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uals. We further recommend amending the definition of "employment" in the Federal Unemployment Tax Act to apply to services for nonprofit organizations. This change would add about 1.3 million workers to the covered group.

We recommend also other changes in the present law which would cover about 30,000 employees of certain Federal instrumentalities, and about 5,000 employees working on American aircraft serving overseas. These changes will extend unemployment insurance coverage to an additional 3.2 million workers. With regard to employers of one or more, the amendment of the Federal Unemployment Tax Act to apply to all persons who employ one or more individuals was first recommended by President Eisenhower in 1954 and was repeated in his economic reports of 1957, 1958, and 1959.

We should bear in mind that the decision in 1935 to restrict coverage to persons employing 8 or more workers in each of the 20 weeks was prompted solely by anticipated administrative problems if the system were extended to small firms. The size of firm limitation of 8 in 20 weeks was in fact a compromise.

The Advisory Council of the President's Committee on Economic Security in 1934 recommended a limitation of 6 workers in 13 weeks. Its report contained the following comment:

A broader coverage than that suggested is deemed desirable by the Advisory Council, but practical considerations lead us to recommend that it be limited as above outlined in inaugurating the system. We recommend, however, that the Federal administrative authorities study the problems of extending the coverage to the employers of less than six employees.

The most frequent objection raised to the extension of coverage to one or more is that there would be insurmountable difficulties in the administration of the act. In response to this objection it might be well to point out that 18 States-some large, some small-now cover employers of 1 or more; 7 of these States cover employers of 1 or more at any time; and the other 11 States cover employers of 1 or more with certain limitations.

As you know, the Federal Insurance Contributions Act and the income tax withholding provisions of the income tax laws also apply to employers of one or more. To my knowledge no particular administrative problems have arisen with respect to coverage under these laws.

I might add that experience of the States which already cover one or more indicates that such coverage actually results in simplified procedures. The determination of whether or not an employer is covered is greatly facilitated. There is no necessity of waiting until the end of the taxable year to determine employer liability.

Such coverage eliminates the need for employer payroll audits or investigations to determine whether specific employers are covered. The Washington State Employment Security Agency which in 1941 extended coverage to one or more at any time and the Arkansas Employment Security Agency which in 1948 extended its law to one or more in any 10 days during the calendar year, expressed the views that on the basis of their respective experiences extension of coverage to one or more reduced rather than increased the difficulties in the administration of the program.

The Washington agency reported as follows:

Beyond initial load of setting up previously excluded group of employers, the administration has posed no problem other than increased field volume. Actually, the men in the field encounter fewer collection problems among the smaller firms and prefer extended coverage to former coverage with size-offirm and duration tests. General coverage eliminates former problems of constant liability audits. Benefit determination has been simplified and speeded up by extended coverage since formerly liability had to be established in many cases before benefit determination could result.

Thus, experience has now conclusively demonstrated that administrative difficulties which would be involved in the extension of coverage to employers who employ one or more are neither significant nor insurmountable.

The extension of coverage is properly within the scope of Federal action. The size of firm limitation to eight or more in 20 weeks was initially contained in the Federal act, by amendment to the Federal act in 1954 this limitation was reduced to four or more. Moreover the States themselves have recognized that coverage is within the area of Federal jurisdiction. This is evidenced from the fact that 31 State laws presently contain provisions under which the State law would be extended automatically to coincide with extension of Federal coverage to small employers.

Since the beginning of the Federal-State unemployment insurance program, States have been free to go beyond Federal coverage. By 1945, 29 States had extended coverage to firms with fewer than 8 workers even though the size of firm limitation in the Federal Unemployment Tax Act was then 8 or more. Since 1945, however, one State has extended coverage to employers of one worker at any time. I am firmly of the view that there is a primary responsibility upon the Federal Government to extend coverage whenever it is considered feasible and appropriate.

As I indicated earlier in this statement, the extension of coverage to nonprofit organizations would add 1.3 million workers to those who already enjoy protection against total loss of purchasing power during periods of involuntary unemployment. Still excluded would be services by clergymen and members of religious orders and by individuals receiving less than $50 a quarter, students employed by their educational institutions, student nurses, interns, and the handicapped workers often referred to as clients-in sheltered workshops.

