The Michigan Chamber of Commerce believes unemployment insurance trust funds should be used only to provide benefits to people who are unemployed through no fault of their own, and who are able and available to work. The Michigan Chamber is opposed to expanding eligibility for unemployment benefits to workers who take leave for birth or adoption.

Background

On December 3, 1999, the U.S. Department of Labor published Proposed Rule for Birth and Adoption Unemployment Compensation [64 Fed. Reg. 67971-67979] with a 45-day public comment period scheduled to expire January 18, 2000. Because the expiration date preceded the Board  meeting, the Chamber moved forward in opposition to the proposed rule based upon existing Board policy relating to unemployment insurance. To date the Chamber has:

• become an active participant in the national coalition working to block the proposed rule,
• written to the U.S. Department of Labor and members of Michigan's congressional delegation urging opposition and an extension of the comment period,
• distributed a press release stating the Chamber's objections to the proposal, and
• requested that the Michigan Department of Consumer & Industry Services formally oppose the proposal.

The position is before the Chamber Board for ratification.

The Clinton Administration's proposed rule would allow states to enact legislation amending unemployment insurance laws to permit parents taking leave for the birth or adoption of a child to collect unemployment benefits while on leave. This rule reverses 65 years of state and federal unemployment law requiring that a person be unemployed through no fault of his/her own, and be "able and willing to work." We expect state legislation to be introduced when the Michigan Legislature returns to session this month.

The Clinton Administration did not seek Congressional approval for the rule, which was published while Congress was in recess. Several business organizations, including the U.S. Chamber and the Michigan Chamber, urged Labor Secretary Alexis Herman to extend the comment period. Congressman Pete Hoekstra (R-Michigan) also sent a letter to the Department of Labor asking Herman to extend the comment period by 75 days. On January 10, 2000, the comment period was extended by only 15 days to February 2, 2000.

The U.S. Department of Labor proposed rule, which also includes language for a model state law, do not require that the leave be approved by the employer.  It also allows  payment of unemployment insurance (UI) benefits to those who resign from employment. The state model bill would allow the claimant to collect benefits for 12 weeks, but the rule contains no time limit. While the proposal is limited to new parents by birth or adoption, states would be free to divert unemployment insurance trust funds for not only that provision but broader coverage for parental and disability leave as well. This rule, if upheld, will expand the Family & Medical Leave Act,  increase both direct and indirect costs for employers, threaten the solvency of Michigan's UI Trust Fund and, in an economic downturn, jeopardize the payment of benefits to those who are involuntarily unemployed.

History of the UI Trust Fund

Employers in Michigan pay two taxes on payroll to fund the federal-state unemployment insurance system.  The first is an experience-rated tax levied against the first $9,500 of each employee's wages. The tax rate ranges up to ten percent. The second tax is assessed under the Federal Unemployment Tax Act (FUTA).  The current FUTA tax rate is 0.8 percent on the first $7,000 of each employee's wages. 

Michigan's UI Trust Fund has been in the negative numbers in recent history. In 1977, the Michigan UI Trust Fund owed the federal UI Trust Fund $624 million.  That debt was repaid in 1979. In 1982, employer tax rates were increased and a "trigger" mechanism was placed in the account building component (ABC) of the tax rate calculation. The trigger automatically increases the tax on employers when the UI Trust Fund balance drops below a specific level. But again, in 1983, the Michigan UI Trust Fund had a debt to the federal government of $2.4 billion. Michigan job providers paid a FUTA penalty tax for three years to speed repayment of that loan.

Despite the earlier legislative changes and the accelerated payments, in 1991 and 1992 a FUTA penalty tax was again imposed on employers to pay off the remaining $417 million debt. Finally, in 1993 employer payments to the UI Trust Fund began to exceed benefit payments.

In 1995, the Chamber lead the fight for further legislative reform of the UI system and Governor Engler signed into law P.A. 25 of 1995 which significantly reformed our state system, reducing employer taxes and bringing benefit payments more in line with our competitor states. The lower UI tax rates in the Act, however, are tied to the solvency of the UI Trust Fund. According to state law, the fund balance must now be at least $2.077 billion to trigger the tax reduction. If the fund reserves fall, as they would under the Clinton proposal, employer tax savings will be eliminated and tax rates will increase.

