DIRECTIVE	:	UIS INFORMATION BULLETIN NO. 13-94
TO	:	ALL REGIONAL ADMINISTRATORS
FROM	:	MARY ANN WYRSCH Director Unemployment Insurance Service
SUBJECT	:	Administrative Finance Initiative (AFI) Description of Current Proposal

Background. UIS Information Bulletin No. 9-94, dated April 13, 1994, provided the new AFI calendar reflecting a one-year delay in the Report to Congress to give the Unemployment Insurance Service (UIS) and the States adequate time for more analysis and more discussions on the proposed new system. This UIS Information Bulletin seeks to contribute to that effort by describing the proposed new system in simple terms. A separate and more detailed AFI Reference Report will also be available for individuals wishing to know more de-tailed information about the formula or any of its components.

The current proposal was developed by UIS staff looking at various options and discussing these options with an ICESA AFI work group. Three meetings were held with the work group to obtain their comments as UIS was developing the current proposal. It is important to note that the current proposal is for discussion purposes to obtain additional comments and improvements. This proposal has not received any official review within the Department of Labor (DOL), OMB, or ICESA.

The development of the new proposed formula was guided by the following goals, principles, and assumptions:

GOALS

• Provide stable and adequate funding for UI administrative costs prior to the beginning of the fiscal year;

• Develop a mechanism for providing timely and adequate funding for unanticipated workload;

• Allocate resources equitably among the States in a manner which promotes innovative and cost effective practices.

GUIDING PRINCIPLES

• Workload levels should be the primary factor in determining allocations;

• Each State should receive a minimum grant level, regardless of workload;

• Nationally available objective data should be used to determine State costs, with consideration for legitimate cost differences among States;

• Method for allocation of State grants should be simplified;

• Disincentives to productivity and efficiency in the current methodology should be eliminated;

• Innovative and cost effective practices should be promoted in the allocation methodology.

WORKING ASSUMPTIONS

• Changes to the UI Administrative Financing System will not include legislative changes;

• New national cost factors will be developed and used to determine overall funding needs and the distribution of resources among the States.

Description of the Proposed New Formula.

Overview

National Unit Cost (NUC).

The most significant change from the current system to the proposed AFI formula is the use of a national unit cost for benefits and one for tax. This simplifies the UI funding methodology, making budget request the more easily understood and defended. It also promotes productivity since the pricing factors are basically national averages. States with above-average costs will have to find more efficient ways to run their UI programs to meet national averages.

In order for the National Unit Cost concept to work, all workload items must be combined into 2 numbers - a workload number for benefits and a workload number for tax. After extensive analysis, it was determined that the following workload items had significant impacts on the total resource requirements for the States:

 

             Benefits                        Tax
             New Initial Claims              Subject Employers
             Additional Initial Claims       Wage Records
             Continued Weeks Claimed              
             Separation Nonmonetaries                  
             Nonseparation Nonmonetaries               
             Appeals

Cost Differences.

The grant will be adjusted for each State to take into consideration legitimate differences in the cost of doing business. One adjustment will be based on differences in salary and benefit rates. A second adjustment will be made for small States to recognize their lack of economies of scale.

Base Workloads.

The actual weeks claimed from the 3rd lowest year of the previous 10 years is multiplied by the benefits adjustment factor (explained in detail later) to arrive at the adjusted weeks claimed which will represent the base workload for all benefit activities. The tax workload, subject employers and wage records, will be forecast by DOL as they are under the current system.

Contingency.

States will be paid for benefits workload above base on sliding scale beginning at 90% of the State's base benefits unit cost. The payment rate will decline gradually as workload increases.

Attachment A provides a chart showing all of the major components of the proposed new formula. The narrative description will follow the steps shown in that attachment. Throughout the description, the FY 1994 proposed allocation under AFI is used as the reference point for understanding the time-frames used in the development of the allocation.

Attachment B is an example of a specific State calculation for FY 1994.