About half of the workers employed in nonprofit organizations are employed by hospitals and nearly one-third by educational institutions. These workers are engaged in a wide variety of occupations, many of which are not peculiar to the nonprofit field. About 40 percent of the hospital workers are food, maintenance, and custodial workers. Among the different kinds of workers represented in the nonprofit area are laboratory technicians, nurses, teachers, social workers, electricians, printers, stenographers, typists, cooks, waitresses, elevator operators, and painters.

We are aware of the fact that nonprofit organizations traditionally have been exempt from some taxes, such as income taxes. Underlying the principle of permitting these exemptions is the performance by such organizations and institutions of services in the public interest, particularly in the fields of education, welfare, health, and scientific

endeavor and research, the cost of which would otherwise fall as a burden upon the Government.

However valid this reasoning may be with respect to the imposition upon such organizations of income taxes, it does not seem pertinent to all other types of taxes. For example, they are subject to special assessments for property improvement, sales taxes, use taxes, and others.

With respect to their own workers, nonprofit organizations should view unemployment taxes as an essential budget item, just as they presently consider the cost of workmen's compensation, fire insurance premiums, and other operating expenses.

With regard to Federal instrumentalities, approximately 29,000 employees of certain Federal instrumentalities in which the Government has no ownership are excluded from the benefits of the unemployment insurance program. Their exclusions arise out of the fact that their employers are creatures of Federal law with Federal exemption from taxation. These include such institutions as the Federal Reserve banks, Federal credit unions, and Federal land banks. I recommend that coverage be extended to these instrumentalities by amending the definition of "employment" in the Federal Unemployment Tax Act. The result would be that these employees of these instrumentalities would be covered by States unemployment insurance laws.

A few Federal instrumentalities that are partially owned by the Government, such as the banks for cooperatives, are also excluded from coverage by reason of Federal exemption from taxation. These institutions employ about 1,000 employees. I recommend that employees of these instrumentalities be brought under the unemployment compensation program for Federal employees.

These changes would eliminate the present discrimination against these employees which arise out of Federal exemption of their employers from taxation. This inequity can be removed only by action of the Congress.

With regard to American aircraft operating outside the United States, another amendment which I recommend would cover services on American aircraft serving overseas if (1) the employees work under a contract made in the United States, or (2) during the performance of their duties, the aircraft lands in the United States. There are about 5,000 such employees.

The law already contains similar provisions with respect to employees on American vessels. This proposal would provide aircrews with the same protection now afforded to seamen. The proposal would also bring the Federal Unemployment Tax Act treatment of aircrew employees into harmony with the Federal Insurance Contributions Act which includes aircrew members under a provision which is essentially the same as we recommend.

Mr. Chairman, you will recall that in 1957 and 1958 the administration recommended enactment of legislation to extend the unemployment insurance program to employers of one or more. In 1957, we also recommended extension of coverage to employees of nonprofit "feeder" organizations, to employees of the excluded Federal instrumentalities, and to employees of American aircraft employed outside the United States. In 1957, this committee reported out H.R. 8888, subsequently passed by the House, which contained the latter three

recommendations. No action, however, was taken on this bill in the Senate.

Discussions last year during the consideration by the Congress of the Temporary Unemployment Compensation Act of 1958 and more recently during discussions on the extension of the act this year have brought more sharply into focus the inequities in the present system because of its discrimination between unemployed workers due solely to the accident of the size or type of firm by which they were employed. I strongly urge the Congress to enact appropriate legislation to remove these inequities.

With regard to the extension of unemployment insurance system to Puerto Rico, the administration also recommends enactment of legislation to extend the Federal-State unemployment insurance system to Puerto Rico. In his last three economic reports to Congress the President recommended that such action be taken.

By concurrent resolution of its legislative assembly the Commonwealth of Puerto Rico has expressed its desire to be brought into the system. Anticipating such action by the Congress, the Puerto Rican Legislature has, by appropriate legislation, established an unemployment insurance program for Puerto Rican workers which can be brought into the Federal-State system. Both Alaska and Hawaii, as Territories, have been part of the system from the inception of the program. As a matter of equity Puerto Rico should be given similar recognition.

