Final Report

COMMERCE COMMITTEE

The Commerce Committee was assigned three studies. House Concurrent Resolution No. 3060 directed a study of the state's unemployment compensation system, including reserve guidelines for the unemployment trust fund, the system for ratesetting, treatment of positive balance and negative balance employers, and the feasibility and desirability of creating an unemployment compensation board. Section 5 of House Bill No. 1017 directed a study of the impact of pending federal legislation that would significantly change the respective federal-state responsibilities and funding for workforce development, workforce training, public labor exchange, and unemployment insurance programs. Section 5 of Senate Bill No. 2252 directed a study of consumer protection in regard to contractor competency and out-of-state contractors licensed in the state.

The Legislative Council also assigned the committee the responsibility to receive a report from the State Board of Agricultural Research and Education on its annual evaluation of research activities and expenditures under North Dakota Century Code (NDCC) Section 4-05.1-19 and a report regarding the safety and performance audit of the Roughrider Industries work programs as provided under NDCC Section 65-06.2-09. The Legislative Council Chairman assigned the committee the responsibility to receive a report regarding the 2004 rate increase proposed by Workforce Safety and Insurance and projections for future rate adjustments.

Committee members were Representatives George Keiser (Chairman), Donald L. Clark, Mark A. Dosch, Mary Ekstrom, Pat Galvin, Eliot Glassheim, Ron Iverson, Kim Koppelman, Mary K. Nester, Jo Ann Rodenbiker, Dan J. Ruby, and Arlo E. Schmidt and Senators Dick Dever, April Fairfield, Tim Flakoll, and Karen K. Krebsbach. Representative Dale C. Severson was a member of the committee until his death on November 4, 2003.

The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2004. The Council accepted the report for submission to the 59th Legislative Assembly.

UNEMPLOYMENT COMPENSATION SYSTEM STUDY

Background

Job Service North Dakota

The federal Social Security Act of 1935 included provisions for the creation of a program for the payment of benefits to unemployed individuals. Under federal law, payments are made to states with approved unemployment compensation laws under which the state administers an unemployment compensation program through public employment offices. The state program administration must conform with rules established by the federal government. The state of North Dakota has provided unemployment insurance to its residents since 1937 through the state and federal partnership. Job Service North Dakota is responsible for administering the unemployment program in this state.

Job Service North Dakota is required by law to appoint a State Advisory Council. In addition, Job Service may appoint local advisory councils. The advisory councils must be composed of an equal number of employer representatives and employee representatives and members representing the general public. The purpose of the councils is to aid Job Service in formulating policies, in discussing problems related to the administration of Job Service, and in assuring impartiality and freedom from political influence in the solution of the problems.

Unemployment Compensation Fund

Job Service North Dakota administers an unemployment compensation fund consisting of:

All contributions collected under the North Dakota Unemployment Compensation Law.
All fines collected pursuant to the provisions of the North Dakota Unemployment Compensation Law.
Interest earned upon any money in the fund.
Any property or securities acquired through the use of money belonging to the fund.
All earnings of the property or securities.
All money recovered on losses sustained by the fund.
All money received from the federal unemployment account in the unemployment trust fund in accordance with Title XII of the Social Security Act.
All money credited to this state's account in the unemployment trust fund pursuant to Section 903 of the Social Security Act.
All money received from the federal government as reimbursements pursuant to Section 204 of the Federal-State Extended Compensation Act of 1970.
All money received for the fund from any other source.

Job Service North Dakota is required to maintain a clearing account, the unemployment trust fund account, and a benefit account within the unemployment compensation fund. After clearance of all funds, the funds must be deposited in the United States Treasury to the credit of the state in the unemployment trust fund. The benefit account consists of all money requisitioned from the state's account in the unemployment trust fund to be used for the payment of benefits. Any money credited to the account of the state in the unemployment trust fund may be used for administration of the unemployment compensation program.

In 2001 the Legislative Assembly adopted legislation to require Job Service North Dakota to report to the Legislative Council before March 1 of each year the actual trust fund balance and the targeted modified average high-cost multiplier, as of December 1 of the previous year. In addition, the report must include a projected trust fund balance for the next three years.

Contributions and Ratesetting

North Dakota Century Code Chapter 52-04 addresses contributions required of employers under the North Dakota Unemployment Compensation Law and the determination of contribution rates. Contributions accrue and become payable by each employer with respect to wages paid for employment.

Statutory provisions for the determination of rates were amended significantly in 1999 in an attempt to raise the unemployment trust fund balance. House Bill No. 1135 (1999) provided a seven-year timeframe to achieve targeted unemployment compensation fund reserve goals based in part on a national economic model that estimates the funds needed to pay unemployment claims for a one-year recessionary period based on current wages and historical claims.

