Interim Joint Committee on Labor and Industry


Minutes of the<MeetNo1> 4th Meeting

of the 2005 Interim


<MeetMDY1> September 14, 2005


The<MeetNo2> 4th meeting of the Interim Joint Committee on Labor and Industry was held on<Day> Wednesday,<MeetMDY2> September 14, 2005, at<MeetTime> 2:30 PM, at the Convention Center Kentucky Dam Village State Park in Gilbertsville, KY<Room>. Representative J R Gray, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Alice Kerr, Co-Chair; Representative J R Gray, Co-Chair; Senators Brett Guthrie, Denise Harper Angel, Jerry P Rhoads, Richie Sanders Jr, and Ken Winters; Representatives John A Arnold Jr, Joe Bowen, C B Embry Jr, Charlie Hoffman, Dennis Horlander, Jim Stewart III, and Brent Yonts.


Guests:  Mr. Andy Frauenhoffer, Deputy Commissioner, Department of Workforce Investment; Jody Richards, Speaker of the House of Representatives; Representatives Perry Clark, Fred Nesler, and Rocky Adkins, House Majority Floor Leader.


LRC Staff:  Betty Davis, Adanna Hydes, Melvin LeCompte; and Ashli Schmidt, Committee Assistant

Co-Chair Gray welcomed committee members to Marshall County and the annual Labor Management Conference.  Co-Chair Gray then asked for a motion to approve the minutes from the July meeting. The motion was made by Rep. Yonts and seconded by Sen. Rhoads.

Co-Chair Gray informed the committee that the next meeting will be held on Thursday, October 13 at 9:30 a.m. at the Kentucky Horse Park in Lexington.  The October agenda will consist of a report, presented by Bill Emrick, Executive Director of the Office of Workers’ Claims, on the work of the Governor’s Task Force on Workers’ Compensation for Jockeys and other horse track employees.

The October agenda will also include an update on AIK Comp by officials from the Office of Insurance.  Co-Chair Gray then directed members to a newspaper article included in the folder addressing the court ruling of AIK Comp, which upheld the ‘joint and several liability’ issue.  The Office of Insurance had informed members that this issue was crucial to their efforts to resolve the problems associated with AIK Comp at the August 14 meeting.

Co-Chair Gray then noted that a ruling was made on the Bartram cases, dealing with black lung.  The Supreme Court upheld the Court of Appeals decision, and the Office of Workers’ Claims is in the process of amending their administrative regulations, to permit an additional x-ray interpretation to be considered by an ALF in a claim for black lung benefits.  Co-Chair Gray stated that the committee would continue to monitor the situation. 

Next, Co-Chair Gray stated that the topic on today’s agenda is unemployment insurance and an update and outlook on the unemployment insurance trust fund. He stressed the financial erosion of the trust fund, stating the trust fund has not faced this level of difficulty since the early 1980’s.  He stated it is very likely the committee will be considering legislation dealing with this issue in the 2006 General Assembly.  Co-Chair Gray then introduced Andy Frauenhoffer, Deputy Commissioner of Workforce Investment.

Mr. Frauenhoffer gave a brief background on the Unemployment Insurance Trust Fund and stated that the current balance of the UI Trust Fund is $306 million, which is an increase from the 2004 year end balance of $267 million. The increased balance is due to the tax rate schedule change from “B” to “C”, as well as the quarterly cycle of contributions and benefits.  He also stated the slight increase was helped by an infusion in 2002 of the Reed Act Distribution of $103.8 million.  If the Reed Act dollars were excluded, the Trust Fund Balance would have decreased by over $493 million since it’s peak in 2000.  Mr. Frauenhoffer noted the Reed Act funds 25% of the balance in 2002.

Mr. Frauenhoffer then stated that the Mercer Model, which is used in economic analysis projection, shows that the UI Trust Fund will become insolvent in 2009, and possibly as early as 2008, if no changes in the program are made. Mr. Frauenhoffer stated the U.S. Department of Labor recommends that states maintain a Trust Fund level adequate to cover twelve months of benefit payments based on the average of the states three historically highest cost years.  To measure the solvency of the trust fund an Average High Cost Multiple (AHCM) is used.  Mr. Frauenhoffer showed a graph comparing Kentucky’s Trust Fund Adequacy to the surrounding states using the AHCM formula.  Kentucky ranks low at .29 or three and a half months of benefits. Of the surrounding states, only Ohio, Missouri, and Illinois were lower, with Missouri and Illinois having insolvent UI trust funds.

Mr. Frauenhoffer then addressed the question of what happens with the UI Trust Fund becomes insolvent. If this were to happen, Kentucky would borrow money to pay the benefits, either from the Federal Government or a private sourcing.  Compared to the surrounding states, Kentucky has a low Average Weekly Wage of $622.32, while the Average Weekly Benefit Amount of $257.92 is above average. 

Mr. Frauenhoffer then discussed the current situation, stating a continuing “gap” between contributions to the Fund and benefits being paid. The Mercer Model projects this trend will continue, unless changes to the program are made.

Currently Mr. Frauenhoffer stated the immediate objective is to avoid trust fund insolvency over the next three to four years. To avoid potential insolvency in 2008, statutory changes will need to be made in adequate time to positively impact the Trust Fund balance.  Over time, the objective is to rebuild the Trust Fund, and maintain a trust fund level that will assure solvency over the long term.  He stated to achieve this, there will have to be an effort between businesses and labor to solve the issue, similar to the 1982 legislation. 

Mr. Frauenhoffer then discussed certain changes to consider. In the area of contributions, changes included increasing the wage base from the current $8,000 to a fixed increase year to year and or index to the wage base, increase the trigger levels of the Trust Fund balance for rate schedule changes, eliminate voluntary contributions, and lastly revisions to the rate schedules.  In the area of benefits, this included implementing a one week wait period for benefits, adjusting the Maximum Weekly Benefits Amount (MWBA) to a percent less than the current 62%, freeze the MWBA at current level until Trust Fund balance reaches a specific level, and restore the benefit calculation percent back to pre-existing levels.

Co-Chair Gray thanked Mr. Frauenhoffer for his presentation and recognized members for questions. Rep. Yonts asked which state will pay if hurricane victims come to Kentucky and file for unemployment benefits. Mr. Frauenhoffer stated that Kentucky is working with the U.S. Department of Labor to assist Alabama, Louisiana, and Mississippi, and the charges will be filed back to the state of unemployment.  The U.S. Department of Labor will also reimburse the state for administrative costs.

Rep. Yonts then asked if the decreased trust fund is a reflection of a poor economy.  Mr. Frauenhoffer stated the economy was not a major cause. 

Rep. Bowen asked if abuse of the UI system could contribute to the trust fund problem and asked if there should be closer scrutiny.  Mr. Frauenhoffer stated he did not have exact figures dealing with that , but there is SUTA legislation, which gives civil and criminal penalties to such crimes.

Rep. Yonts asked if there would be a legislative proposal dealing with the UI Trust Fund by the end of the year.  Mr. Frauenhoffer stated that at the end of October the situation will be evaluated, and that Co-Chairs Gray and Kerr have requested legislation. 

Co-Chair Kerr stated she appreciated everyone’s attendance to the conference there being no further business, the meeting was adjourned.