respectively. Delaware, West Virginia, and Oregon are now also eligible for advances.

Should we in the future experience another substantial downturn in employment, it is highly probable that other large States, in addition to Michigan and Pennsylvania, will need advances from the Federal unemployment account.

The administrative financing provision of the Employment Security Administrative Financing Act has also proven to be inadequate. Our estimates indicate that Federal unemployment tax collections in the fiscal year ending June 1959 will be $4 million less than the administrative expenditures for that year. While it is estimated that a small surplus will be available in fiscal year 1960, it is clear the thereafter administrative costs will exceed collections, with a resulting deficit.

I believe it would be pertinent to point out at this point that since the Administrative Financing Act of 1954 was passed by the Congress approximately $138 million have been distributed to the States and credited to their account in the unemployment trust fund as representing the excess of receipts over expenditures. The result is that on an annual basis the excess receipts over expenditures are distributed to the States and when a deficiency arises it is necessary to obtain nonrepayable appropriations from the general fund of the Treasury. To improve the system of financing the employment security program, the administration recommends legislation which would accomplish the following:

(1) The establishment of a Federal employment security administration account as a trust fund (similar to the one established for the old-age survivors insurance and disability insurance funds and for the railroad retirement and unemployment insurance funds). The total proceeds from the unemployment tax would be placed annually in this trust fund.

The establishment of a trust fund would provide a method for the accumulation of reserves to meet deficits that may be encountered in future years. Since all of the receipts derived from the Federal Unemployment Tax Act are at present earmarked exclusively for employment security purposes, it would not result in the expenditure of any additional funds.

(2) The funds necessary for administrative expenses for both the Federal agencies and the State agencies would then be paid from this trust fund.

(3) All remaining balances in the administration account would be transferred to the Federal unemployment account until an amount equal to four-tenths of 1 percent of the taxable payrolls had been accumulated in this account. A minimum of $550 million would be established for that account. The recent experience with States eligibility for advances indicates a necessity for a higher statutory balance in the Federal unemployment account, and this need may be even greater in the future. The proposed automatic adjustment is preferable to a fixed dollar balance because it would build up the balance in the Federal unemployment account automatically as taxable payroll increases and would thus be more adequate for necessary advances when potential benefit liability of the States is high.

(4) After the transfer of the required amount to the Federal unemployment account the balance would remain in the Federal employment security administration account until this account has

accumulated a reserve of $250 million. Repayable advances to the administration account, when necessary, would be authorized.

(5) Any amount repaid by a State for advances made to it from the Federal unemployment account would be repaid to that account. If at the end of the fiscal year the amount available in the Federal unemployment account is equal to four-tenths of 1 percent of the taxable payroll or the $550 million minimum, whichever is the greater, the amount so repaid will be transferred to the administration account. (6) The administration's proposal also contains a provision which authorizes the Secretary of the Treasury, after consultation with the Secretary of Labor, to transfer from the Federal employment security administration account to the general funds of the Treasury amounts necessary to repay the Federal Government for any advances made either to the administration account or to the loan account.

(7) If there are no outstanding advances from the U.S. Treasury and the Federal employment security administration account is less than $250 million, the amount repaid by the State would be used to bring that account to the $250-million ceiling.

(8) Distribution to the States of any remaining excess would be made when all of the above-mentioned contingencies have been taken care of.

The formula for such distribution is the same as in the present law except that the amount otherwise available for distribution to a State would be first applied against any remaining balance of advances made to the State under title XII. It seems reasonable that any distribution of Federal taxes to a debtor State should be applied first to the repayment of advances and may save employers in the State from higher Federal taxes to repay unpaid advances. Experience has further demonstrated that generally the States do not request advances from the loan fund until their reserves are substantially less than those which are presently required as a condition of eligibility for advances. The administration's proposal accordingly would amend section 1201 of the Social Security Act to tighten the eligibility requirements for an advance from the loan fund. It would make a State eligible for an advance only if at the end of any month (instead of a quarter as under the present law) its reserve has fallen below benefits paid in the last 6 months (instead of 12 months). If, however, in any month the total advances for which States can qualify exceed the balance in the Federal unemployment account, the Secretary would certify advances only to those States whose reserves were equal to less than the compensation paid in the preceding 3 months.