BASE BENEFITS

DETERMINE STATE BASE WEEKS CLAIMED LEVEL
Determination of a State's base benefit allocation is begun with the following two steps:

• Determine each State's Regular UI, UCFE, and UCX weeks claimed for each of the prior 10 years of actual data available at the time the decision needs to be made for determining the budget request to Congress and choose the 3rd lowest year in that 10 year period. For FY 1994, the AFI system would have utilized FY 1982 to FY 1991 because the Department of Labor began the formulation of its FY 1994 budget request to Congress in May 1992. This step only identifies the level of weeks claimed in the base which is the largest and most important benefits workload. A step described under Benefit Adjustment Factor will explain how initial claims, nonmonetary determinations and appeals will be computed for the base.

• Determine whether the third lowest year described above is at least 70 percent of the average weeks claimed for 8 of the 10 year period after disregarding the highest and lowest years as anomalies. The base weeks claimed will be raised to 70 percent if it is below that figure. This assures a minimum base figure.

The proposed method of determining the State base for benefits is attempting to resolve the following two frequent criticisms from States with regard to the current system:

• States need to know their base allocation sooner than five months prior to the fiscal year. Preliminary allocations were provided to States in May 1993 for the FY 1994 that began in October 1993. States would have known their base allocation by May 1992 under the proposed new formula, one year earlier.

• The budget request submitted to Congress should be formulated from the actual allocations to be made available to the States for that fiscal year. DOL would have needed to know in May 1992 these State allocations for the FY 1994 budget request decision-making under AFI.

BENEFIT ADJUSTMENT FACTOR

The benefit adjustment factor provides the methodology for incorporating the mix of initial claims, nonmonetary determinations and appeals workload into the base. Since the simplified formula has only one benefits unit cost, we convert each State's initial claims, nonmonetaries and appeals workloads into adjusted weeks claimed.

The benefit adjustment factor is arrived at annually for each State by forecasting the benefits workloads of each State in order to utilize the latest relationships between the major workload activities and weeks claimed. These workloads are converted to staffyears using a national workload per position for each workload item. The resulting total benefits staffyears are divided by the weeks claimed staffyears to arrive at the State's own benefit adjustment factor. The national workload per position used was compiled from a survey of States showing actual usage. The following is an example of the computation.

                                         National 
                                         Workload
                          Forecasted      Per                              
                            Workload     Position     Staffyears

New Initial Claims           132,059        1,943          67.97 
Additional Initial Claims    110,944        6,993          15.87 
Continued Weeks Claimed    2,336,249       18,013         129.70  
Separation Nonmons            35,662        1,546          23.07
Nonseparation Nonmons         47,280        3,108          15.21
Appeals                       14,849          339          43.80
                                                          ------
Total                                                     295.62
                                                         
Total Staffyears 295.62     = BAF 2.279
Weeks Claimed Staffyears 129.7

BENEFITS WORKLOAD

The actual weeks claimed from the 3rd lowest year of the previous 10 years is multiplied by the benefit adjustment factor to arrive at the adjusted weeks claimed which will represent the base workload for all benefit activities.

BENEFIT NATIONAL UNIT COST

The national unit cost represents a three year average cost which incorporates all administrative costs for processing the benefits workloads in the States including salaries, personnel benefits, nonpersonal services, and overhead. The national unit cost for any year is the total benefit costs for the year divided by the national benefit workload for that year. An average three-year NUC is used to smooth the year to year variations. Since the FY 1994 Budget Request went forward in May 1992 within DOL, unit costs for FY 1989-91 are used for the FY 1994 AFI calculations. In arriving at the national unit cost for those three years, the FYs 1989, 1990, and 1991 costs were inflated to be in FY 1992 dollars. Later in the discussion there is a description of how the calculated results are increased for inflation to 1994 dollars.

UNADJUSTED BASE BENEFIT GRANT

Each State's adjusted weeks claimed workload is multiplied by the national benefit unit cost to arrive at the State's unadjusted base benefit grant. The same national benefit unit cost is used for calculating each State's unadjusted base benefit grant.