Section 52-04-05 establishes the formula for determining the trust fund reserve target. That section provides, in part:

The solvency target is an average high-cost multiple of one. The average high-cost multiple is the number of years the bureau [Job Service North Dakota] could pay unemployment compensation, based on the reserve ratio, if the bureau paid the compensation at a rate equivalent to the average benefit cost rate in the one calendar year during the preceding twenty calendar years and the two calendar years during the preceding ten calendar years in which the benefit cost rates were the highest. "Reserve ratio" means the ratio determined by dividing the balance in the trust fund reserve at the end of the calendar year by the total covered wages in the state for that year. "Benefit cost rate" means the rate determined by dividing the unemployment compensation benefits paid during a calendar year by the total covered wages in the state for that year. The computation of the reserve ratio and benefit cost rate must exclude the wages and unemployment compensation paid by employers covered under section 3309 of the Internal Revenue Code of 1986, as amended [26 U.S.C. 3309]. The trust fund reserve target will be achieved over a seven-year period from January 1, 2000. Progress toward achieving the targeted amount of the trust fund reserve is measured by reducing any difference between one and the average high-cost multiple of the state by an amount that is at least equal to the ratio of the number of years left to reach the targeted amount of the trust fund reserve to the difference between the trust fund reserve and the targeted amount. If the calendar year annual average insured unemployment rate is above three percent and has increased one hundred ten percent of the average of the preceding two calendar years, a tax rate will be set to provide for fifty percent of the additional revenue needed for the trust fund to be derived from tax rate increases and the remaining fifty percent becomes a drawdown against the trust fund reserve. In setting tax rates, the amount of the trust fund reserve may not be allowed to fall below three hundred percent from a standard margin of error for the targeted amount of the trust fund reserve.

The executive director of Job Service North Dakota may make reasonable adjustments to the tax rates set for a calendar year to prevent significant rate variations between calendar years. When the trust fund reserve is being rebuilt, rates may not be lowered until the target level is reached. If, while achieving the trust fund reserve target, the trigger of above 3 percent insured unemployment rate and an increase of more than 110 percent of the average of the two preceding years has been in effect for two or more consecutive years, the period of time to achieve the trust fund reserve target is extended to seven years from the end date of the last year in which the trigger was in effect. If this trigger has been in effect for one year, the amount of tax increase toward achieving the targeted amount of the trust fund reserve must be determined using the number of years remaining of the seven-year period, excluding the year the trigger is in effect.

Sections 52-04-05 and 52-04-06, which were amended in 1999 and 2001, set forth the variables used in determining rates. Under Section 52-04-05, rates must be determined as follows:

The income required for the calendar year must be divided by the estimated taxable wages for the calendar year. The result rounded to the next higher one one-hundredth of 1 percent is the average required rate.
If the positive employer maximum rate is at least 1 percent, the positive employer minimum rate is the positive employer maximum rate minus nine-tenths of 1 percent. If the positive employer maximum rate is less than 1 percent, the range for the positive employer minimum rate must be at least one-tenth of 1 percent and must be less than two-tenths of 1 percent (the minimum of one-tenth of 1 percent plus the increment of one-tenth of 1 percent), with the positive employer minimum rate equal to the positive employer maximum rate minus a multiple of the increment one-tenth of 1 percent as provided in Section 52-04-06(2) to fall within the range described above. Within the table of rate schedules for each calendar year, a rate schedule may not be used if it would generate less income than any rate schedule preceding it on the table of rate schedules. The negative employer minimum rate is the positive employer maximum rate plus 5.1 percent.
The positive employer maximum rate must be set so that all the rates combined generate the average required rate. The negative employer maximum rate is the negative employer minimum rate plus 3.6 percent. However, the maximum rate must be at least 5.4 percent.

Section 52-04-05 further provides that unless otherwise provided, an employer's rate may not be less than the negative employer minimum rate for a calendar year unless the employer's account has been chargeable with benefits throughout the 36-consecutive-calendar-month period ending on September 30 of the preceding calendar year. In addition, if an employer in construction services has not been subject to the law as required, that employer qualifies for a reduced rate if the account has been chargeable with benefits throughout the 24-consecutive-calendar-month period ending September 30 of the preceding calendar year. If an employer in nonconstruction services has not been subject to the law as required, the employer in nonconstruction services qualifies for a reduced rate if the account has been chargeable with benefits throughout the 12-consecutive-calendar-month period ending September 30 of the preceding calendar year.

Section 52-04-05 also placed a limit on the increase of rates for calendar years 2000, 2001, and 2002. During the building of the trust fund reserve, the rate assigned to an employer may not exceed 130 percent of the previous year's rate for that employer and an employer may not receive more than a 10 percent decrease in that employer's rate from the previous year's rate for calendar years 2000, 2001, and 2002. However, the rate limitation provision for calendar years 2000, 2001, and 2002 did not apply to an experience-rated employer that was a new employer the previous year, a negative employer that was a positive employer the previous year, a positive employer that was a negative employer the previous year, an employer that failed to file a report, a new employer, and an employer that chose to make payments in lieu of contributions. With respect to a new employer, Section 52-04-05 provides that for each calendar year, the new employer must be assigned a rate that is 150 percent of the positive employer maximum rate or a rate of 1 percent, whichever is greater, unless the employer is classified in construction services. However, an employer must be assigned within the negative employer rate ranges for any year if, as of the computation date, the cumulative benefits charged to that employer's account equal or exceed the cumulative contributions paid on or before October 31 with respect to wages paid by that employer before October 1 of that year. A new employer in construction services must be assigned the negative employer maximum rate.

