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STATEMENT OF R. L. ETTENGER, JR. Mr. ETTINGER. Mr. Chairman and gentlemen: My name is R. L, Ettenger, Jr. I am in the accounting department of the Association of American Railroads, as assistant to the vice president.
At yesterday's session of the committee, Dr. Parmelee described the benefits provided by S. 3925, and he commented on those provided by S. 3920.
He also discussed briefly the graduated tax scale suggested by S. 3925. I should like to go into that phase a little further and discuss some other parts of the bill.
Section 10 of S. 3925 proposes to substitute a flexible basis for determining the contributions required of employers to implement the unemployment insurance system for the present percent of the pay roll.
Briefly, this flexible basis is bottomed on a contribution or pay-roll tax rate of 3 percent which is the same as the presently fixed rate. If, at June 30 of any year, the amount credited to what is technically known as the “account” but might more aptly be termed the "benefit fund,” is less than $100,000,000, the basic tax rate of 3 percent would prevail for the following fiscal year. But if the amount in the benefit fund is $100,000,000 but less than $125,000,000 the tax rate would be 2 percent. And if the amount in the benefit fund is $125,000,000 or more the tax rate would be 1 percent. Thus, the tax rate for each year would depend upon the amount in the benefit fund at the close of the preceding fiscal year.
Senator MINTON. The benefit fund? How is that made up?
Mr. ETTENGER. That is 90 percent of the collections obtained from this pay-roll tax plus the amounts turned over by the States which represents the railroad contributions to the State funds while they were covered by State acts, that were not used in the payment of benefits.
In our consideration of this plan, we kept clearly in mind the necessity for maintaining the benefit fund in a position to meet any demands which might arise under any reasonably predictable circumstances. Not until there is a reserve of $100,000,000 or more in the benefit fund would there be any reduction from the basic 3 percent tax rate. And, as an additional safeguard, we provide that taxes accrued but unpaid at June 30 shall not be treated as a part of that benefit fund in determining the rate for the ensuing fiscal year. As the pay roll—that is, the taxable pay roll—is now more than $2,000,000,000 per year and taxes are payable for each calendar quarter, the benefit fund will have a sizable current asset in addition to the amount actually credited thereto. In our opinion, the reserve provided will meet any foreseeable contingency.
In urging favorable consideration of this amendment, we realize that any arrangement for reducing taxes will be academic unless railroads can stabilize employment. Dr. Parmelee has pointed out that since July 1, 1939, employment conditions have been most favorable insofar as they affect the unemployment-insurance system. S. 3925 provides for substantial increases in benefit payments. Therefore, what might now be thought to be a normal pattern of employment would probably make such demands upon the benefit fund as to prevent the accumulation of a large reserve. Now, we believe
that employees would rather receive regular wages than unemployment benefits. And, being realists, we also believe that some material incentive for stabilizing employment will do more good than an unlimited amount of lip service. You gentlemen know the railroads' situation financially. You know how essential it is for them to seize upon every proper means to conserve their revenues both currently and prospectively. This amendment encourages the payment of wages for services instead of taxes for unemployment benefits. It may be too much to expect immediate results, but we submit that the door should be opened, that the possibilities may be seen and eventually realized.
The principle of extending some reward for reducing unemployment is recognized in all but one of the 51 unemployment compensation acts embraced in the Federal-State system. Forty of those acts have some provision for amerit or experience rating of employers with a reduction in taxes if the record is favorable. Ten acts provide that the subject be studied and recommendations submitted to the appropriate authorities.
These State experience rating plans admittedly have the disadvantage of being administratively expensive. Accounts must be kept to show the amount contributed by each employer. Each benefit payment must be charged against one of these accounts. The difference between the amount of taxes paid by and the amount of benefits charged to the account of each employer must be drawn off periodically. However, they are unquestionably sound in principle. At the hearing before this committee June 9, 1938, on the act of which S. 3925 is amendatory, Chairman Wheeler said, at page 192:
I can understand the merit rating principle. I think that the man who conducts his business in a high-class manner ought to have advantages over the man who runs his business in a slipshod manner. That would tend to be beneficial, I think. However, in the railroad industry I think you have got to look at it as one rather than separate industries.
We believe that we have overcome these disadvantages. Our plan is simple. There would be no difficulty in determining the amount of the assets in the benefit fund as of June 30 each year, in accordance with the provisions of subsection (a) of the amendment. No expensive bookkeeping, complicated formulas or other troublesome details are required. The industry is treated as a unit without regard to the separate entities.
