DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 42-89
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	DONALD J. KULICK Administrator for Regional Management
SUBJECT	:	Experience Rating Index for Rate Year 1988

1. Purpose. To transmit the first annual Experience Raging Index (ERI) for States for rate year 1988.

2. Reference. Manual Transmittal Letter No. 1460 and Change 1.

3. Background. The Department of Labor has long been interested in experience rating and the degree to which States have used experience rating in their tax programs. An Experience Rating Index (ERI) was first suggested by the National Commission on Unemployment Compensation as written in their July 1980 Studies and Research compilations. The idea was further developed by the Office of Inspector General (OIG). On August 16,1985, the OIG issued an audit report, based on the experience of 12 States, citing a decline in the level of experience rating in the Unemployment Insurance (UI) tax system. The report recommended that the Employment and Training Administration (ETA) revise the State Employment Security Agencies' (SESAs) reporting of experience rating to provide for data which would enable the development and publication of an ERI. The OIG stated that this ERI would provide a measure of the relative degree of experience rating in the States' UI tax systems.

   The UI Service contracted with Dr. Wayne Vroman to examine experience rating in general and review the OIG report in particular. In April 1986, Dr. Vroman's report, "Experience Rating in Unemployment Insurance: Some Current Issues" was delivered to the Department. The report concluded that the OIG's report had exaggerated the extent of the decline of experience rating that occurred between 1970 and 1983. Vroman further concluded that the OIG recommendations should be given serious consideration. These recommendations included changing the ETA 204 reporting form such that an ERI could be calculated for each State as well as several suggestions for desirable State level changes that would enhance the degree of experience rating. His report stated that if this information were to be collected, meaningful comparisons of ERIs across States could be made.

   Manual Transmittal Letter No. 1460 revised the reporting instructions for the ETA 204, Experience Rating Report. The revisions were in response to the OIG audit and required in order to collect the information necessary to calculate an ERI for States.

4. Discussion. Attachment I shows the Experience Rating Index by State for rate year 1988. This is the first year of this report that will be produced and distributed annually.

   The ERI is a relative measure of the degree of experience rating in State UI programs. Specifically, it represents the percentage of benefits-effectively charged to taxable employers. It is emphasized that the ERI is best suited as an indicator o the change in the level of experience rating in a single State over a period of time in terms of economic fluctuations and law changes. It is less useful as a comparative measure among States because of the uniqueness of State laws governing financing.

   Two States have pointed out that the index is an incomplete description of a State's experience rating system since it ignores fund balances and reports on only one year rather than cumulative experience.

   The ERIs shown on Attachment I were calculated by the National Office using ETA 204 data submitted by States for the 1988 rate year. At this point, the ERIs are considered final. If States provided updated information by the required due date, the ERIs have been revised. Information not available (INA) is shown for those States which did not have the needed data at this writing. In some cases, INA indicates States that have a June 30 rate year ending date and had already completed the ETA 204 report for rate year 1988 prior to receipt of the revised instructions. In other cases, INA reflects States for which all the data needed are not available because of involvement in automation projects, etc. In addition, the information needed to calculate an ERI is not available for Alaska (a payroll declines system) and Puerto Rico (uniform tax system). In benefit wage ratio States, benefit charges attributable to inactive employer accounts and noncharges were estimated based on benefit wage data. The ERI is also being published in the UI Data Summary and any publications deemed appropriate. A sample ERI calculation, with accompanying definitions, is shown in Attachment II.

   Initially, the National Office intended to adjust the ERIs for States in which the taxable wage base changed between the computation year (12 months ending on the computation date) and the rate year. However, a review of several States with wage base changes showed that the impact, when the base change was small, was relatively minor and except for a few States, the taxable wage base change was less than ten percent. Accordingly, adjustments have not been made. However, depending on the magnitude and direction of a taxable wage base change, the ERI would have been slightly higher or lower if the impact of a change in the base had been considered and the ERI adjusted. The taxable wage base change in Hawaii was substantial, from $15,600/16,500 during the computation year to $8,700 during the rate year. Accordingly, the ERI would have been approximately 10 percent lower than that shown if the impact of the base change had been considered and the ERI adjusted.

5. Action. SESAs should examine their experience rating provisions in light of their ERI and may wish to consider strengthening experience rating when proposing legislation. Some examples of changes that would enhance the level of experience rating include: (1) raise the maximum tax rate for employers, particularly negative balance employers, (2) tax new employers at a rate that reflects industry cost experiences, (3) reduce or eliminate so-called write-offs for employers with large negative balances, (4) eliminate tax rate limiters which restrict year-to-year tax rate increases when trust fund balances are declining and (5) increase the taxable wage base.

6. Inquiries. Direct inquiries to the appropriate Regional Office.

7. Attachments 

   1. Experience Rating Index by State

   2. ERI Sample Calculation