The executive director of Job Service North Dakota is authorized to provide any negative employer whose contributions paid into the trust fund are greater than the benefit charges against that employer's account, for a minimum of three consecutive years immediately preceding the computation date or subject to the law as required, with up to a 30 percent reduction to that employer's rate for any year if that employer has in place a plan approved by Job Service which addresses substantive changes to that employer's business operation and ensures that any rate reduction provided will not put the employer's account back into a negative status.

Section 52-04-06 addresses the determination of rate groups. That section provides that an employer's reserve ratio is the difference between the six-year contributions paid by that employer on or before October 31 of any year, with respect to wages paid by that employer before October 1 of that same year, and the six-year benefits charged to that employer's account before October 1 of that year, divided by the average annual payroll. Job Service North Dakota is required to assign an employer whose cumulative contributions exceed cumulative benefits within the positive employer rate groups. An employer whose cumulative contributions are equal to or less than cumulative benefits must be assigned within the negative employer rate groups.

Job Service North Dakota is required to establish, for each calendar year, a schedule of positive employer rate groups within the positive employer minimum rate and the positive employer maximum rate. Each successive rate group for positive employer rate groups must be assigned a rate equal to the previous group's rate plus one-tenth of 1 percent. The number of rate groups in the positive employer schedule must be the number required to provide for a rate group at each one-tenth of 1 percent interval between the positive employer minimum rate and the positive employer maximum rate. In addition, for each calendar year, Job Service is required to establish a schedule of negative employer rate groups with the negative employer minimum rate and the negative employer maximum rate. Each successive rate group for negative employer rate groups must be assigned a rate equal to the previous group's rate plus four-tenths of 1 percent. The number of rate groups in the negative employer schedule must be the number required to provide for a rate group at each four-tenths of 1 percent interval between the negative employer minimum rate and the negative employer maximum rate.

Job Service North Dakota is required to assign positive employers to the rate in the positive employer rate schedule in the rank order of their reserve ratios with the highest reserve ratio positive employers assigned to the first positive employer rate. Job Service is also required to assign each successively ranked positive employer to a rate within the positive employer rate schedule so that each rate within the rate schedule is assigned the same proportion of the positive employer's prior year's taxable wages. Job Service is required to make similar assignment requirements for negative employers.

Testimony and Committee Considerations

Ratesetting

The committee received testimony from representatives of Job Service North Dakota regarding the 1999 legislation that was intended to stabilize the average unemployment insurance tax rate, shift part of the burden from positive balance employers to negative balance employers, and raise the unemployment trust fund balance to a solvency target over a seven-year period. Before that legislation, unemployment tax rates had been very volatile, and tax revenue to the fund was less than benefit payouts since 1994. When the rate limiters contained in the 1999 legislation expired in 2002, many employers' tax rates for 2003 increased dramatically. However, testimony indicated that tax rates are expected to remain stable until the trust fund reaches the targeted reserve in 2007.

Positive Balance and Negative Balance Employers

The committee received testimony arguing that positive balance employers are subsidizing negative balance employers who are paying the maximum tax rate, but not assessed full liability. Because of the cap on the maximum tax rate for negative balance employers, the burden of building the reserves in the trust fund falls on the positive balance employers.

Because seasonal job-attached employees are entitled to receive benefits without being required to seek other employment while waiting to be reemployed by the seasonal employer, representatives of positive balance employers contended that negative balance employers use the unemployment insurance system as a means to retain seasonal employees rather than encourage the seasonal employees to seek other employment during the employer's off-season. Conversely, representatives of seasonal employers and seasonal employees argued that the policy of providing unemployment compensation benefits to seasonal employees helps ensure that industries, such as the construction industry, will be able to maintain experienced, well-trained employees rather than lose those employees as they leave the state for jobs in warmer climates.

The committee considered a bill draft that created a proportionately greater responsibility on negative balance employers for that portion of the unemployment insurance tax burden, which represents the amount of revenue necessary to make due progress toward the unemployment insurance reserve fund solvency target. Proponents of the bill draft argued that although positive balance employers still would be subsidizing negative balance employers, the bill draft would shift a small portion of the burden of making progress to the reserve fund solvency target to the negative balance employers.