The rewards sought by this amendment for stabilization of employment are prospective. The amendment would provide also for a reduction in the tax rate for the fiscal year beginning July 1, 1940. We believe this is fully justified. The Railroad Unemployment Insurance Act was enacted in June 1938. It provided that the States transfer a part of their unemployment benefit funds, as of June 30, 1939, together with subsequent collections from railroads, to the railroad benefit fund. No one could forecast how much the transfers would amount to. As late as May 17, 1939, Chairman Latimer of the Railroad Retirement Board told the House Committee on Interstate and Foreign Commerce that the railroad benefit fund would receive about $70,000,000 from the State funds. The printed record, page 499, of the recent hearings on the appropriation bill, 1941, shows that Mr. Latimer now estimates that the transfers will amount to approximately $102,500,000.
Senator Minton. How long a period does that cover?
Mr. ETTENGER. That covers from January 1, 1936, to June 30, 1939.
Mr. Hay. May I ask a question right at that point?
Mr. Hay. When that is done, that will complete the transfer of all funds that may be expected from that account, will it not?
Mr. ETTENGER. That is correct, sir.
Mr. Hay. In other words, we cannot depend upon that as a source of assets for this fund after that transfer is made?
Mr. ETTENGER. That is correct.
The contributions for the fiscal year 1940 will total about $66,000,000 of which $60,000,000 will be placed to the credit of the benefit fund. Three-fourths of the contributions--$45,000,000 for the benefit fundwill have been collected by June 30, 1940. Benefit payments to June 30, 1940, will, for the reasons heretofore given, total the relatively small sum of $16,000,000. Thus, the unexpectedly large amount to be obtained from the States plus the equally unexpected employment situation will result in the benefit fund having a reserve which warrants a temporary reduction in the contribution rate. This would recognize that some unexpected-but nonrecurring-conditions make it possible to return a part of the first year's insurance premium by means of a credit on the next year's premium.
Just as a matter of record, I direct your attention to the fact that in 21 States-Alabama, Arkansas, California, Florida, Indiana, Kentucky, Massachusetts, Michigan, Nebraska, New Hampshire, New Jersey, New York, Ohio, Oregon, Rhode Island, South Carolina, South Dakota, Virginia, Vermont, Washington, and Wisconsin employers are in a better position with respect to taxes than railroads. This is due to the fact that in those States a tax is paid on the first $3,000 of wages for any individual in any one year, while the railroads pay taxes on all wages not in excess of $300 in any one month. Other States will probably adopt this limitation which conforms to the standard set by the Social Security Act. In addition to this reduction in the basic tax, employers under State acts have open to them the means for further reducing their taxes through the operation of the experience rating provisions.
We also direct your attention to the disparity between the treatment of railroads as compared with other employers in the matter of pay-roll taxes. Currently, railroads are paying a pay-roll tax of 3 percent for unemployment insurance purposes and a pay-roll tax of 3 percent for old-age retirement purposes. Other employers pay a pay-roll tax of 3 percent or less for unemployment insurance purposes and a pay-roll tax of only 1 percent for old-age retirement purposes.
Section 11 of S. 3925 authorizes an appropriation to the Railroad Retirement Board from the Railroad Unemployment Administration fund of such amounts as may be required to meet all expenses necessary or incidental to administering the act. This provision is in lieu of the present arrangement whereby all amounts credited to the administration fund are permanently appropriated and are continuously available to the Board for these purposes. We do not seek in any way to limit the purposes for which expenditures may be made. We merely propose that the Board justify and obtain an annual appropriation to meet its expenses under this act, just as it does to meet its
expenses under the Railroad Retirement Act. An approved budget is one of the generally accepted principles of prudent administration.
The present arrangement is unique. I do not know if any other Government agency which is authorized to collect taxes and then spend part of the collections for administrative expenses without submitting its budget for approval and obtaining an appropriation from Congress. It violates a basic principle of sound business practice.
This administration fund is not a minor item. It aggregates many millions of dollars. And more millions are to be credited to the fund each year. As provided by section 11 of the act, the fund consists, first, of 10 percent of all the taxes collected from employers; second, of all of the money paid into the Treasury by employers with respect to the years 1936, 1937, 1938, and 1939 under title IX of the Social Security Act; and third, such additional amounts as Congress may appropriate. If the transfer to the Board of the amounts previously paid under title IX was meant to be a nest egg, it has certainly proved to be a most substantial one. From this source alone, there has thus far been transferred to the administrative fund the sum of $14,854,442, and, we are informed, the Board expects that an additional sum of approximately $3,500,000 will be forthcoming; So the next egg will be about $18,300,000. The railroad pay roll is presently at more than a $2,000,000,000 level. The administrative fund gets 10 percent of the tax on that pay roll. Given a 3-percent tax rate, this would produce another credit to the fund of more than $6,000,000 a year. I have not heard of any proposal to ask Congress for any additional moneys for the administration fund and it appears reasonable to assume that no such request is contemplated.
