Stimulus Funds, Unemployment Compensation & SB 460 WHY YOU SHOULD VOTE NO. On The MULTI-MILLION DOLLAR PLAN TO RAISE TAXES ON ALABAMA S EMPLOYERS

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1 It s Time To SEPARATE FACT FROM FICTION Stimulus Funds, Unemployment Compensation & SB 460 Inside Are THE FACTS That Explain WHY YOU SHOULD VOTE NO On The MULTI-MILLION DOLLAR PLAN TO RAISE TAXES ON ALABAMA S EMPLOYERS Provided by the Business Associations Tax Coalition April 7, 2009

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3 Let s Be Clear Stimulus Funds, Unemployment Compensation & SB 460 EMPLOYERS CARRY THE LOAD EXECUTIVE SUMMARY The Business Associations Tax Coalition, a group of nearly 30 business associations that together represent the majority of all Alabama employers, opposes the expansion of unemployment compensation benefits, as called for under Senate Bill 460, because it will dramatically increase unemployment compensation costs on businesses of every type and size. According to facts provided by the Alabama Department of Industrial Relations, if SB 460 is enacted, the higher per employee costs will hit quickly starting when employers receive their First Quarter 2010 UC tax bills in January; and the long-term cost ramifications of the bill will continue for years to come. The Unemployment Compensation Trust Fund: EMPLOYERS CARRY THE LOAD Alabama s Unemployment Compensation Trust Fund has been hit hard as a result of the economic downturn and skyrocketing unemployment (February s 8.4% is the highest rate in 22 years.) Employer taxes are the ONLY permanent source of funding for the Alabama Unemployment Compensation Trust Fund. Employers pay into it based on 1) a predetermined, graduated schedule that increases as the Fund balance decreases; 2) their own UC experience rating; and 3) costs that can t be assigned to any specific employer and must be shared by all Fund participants. Unfortunately, each of these elements are, by nature, more costly in hard economic times when unemployment goes up. Recent Benefit Increases Mean Higher Costs NOW: EMPLOYERS CARRY THE LOAD In July of this summer, the maximum weekly benefit available to unemployed Alabamians will go up by $10. This increase follows a $20 weekly benefit boost in This $30 per week increase was agreed upon and enacted during the 2008 legislative session, well before any word of federally mandated benefit expansions surfaced. That means Alabama businesses, already struggling to survive record-shattering economic challenges, are just now absorbing a $29 million annual tax increase. According to DIR, beginning Jan. 1, 2010, Alabama employers will pay their UC taxes into the UC Trust Fund at the highest rate schedule possible (Schedule D), meaning the taxes assessed to individual employers will increase anywhere from almost 16 percent to 56 percent per employee, depending on the employer s experience rating. DIR says that guaranteed increase will cost employers at least $20 million more per year for at least five years. Every two years, Alabama lawmakers consider enhancement legislation that provides supplemental funding for certain state employment services. In the past decade, this biennial consideration on average has resulted in weekly unemployment benefits increases of $15 every two years. If past experience holds true, employers will see a cumulative $45 million increase in unemployment taxes in 2010, 2012 and So, by the time the proposed SB 460 becomes effective, Alabama employers will already be paying at least $49 million more each year, and possibly as much as $94 million more, in unemployment compensation taxes than they did just one year ago. (OVER)