Job Service Advisory Council

Although state law requires Job Service North Dakota to appoint an advisory council, the committee received testimony indicating the current advisory council is ineffective because the last two Governors have designated the Workforce Development Council as the Job Service Advisory Council. Testimony indicated that the Workforce Development Council has not engaged in any discussion addressing policies and problems related to unemployment compensation.

The committee considered two bill drafts that would have provided for a seven-member advisory council to advise Job Service North Dakota regarding issues relating to the operations, effectiveness, fairness, and efficiency of the unemployment insurance program. One of the bill drafts would have required the executive director of Job Service to appoint the members of the advisory council and the other bill draft would have required the Governor to appoint the members of the advisory council. Committee members generally agreed that members of the advisory council should be appointed by the Governor.

Proponents of the bill draft argued that establishing an advisory council consisting of members who are familiar with and interested in the unemployment compensation system would provide valuable guidance to Job Service North Dakota and would provide employers and employees an opportunity to have input in decisions made by Job Service. Opponents of the bill draft contended that the advisory council required under current law could be effective if the members appointed to the council were truly interested in improving the unemployment compensation system. In addition, opponents of the bill draft argued that the bill draft provided for a disproportionate number of employers on the council membership. Conversely, others argued that the membership of the council should be expanded beyond seven members to include additional employer members representing specific industries in the state.

Recommendations

The committee recommends House Bill No. 1027 to revise the formula for determining unemployment compensation tax rates so that a proportionately greater responsibility is shifted to negative balance employers for that portion of the unemployment insurance tax burden, which represents the amount of revenue necessary to make due progress toward the unemployment insurance reserve fund solvency target.

The committee recommends House Bill No. 1028 to establish a seven-member Job Service North Dakota Advisory Council, appointed by the Governor, for the purpose of advising Job Service regarding issues relating to the operations, effectiveness, fairness, and efficiency of the unemployment insurance program.

IMPACT OF FEDERAL UNEMPLOYMENT COMPENSATION LEGISLATION STUDY

Background

North Dakota Century Code Section 52-08-01, which was enacted in 1935, provides that the state of North Dakota accepts and will observe federal law regarding the establishment of a national employment system. To carry out its responsibilities, Job Service North Dakota is required by law to establish and maintain free public employment offices where necessary in the state.

Workforce Training and Development Programs

Job Service North Dakota

Job Service North Dakota provides workforce training and development through numerous federal and state programs, including:

The Workforce Investment Act of 1998, which is the primary federal workforce training program. The purpose of the Act is to increase occupational skill attainment, employment, retention, and earnings of participants through program activities, such as classroom training, on-the-job training, and work experience. The Workforce Investment Act of 1998 was scheduled to expire on September 30, 2003. Congressional legislation to reauthorize the Act remains in conference committee.
The job opportunities and basic skills (JOBS) program under which Job Service North Dakota contracts with the Department of Human Services for administration. The program provides basic education and specific job skills training to people eligible for the temporary assistance for needy families (TANF) program.
The Work Force 2000 program, which is a state-funded job training program designed to assist North Dakota industry and business in retraining and upgrading workers' skills to meet demands brought about by the introduction of new technologies and work methods into the workplace and to provide assistance to companies to help train new employees.
The trade adjustment assistance program, which is a federal program administered in the state by Job Service North Dakota. The program provides special job training, job search assistance, relocation, and related services to workers who have become unemployed as a result of foreign imports or jobs going to Canada or Mexico, as a result of the North American Free Trade Act.
The senior community service employment program, which is designed to foster and promote useful part-time employment opportunities in community service activities for unemployed low-income individuals who are 55 years of age and older and who have decreased employment prospects.
The new jobs training program, which was enacted by the 53rd Legislative Assembly (1993). The program provides a state income tax withholding credit equal to the state income tax withholding projected to be generated from new jobs created. To qualify an employer must either be locating to the state or expanding employment within the state. The eligible employer may access funding by obtaining a grant or loan from a commercial or private lender, city, or local development corporation. The loan or grant covers the costs of workforce training and program administration identified in the project agreement between the employer and Job Service North Dakota. The loan or grant is repaid through state income tax withholding credits generated from the new positions created.

Department of Commerce

The Department of Commerce Division of Workforce Development is responsible for providing administrative support for the North Dakota Workforce Development Council, the North Dakota Youth Development Council, and the State Commission on National and Community Service. The division is also responsible for the development of a public and private partnership for the recruitment of workers.

The purpose of the North Dakota Workforce Development Council is to advise the Governor and the public regarding the nature and extent of workforce development and economic development needs in North Dakota and how to meet those needs effectively while maximizing the efficient use of available resources and avoiding unnecessary duplication of effort. The council is responsible for drafting the state's five-year strategic workforce development plan, assisting the Governor in the development of a statewide workforce investment system carried out through a one-stop delivery system, developing and improving state performance measures that will be used to assess the effectiveness of programs covered by statewide workforce investment activities, developing a statewide employment statistics system, and coordinating workforce development system activities with state and local economic development strategies.

