Proposal to Amend Current Alabama Unemployment Tax Rate Schedule

August 13, 2010

Presented by:

CPM II Unemployment Tax Rate Team:

David Barnthouse Jo Doyal

Ronica Faire Jamie Jackson Jondra Oswalt Michele Tatum Wes Thornhill Jason Wilson

Table of Contents Introduction................................................................................................................................................... 1

Outcomes of This Proposal ........................................................................................................................... 2

The Need for Reform .................................................................................................................................... 3

The Negative Impact of No Reform in Unemployment Tax Schedule......................................................... 5

Southern States Tax Structure Options ......................................................................................................... 6

Alternative Solutions..................................................................................................................................... 8

Alternative I .............................................................................................................................................. 9

Alternative II ........................................................................................................................................... 10

Alternative III.......................................................................................................................................... 11

Alternative IV ......................................................................................................................................... 12

Alternative V........................................................................................................................................... 13

Alternative VI ......................................................................................................................................... 14

Stakeholder Presentation............................................................................................................................. 15

Solution ....................................................................................................................................................... 16

Proposed Amendments: .............................................................................................................................. 20

Conclusion .................................................................................................................................................. 21

References ................................................................................................................................................... 22

Appendix A ................................................................................................................................................. 23

1

Introduction

Economic downturns gripping the nation have also negatively impacted Alabama. Business closings and

Lay-offs have brought unemployment rates to levels not seen in over 25 years. This crisis has resulted in

a substantial drop in Alabama’s Unemployment Trust Fund and higher unemployment tax rates to

Alabama employers for the 2010 calendar year. The trust fund balance as of June 30th of each year

determines the employer tax schedule for the following calendar year. For 2010 employers will be in the

highest unemployment tax schedule (Schedule D). In this tax rate structure all employers share equally in

the burden of shared costs even though they may not have contributed to the problem. Shared costs are

those costs which cannot be directly applied to any one employer’s tax rate account. A significant

component of the shared costs is the difference between what maximum rated employers pay into the

system and the benefits charged back to them. During economic downturns this difference can increase

substantially resulting in a dramatic increase in the actual rate applied to each employer. The increase in

shared costs affects all employers whether they have had benefit charges or not. This inequity causes

employers with no claims or trust fund impact (minimum rated employers) to pay substantially more in

unemployment taxes.

As part of the Certified Public Manager Training Program, a project team was formed to research various

alternatives in providing a more equitable unemployment tax rate schedule which would be a closer

representation of each employer’s impact to the unemployment trust fund. To complete this task, the

team looked at several alternative solutions including how other states’ unemployment tax rate systems

were structured to provide a fair unemployment tax rate to their employers. It is important to note that

any alternative solution would not solve this inequity today without a change in law.

The team’s goal is to determine what alternative would result in an equitable distribution of shared costs

to all employers based on their company’s impact to the Unemployment Trust Fund.

2

Outcomes of This Proposal

A fairer tax rate structure

Less business closings

Could lower shared costs for all employers over the long term

Greater discretionary cash flow to business with minimal or no impact to trust fund

Possible job growth and reduction in unemployment

Possible repayment of trust fund monies not being recouped now

Could cause a quicker rebuilding of trust fund monies

Less tax burden to all employers due to no loss or minimal loss in FUTA (Federal Unemployment Tax Act) credit

3

The Need for Reform

The current Code of Alabama regarding the Unemployment Tax Schedule has not been modified since

1989. Our current Alabama Unemployment Tax Schedule consists of four tax rate schedules, A, B, C and

D. The original intent of the four schedules was to assists in the recovery of benefit costs in such a

manner as to ensure that the Trust Fund, from which benefits are paid, will neither become depleted nor

collect excess revenue. The objective is to maintain an adequate balance so that benefits can be paid

when necessary. Therefore, the balance in the trust fund determines which schedule will be in effect for

the upcoming calendar year.