BASE TAX

FORECAST SUBJECT EMPLOYERS
DOL will forecast subject employers and wage record items for the Budget Year for each State. These workloads are relatively stable and can be forecasted for each State with reasonable accuracy. For the two States that are still wage request, New York and Michigan, we also forecast wage record items in order that these two States are properly adjusted in the calculations.

TAX ADJUSTMENT FACTOR

The tax adjustment factor provides the methodology to convert wage record items workload into subject employers to result in an adjusted subject employer workload to represent both workloads. Subject employers and wage record items are converted to staffyears using a national workload per position for each workload item. The resulting total staffyears are divided by the tax staffyears to arrive at the State's own tax adjustment factor. The following is an example:

                                        National
                                        Workload
                         Forecasted       Per
                          Workload      Position    Staffyears 

Subject Employers          105,170           797        131.96 
Wage Record Items       11,207,911       510,513         21.95
                                                        ------
Total                                                   153.91


Total Staffyears 153.91         = TAF 1.166
Subject Employers Staffyears 131.96

TAX WORKLOAD

The tax workload is the number of subject employers forecasted by DOL for the State for the Budget Year, multiplied by the tax adjustment factor to arrive at adjusted subject employers which will represent the combined workload for subject employers and wage record items.

TAX NATIONAL UNIT COST

The tax national unit cost is the same as described above for benefits except that it is derived from the average cost under tax and wage record functions.

UNADJUSTED TAX GRANT

Each State's adjusted subject employer workload is multiplied by the national tax unit cost to arrive at the State's unadjusted tax grant. The same national tax unit cost is used for calculating each State's unadjusted tax grant.

BASE UNADJUSTED STATE GRANT BENEFITS AND TAX

The unadjusted base benefit grant and the unadjusted tax grant are added together to represent the base unadjusted State grant. Up to this point in the calculations, the only reason one State would have more dollars in its grant than another State is that the State has more workload. The same national unit costs for benefits and tax were used in all States.

STATE INDEX FACTOR FOR COST OF LIVING

Since the cost of doing the UI business in one State is more or less expensive than doing the UI business in another State, the unadjusted base grant needs to be adjusted upward or downward based on the cost of living in each State. The most representative adjustment factor available was an index based on State Unemployment Service salary and benefit rates. The index was found to be the most representative for salary and benefits as well as nonpersonal services. The index is computed for each State by dividing each State's UI salary and benefits rate by a national weighted average UI salary and benefits rate.

For example, let us assume that the unadjusted State grant is $20,000,000. If this State had higher salary and personal benefits rates than the national average which resulted in an index of 1.05, then its $20,000,000 would be multiplied by 1.05 to increase its grant to $21,000,000. If another State with a $20,000,000 unadjusted State grant had lower salary and personal benefits rate than the national average which resulted in an index of .95, then its $20,000,000 would be multiplied by .95 to decrease its grant to $19,000,000.

STATE INDEX FACTOR FOR SMALL STATE

This adjustment is not to be confused with an adjustment for inflation which will be covered later in the calculations. This is simply adjusting the grant to reflect the fact that some areas are more or less expensive than others. All States will be increased for inflation in a later computation.

Analysis showed a distinct cost disadvantage for small States regardless of density; however, among those small States, less dense States have more of a disadvantage. Some cost differences are population related--low claims level, high fixed costs, lack of economies of scale, etc. Other differences are density related--more local offices needed, further distances to travel, etc.

Small States were defined as those with a civilian labor force of under 1 million which includes Alaska, Delaware, District of Columbia, Hawaii, Idaho, Maine, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Utah, Vermont, Virgin Islands, West Virginia, Wyoming. States with a civilian labor force closer to 1 million will receive a proportionately smaller adjustment than States with a smaller civilian labor force. Similarly, small States with greater density will be given smaller adjustments than those with lower density.

Since this small State adjustment will be part of the budget formulation for the request to Congress, this adjustment will not be at the expense of the allocation to the other States.

