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Consequently by an action of the Federal Government, these persons would be subjected to a substantial loss of badly needed retirement income, notwithstanding the fact that they have retired in accordance with clear instructions (reinforced in each case by a formal quotation of benefits from the State pension fund) in order to avoid any reduction in pension.

The New Jersey Education Association and the New Jersey Civil Service Association are not asking for any extension of social security benefits for these people. We are asking that the benefits they were promised when they retired will be paid.

We are not asking that regulations be changed specially for these people. We are asking that the requirements for attaining "fully insured" status which existed when these people retired be preserved for them.

To this end, we ask that before section 204 (a) of H.R. 12580 is enacted into law it be amended in such a way that some 3,400 deserving retired public employees will not be adversely affected.

(By direction of the chairman, the following is made a part of the record:)


(For staff analysis and departmental views, see p. 482)


Chairman, Senate Committee on Finance,
Washington, D.C.

DEAR MR. CHAIRMAN: On May 26, 1960, we introduced S. 3594, a bill to modify conditions for a reduced rate of contributions under the Federal Unemployment Tax Act. This bill was prepared in consultation with the United States and New York State Departments of Labor, in order to permit effective coverage of nonprofit religious, charitable, literary, scientific, and educational organizations under the Federal act. The provisions of this bill would permit coverage of such organizations on a reimbursement rather than tax basis without coming into conflict with section 3303 (a) (1) of the Federal Unemployment Tax Act, which would make the entire State program ineligible if this treatment were given to nonprofit organizations. The New York State Legislature enacted legislation this year which would permit nonprofit organizations to participate in such coverage. subject to the adoption of Federal enabling legislation. We are also informed that a similar proposal pending in California would also be made possible by the adoption of this proposal.

The introduction of a companion bill in the House of Representatives was discussed with the senior New York member of the Ways and Means Committee, Representative Keogh, but the lateness of its presentation to that committee did not permit consideration of the proposal in that body.

We are, therefore, reintroducing S. 3594 as an amendment1 to the Social Security Amendments of 1960, H R. 12580, which will soon be before your committee for consideration. In order that you may fully evaluate the purpose of this amendment. we are enclosing a memorandum prepared in support of this proposal by the division of employment of the New York State Department of Labor, and a letter of transmittal from them, indicating their discussions with Representative Keogh.

We hone that the committee may be able to act favorably on this proposal. Sincerely,


1 Introduced on June 24, 1960, as amendment 6-24-60-E.



Albany, N.Y., June 14, 1960.

Re Federal bill to facilitate State coverage of nonprofit organizations.

U.S. Senate, Washington, D.C.

(Attention: Mr. Robert Kaufman, legislative assistant).

DEAR SENATOR JAVITS: Mr. Alfred L. Green, the executive director of the division of employment, who is out of the State on official business, has asked me in his absence to handle the Federal bill to facilitate State coverage of nonprofit organizations.

Following the suggestion made by your office, we took up the introduction of a companion bill to S. 5394 with Representative Eugene J. Keogh. Mr. Keogh was receptive to the idea and took it up with the Committee on Ways and Means. Because the committee, on June 9, 1960, reported the social security bill, time did not permit full consideration of the proposal by that committee. It was suggested that the Senate Finance Committee consider the proposal at this stage. Mr. Keogh promised every possible assistance. Please advise what action may be taken in this regard.

For your information, I transmit a copy of the memorandum which was sent to Mr. Keogh on June 6, 1960, in support of the companion bill.

Sincerely yours,


Director, Unemployment Insurance Accounts Bureau.



Enactment of the bill would afford all States a new method for providing protection against unemployment to employees of nonprofitmaking religious, charitable, literary, scientific, and educational organizations. It would permit the coverage of such organizations on a reimbursement rather than a tax basis. This is not now possible because the States' permitting coverage on a reimbursement basis would be in conflict with section 3303 (a) (1) of the Federal Unemployment Tax Act.

Section 3303 (a) (1) sets forth standards for the several State laws, adherence to which is required in order that the employers within any such State whose tax rates are less than 2.7 percent be permitted to obtain an additional credit against the Federal unemployment tax for the difference between 2.7 percent and the lower rates accorded employers under the State's experience rating formulas, thus, limiting the payment to the Federal Government in all cases to an excise tax of only three-tenths of 1 percent. The Federal act requires that under State law no reduced rate of contributions may be permitted to a "person" except on the basis of his experience with respect to unemployment. This provides coverage of nonprofitmaking religious, charitable, literary, scientific, and educational organizations on a cost basis because section 7701 (a) (1) of the Internal Revenue Code includes such organizations as "persons" within the meaning of section 3303(a). Hence, without the enactment of this bill all employers within any State whose law permitted reimbursement of benefits in lieu of tax would be deprived of the additional credit since the Secretary of Labor would no longer find that under such law no reduced rate of contributions is permitted to a "person" except on the basis of his experience with respect to unemployment.