Based on the fund balance, one of the following schedules will apply:

Schedule A: If fund balance is 125% or more of desired level. Schedule B: If fund balance is equal to desired level but less than 125%. Schedule C: If fund balance is less than desired level but at least 70%. Schedule D: If fund balance is less than 70% of the desired level.

Represented on the next page is an example of the inequities in the present tax schedule as we move from

Schedule C to Schedule D when shared costs are added. For the minimum rated employers (found at the

top of the schedule) the increase from C to D is 169 percent while the maximum rated employers (found

at the bottom of the schedule) have reached a cap and do not “carry their weight”. These large increases in

taxes are due to the distribution of shared costs to all employers. Not only is there a cap, but the shift from

C to D at the bottom of the schedule results in only a 30 percent increase for maximum rated employers!

Shared costs are those costs which cannot be directly applied to any one employer and are part of the

employer’s tax rate. A significant increase in shared costs was experienced by all Alabama employers for

the 2010 calendar year due to maximum rated employers at the bottom of the table who had reached the

maximum tax rate. Note that from line 23 downward the amount of tax due per employee remains the

same. Many of the maximum rated employers, because of this “cap”, do not pay back all the benefits

their employees receive from the trust fund. These excess benefit charges for the calendar year 2010 were

$140,945,000.00. All Alabama employers shared in this bill, even though, many were not the reason for

the creation of this large sum. These costs alone were 57% of the total shared costs for the 2010 calendar

4

year’s unemployment tax rate. Shared costs are five times higher than it has ever been in the history of

our unemployment system.

The Need for Reform Continued -

2010 Tax Increases

Line No. Base 2009

Tax 2010 Tax $ Increase % Increase

1 $8,000 $64 $172 $108 169%2 $8,000 $76 $184 $108 142%3 $8,000 $96 $200 $104 108%4 $8,000 $112 $216 $104 93%5 $8,000 $128 $232 $104 81%6 $8,000 $148 $252 $104 70%7 $8,000 $164 $272 $108 66%8 $8,000 $180 $292 $112 62%9 $8,000 $196 $312 $116 59%10 $8,000 $216 $332 $116 54%11 $8,000 $232 $348 $116 50%12 $8,000 $248 $368 $120 48%13 $8,000 $268 $388 $120 45%14 $8,000 $284 $408 $124 44%15 $8,000 $304 $428 $124 41%16 $8,000 $328 $456 $128 39%17 $8,000 $364 $496 $132 36%18 $8,000 $400 $536 $136 34%19 $8,000 $432 $576 $144 33%20 $8,000 $464 $616 $152 33%21 $8,000 $504 $656 $152 30%22 $8,000 $504 $656 $152 30%23 $8,000 $512 $664 $152 30%24 $8,000 $512 $664 $152 30%25 $8,000 $512 $664 $152 30%26 $8,000 $512 $664 $152 30%

Table 1

5

The Negative Impact of No Reform in Unemployment Tax Schedule

Poor public policy in the continuation of an unfair tax structure May cause smaller businesses to close their doors Increase in shared costs to all employers Not all monies paid out from the trust fund will be recouped Slower rebuilding of the trust fund balance Possible loss of all or part of the FUTA (Federal Unemployment Tax Act) credit Would be in Schedule D a longer period of time

6

Southern States Tax Structure Options

With shared costs five times higher than it has ever been, the unemployment tax structures of our

neighboring states in the southeast were considered as a possible solution to a fairer distribution of shared

costs. The southern states looked at were Florida, Georgia, Mississippi, Louisiana and Tennessee. Of

these five states, Georgia, Tennessee and Louisiana are reserve/ratio states and are not similar in structure

to Alabama which is a benefit/ratio state. The research regarding Louisiana is documented under Pay

Your Way. The most similar to Alabama of the remaining five states are Florida and Mississippi.