The proposal would assure that advances will be sought only to meet current emergencies and would tend to lessen drains on the Federal unemployment account that are not absolutely necessary.

At present, the Federal Unemployment Tax Act assesses a 3 percent tax on the first $3,000 of an employee's earnings. Our studies indicate that in order to provide more adequate financing on both the Federal and State levels, it will be necessary to increase the tax base from $3,000 to $4,200.

When the $3,000 tax base was established in 1939, it represented 95 percent of all covered wages. At the present time, it represents 65 percent of covered taxable wages. A $4,200 per year tax base would

represent 78.6 percent of total covered wages. It would also be roughly equivalent to today's average earnings in covered employment. For a number of States an increase in their revenues and reserves is essential to compensate for the heavy drains during the present and the last year.

The annual contributions to the State unemployment insurance funds will approximate $1,700 million in the fiscal year ending June 30, 1960. It is estimated that the proposed increase in tax base could, on the basis of present coverage, produce an additional $350 million in contributions.

If coverage is extended in accordance with the administration's recommendation, the increased tax base can produce an additional $625 million instead of an additional $350 million. The proposed increase in tax base would be of substantial assistance to those States whose reserves have been significantly diminished during the last several years. Any State whose reserves are presently adequate could offset this increase in contributions by appropriate adjustments in its taxing provisions.

The increase in tax base on the basis of present coverage would produce, under the Federal Unemployment Tax Act, an additional $73 million. If coverage is extended in accordance with the administration's proposal, the increased tax base would produce an additional $102 million instead of an additional $73 million.

The administration's proposal contains a provision which would require the Secretary of Labor to conduct studies and submit a report to the Congress every 4 years regarding the financial soundness of the whole system. This would give the Congress an opportunity periodically to scrutinize the financial structure of the program and to consider the appropriateness of any adjustments.

The proposals I have discussed are the administration's recommendations for strengthening and improving the employment security program. They are also calculated to remove the present unwarranted discrimination which denies to significant segments of our labor force the benefits of the unemployment insurance system.

I strongly urge that the Congress enact the administration's recommendations into law.

That concludes the statement.

The CHAIRMAN. Mr. Secretary, we thank you, sir, for advising the committee of the position of the administration with respect to amendments of the unemployment compensation program. Let me see if I understand clearly these recommendations.

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First of all, you are interested in the matter of extension of coverage and you propose to cover additional people under the State unemployment compensation program by requiring the States to cover employers with one or more employees at any time.

Mr. O'CONNELL. That is correct.

The CHAIRMAN. Whereas the present law now provides that States may qualify by covering employers of four or more employees employed within what period of time?

Mr. O'CONNELL. Twenty weeks.

The CHAIRMAN. In other words, if an employer within a State during a 20-week period of a calendar year has as many as four employees, he is covered with respect to his employees during the entire calendar year?

Mr. O'CONNELL. I think that is correct.

The CHAIRMAN. Now, however, under your proposal, if a man operates a grocery store, say, and he has an employee for only a week in a calendar year, that week's employment will be covered by a tax on the employer for that period of employment?

Mr. O'CONNELL. With only this qualification: that individual would have to be employed in the type of work which the employer performs. He could not be somebody brought in to do some work not directly connected with that type of employment.

The CHAIRMAN. I wanted to bring that out.

The employee of a person operating a grocery store would have to be doing work that the employer would also be doing or had been doing.

You also suggest that we extend coverage by imposing a tax upon nonprofit organizations. Are those the organizations which are set forth in section 3306 (c) of the Internal Revenue Code?

Mr. O'CONNELL. I believe those are the same.

The CHAIRMAN. We would then, in order to carry out your suggestion, repeal one of the present provisions excluding certain groups from the definition of the term "employment"?

Mr. O'CONNELL. That is correct; yes, sir.