4 SB 460 Adds Pounds to the Pressure: EMPLOYERS WILL CARRY THE LOAD SB 460 allows the federal government to usurp Alabama s right to set its own unemployment compensation laws by mandating new benefit expansions that will cost Alabama s job creators far more millions in tax increases over the long term than the $100 million short-term federal stimulus infusion some lawmakers like to call free money. In short, according to DIR and the state Legislative Fiscal Office, SB 460 will another $22 million in annual costs to employers in 2014, putting the grand total annual tax burden employers would bear from that point forward at $71 million, at minimum. The annual cost could be $116 million or more. But remember, when it comes to higher employer costs, the short-term stimulus money means absolutely nothing. The bottom line impact of the SB 460 benefit expansions (more people will be eligible and added to the unemployment compensation rolls, and for longer periods of time), will start almost immediately as employer tax tables are revised based on a lower Fund balance (more unemployment means more paid out) and higher employer experiences (more employees now qualify so more apply for benefits). CAUTION: BEWARE OF WEIGHT LIMIT As it is often said, If it sounds too good to be true, it probably is. Or what about, Nothing in life is free. In either case, wise heads advise CAUTION. Simple common sense tells us, if more benefits are given, more benefits must be paid for. And, in Alabama, the only means of paying for them is by taxes charged to employers for payment into the state s Unemployment Compensation Trust Fund. S.B. 460 is a massive tax increase on jobs that will be paid by the employers of Alabama. Alabama s employers cannot afford to accept federally mandated, but only partially funded, unemployment benefit expansions. The conclusion then is, if Alabama lawmakers vote to expand unemployment compensation benefits in accordance with a mandate from Washington, D.C., they will be complicit in enacting an enormous new tax increase on jobs that can ONLY be paid by Alabama employers. THE BUSINESS ASSOCIATIONS TAX COALITION URGES ALL ALABAMA LAWMAKERS TO SAY NO TO NEW TAXES ON JOBS. THE FACTS ARE CLEAR. AND THE CHOICE IS CLEAR. BATC URGES YOU TO STAND UP FOR BUSINESS AND FIGHT FOR JOBS. VOTE NO ON SENATE BILL 460 THE BUSINESS ASSOCIATIONS TAX COALITION APRIL 7, 2009

5 Let s Be Clear Stimulus Funds, Unemployment Compensation & SB 460 Who Really Pays As representatives of thousands of Alabama employers, business groups throughout the state have been bombarded with information regarding the federal stimulus package, especially the portion that deals specifically with the expansion of unemployment compensation benefits. Some is accurate, but much is not. In response to the widespread confusion surrounding this complex issue, it is incumbent upon us to clearly convey the business community s position, regarding the direct relationship between expanding unemployment compensation benefits, as called for under Senate Bill 460, and the corresponding tax increases on business and industry that will occur if the proposed legislation is enacted. SOME RELEVANT BACKGROUND As the result of federal stimulus funds already received in Alabama, qualified unemployed Alabamians, who previously would have exhausted their unemployment benefits after 26 weeks, now are able to receive full benefits for up to 59 weeks through May 31, In addition, a $25 per week increase has been added to every recipient s weekly benefit and will apply to all claims applied for through the remainder of this year, and because of the 33-week extension, could be paid out through July 3, The state of Alabama has taken this funding the full amount allowed to us and is spending it now. Neither of these two federally funded programs has received much attention, even though they will put more than $250 million into the pockets of unemployed Alabamians. A great deal of attention, however, has been focused on the nearly $100 million in federal stimulus funds that will come to Alabama if we change our existing state laws to conform with specific federal provisions that will increase, by the thousands, the number of individuals eligible for unemployment benefits in our state. While many consistently and inaccurately maintain, in the course of discussion on this matter, that this benefit expansion will not precipitate a tax increase, data provided by the Alabama Department of Industrial Relations unequivocally proves otherwise. If lawmakers enact SB 460, in conformity with federal stimulus provisions, the state will be complicit in changing our existing unemployment laws, in dramatically expanding unemployment benefits, and in implementing a tax on jobs that can ONLY be paid by Alabama employers. It is clear that much of the stimulus money targeted for the expansion of unemployment benefits will, if taken, leave Alabama holding the bag with millions in unfunded unemployment compensation liability. Further, as other states join in questioning the wisdom of accepting conditional federal funds with expensive strings attached, it appears likely that Alabama could be left at a regional competitive disadvantage if we choose to trade costly, long-term policy changes for short-term stimulus money. Lastly, the federal government has traditionally and justifiably left this matter to the discretion of the individual states.