Florida’s trust fund balance at the time of the project study was at a deficit and therefore, not considered

further. As Mississippi’s trust fund balance at the time of the project study was positive, Mississippi was a

primary consideration in our research. There are a lot of similarities between Mississippi’s and

Alabama’s tax programs and the differences are quite telling. Both states use Benefit Ratio experience

rating methodologies to grade employers and assign tax rates. Both have a very large proportion of

employers at the lowest tax rate (Benefit Ratio). Both have a very similar social cost rate (shared costs)

assignment—Alabama’s Shared Cost assessment is almost the same as Mississippi’s General Experience

Ratio. Both states pay rather low benefit levels to the unemployed. The main difference in financing is

that Mississippi adds to each employer’s tax rate a solvency amount. It is called the General Experience

Rate or Size of Fund Index Factor. Alabama’s tax schedule is structured to re-coup the average benefit

costs in the recent prior years without building any forward funding amount. Recent economic conditions

have negatively impacted the Alabama trust fund, proving the existing system was not aggressive enough

to handle an economic crisis. To improve forward funding Alabama would need to expand the existing

structure to provide a more aggressive tax rate necessary to sustain another severe recession. Although an

excellent example of solvency and fairness, the Mississippi model is considered by financial analyst too

aggressive and not politically attainable in most states. It also does not address the unfairness of

Alabama’s unemployment tax structure.

7

Southern States Tax Structure Options continued -

Research indicated that the surrounding states did not offer a viable solution to eliminating the inequities

faced by Alabama employers and therefore, were not taken into serious consideration as an alternative

solution. Therefore, the project team looked into developing alternatives which would specifically target

shared costs—the root of the problem. To eliminate or minimize the negative impacts of Alabama’s

current tax situation, the project team focused on alternatives which potentially could provide a more

equitable distribution of shared costs to all employers based on their company’s impact to the

Unemployment Trust Fund.

8

Alternative Solutions

Several alternative solutions were considered. Those solutions are as follows:

Expand the Schedule to add E and F or more lines Two schedules based on the employers total wages paid A graduated tax schedule increasing the employer’s taxable wage base Benefit Impact percentage Pay your Way Proportional Shared Costs and addition of Schedule E

9

Alternative I

Expand the Schedule to add E and F or more lines This alternative examined modifying the tax rate table through either the addition of more schedules

beyond D or increasing the number of lines at the bottom of the table so as to add additional benefit

ratios. Mr. James Henry, the author of the currently used tax rate table, was consulted regarding this

alternative solution. The combination of a schedule with shared costs applied results in an average tax

rate. In order to remain revenue neutral and return to the same average tax rate, adding more schedules

can only really be accomplished by modifying the previous C and D schedules so they start with lower

rates. However, this does not address the inequities of shared costs.

Modifying the tax rate table by adding lines, (more intervals) was also examined. This involved adding

more intervals by cutting the existing ranges into smaller intervals. An example would be cutting the

range of the intervals in half and then adding more lines so the entire range of all intervals remains

covered. But like adding more schedules, this does not eliminate the inequities caused by costs sharing.

Adding schedules to the existing tax rate table would not eliminate the inequity of the current tax rate

structure. This could result in penalizing employers further as additional schedules could result in higher

tax rates. Higher tax rates could realize a rebuilding of the trust fund balance in a smaller period of time,

and bring employers back down to a lower Schedule, e.g. C; however, it would do nothing to redistribute

shared costs to employers who were costing the trust fund. Adding more lines to the bottom of the table

would also not result in a more equal distribution of shared costs to the higher tax rated employers.

Potentially, it could bring in more unemployment tax dollars and help to lower shared costs by doing so;

however, this would be a long term effect.

Due to its inability to solve the shared-cost inequity problem, the conclusion was that this

option was not a viable alternative.