At the present time in New York State alone approximately 350,000 employ ees engaged by 7,500 nonprofit organizations devoted exclusively to religious, charitable, literary, scientific, and educational purposes are denied the protection of unemployment insurance extended to persons engaged in private industry. Although the law permits the inclusion of such organizations on a voluntary basis, very few have sought coverage for their employees because the cost is prohibitive. Cognizant of its responsibility to all segments of its labor force, the State of New York sought to provide for such unemployment protection on an optional reimbursement basis. On January 20, 1960, how

ever, the U.S. Department of Labor ruled that a reimbursement method would not be consistent with the present requirements of the Federal Unemployment Tax Act. This ruling followed presentation of the proposal and reasons for it to the Secretary of Labor by members of the New York Advisory Council on Unemployment Insurance. Efforts by the industrial commissioner of the State of New York to obtain a change of position were fruitless.


There is general agreement on the need for the unemployment protection of workers employed by nonprofit organizations which are otherwise exempt from Federal and State taxation. These employees need the protection just as much as other workers. There is no essential difference between officeworkers employed by such organizations and officeworkers of other employers, such as banks, insurance companies, employers in professional occupations, and others or indeed governmental employees. There is no difference between kitchenworkers in hospitals and kitchenworkers in hotels or restaurants. There is no difference between the maintenance staff of buildings owned and operated by such organizations and staff in buildings operated by other real estate


Representative spokesmen of nonprofit organizations share these views. However, after consultation with them, the administration in New York conIcluded that compulsory taxation on the conventional basis would meet with justified objections. A bill was, therefore, developed which gave such organizations the option to cover their workers either on a reimbursement basis or on the basis of taxation as it applies to private employers. In support of this approach, the Unemployment Insurance Advisory Council of New York said that:

"In planning for the inclusion of the nonprofit institutions it must, however, be realized that they present a special situation involving factors not found in private industry.

"To begin with, these agencies cannot pass on the charge to consumers by increases in price. Furthermore, since they are exempted from income taxes, the unemployment insurance contribution cannot be deducted as a cost of doing business. This takes on special importance for them since they are service organizations and for most the payroll constitutes the largest part of their total operating expenses, running for some as high as 70 or 80 percent and

even more.

Then, in very many of these institutions, e.g., colleges, universities, community houses, welfare agencies, literary and scientific societies, the greater part of the staff is professional, holding either tenure or a contract for a fixed term. Turnover among such personnel is relatively slight and generally occurs when a member of the staff resigns voluntarily to go elsewhere. Contributions based on the salaries paid to such persons would impose an added burden on budgets already strained and yet there would be little likelihood that any substantial part of the contributions would ever be used to pay benefits.

"It is these special circumstances in which the nonprofit organizations find themselves that have led the Advisory Council to the conclusion that they should be given a method of financing the cost of the benefits paid out to their employees different from that available to employers in private industry. The council proposes that the nonprofit organizations be dealt with in the same way as the State and its governmental subdivisions.

"Employees of the State of New York and of those municipalities which have elected coverage are given benefits in the event of their unemployment. But neither the State nor the municipalities contribute to the unemployment insurance fund in the same manner as do private employers. They are on a straight-cost basis. They merely reimburse the fund each year for the amount paid out by way of benefits to their employees. The council recommends that the nonprofit institutions be likewise kept free of the obligation to make regular contributions and that they too be permitted to be on a cost basis.

"Such method of financing should not be exclusively mandatory. Each agency should have the option to come into the system either on a cost basis or on a contribution basis, that is, to make contributions in accordance with the same experience rating formula which determines contributions by employers in private industry.

"The purpose frankly is to permit each agency to choose that method of financing which it finds better and cheaper. Those agencies with little or no turnover would consequently be put to little or no cost. Those with high turnover would have no greater cost than that which is borne by private industry.

"For the employees of the nonprofit institutions it would make no difference whatever which method of financing their particular agency chose. They would receive the very same benefits as are made available to the employees in private industry under the very same conditions. The difference would only be in the manner of meeting the costs.

"The special status which the nonprofit institutions hold in our society amply justifies the differentiated treatment which is proposed for them. The nonprofit agencies are engaged in public services, services which Government would in the main be compelled to furnish if these institutions were to go out of existence. Their funds are totally dedicated to these services. No individual derives a personal profit from their operations. If it is right for governments to insure their employees on a cost basis, then it is equally right to enable the nonprofit organizations to do the same."

All of these observations apply with equal force in other States.