The Michigan UI Trust Fund currently has a reserve of more than $2.5 billion. While that amount is a dramatic improvement over the past, that level is still below the actuarially recommended 1.5 times the average high cost multiple (ACHM). The ACHM is a calculation based on the worst-case scenario for benefit payments during a recession, based on past claims experience in the state.

The Michigan Chamber of Commerce supports legislation to amend state law governing the Michigan Catastrophic Claims Association (MCCA) by increasing the retention level to cover losses for medical benefits for injuries sustained in automobile accidents.

The Chamber believes operation of the MCCA, and assessments for that purpose, are business issues. Chamber members purchase fleet automobile policies that are affected by the MCCA assessment. The costs of injuries sustained in work-related automobile accidents are covered by workers' compensation, and impact both premium and system costs borne by employers. In addition, employee health benefit plans cover automobile accident costs even for non-work-related accidents and injuries. In fact, workers' compensation is, and insured employee health benefit plans may be, primary in automobile accidents, meaning they pay first - before the automobile insurance policy. For these reasons, the Chamber believes the retention level should be established at a level that fosters competition, allows for accurate rating,and encourages medical management of claims.

Background

Michigan is the only state in the nation with a no fault insurance law that provides unlimited lifetime medical and rehabilitation benefits. Since enactment of the no fault law in 1973, the unlimited nature of these benefits has created challenges for insurers because of the potential for overwhelming losses that are impossible to actuarially project. No reinsurance company has ever been willing to write reinsurance coverage for such a risk. To address this problem, and preserve unlimited benefits, the Legislature established the MCCA in 1978.

While created by statute, the MCCA is a private, non-profit association of companies writing automobile insurance in Michigan, in essence operating as a reinsurer. This mechanism allows companies of all sizes to compete in the auto insurance market. The MCCA does not receive any state funding. The member companies are required by statute to be charged a premium to cover the costs of catastrophic claims plus the operating expenses of the MCCA. The companies collect this funding for the MCCA through an assessment of each insured vehicle. The amount of the annual assessment is determined by the MCCA's Board of Directors. Members of the MCCABoard are appointed by the Insurance Commissioner, who also serves as a non-voting member.

Each automobile insurance company, since 1978, has been responsible for the first $250,000 of a personal injury protection (PIP) claim, while amounts above that retention level are reimbursed by the MCCA. Claims exceeding the $250,000 are referred to as catastrophic claims. When this retention level was established more than 20 years ago, it was believed only the most severe automobile accidents would surpass this amount.

Since that time, as medical technology has improved, the cost of medical care has escalated and related litigation and adverse court decisions have increased, more claims have exceeded the existing retention level. As a result, the amount of money needed to fund the MCCA has also increased.

The insurance industry has spent a number of years studying this issue and attempting to forge a consensus on a change in the retention level to reflect this dynamic. The members of Michigan Insurance Federation (MIF), a trade association representinga broad cross section of insurance companies, have recommended legislative approval of a three-tiered retention level approach, designed to accommodate various sizes of companies by allowing them to select the retention level best suited to their business. Under the MIF proposal, the MCCA would provide reimbursement for losses that exceed one of three different retention levels selected by the member company: the current $250,000; $500,000, or $1 million.

Other insurance companies, including Michigan's two largest automobile insurance writers - State Farm and AAA - which are not MIF members, have expressed reservations about the MIF proposal for various reasons. The Michigan Association of Insurance Agents has also declined to support the proposal, citing concerns expressed by some small independent agency companies about its potential uncompetitive impact.

Most of the interested parties would agree to a standard increase in the retention level, though there is not consensus on the amount of the increase.

The Michigan Chamber reaffirms its support for the preservation of Michigan's no-fault automobile insurance law, including the prompt payment of benefits in exchange for strict limitations on the right to sue an at-fault party for non-economic damages (i.e., pain and suffering). Moreover, the Michigan Chamber supports legislation to address insurance fraud and the over utilization of benefits and is in support of current legislative proposals to provide Personal Injury Protection (PIP) benefits for private passenger auto insurance with a variety of optional benefit levels and impose a medical fee schedule for personal auto PIP claims based upon the existing workers’ compensation fee schedule.