10

Alternative II

Two schedules based on the employers’ total wages paid The present tax rate structure adversely affects small employers whose businesses may have experienced

one claim where relief was not given. The employer with a larger taxable wage base is better equipped to

absorb more benefit charging and maintain a lower rate while the smaller employers’ rate may soar due to

one claim. The idea of instituting two schedules based on total wages was considered. For instance, a

smaller employer with total wages of $150,000 or lower would have a separate tax rate schedule from

larger employers with $150,000 and upward in total wages. The smaller employer’s tax rate table could

have larger intervals with respect to benefit ratios. Thus, the smaller employer would not move up the

table as rapidly as the present table allows for with the smaller intervals. This still does not solve the

issue of the huge impact of shared costs to all employers which is the primary reason for the huge

increase in rate. It has also been determined that an employer who does have a high rate, even the smaller

employer, is costing the trust fund in that more benefits are paid out to this employer’s employees than

the employer has paid in. Conversely, there exist larger employers who have paid out more in taxes then

are their benefit charges. Charging these employers a higher tax rate might be considered punitive in

nature.

Due to its inability to solve the shared-cost inequity problem, the conclusion was that this option was not a viable alternative.

11

Alternative III

Graduated Taxable Wage Base Employers in Alabama pay unemployment tax on the first $8,000 in gross wages per employee on a

yearly basis. Revising the present tax rate schedule to include an increasing taxable wage base was

considered as an alternative. The principle idea was, as the employer moved down the tax rate schedule,

(due to a larger benefit ratio) the employer’s taxable wage base would gradually increase and would top

out at $12,000.00 at the highest tax rate. This would bring more tax revenue into the trust fund and cause

those at the highest rate to pay more and “carry their weight.” The positive result would be a reduction in

shared costs over the long term due to an increase in tax revenue. However, this alternative offers no

relief of shared costs to those employers who are not contributing to the problem and could result in a

significant financial burden to all employers, especially the smaller employer who very well could be at

the highest rate. Thus, this alternative was deemed excessively punitive.

Due to its inability to solve the shared-cost inequity problem, the conclusion was that this

option was not a viable alternative.

12

Alternative IV

Benefit Impact Percentage This alternative would distribute statewide shared costs based on the individual employer’s overall impact

to the trust fund. The employer’s total benefit charges were considered as in relation to the statewide

benefit charges paid out for the fiscal year ending June 30th. The tax rate calculation is based on three

fiscal years ending June 30th of each year. The direct impact of the employer’s cost to the trust fund can

be seen as it directly relates to the benefit charges paid out as a result of lay-offs by the employer. This

percentage, the Benefit Impact, could then be multiplied by the statewide shared costs percentage (derived

by current Alabama Unemployment Compensation Law) to determine the employer’s actual portion of

statewide shared costs. The conclusion to this alternative was that it would be hard to implement from an

administrative standpoint and would actually need more data in the calculation for a fair assessment of the

employer’s real impact to the trust fund.

Due to its inability to solve the shared-cost inequity problem, the conclusion was that this

option was not a viable alternative.

13

Alternative V

Pay Your Way Several options were considered for making employers responsible for their own individual benefit

charges, AKA “pay your way.” The State of Louisiana’s current tax structure was considered as it

reflects this alternative idea. The State of Louisiana adds an additional percentage charge to the

employer’s rate for those who pay less than they actually cost the system. This method mitigates a

portion of shared costs. This means minimum rated employers do not help to pay the “tab” for employers

who have charges over their cap. However, Louisiana is a Reserve Ratio State, and the tax structure is

different from Alabama which is a Benefit Ratio State. The change to this type of tax structure would

require a significant law change and be administratively prohibitive.

The possibility of two shared costs was looked at as well. In this scenario, the $ 140,945,000.00 in costs

not paid by the maximum rated employers and included in the shared costs calculation for the fiscal year

end June 30, 2009, would only be added in the tax rate calculation of those employers who had caused the

deficit. This $140,945,000.00 would not be included in the shared costs calculation for employers who

had no impact to the trust fund, resulting in lower tax rates for them than currently imposed for the 2010

calendar year. This, however, would have a negative impact on the trust fund balance as only a very

small portion of employers would bear the $140,945,000.00 costs. At the highest rate, per Department of

Industrial Relations’ data, there are only 5,416 employers. Their total taxable wages multiplied by the 1.5

percent shared costs would not successfully recoup the deficit of $140,945,000.00 caused by them.