The division administers northdakotahasjobs.com, which is a single statewide web site that provides seamless access for employers and jobseekers to a job opening and resume management system to support the recruitment of alumni and workers from out of state. The web site has a student/adult career guidance system, assessment tools, and electronic portfolio integrated into the site to provide employers with opportunities to advertise internship and work-based learning opportunities while giving students a tool to learn about employers that exist in the state and opportunities the employers have available.

In 2003 the Legislative Assembly required the Department of Commerce, in cooperation with Job Service North Dakota, the Department of Human Services, and the North Dakota University System, to include in its annual report to the Legislative Council the number of individuals trained and the number who became employed as a result of each entity's workforce development and training programs, including the state's investment, the areas of occupational training, the average annual salary of those employed, and the average increase in earnings 12 months after completion of training.

The division also provides matching funds to communities that participate in standardized community labor availability studies.

Department of Human Services

The Department of Human Services provides workforce training and development assistance for individuals who are eligible under selected public assistance programs, including:

The TANF program, which is a federal and state program to provide cash assistance to families in need and to reduce dependency by promoting job preparation and work. Under the program, individuals may receive basic education and job skills training and work support assistance, such as child care assistance, transportation assistance, and career-related counseling.
The JOBS program, which is the employment and training component of the North Dakota TANF program under which individuals who are eligible for the TANF program may receive basic education and specific job skills training.
The child care assistance program, which provides assistance to low-income families to help obtain and pay for the care of dependent children while individuals are at work or in training.

State Board for Career and Technical Education

The State Board for Career and Technical Education administers vocational technical education in the state through programs provided by public school districts, Bureau of Indian Affairs schools, tribally controlled colleges, junior and state colleges, state universities, and other agencies. The mission of the State Board for Career and Technical Education is to work with others to provide all North Dakota citizens with the technical skills, knowledge, and attitudes necessary for successful performance in a globally competitive workplace. The board also distributes grant funds for specialized industry training provided on demand by vocational education centers.

North Dakota University System

The North Dakota University System provides workforce training and development through the institutions' continuing education divisions and the four community colleges that are responsible for coordinating workforce training activities.

The University System appropriation for the 2003-05 biennium included $1,550,000 for centers of excellence. The purpose of the program is to develop and engage strategies for science and technology research and development, commercialization, entrepreneurship, infrastructure, growth and expansion of knowledge-based industries, and activities in the state to develop innovative approaches that expand the gross state product; to assist efforts to attract private and federal assistance for science and technology research and development and for commercialization in growth clusters most likely to increase the gross state product; to increase collaboration among state, federal, and private research and development and technology commercialization organizations in the state; to strengthen the leadership and support of the National Science Foundation experimental program to stimulate competitive research programs and to encourage partnerships with other state institutions for expanded efforts to stimulate economic growth in identified industry clusters; to provide leadership in science and technology policy at a regional, a national, and an international level; and to create employment opportunities for North Dakota University System graduates.

Proposed Federal Legislation

In 2002 the United States Department of Labor sent to Congress the administration's proposal for an overhaul of the unemployment compensation system. Among other things, the proposal would reduce employers' federal unemployment taxes and transfer control of funding for unemployment compensation services and administration to the states. States would be allowed to use existing unemployment tax systems to fund the administration of the programs or create a separate administration tax. The federal government would continue to set standards for coverage and benefits.

Federal grants to states would continue for federal activities such as federal unemployment claims, tax credits, alien labor certification, required reports, and statistical programs. Proposals for reauthorization of the Workforce Investment Act also include provisions for offering personal reemployment accounts to some unemployed individuals.

Testimony and Committee Considerations

The committee received reports from representatives of Job Service North Dakota regarding proposed federal legislation and the potential effect of the legislation on the unemployment compensation system in this state. The reports indicated that although reauthorization of the Workforce Investment Act could provide opportunities for strengthening some of the infrastructure in place for training programs and creating a more responsive, demand-driven system, representatives of Job Service have concerns regarding the effect of proposals to change the cost allocation for operating the one-stop career centers and the administrative and consolidated funding stream. Under the reauthorization proposal, each partner in the one-stop career centers would be required to pay a portion of the cost, which could result in reductions in funding. In addition, reauthorization could result in a loss of funding for youth training programs due to proposals to direct funds to certain impacted local workforce areas. However, proposals for reauthorization could also allow expanded use of individual training accounts.

The committee also was informed of four proposals under consideration by either the United States Congress or the United States Department of Labor which could have a significant impact on the unemployment insurance compensation program in the state. One proposal would devolve the administrative funding responsibility for the program from the federal government to the states by 2009, when the states would be expected to cover the full administrative costs of the unemployment insurance programs without federal support except for a hold harmless provision that would protect states from a too rapid decline in federal administrative grant funding for the first five years of the proposal's full implementation. Although the proposal could be described at the federal level as a reduction of employer taxes, the result is that taxes would have to be increased at the state level to cover the administrative costs. If the federal tax is reduced, the Legislative Assembly would have to determine if the state should continue to fund the public employment service, reemployment services, and online position advertising and virtual recruitment services.