6 Page 2: UC Tax Increases under SB 460 If passed, SB 460 will surrender to Washington a significant element of our state s rights. THE SITUATION NOW Alabama s Unemployment Compensation Trust Fund has been hit hard as a result of the economic downturn. A fact that has gone largely unacknowledged. Just recently, Alabama announced an 8.4 percent unemployment rate the highest level in more than 22 years. Increasing unemployment means increasing demand on the 100 percent employer-supported UC Trust Fund. As a result, beginning January 1, 2010, Alabama employers will be required to pay into the Fund at a higher rate, moving from Schedule C to Schedule D. The fact is, every Trust Fund dollar paid out for benefits in one year, must be repaid by employers in subsequent years. According to Department of Industrial Relations estimates, when Alabama businesses are moved to Schedule D in January, our employers will automatically pay a mandated additional $20 Million each year in unemployment taxes. For Alabama employers who have done everything right and kept their employees on the payroll in these hard economic times, the higher rate schedule will mean a percent increase in the UC taxes they pay per employee. But that s not all. Last year, the Alabama Legislature passed Act , which raised Alabama s maximum weekly unemployment benefit from $235 to $255 in 2008, and from $255 to $265 in 2009 (a $30 increase over two years). Those benefit increases, fully rolled out by this July, have come at a cost to our businesses of approximately $29 million. The automatic Schedule D tax increase plus the previously enacted benefit increases represent a total, guaranteed tax increase of $49 million that will impact our businesses and industries almost immediately. Now, as Alabama employers fight to survive a record-breaking economic downturn, they face yet another bottom-line threat. This time it comes from those who inaccurately proclaim that, with help from Washington, Alabama can increase unemployment benefits without increasing taxes. The information that follows explains why they are wrong. How Unemployment Costs Impact Alabama Employers Alabama employers provide 100 percent of the money that comprises Alabama s Unemployment Compensation Trust Fund. Benefits for unemployed Alabamians come directly from this employer-funded account, which is designed to ensure that money is available to pay for benefits when needed. If the Trust Fund balance drops below a mandated desired level, employers automatically pay higher unemployment compensation taxes to replenish and stabilize the trust fund. The amount employers pay into the Trust Fund is determined by three elements: Alabama employers pay unemployment taxes based on a schedule of taxation (referred to as Schedule A, B, C, or D), with each subsequent tax schedule becoming increasingly costly. The schedule in effect at any given time is determined by the UC Trust Fund balance.

7 Page 3: UC Tax Increases Under SB 460 The amount an individual employer pays is further based on the employer s own experience rating. All employers are assigned one of 26 variable Experience Rates; an employer must pay based on the rate and prior year experience. Finally, an employer s total tax rate includes shared costs. This portion of the employer s tax is used to pay for benefit expenses that cannot be charged back to a specific employer for various reasons, e.g., to cover the unemployment benefit expenses of companies that have shut down or to supplement the payments of those whose benefit costs exceed the maximum allowable rate at which they are already paying. All employers must assume these liabilities. If, in accordance with the federal stimulus mandate and SB 460, more individuals are added to Alabama s unemployment compensation rolls, whether by qualifying under a revised alternative base period, by receiving additional weeks of benefits while training, by leaving their jobs as a result of domestic violence, or by remaining eligible even if only seeking part-time employment, then Alabama employers will be required to start replenishing those additional benefit dollars expended with their First Quarter 2010 UC tax payments. That is because, according to DIR, 1) Alabama will move from Schedule C into Schedule D effective January 1, 2010, triggering the first element that leads to higher individual employer tax rates; 2) there will be thousands more recipients eligible and for longer benefit periods, which will increase employer Experience Rates, adding costs to the second element of the employer tax rate formula; and 3) due to economic pressures, there will likely be an increased number of closings and layoffs, increasing Shared Costs the third element of the tax rate formula. In addition, expanded benefit payments will increase the drain against the UC Trust Fund balance and cause Alabama employers to continue paying under Schedule D for a longer duration. DIR projects that Schedule D will be in effect at least through In summary, when the benefits are expanded, Alabama employers will start paying more, effective in January, as their UC tax rate becomes determined by: Alabama s move to Schedule D Higher individual employer experience ratings due to increased eligibilities and longer benefit period. Higher shared costs brought on troubling economic conditions. Since employer taxes are the ONLY source of funding for the Alabama Unemployment Compensation Trust Fund, when existing funds are drained to meet added benefit demands, there is no alternative for rebuilding the Fund other than to increase the costs borne by Alabama employers in the form of higher unemployment taxes. It is therefore indisputable, based upon facts provided by the Alabama Department of Industrial Relations, that S.B. 460 is a massive tax increase on jobs that will be paid by the employers of Alabama. The Business Associations Tax Coalition April 7, 2009

8 UNEMPLOYMENT COMPENSATION TAX SCHEDULE HISTORY YEAR TAX SCHEDULE 1991* B 1992 B 1993 C 1994 A 1995 A 1996 A 1997 A 1998 B 1999 B 2000 B 2001 C 2002 C 2003 C 2004 C 2005 D 2006 C 2007 C 2008 C 2009 C 2010** D * First year the four-schedule system was applied in Alabama in order to maintain the desired level in our state s UC Trust Fund. ** Schedule projected by DIR. Only 2 nd time in past two decades that Alabama employers will have to pay UC taxes at the highest possible rate schedule. DIR further projects that employers will have to continue paying at this highest possible rate, Schedule D, for AT LEAST THE NEXT FIVE YEARS, through Dec. 31, 2014.