The following objections have been raised:

1. Allowing State option for coverage on a reimbursement basis would weaken the case for a repeal of the exemption of these organizations under the Federal Unemployment Tax Act.

2. A precedent would be set for coverage on a reimbursement basis and others could demand similar treatment.

3. State unempployment funds would be exposed to losses if an exempt organization ceases operations without funds for reimbursement.

First objection: Weakening the case for repeal of exemption

This point has Federal and State aspects. If a State wishes to make a drive for coverage of nonprofitmaking organizations while the Federal statute does not cover such employers, the proposed amendment will strengthen, not weaken, the State's hand. The State will be free to achieve compulsory coverage on a tax basis or on a reimbursement basis or on a combination, by option or otherwise.

On the Federal level, also, the bill would strengthen the case for the repeal of the exemption, if needed. If all States were to achieve coverage, there would be no need for further Federal action. If this result were not reached, the Federal authorities could point to the unequal treatment and make a strong point for the need for Federal action. The mere fact that some States did provide for coverage would demonstrate the propriety of such coverage and the need therefor. If other States did not fall in line on their own initiative, the argument for Federal initiative would gain weight.

Second objection: Precedent

Allowing for exclusion of nonprofit organizations from experience rating standards will not be a precedent for others.

Nonprofit organizations, not only traditionally but also by the nature of their work, their operations and their financing are in an entirely different category from all others. They are endowed with a public purpose and perform functions necessary to the well-being of the States and the Nation. The idea of general and equal taxation to defray the cost of Government services has no place when nonprofit religious, charitable, literary, scientific, and educational organizations are concerned. Such organizations must of necessity look to others for their financial existence.

On the other hand, the idea of general and equal taxation applies with respect to other employers.

Third objection: Failure to reimburse

It is, of course, possible that some nonprofit organizations may cease operations without funds with the result that benefits are paid without reimbursement. However, these instances are no different from cases involving insolvent employers whose delinquent contributions are never collected. Benefits are nevertheless paid to their employees on the basis of employment with those employers. Of major general consideration is the fact that the Federal amendment is only

enabling legislation. Each State which wishes to take advantage of the opportunity to achieve coverage of these organizations on a reimbursement basis will carefully consider all implications of the program. Proposed Federal amendment neither binds nor forces any State, it only paves the way. Whether a State will decide to extend coverage, the manner in which it will do so and the safeguards to be provided are strictly State matters.


(For staff analysis and departmental views, see p. 464)


Chairman, Senate Finance Committee,
Washington, D.C.

JUNE 25, 1960.

DEAR SENATOR: I understand that your committee is meeting on June 28 to consider H.R. 12580, the social security bill passed by the House of Representatives last Thursday.

If H.R. 12580 is enacted in its present form it will reduce the retirement allowances of approximately 2,130 New Jersey teachers and 1,300 other New Jersey public employees. The average cut in allowances will be approximately $1,300 per year for retired teachers and approximately $960 per year for other retired public employees.

The people affected by this legislation are members of the New Jersey Teachers Pension and Annuity Fund and the New Jersey Public Employees Retirement System. They have retired under a plan which permits the State of New Jersey to reduce the retirement allowance payable by the State pension fund if the employee earned a social security benefit through New Jersey public employment. Any social security benefit earned in this way is used to relieve the State of all or a portion of its obligation to pay a pension to retired public employees.

Many of the persons affected by this legislation have purposely advanced the dates of their retirement in order to avoid earning a social security benefit through public employment in New Jersey. If H.R. 12580 is enacted in its present form section 204 (a) will reduce the number of quarters of coverage required to attain fully insured status to such a degree that all of these people will be considered as having earned their social security benefits through New Jersey public employment.

The effect on these people will be a substantial reduction in income through loss of pension from the State of New Jersey.

The amendment proposed by section 204 (a) of H.R. 12580 is designed to provide needed benefits for a number of our senior citizens. This is a desirable purpose. The New Jersey Education Association and the New Jersey Civil Service Employees Association have informed me they are sympathetic with the desire to extend full benefits to these people and agree with this purpose. They agree with me, however, that this can be accomplished by approaches which will not deprive New Jersey public employees of State pensions they have earned during many years of service.

One approach would be the following amendment to section 204 (a) of H.R. 12580, already introduced by Senator Williams of New Jersey and me:

"(e) The amendment made by subsection (a) shall not apply in the case of any individual who, on, before, or after the date of enactment of this act, becomes entitled to retirement benefits under the Teachers Pension and Annuity Fund of the State of New Jersey or to retirement benefits under the Public Employees Retirement System of the State of New Jersey."

I ask that your committee give serious consideration to this amendment or to some other approach affording assurance to these deserving public employees who have rendered a number of years of service with the justified expectation that they would be entitled to their benefits upon retirement.



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