A second proposal would take the Wagner-Peyser portion of the grants that states receive as a result of the Federal Unemployment Tax Act and consolidate that funding with the Workforce Investment Act adult and dislocated worker funding streams. The testimony indicated that one of the potential impacts of the proposal is that one-stop funding would be focused on low-wage workers when the state needs to attract and serve job seekers from across the income and skills spectrums.

Another proposal under consideration would create personal reemployment accounts for claimants profiled as being likely to exhaust their benefits and who are eligible for 20 weeks or more of benefits. The accounts would be available to the claimants for purchase of workforce training and support services deemed necessary to prepare them for reemployment. The committee was informed that the proposal likely would result in increased workload for Job Service North Dakota.

The fourth proposal involves the United States Department of Labor revising unemployment insurance performance standards by reducing the number of standards and adding a standard that measures the effectiveness of the states' reemployment efforts. The testimony indicated that if the adopted performance standard would require some specific outcome with respect to all unemployment insurance claimants, that standard could not be met unless Job Service North Dakota staff had interface with all unemployment insurance claimants. In addition, there was some concern with timeframes selected with respect to placement and measuring retention.

The committee received testimony from representatives of Job Service North Dakota regarding the need to replace the unemployment insurance computer system because the unemployment tax and benefit processing system is nearing obsolescence. The committee received information indicating that several other states are in the process of replacing unemployment insurance computer systems at costs of up to $65 million. An initial cost estimate for replacing the Job Service system was $18 million to $24 million.

The state received $15.2 million in federal Reed Act funds in 2002 which may be used to address computer system replacement. In addition, there is potential for another Reed Act distribution that could result in another $16 million allocation to North Dakota. The committee was informed that further study of the replacement of the unemployment insurance computer system is necessary and Reed Act funds may be used to conduct a preliminary procurement planning study.

The committee received a report from representatives of Job Service North Dakota regarding a proposal to implement a "work first" reemployment model, which would consist of orientation to a reemployment program, a one-on-one assessment, development of employment plans, and periodic reemployment reviews of claimants. During a period of unemployment, a worker would go through a process that would initiate the reemployment process, conduct a face-to-face appointment, and complete an online resume. The model would be tested at control sites in Bismarck, Minot, Fargo, and Grand Forks.

Recommendations

Because no significant changes in federal law were adopted before the committee completed its study, the committee makes no recommendation for responding to the proposed changes in federal law.

The committee expressed its support for a request by Job Service North Dakota to the 59th Legislative Assembly for an appropriation of Reed Act funds adequate to fund procurement planning studies, including development and issuance of a request for proposals relating to the costs and appropriate technology to replace the mainframe computer application used to process unemployment insurance claims and unemployment insurance tax reporting and payment.

The committee also expressed its support for a proposal by Job Service North Dakota to request an appropriation by the 59th Legislative Assembly of $250,000 of Reed Act funds to fund a pilot project on intensive reemployment actions designed to demonstrate whether those actions can have a significant effect on reducing expenditures from the unemployment insurance trust fund.

CONTRACTOR COMPETENCY STUDY

Background

North Dakota Century Code Chapter 43-07 addresses licensing of contractors. A contractor includes "any person engaged in the business of construction, repair, alteration, dismantling, or demolition of bridges, highways, roads, streets, buildings, airports, dams, drainage or irrigation ditches, sewers, water or gas mains, water filters, tanks, towers, oil, gas, or water pipelines, and every other type of structure, project, development, or improvement coming within the definition of real or personal property, including the construction, alteration, or repair of property to be held either for sale or rental, and shall include subcontractor, public contractor, and nonresident contractor."

A nonresident contractor is any contractor who has not established and maintained a place of business within this state, or who has not made reports to North Dakota Workforce Safety and Insurance within the previous year of employees within the state, and who has not made contributions to the North Dakota Workforce Safety and Insurance fund accordingly, or who, during a like period has not made an income tax return in this state.

A contractor is required to be licensed if the cost, value, or price per job exceeds $2,000. The Secretary of State is responsible for enforcing the licensing provisions of NDCC Chapter 43-07 and may request the Attorney General to bring an action to enjoin a person from acting as a contractor if the person is not licensed as required.

An individual who is 18 years of age or older may apply for a license to act as a contractor by completing the necessary forms and submitting under oath a statement of the applicant's experience and qualifications as a contractor. In addition, the applicant must submit a copy of a certificate of insurance indicating liability coverage and submit a statement from Workforce Safety and Insurance that the applicant has secured satisfactory workforce safety and insurance coverage.

