DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 33-90
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	DONALD J. KULICK Administrator for Regional Management
SUBJECT	:	Experience Rating Index for Rate Year 1989

1. Purpose. To transmit the second annual Experience Rating Index (ERI) for States for rate year 1989.

2. Reference. Manual Transmittal Letter No. 1460 and Unemployment Insurance Program Letter, No. 42-89.

3. Background. Experience rating of the State Unemployment Insurance (UI) financing programs has long been a subject of interest within the Department of Labor. An Experience Rating Index (ERI) was first suggested by the National Commission on Unemployment Compensation in their July 1980 Studies and Research compilations. In 1985, the Department of Labor's Office of Inspector General (OIG) completed an audit of 12 States to determine the effectiveness of experience rating in financing UI. According to the report, data show that the level of experience rating in nine of the twelve States declined during the period 1970 through 1983, causing a shift from individual employer's responsibility toward a socialized system. To determine if in fact there has been a decline, an Experience Rating Index (ERI) has been developed and implemented by the Employment and Training Administration.

   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 were required in order to collect the information necessary to calculate the ERI for States.

4. Discussion. Attachment I shows the components for calculating the Experience Rating Index by State for rate year 1989. Additionally, the ERI by State for rate year 1988 is shown.

   The ERI represents the percentage of benefits effectively charged to taxable employers, and as such is a relative measure of the degree of experience rating in the States' UI programs. It is emphasized that the ERI is best suited as an indicator of 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 uniqueness of State laws governing financing.

   The ERIs shown on Attachment I were calculated by the Employment and Training Administration using ETA 204 data submitted by States for the 1989 rate year. Information not available (INA) is shown for those States which did not have the needed data at this writing. The information needed to calculate an ERI is not available for Alaska (a payroll decline 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.

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. Areas to be examined and considered for change include: (1) the level of the minimum and maximum tax rates, (2) the ranges of tax rates from minimum to maximum rates, (3) tax rate limiters that restrict year-to-year tax rate increases, (4) the taxation of new employers, (5) changes in the taxable wage base, and (6) non-charges and writeoffs.

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

7. Attachments. 

   1. Experience Rating Index by State

   2. ERI Sample Calculation