ANNUAL INCREASE FOR INFLATION

In order that the grants keep pace with inflation, the grant will be increased annually by the Gross Domestic Product (GDP) deflator plus 1.3 percentage points. The latter reflects the difference between recent average inflation as measured by the GDP deflator and the average inflation measured by a Census of Government index of State salaries. In the case of FY 1994 grants, a combined two-year inflation factor is used in order to convert the national unit cost in FY 1992 dollars to FY 1994 dollars.

ADJUSTED STATE GRANT BENEFITS AND TAX

This is the State's base allocation for the year after adjustment for the specific cost factors applicable to that State. This is prior to any adjustment for phase-in to the new AFI system.

ADJUSTMENT FOR PHASE-IN

The change to a new allocation formula results in some resources shifting between States relative to the current system. In addition, year-to-year workload changes will cause State grants to rise or fall. The current system has a hold harmless provision for the base benefits functions to assure that no State is reduced more than 20 percent from the prior year for those functions.

Under the AFI approach, a phase-in will initially constrain large year-to-year shifts in State grants. This provision will ensure that a State's funding level will not be lower than 90 percent of the previous year's base allocation. In addition, States experiencing funding reductions will be able to submit proposals to compete for technical assistance grants to help their transition to a more efficient and less costly operation. As a result of constraining the reductions in any year, this will also have the effect of slowing the gain for those States receiving increases under AFI.

STATE BASE GRANT

This is the State's base allocation for tax and benefit operations for the fiscal year. Benefits workload experienced above base will be funded during the year on a quarterly basis.

CONTINGENCY

States will continue to be paid on a unit cost basis for claims workload above base. The current system pays States for contingency workload at a rate that averages nationally 30 to 40 percent below the funding level in base. The lower contingency rate in the current system occurs immediately and remains at the same level for all contingency workload regardless of volume. The proposed AFI contingency system would have a more gradual decrease in funding that should reflect increased productivity due to volume of workload and not fall below 60 percent of the base funding level.

WEEKS CLAIMED ABOVE BASEL LEVEL

To determine what is counted as contingency workload, each State's weeks claimed in base will be distributed by quarter in proportion to the average quarterly distribution in the most recent five years. For example, a State with 2,600,000 weeks claimed in base would have its base distributed as follows based on that State's average experience of the past five years:

           Quarter        Weeks Claimed       Percentage
           Oct-Dec           572,000              22     
           Jan-Mar           780,000              30
           Apr-Jun           624,000              24
           Jul-Sep           624,000              24
                           -------------------------
                           2,600,000             100

The base is distributed in this manner rather than placing 25 percent (straight-line) in each quarter in order to assure that a State that earns contingency for a quarter will also earn its base workload for the entire year. As a result of distributing the State's base by the quarterly percentage of its previous five years, any weeks claimed that exceeds the State's base amount for the quarter is counted as weeks claimed for contingency earnings.

BENEFIT ADJUSTMENT FACTOR

We explained above how weeks claimed in base were multiplied by the benefit adjustment factor to provide for the related initial claims, nonmonetaries and appeals workload in base. Similarly, the contingency weeks claimed are multiplied by the same benefit adjustment factor as used in the base computations to provide for the initial claims, nonmonetaries and appeals related to the contingency workload. Contingency weeks claimed multiplied by the State's benefit adjustment factor will result in contingency workload.

STATE BASE UNIT COST

The unit cost used for computing contingency earnings will be the basic unit cost for that State that has been adjusted for the cost of living, small State adjustment (if applicable), and the annual increase for inflation. In other words, the State's unit cost for contingency computation is the same as used in computing the State's base.

CONTINGENCY PRICING TABLE
         
             % above              % of Base
             Base Wkld            Unit Cost

             First 10%                 90%
             10 -  20%                 80%
             20 -  30%                 70%
             Above 30%                 60%

The reduction in per-unit cost for funding contingency workload under AFI is a gradual, workload-based decrease in funding that should reflect increased productivity due to volume of workload. This reduction will be applied to the State's base unit cost explained above by funding contingency workload at 90 percent of that State's base unit cost, then 80 percent, etc., depending of the amount of workload experienced in contingency.
The amount of workload above base for the 10 percent increments in contingency pricing will be computed as a percent of base unadjusted weeks claimed. For example if the State had 2,600,000 weeks claimed in base for the year, then the first 260,000 contingency weeks claimed (prior to applying the benefit adjustment factor) will be at 90 percent of the State's unit cost, then contingency weeks claimed 260,001 to 520,000 will be funded at 80 percent of the State's unit cost, etc. For purposes of this computation, the contingency weeks claimed will be cumulative from quarter to quarter throughout the year.

