DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 19-90
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	DONALD J. KULICK Administrator for Regional Management
SUBJECT	:	Sequestration Under the Balanced Budget and Emergency Deficit Control Act, as Amended,(Title II of P.L. 99-177, as amended)

1. Purpose. To advise State agencies of the provisions of title II of the Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99-177), as amended by the Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 (P.L .100-119) and section 11002 of the Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) which. concern unemployment compensation; to provide suggested draft legislation for amending State extended benefit laws where appropriate; and to notify States of reductions in Federal reimbursements for extended benefits for FY 1990 which became effective October 1, 1989.

2. References. Section 251(a)(4)(B), Section 256 (a) (2) , Section 256(b)(3), Section 256 (h) (1) and Section 256(h)(2) of P.L. 99-177; P.L. 100-119; and Section 11002 of P.L. 101-239.

3. Background. On December 12, 1985, the President signed the Balanced Budget and Emergency Deficit Control Act of 1985, P.L. 99-177. This Act is better known as the Gramm-Rudman-Hollings (G-R-H) Act. In FY 1986, the first year G-R-H was in effect, the Comptroller General of the General Accounting Office (GAO) advised the President of the need to apply a 6.1 percent sequester against funds appropriated in FY 1986, effective March 1, 1986. This sequester remained in effect for the remainder of the fiscal year.

4. Current Sequestration Procedures. The procedures as laid out in P.L. 99-177 to determine the need for a sequester. were amended in P.L. 100-119 in 1987. The original and current procedures are explained below.

   Under the original Act, the process for issuing sequester orders was: the Office of Management and Budget (OMB) and Congressional Budget Office (CBO) jointly issued reports to the Comptroller General on the estimated budget deficit for the coming fiscal year. The Comptroller General would issue a report to the President on the specific amounts or percentage by which accounts must be reduced to eliminate the excess deficit. On October 15, the President-would issue a final order for a sequester, if necessary, according to the Comptroller General's report. The United States Supreme Court ruled that the procedure by which sequestration occurred was unconstitutional because the G-R-H Act violated the principle of separation of powers by granting the Comptroller General final authority to determine the size and composition of the sequestration the President must order. P.L. 100-119 revised the G-R-H Act of 1985 to place sole responsibility on OMB. CBO continues to issue reports Under the G-R-H Act; as amend, the Director of OMB is obliged to determine each year whether or not sequestration is necessary and, if so, the magnitude of the sequestration. The CBO is obliged to prepare independently its own sequestration reports. The CBO reports are transmitted to the Director of OMB and Congress, and provide a basis for comparison against which Congress and others may assess the OMB reports. If the deficit targets have not been met through the standard legislative process, the President is directed to issue an order reducing outlays in each financial account in the Federal budget by an across-the-board percentage sufficient to meet the deficit targets. The OMB reports to the President and the Congress provide the basis for sequestration orders to be issued by the President. Unless specifically exempted by law, each financial account in the Federal budget is subject to sequestration.

5. Items Exempt From Sequestration. Section 256(h)(1) of P.L. 99-177 identifies three unemployment compensation accounts which are exempt from reduction under a sequester order. These are:

   1. Any benefits payable from a State unemployment fund, including regular benefits, additional benefits, and extended benefits, as defined in section 205 of the Federal State Extended Compensation Act of 1970 (State accounts in the Federal Unemployment Trust Fund).

   2. Loans and advances to State-and Federal unemployment accounts (Title XII loans to States from the Federal Unemployment Account (FUA) and, when needed, advances to FUA to fund loans to States).

   3. UCFE and UCX benefits (payments from the Federal Employees Compensation Account).

6. State Options-Sequester of Federal Share of EB. Section 251(a)(4)(B)(ii), the amended G-R-H Act states that the Federal share of Federal-State Extended Unemployment Compensation (EB) will be subject to sequestration. Section 256(h)(2) authorizes States to reduce EB weekly benefit amounts by a percentage which does not exceed the percentage by which the Federal share of EB is reduced. Any such reduction in EB weekly benefit amounts will not be considered a failure to conform or comply with Section 3304(a)(11) of the Internal Revenue Code of 1986.