The CHAIRMAN. By that step, we would cover 1,300,000 additional employees?

Mr. O'CONNELL. That is our estimate.

The CHAIRMAN. Then you have some other recommendations that would extend coverage to smaller groups so that all together, by following your recommendation, we might extend coverage to some 3,200,000 or more additional employees?

Mr. O'CONNELL. That is correct, sir.

The CHAIRMAN. You said in the beginning that there are approximately 13 million employees who are not now covered by any program?

Mr. O'CONNELL. That is right, sir.

The CHAIRMAN. Would we subtract this 3,200,000 from that figure of 13 million?

Mr. O'CONNELL. Yes, sir.

The CHAIRMAN. And we would still leave approximately 10 million people who would not be covered even though we should enact the recommendations you bring to us?

Mr. O'CONNELL. That is correct, sir.

The CHAIRMAN. Those are employees in agriculture, employees who perform domestic service, and employees in service not in the employer's trade, and so on?

Mr. O'CONNELL. Our figures would indicate that this would include 5.3 million employed by State and local governments, 2.4 million in domestic service, 1.9 million in farm and agricultural processing, and three-tenths of a million in miscellaneous noncovered employment. That makes up, as you say, approximately 10 million.

The CHAIRMAN. You have considered very carefully the question of whether or not unemployment compensation should be extended to any of the remainder of these 10 million employees and you have reached the conclusion presumably that it is not now feasible to extend it to any of the remaining number.

Mr. O'CONNELL. That is right, but I wouldn't say we had necessarily completed our consideration. It is possible, I think, that certain other extensions of relatively smaller amounts might be reached, but we have not had adequate data which would indicate to us that it is practical or feasible at this time.

The CHAIRMAN. We are, of course, acquainted with your recommendation for the extension of the unemployment system to Puerto Rico. We have given consideration to that matter in the committee heretofore.

I did not exactly understand, Mr. O'Connell, how you propose to improve the financing of the employment security program. At the present time we allot, do we not, to the fund created under the so-called Reed Act the excess that we receive from the three-tenths of 1 percent tax over the cost of administration in each fiscal year?

Mr. O'CONNELL. That is right. It is an earmarked fund in the Treasury Department.

The CHAIRMAN. And that money is available to States that may get into a distressed circumstance?

Mr. O'CONNELL. When their reserves drop below the statutory limit. The CHAIRMAN. When their reserves drop below the present statutory limit or quota, a State is eligible under existing law to borrow from the so-called Reed fund whenever the payments from the fund are equal to the receipts within a 12-month period, or how does that work?

Mr. O'CONNELL. When their reserve for the payment of benefits drops below the amount they found necessary to pay out in benefits for the preceding 12 months.

The CHAIRMAN. I see. If, at the end of any calendar quarter, it is determined that the amount in the fund to State X is less than State X paid out in benefits in the preceding 12 months, then the State is eligible to receive a loan under existing law and may file an application for such?

Mr. O'CONNELL. That is correct.

The CHAIRMAN. You propose to change that so that a State would be eligible for a loan when the amount in its fund at the end of a quarter was less than its payments in compensation for the preceding 6 months?

Mr. O'CONNELL. Yes, sir.

The CHAIRMAN. Is that sufficiently generous to enable the States to prevent the development of situations wherein they are caught suddenly without moneys to pay unemployment benefits?

Mr. O'CONNELL. We would think so from experience.

The CHAIRMAN. You have given consideration to that point?
Mr. O'CONNELL. Yes, sir.

The CHAIRMAN. What you are trying to do is to avoid, as I understand your statement, the eligibility of a State for such a loan except when a state is actually in need, and we might say more immediately in need, of additional money?

Mr. O'CONNELL. This is our purpose, Mr. Chairman.

The CHAIRMAN. Will it result in fewer requests for loans and therefore a less potential drain upon the so-called Reed fund, in your opinion?

Mr. O'CONNELL. I think it very well could. Maybe somebody has more direct experience, but I think if we were to examine some re