To continue with our example above that experienced contingency weeks claimed for the year that represented 25 percent of the base, the distribution for contingency pricing would be as follows:

    

                  Weeks Claimed        State Unit Cost for
                                               Pricing

            Actual    Base     Cont.      90%      80%      70% 
Oct-Dec    715,000   572,000  143,000   143,000<
Jan-Mar    975,000   780,000  195,000   117,000   78,000
Apr-Jun    784,000   624,000  160,000            160,000
Jul-Sep    776,000   624,000  152,000             22,000  130,000
         --------------------------------------------------------
         3,250,000 2,600,000  650,000   260,000  260,000  130,000

CONTINGENCY EARNINGS

As in the current system, States will be paid for workload above base during the year on a quarterly basis. Also, we plan to continue the contingency reserve appropriation language that automatically makes additional contingency funds available for unanticipated workload above the appropriated level to eliminate the need for supplemental appropriations for workload.

TOTAL STATE GRANT

The total State grant for the year is the combination of the base budget made available during the year plus contingency. As in the current system, States will have bottom-line authority, meaning that States will have authority to move resources among the UI program categories, among the quarters of the fiscal year, and among the UI cost categories.

COMPETITIVE TECHNICAL ASSISTANCE AND INNOVATION GRANTS

The UI system has benefitted greatly in the past from the continuous improvements made in the State operations. We would like this practice to continue. Furthermore, the legislation that requested a revised method for allocating grants among the States specifically stated that we address "ways to promote innovation and cost-effective practices in the method of allocating such grants among the States."

We are proposing annual Competitive Technical Assistance and Innovative Grants. This would be an expansion of the current Automation Grants program. It would be broadened to include besides automation, innovative or demonstration projects as well as technical assistance and support to help States fix problems in performance. The primary focus of such grants would be for States to develop new and more efficient operations that could be exported to other States.

During the first several years of operating under the new system, the Technical and Innovative Grants will be prioritized to help higher cost States improve their operations and help reduce their costs during the phase-in to the new method of allocating grants among the States. As with Automation Grants, States would compete for these grants by submittal of proposals.

COMPARISON OF CURRENT SYSTEM WITH PROPOSED AFI SYSTEM

In order to analyze and understand the operation of the new proposed method of allocating grants among the States, we have computed the allocation under the new system for FY 1989 through FY 1994 and have compared these grants to the allocations under the current system. These data allow the reader to analyze how the system behaves over time. This information in shown in Attachment C.

The data for FY 1994 reflect the dollars for the new system as it is proposed to operate. This was possible because we had the proper years of data (1989 - 1991) provided from the States to compute the applicable national unit costs. We did not ask the States to provide the necessary financial data for the years prior to 1989 that would be the input to computing the grants for FY 1989 to FY 1993. Since it is important to see how the system operates over a period of time, we felt it was important to use the same national unit cost applied for FY 1994, but decreased it by the appropriate inflation factor to lower it to the appropriate level for running the formula for Fiscal Years 1989 through FY 1993. We felt that was sufficient for this review. In Attachment C we only show a comparison of the total grant for FY 1989 through FY 1993. The States wanting information on base benefits, tax, and contingency for FY 1989 through FY 1993 can obtain that information from the AFI Reference Report.

COMMENTS

We welcome any comments, constructive criticism, or alternative approaches to the methodology or any of its components. We will address these concerns and provide additional feedback during the year through future UIS Information Bulletins.

Please address any questions or comments to Bob Deslongchamps at (202) 219-4620 or Tim Felegie at (202) 219-4359.

Attachments

NOTE: Attachment(s) not available to DMS