   States have two options for handling the sequestration of the Federal share of EB:

   1. The State may continue. to pay the full EB weekly benefit amount, absorbing from State unemployment trust funds any reduction in Federal reimbursements. If a State decides to choose this option, it should review its law to see if any changes are needed.

   2. The State may reduce the EB weekly benefit amount by a percentage which does not exceed the percentage by which the Federal share of EB has been reduced. For FY 1990 the Federal share of EB payments will be reduced by 1.4 percent.

   EXAMPLE Under either option a State chooses, if a claimant's weekly benefit amount is $110, the Federal reimbursement would normally be $55 and the State share would be $55.

   Option a: If the $55 Federal reimbursement is reduced by 1.4 percent under a sequester order (a reduction of 77 cents), the State has the option of not reducing the claimant's $110 EB weekly benefit amount by the maximum of 1.4 percent. Therefore, the Federal share would be $54.23 and the State share $55.77. The State should review its law to determine if any adjustments need to be made.

   Option b: Alternatively, if the Federal reimbursement is reduced by 1.4 percent (77 cents), the State may choose to reduce the $110 EB weekly benefit amount by any amount up to 1.4 percent ($1.54) of the total weekly benefit amount, which would account for a reduction of 77 cents in the Federal reimbursement and a reduction of up to 77 cents in the State share. Note: rounding down to a whole dollar amount is necessary for full Federal reimbursement. Therefore, the State can pay the claimant any amount between $110 ($54 Federal and $56 State) and $108 ($54.23 Federal and $54.23 State).

   If a State chooses option (b), the State law must be amended to allow for the reduced payments. Draft language which will allow States to reduce EB weekly and total benefit amounts by a percentage not to exceed the percentage of reduction in the Federal share of EB is provided as an attachment to this UIPL. This draft language originally was provided to States as part of the Draft Language to Implement the Employment Security Amendments of 1970--H.R. 14705. Suggested changes to the original draft language are underlined and various explanatory notes are included.

   Most States which charge EB provide that 50 percent of the EB weekly benefit amount will be charged to the appropriate employer's account. The Federal reduction may impact the percentage of EB actually charged to employer accounts. For example, if the State law is not amended 'to reduce EB weekly benefit amounts to the full extent permitted by Section 256(h)(2) of P.L. 99-177, the State share of EB will be more than 50 percent.

   Therefore, if the State law provides that a specific percentage of EB will be charged to a contributing employer's experience rating account (such as 50 percent), the State may wish to consider amending its law to provide that the full State share of EB payments made rather than a fixed percentage will be-charged to the employer's account. This would ensure that the entire amount of the State share is charged. Sharable regular compensation must continue to be charged as all other regular compensation is charged under State law. (see 20 CFR 615.10(a)).

   For reimbursing employers, 20 CFR 615.10(b) requires that "not less than 50 percent of any sharable [regular and extended] compensation" shall be charged to them. Unless the State law is amended to reduce EB weekly benefit amounts to the full equivalent of the percentage reduction in Federal reimbursements, the State law will need-to be amended to assure that the full amount of the State share of any EB of sharable regular payment is charged to the reimbursing employer.

7. FY 1990 Sequestration. In accordance with the amended G-R-H Act of 1987 and P.L. 100-119 on October 16, 1989, OMB issued its final sequestration report for FY 1990 calculating a need for a 5.3 percent reduction to remain in effect through the first week of February 1990 to meet the FY 1990 G-R-H target. On December 27, 1989, OMB issued a Revised Final Sequester report. Across-the-board reductions were recalculated at 1.4 percent effective October 1, 1989 through September 30, 1990. All accounts are subject to sequestration unless specifically exempted by Federal law.