The Secretary of State is required to classify as not in good standing the license of any contractor who fails to:

Maintain liability insurance coverage.
File, renew, or properly amend any fictitious name certificate.
Maintain an active status of a corporation or registration as a foreign corporation.
Maintain an active status of a limited liability company or registration as a foreign limited liability company.
File or renew a trade name registration.
File or renew a limited liability partnership or foreign limited liability partnership.
File or renew a limited partnership or foreign limited partnership.

A contractor who has been notified by the Secretary of State that the contractor's license is not in good standing must cease soliciting or entering new contract projects. If the contractor does not correct the specified deficiency within 30 days or if the contractor enters new contract projects while the contractor's license is not in good standing, the Secretary of State is required to revoke the license of the contractor under the procedures set forth in the Administrative Agencies Practice Act (NDCC Chapter 28-32).

Four classes of licenses define the limitations on the types of projects on which a contractor may work. The holder of a Class A license is subject to no limitation as to the value of any single contract project. The holder of a Class B license may not engage in the construction of any single contract project of a value in excess of $250,000, the holder of a Class C license may not engage in the construction of any single contract project of a value in excess of $120,000, and the holder of a Class D license may not engage in the construction of any single contract project of a value in excess of $50,000. The fee for a Class A license is $300, $200 for a Class B license, $150 for a Class C license, and $50 for a Class D license. A license is effective for one year.

A licensee may renew a contractor's license by obtaining from the Secretary of State a certificate of renewal. When filing for a renewal, the licensee is required to file an application that includes a listing of each project, contract, or subcontract completed by the licensee during the preceding calendar year in North Dakota, and if a performance bond was required, the name and address of the issuer of the bond. In addition, the applicant is required to include with the application a copy of a certificate of liability insurance and a certification that the applicant has submitted all payroll taxes. An application for renewal must be filed by March 1 of each year. The fee for renewal of a license is equal to 20 percent of the license fee for that class of contractor. If a contractor fails to file for a renewal by March 1, the contractor is deemed to be unlicensed. However, the contractor has until June 1 of that year to renew a license by paying a penalty fee of 75 percent of the renewal fee and paying the renewal fee. After June 1, any license not renewed is revoked.

The Secretary of State is required to maintain a complete indexed record of all applications, licenses, certificates of renewal, revocations, and other information maintained on contractors. The Secretary of State may dispose of an inactive contractor file after two years if no attempts have been made to apply for a new license or renew the license.

North Dakota Century Code Section 43-07-14 establishes the grounds under which a complaint may be filed against a contractor, including:

Abandoning any contract without legal excuse.
Diverting funds or property received under express agreement for the prosecution or completion of a specific contract, or for a specified purpose in the prosecution or completion of any contract, and applying using the funds for any other contract obligation or purpose to defraud or deceive creditors or the owner.
Engaging in any fraudulent or deceptive acts or practices or misrepresentation as a contractor in consequence of which one or more persons is injured in a total amount exceeding $3,000.
Making any false statement in any application for a license or renewal, violating any provision of NDCC Chapter 43-07, or being convicted of an offense the Secretary of State determines has a direct bearing on the applicant's or licensee's ability to serve the public as a contractor.
Engaging in work without any trade or professional license required for that work.
Failing to fully refund the contracting party's advance payment if a rebuttable presumption of abandonment has arisen and the contracting party has made a request to the licensee for a refund.

The Secretary of State is required to review all complaints filed with respect to contractors. If the Secretary of State determines that a complaint provides sufficient facts upon which a reasonable person could conclude that one or more of the acts or omissions set forth in NDCC Section 43-07-14 have been committed, the Secretary of State may initiate an adjudicative proceeding in accordance with Chapter 28-32. If, after an adjudicative proceeding or as part of an informal disposition under Chapter 28-32, the Secretary of State determines that the licensee is guilty of an act or omission charged or if the licensee admits guilt to an act or omission charged, the Secretary of State may suspend or revoke the contractor's license, order a civil penalty of not more than $1,000, order restitution in an amount not more than $5,000, or impose a lesser sanction or remedy. The Secretary of State may suspend the contractor's license for a period of not more than 60 months and may not renew, reinstate, or issue a new license until the licensee has paid any civil penalty or restitution imposed. The Secretary of State may bring an action in district court to recover restitution or penalties. A contractor aggrieved by a decision of the Secretary of State in revoking or suspending the contractor's license or ordering restitution or penalties may appeal the decision to the district court. A licensee is prohibited from obtaining a license under any name during the period of revocation or suspension. A licensee whose license has been revoked may not be relicensed for a period of up to five years.

North Dakota Century Code Section 43-07-19 addresses nonresident contractors. An applicant for a contractor's license who is not a resident of North Dakota, by signing and filing the application, is deemed to have appointed the Secretary of State as the applicant's lawful agent upon whom may be served all lawful process in any action or proceeding against the nonresident contractor. Registered foreign corporations entitled to do business in this state according to Chapter 10-19.1, registered foreign limited liability companies entitled to do business in the state according to Chapter 10-32, foreign limited liability partnerships entitled to do business in the state according to Chapter 45-22, and foreign limited partnerships entitled to do business in the state according to Chapter 45-10.1 and having a current registered agent and registered address on file in the Secretary of State's office are not required to appoint the Secretary of State as agent for service of process.