On January 1, 1957, employers of four or more workers in the Commonwealth became liable for the payment of unemployment insurance contributions of 3 percent of wages up to $3,000. Of these contributions 2.7 percent is earmarked for benefit payments and threetenths of 1 percent is used for administrative costs.

Approximately 200,000 workers or about one-third of the island's labor force and some 6,000 employers are covered by the program. If the unemployment insurance program is extended to Puerto Rico and made applicable to 1 or more workers, covered employment in 1960 would rise to 250,000 workers and 16,000 employers.

In 1950 Congress amended the Wagner-Peyser Act which provides for the establishment of a Federal-State system of public employment offices to confer upon Puerto Rico the benefits of that act. Because the Federal Unemployment Tax Act does not now apply to employers in Puerto Rico no revenue is received under that act from the Commonwealth.

Nevertheless, since 1950 Puerto Rico under the Federal Unemployment Tax Act will exceed the amounts necessary for grants to the Commonwealth for unemployment insurance administration. To the extent that such a surplus exists it would be used to diminish the cost to the United States for employment service grants made to Puerto Rico under the Wagner-Peyser Act.

Benefits were first paid in Puerto Rico in January 1959. Between January 1, 1957, and January 1959, $14.9 million were accumulated in the Puerto Rico unemployment insurance fund. Benefits payable from the fund are conservative. They range from $7 to $12 per week for a maximum of 7 weeks. Our estimates projected through June 30, 1964, indicate a further increase in the reserves to approximately $24 million.

This is predicated upon the continued expansion in the Puerto Rican economy. There is thus a clear indication that Puerto Rico will not become a drain on the Federal loan fund.

At the present time the Federal programs of unemployment compensation for Federal employees, ex-servicemen, and Korean veterans are applicable to Puerto Rico and benefits are paid under these programs through the Puerto Rico Employment Service. Extension of the unemployment insurance system to Puerto Rico through appropriate legislative amendments would complete the Puerto Rico employment security system.

All of the social security programs, except unemployment insurance, are now applicable to Puerto Rico. These include the maternal and child welfare program, old age assistance, aid to dependent children, aid to the blind, aid the permanently disabled and the old age survivors and disability insurance program. If the recommended action were taken it would afford Puerto Rico the benefits of the last social security program which is now applicable to the Commonwealth.

I would like now to move on from the matter of coverage under the act to improvements in financing of the employment security program. The administration's proposals for extension of coverage, which I have discussed, are related to improving the unemployment insurance program by bringing its benefits to a substantial segment of the labor force now excluded.

Our experience has demonstrated that there is need also for improvement in other areas of the program. I refer specifically to the financing aspects. In 1954 the Congress, through the enactment of the Employment Security Administrative Financing Act-the socalled "Reed Act"-took steps to improve the financing of the employment security program. Under this act all revenues received under the Federal Unemployment Tax Act are covered into the general funds of the Treasury but are earmarked for financing the employment security program.

In general terms, the Employment Security Administrative Financing Act provides that all administrative costs of the employment service and unemployment insurance programs, both for the Federal and State agencies, are to be appropriated from these earmarked funds. Any balance remaining thereafter is used first to build up a reserve in the Federal unemployment account (created by the act) of $200 million. The remaining funds, if any, are then distributed among the several States in accordance with a formula prescribed in the law.

From the $200 million Federal unemployment account, interest free, repayable advances are made to the States for the payment of benefits, when the State reserves are reduced to certain levels. To be eligible for such an advance, the reserves of a State, at the close of any calendar quarter, must have fallen below the total compensation paid out under the State unemployment compensation law during the 12month period ending at the close of that calendar quarter.

The $200 million in the Federal unemployment account from which advances are made to the States for the payment of benefits has proven completely inadequate. In fact, the account was approximately $15.5 million short of meeting a recent request for an advance of $112 million to the State of Pennsylvania. În addition, Alaska and Michigan presently have advances of $8,265,000 and $113 million,