   1. Programs Exempt from FY 1990 Sequestration. Only those programs listed in Section 256 (h) (1) of P.L. 99177 are exempt from sequestration. These include only regular, extended, and additional benefits payable from a State unemployment fund, and UCFE and UCX payable from the Federal Employees Compensation Account in the Federal Unemployment Trust Fund: DUA payments made in FY 1990 are not subject to sequester. Funds for DUA payments are coming from a Dire Emergency supplemental enacted in FY 1989. The sequestration is applicable only to funds appropriated for FY 1990.

      The Department will inform States of any change in payments under programs listed below which become necessary due to sequester of FY 1990 budget resources.

   2. Programs Subject to FY 1990 Sequester. Benefits payable under the following benefit and allowance programs are subject to sequester in FY 1990. These include:

      1. Federal share of extended benefits;

      2. The Trade Adjustment Assistance Program (TAA);

      3. The Airline Employee protection program (AEPP);

      4. Any future Federal UI or UI-type program, unless specifically exempted by Federal statute.

   3. Federal Share of Extended Benefits. As a result of P.L. 99-117, a percentage of Federal reimbursements for Federal-State Extended Unemployment Compensation. (EB) (including sharable regular compensation) paid during FY 1990 will be sequestered. The Federal reimbursement will be reduced by 1.4 percent for payments made on or after October 1, 1989. For this purpose only, payments will be considered made on the day the checks are dated.

      The 1.4 percent reduction will apply to all Federal EB reimbursements (sharable regular and sharable extended benefits) regardless of whether the week of unemployment for which the payment is made ended before or after October 1, 1989.

   4. Trade Adjustment Assistance Program. Since the percentage of the G-R-H sequester was revised in December 1989, Trade Readjustment Allowance (TRA) payments made under the TAA program with- a 5.3 percent reduction must be recomputed with a 1.4 percent reduction. After computing the reduction, the resulting weekly payment, if not a whole dollar amount, is to be rounded as provided for in the applicable State law for rounding weekly payments of regular UI.

      EXAMPLE - A claimant had been found eligible-to receive $100 a week in TRA benefits, but the weekly amount was reduced by $5.30 (5.3 percent) to $94.70 due to the original G-R-H sequester. With the final sequestration of 1.4 percent, the claimant is now entitled to a weekly benefit amount of $98.60, a reduction of $1.40 (1.4 percent). from the original entitlement. Therefore, for each payment made with a 5.3 percent reduction the claimant is entitled to a supplemental payment of $3.90, the difference between the old and the revised sequester percentage, for each week the $5.30 was deducted from the claimant's check. All remaining TRA benefits in FY 1990 for weeks of unemployment would have only $1.40 deducted from the $100 weekly benefit amount. These figures should be adjusted for rounding in accordance with State law applicable to regular benefits.

      For training under the TAA Program only the bottom line availability was affected by sequestration. Individual State training allocations and administrative funding were not affected by the change in the sequestration amount. However, the revised G-R-H sequester amount will allow more workers to be trained than under the initial sequester. As with training, under the TAA program only bottom line availability for job search and relocation allowances was affected by the G-R-H sequestration.

   5. Administrative Financing. Section 256 (b) (3) of P.L. 99-177 states that Federal payments to States for administration of unemployment compensation programs and those programs exempt from sequester will be subject to sequestering, under subsection (h)(1). Administrative funds associated with the Federal-State unemployment compensation program and any other related Federal unemployment or allowance program are not included In the list of exemptions; therefore they are subject to reduction under the sequester order. Sequestration applies to all such administrative funds in the Federal Unemployment Benefits Account (FUBA) and State Unemployment Insurance Employment Services Operations (SUIESO) account. A notice was published in the Federal Register (January 29, 1990) explaining the FY-1990 shortfall due to a projected increase in workload and the sequester.

8. Action Required. State agency administrators are requested to provide the above information to appropriate staff.

9. Inquiries. Please .direct inquiries to the appropriate Regional Office.

10. Attachment. Draft language to amend State EB law.