9 THE REST OF THE STORY EXPANDED UC BENEFITS HAVE A THREE-PRONGED COST IMPACT ON ALL EMPLOYERS INDIVIDUAL UC TAX RATES. IN DETERMINING THE FULL COST OF SB 460 (sub), THESE THREE COST ELEMENTS ARE CERTAIN; AND ALL ALABAMA EMPLOYERS WILL START PAYING THE RESULTING HIGHER TAX RATES BY MAY 2010 (with their 1 ST quarter 2010 tax payment). ELIGIBILITY EXPANSIONS MANDATED UNDER THE FEDERAL STIMULUS PACKAGE AND SB 460 (sub), WILL INCREASE THE NUMBER OF QUALIFIED UC BENEFIT RECIPIENTS IN ALABAMA BY APPROXIMATELY 20,000. IF SB 460 (sub) PASSES, THE HIGHER NUMBERS WILL MEAN: n MORE FUNDS ARE PAID OUT, PUTTING GREATER PRESSURE ON THE UC TRUST FUND; KEEPING ALL EMPLOYERS AT THE HIGHEST TAX RATE SCHEDULE D. n MORE ARE ELIGIBLE TO RECEIVE BENEFITS -- AND FOR LONGER PERIODS -- RESULTING IN HIGHER EXPERIENCE RATINGS (employer-specific). n TIGHT ECONOMY, HIGHER EXPERIENCE RATES, ETC. MEAN MORE EMPLOYERS MAX OUT OR CLOSE DOWN, LEAVING THEIR UNPAID COSTS TO BE SHARED BY OTHERS IN FUND (all). DATE 7/06/08 2/28/09 6/30/09 7/01/09 7/05/09 UC BENEFIT INCREASE or SYSTEM CHANGE $20 WEEKLY MAX BENEFIT INCREASE from $235 to $255 per week (by 2008 legislative act) JOBLESS ALABAMIANS RECEIVE $25 PER WEEK INCREASE (Max benefit increases from $255 to $280) MAX ELIGIBILITY TERM EXTENDED FROM 26 WEEKS TO 59 WEEKS (by 2009 Federal Stimulus Bill) DIR PREDICTS STATE S UC TRUST FUND WILL FALL BELOW MANDATED OPTIMAL BALANCE: AUTOMATIC TRIGGER TO HIGHEST UC TAX SCALE: SCHEDULE D BENEFIT EXPANSIONS PROPOSED IN SB 460 TAKE EFFECT $10 WEEKLY MAX BENEFIT INCREASE from $280 to $290 per week (by 2008 legislative act) (Becomes $265 when $25/wk stimulus expires) ANNUAL COST OF BENEFIT/CHANGE EXPIRES ANNUAL COST TO EMPLOYERS CUMLATIVE COST (1) $19 MILLION PERMANENT $19 MILLION $19 MILLION $250 MILLION Costs will be variable based on employer-specific data. See SCHEDULE D explanation on reverse side (2) $100 MILLION Federal Stimulus Funds See provisions on reverse side (3) $25 per week additional expires 12/31/09 33-week extension expires 5/31/10 Employers are projected to pay at Schedule D levels at least through 12/31/14 PERMANENT after 12/31/13 NONE if state/feds decide NOT to extend the increased benefits when they expire. If all, or part, are extended: POTENTIAL COST: UP TO $250 MILLION Status only announced here. Higher rates become effective: 1/1/10 First payment due before: 5/1/10 $22 MILLION beginning 1/1/14 $10 MILLION PERMANENT $10 MILLION Employers Begin Move into Higher Individual Experience Rates with IMMEDIATE impact on their tax rates. $29 MILLION 1/01/10 through 12/31/ , 12, 14 Legislative Sessions DUE TO LOW TRUST FUND BALANCE, EMPLOYER RATES RAISED TO / MAINTAINED AT HIGHEST POSSIBLE: SCHEDULE D BIENNIAL ENHANCEMENT BILL UC BENEFIT INCREASE NEGOTIATIONS $20 MILLION Projections show that expanded pressure on UC Trust Fund will extend highest tax scale at least through 2014 See explanation on reverse side (4) PERMANENT $20 MILLION To be determined. However, Max Weekly Benefit BIENJNIAL INCREASE IN PAST DECADE AVERAGED $15 for possible BIENNIAL COST to employers: $15 MILLION (in 2010, 2012 and 2014) 1/01/14 FEDERAL STIMULUS FUNDS EXHAUSTED. EMPLOYERS ASSUME FULL COST OF SB 460 (sub) BENEFIT EXPANSIONS $22 MILLION PERMANENT $22 MILLION $49 MILLION+ Shared costs projected to double starting in Subsequent years status unknown. Three $15 Million hikes = $45 Million total: $94 MILLION+ POSSIBLE by 2014, with avg. Enhancement increases $71 MILLON+ DEFINITE EACH YEAR FORWARD $116 MILLION + POSSIBLE by 2014, with avg. Enhancement increases

