Legislative Services Central Staff provides a variety oflegal, fiscal, research and administrative services to individual legisla-tors, legislative officers, legislative committees and commissions, andpartisan staff. The central staff is organized under the Central StaffManagement Unit into ten subject area sections. Each section, under asection chief, includes legal, fiscal, and research staff for the standingreference committees of the Legislature and, upon request, to specialcommissions created by the Legislature. The central staff assists theLegislative Budget and Finance Officer in providing services to theAppropriations Committees during the budget review process.

Individuals wishing information and committee schedules on the FY2013 budget are encouraged to contact:

Legislative Budget and Finance OfficeState House Annex

Room 140 PO Box 068Trenton, NJ 08625

(609) 292-8030 • Fax (609) 777-2442

DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT - New Jersey Legislature

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