For all practical purposes, the effect of the provision establishing the administration fund was to say to the Board, “More than $18,000,000 has been deposited to your credit in the bank. Additional deposits of $6,000,000 or more will be placed to your credit each year. Here's a blank checkbook. The disposition of these deposits is up to you." That is the way it appears to me, and that is why I say that the arrangement is unique.
Now, we are familiar with the argument that it is impossible to make an advance estimate of the amount needed to administer an unemployment insurance system. It may be a difficult task but certainly it is not impossible. Under title III of the Social Security Act, grants are made to States for unemployment compensation administration. And how are those grants made? From funds annually appropriated to the Social Security Board for that purpose. The Social Security Board can and does prepare a budget and obtain an annual appropriation by Congress for the administration of 51 separate, diversified unemployment compensation systems. In the light of this record, the argument that the Railroad Retirement Board makes is not persuasive.
The Railroad Retirement Board is charged with the duty of administering two separate acts, namely, the Railroad Retirement Act and the Railroad Unemployment Insurance Act.
It is well known that the retirement system was established by Congress pursuant to an agreement between railroad management and railroad labor organizations. It is equally well known that the agreement included a provision that the costs of this system would be met by pay-roll taxes payable in equal proportions by employers and employees. Congress annually appropriates part of these pay-roll taxes
to the Board to defray the costs of administering the retirement system and the balance to the retirement account for pensions and annuities. I mention this arrangement to show that, by agreement, the expenses of administering the retirement system are borne jointly and equally by employers and employees.
The expenses of administering the unemployment insurance system are borne solely by employers. They are paid from the pay-roll taxes collected from employers and credited to the administration fund as I have already stated.
The functions involved in administering these two acts have many points in common. Therefore, the Board and many employees of the Board are rendering some service to both systems in carrying out their assignments. This calls for a division of expenses as between the amount chargeable to the retirement system and the amount chargeable to the unemployment-insurance system. But the appropriations for expenses of the retirement system are limited while the moneys available from the unemployment-insurance administration fund are unlimited. This situation was brought to the attention of the House Subcommittee on Appropriations when considering the appropriation bill, 1941, at which time the record of the hearings shows that Congressman Tarver, of Georgia, said, addressing Mr. Latimer:
Isn't that a rather unsatisfactory system? For example--and I am not indicating you may desire to do this; but would it not be possible if you did not have funds that you desired for the enforcement of the Railroad Retirement Act to employ a lawyer or other employee from this trust fund for the administration of the Railroad Unemployment Insurance Act, which is substantially more than your needs, and charge one-tenth of him to the Railroad Retirement Act and ninetenths to the Unemployment Insurance Act, although he might devote a substantially larger portion of his time than one-tenth to the work of the Railroad Retirement Act? Wouldn't there be considerable opportunity there for a shift of funds, so that funds intended for the administration of the Unemployment Insurance Act could be used for the Railroad Retirement Act?
Mr. Latimer's reply was:
We submit that this situation should be corrected. We are of the opinion that section 11 of S. 3925 is a step, at least, in the right direction, and the necessity for taking such a step at this time is heightened by the fact that the Board is now administering two separate acts involving some common expenses and that there are proposals pending which would add some additional functions to the Board's present duties.
Section 12 of S. 3925 provides that so much of the balance in the administration fund as of June 30 of each year as is in excess of $6,000,000 shall as of such date be transferred to the credit of the benefit fund. The act now provides that at the expiration of the fiscal year 1946, and of each fiscal year thereafter, the Board may make such transfer as it deems proper of any excess.
Section 23 of S. 3920 would amend this provision, but only to the extent of permitting a transfer to be made at the expiration of each fiscal year.
We have been told on many occasions by Mr. Latimer and by others that the railroad unemployment insurance system could be more economically administered than a State system. Just as soon as the act became the law, railroads advised Mr. Latimer that they would be glad to join with him in developing a plan for making it effective. Representatives of railroads and the Board conferred frequently on