10 THE FACTS. ALABAMA UNEMPLOYMENT COMPENSATION BENEFIT INCREASE TIMELINE EXPLANATIONS AND DEFINITIONS (1) CUMULATIVE COSTS (Column 6): The annual amount in UC taxes that Alabama employers will pay collectively in that year, in addition to that which they already paid in UC taxes prior to July The cumulative cost is calculated by adding together each ANNUAL COST TO EMPLOYERS in Column 5. (2) MOVE FROM SCHEDULE C TO SCHEDULE D (Rows 3 and 6): The State of Alabama sets a Desired Level (DLF) for the Unemployment Compensation Trust Fund. If benefit payment withdrawals force the Fund balance below 70 percent of the DLF, the tax rate at which employers pay into the fund is moved to the next highest schedule. The Alabama DIR projects employers will be move into Schedule D on January 1, Schedule D represents the highest rate level available. Alabama employers have been taxed at Schedule D rates only one time since the payment formula was implemented in 1991 (almost two decades). DIR conservatively estimates that once rates are moved to Schedule D in the first quarter of 2010, employers will continue to pay at that level at least until the end of (3) PROVISIONS OF SB 460 (as substituted) (Row 4): When the federal economic stimulus package was signed into law, Alabama became automatically eligible for a $250 million funding infusion to pay for a $25 per week unemployment benefit increase and for the extension of weekly unemployment benefit payments from 26 to 59 weeks. Nearly $100 million more is available in federal stimulus funds but only if the expanded benefits of SB 460 (sub) are written permanently into law. If passed, the bill will: 1) Establish a new method that would ease the requirements for determining whether a worker has earned enough in wages to qualify for benefits; 2)Extend eligibility to those who quit their jobs as the result of domestic violence;" 3) Allow unemployed workers to continue receiving benefits for as long as 26 weeks after their regular benefits have expired, if they are in a job-training program; and 4) Extend eligibility to people looking for part-time employment only. The cost to employers of these additional benefits will be at least $22 million per year, according to Alabama s Legislative Fiscal Office. (4) ENHANCEMENT LEGISLATION (Row 7): Every two years, Alabama lawmakers must address Enhancement legislation that provides for supplemental funding for certain state employment services. Past experience shows that this legislation often precipitates some level of Unemployment Compensation benefit increases. During the past decade, the average UC maximum benefit has increased every other year (biennially) by $15 per week. The Annual Cost to Employers and the Cumulative Cost to employers shown here in Columns 5 and 6, respectively, are based on three Enhancement-related increases (2010, 2012 and 2014) derived from the average of the REAL enhancement-related cost increases picked up by Alabama employers over the past 10 years.

11 Members of the Business Associations Tax Coalition Alabama Association of Life Companies Alabama Association of Realtors, Inc. Alabama Bankers Association Alabama Cable Telecommunications Association Alabama Concrete Industries Association Alabama Farmers Federation Alabama Forestry Association Alabama Hospital Association Alabama Manufactured Housing Institute Inc. Alabama Nursing Home Association Alabama Petroleum Council Alabama Poultry & Egg Association Alabama Pulp and Paper Council Alabama Retail Association Alabama Roofing, Sheet Metal et al Alabama Road Builders' Association Alabama Rural Electric Association Alabama Society of CPA's Alabama Trucking Association American Council of Engineering Cos. of Alabama Associated Builders & Contractors of Alabama Associated General Contractors of Alabama Automobile Dealers Association of Alabama Business Council of Alabama Coalbed Methane Association of Alabama Community Bankers Association of Alabama Home Builders Association of Alabama Manufacture Alabama National Federation of Independent Business Petroleum & Convenience Marketers of Alabama