North Dakota Century Code Section 43-07-25 provides that on request the Secretary of State must provide city and county enforcement officials with a list of licensed contractors. The Secretary of State also is required to provide information on the activities of a contractor doing business in this state of which officials of Workforce Safety and Insurance, Job Service North Dakota, or the Tax Commissioner may be unaware and that may be relevant to the duties of those officials.

Testimony and Committee Considerations

The committee received reports from the Secretary of State and a representative of the Attorney General's office regarding the handling of complaints against contractors. Although the Secretary of State, the Attorney General, and Workforce Safety and Insurance have participated in enforcement checks to determine if contractors are licensed and paying all applicable state payroll taxes and have encouraged consumers to seek background information regarding contractors before entering contracts, consumers in the state occasionally experience problems with unlicensed contractors and contractors that do not complete projects to the satisfaction of consumers. The testimony indicated that a relatively small number of contractors are responsible for a large number of the complaints filed with the Secretary of State and the Attorney General.

The committee received testimony suggesting that some out-of-state contractors that have done work in the state after recent storms or disasters have performed poor work and quickly left the state with no intention of fulfilling warranties. Because concern was expressed that treating out-of-state contractors differently from resident contractors could be found to be unlawfully discriminatory by the courts, committee members generally were reluctant to impose additional regulatory burdens with respect to the licensing process. However, the Secretary of State presented proposals to the committee to enhance the authority of the Secretary of State and the Attorney General to regulate the conduct and the licensing of contractors.

Although concerns were expressed regarding placing additional burdens on applicants for licenses, the committee considered a bill draft that authorized the Secretary of State to request criminal history background information for applicants for a contractor's license or for renewal of a contractor's license; authorized the Attorney General to use consumer fraud statutes to bring complaints against contractors; and provided additional grounds for denying an application for a contractor's license, refusing to renew a license, or revoking a license.

Recommendation

The committee recommends Senate Bill No. 2026 to authorize the Secretary of State to request criminal history record information regarding an applicant for a contractor's license or contractor seeking to renew a license; to authorize the Attorney General to bring a complaint against a contractor under consumer fraud laws; and to specify additional grounds upon which the Secretary of State may deny an application for a contractor's license, refuse to renew a license, or revoke a license.

STATE BOARD OF AGRICULTURAL RESEARCH AND EDUCATION REPORT

Pursuant to NDCC Section 4-05.1-19, the State Board of Agricultural Research and Education submitted a report to the committee on its annual evaluation of research activities and expenditures. The report summarized how the board is responding to each of the board's statutory responsibilities and reviewed the various programs and activities of the board.

WORKFORCE SAFETY AND INSURANCE REPORTS

Safety Audit of Roughrider Industries Work Program and Performance Audit of the Modified Workers' Compensation Coverage Program

The committee received a report from Workforce Safety and Insurance regarding the safety audit of Roughrider Industries work programs and the performance audit of the modified workers' compensation coverage program. The modified workers' compensation program was established in 1997 to provide workers' compensation coverage for inmates in prison work programs and to allow Roughrider Industries to continue receiving federal funding through the prison industry enhancement certification program. The safety audit indicated Roughrider Industries was found to be in compliance with all components of the Workforce Safety and Insurance risk management program. The September 2004 audit of the modified workers' compensation coverage program concluded that the desired results and effectiveness of the program are being achieved. The Workforce Safety and Insurance Board of Directors may be presenting a proposal to allow the board to set an adequate premium rate if the board determines that the premium charged is not adequate to cover administrative expenses for the program.

2004 Premium Rate Increase

The Workforce Safety and Insurance Board of Directors authorized the agency to proceed in March 2004 with a proposal for a premium rate increase for workers' compensation coverage. The board indicated the increase was necessary to counteract the rapid increase in medical and prescription drug costs. The proposed rate changes for the 141 individual classifications ranged from 4 to 14 percent. The recommendation presented by the board provided for a 9 percent average rate increase. Because of the investment gains of the workers' compensation fund, a performance dividend of $5 million to $6 million was proposed to mitigate the premium rate increase. Therefore, the net effect of the premium rate proposal was estimated to average 4 percent. Representatives of Workforce Safety and Insurance stated that even with the proposed premium increase, a national study indicated that North Dakota employers will continue to pay the lowest premiums in the country while ranking in the top 20 states in benefits paid to injured workers. In addition, the premium rates remain significantly lower than the rates were 10 years ago. However, it was reported that because reductions in rates attributable to efficiencies in administration, safety, and cost control have reached a point at which further savings are not feasible, premium rates must be increased to account for increased costs due to medical and prescription drug cost inflation.