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

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.

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