Although this would certainly achieve lower shared costs for some, it would adversely affect the trust

fund balance. There may also be conformity issues with this as not all employers are treated the same

using this method.

Due to possible conformity issues and the extended time to recoup costs, the conclusion was

that this was not a viable alternative.

14

Alternative VI

Proportional Shared Costs and Addition of Schedule E This option, termed “proportional sharing”, would make shared cost charges directly relate to those

employers costing the trust fund the most by applying a proportional sharing factor. The maximum rated

employers would share the most burden. The minimum rated employers would, however, see a small

increase in proportion to the current tax schedule. The use of a proportional sharing factor preserves the

interval relationships built into the tax rate table ensuring employers are taxed in direct relation to their

benefit ratio. Because a direct relationship exists, all employers receive equitable treatment. The

proportional shared costs is arrived at by maintaining an average tax rate for all employers and ensuring

that the trust fund tax dollars brought in under the old method of applying shared costs will equal using

the new method of proportional sharing. Therefore, it approaches the idea of equitable treatment for each

employer without increasing taxes, a revenue neutral approach.

In the interest of returning the Alabama trust fund to solvency an additional schedule, E, could be added.

However, this was not part of the team’s original project goal, which was to provide a more equitable

unemployment tax rate structure for all employers.

Research indicated that the alternative of proportional sharing was the most viable option to eliminate the unfairness in the current unemployment tax rate structure for all Alabama employers.

15

Stakeholder Presentation On April 21, 2010 a meeting was held to present the initial findings of the project team’s research to

interested parties in the business community. Present were Ms. Rosemary Elebash, National Federation

of Independent Business; Mr. Allen Owen III, MeadWestvaco Corporation; Mr. George Clark,

Manufacture Alabama. Also present were members of the project team and Mr. Thomas Surtees, Mr.

Hoyt Russell, Mr. Jim Henry and Ms. Charlotte Lackey, all from the Department of Industrial Relations.

A positive response was received from the stakeholders concerning the Proportional Sharing Alternative.

In particular, the alternative was received positively due to the possibility of exiting Schedule D sooner

and moving back into Schedule C. They were also concerned about the situation that led us to schedule D

in the first place and understanding why it happened. Ms. Elebash suggested looking at the State of

Mississippi as a possible solution; however, as mentioned earlier in this paper is not a viable alternative in

solving the inequities of Alabama’s current tax rate structure. Mr. Thornhill reminded the stakeholders

that our team task was to propose possible solutions to the inequities of the current tax system and not to

fix the “broken tax system solvency problem”. Many team members felt the solvency problem was a

natural follow-on from the inequity problem and that since it was discussed at the presentation, it should

become part of our final proposal.

16

Solution

After reviewing all options, Alternative VI appears to be the optimum solution. This approach would

allow minimum rated employers to pay less in shared costs while distributing a greater shared costs to

maximum rated employers. The proportional sharing factor would be instituted once the statewide shared

cost ratio for all employers reached one percent or greater. This would apply to both Schedule C and D of

the current table and the new E Schedule referenced later. The normal tax calculations in Alabama

Unemployment Tax Law would apply. Shared Costs and the desired level of the fund would be calculated

as previously done. The goal behind proportional sharing is to develop an alternative to the shared-cost

ratio method while maintaining the same average tax rate. The actual distribution of contributions can

vary line-by-line, but not the totals. Under proportional sharing it is therefore possible to solve for a

factor (sample calculations in appendix 1) which when applied to each tax-rate interval and multiplied by

taxable wages, will arrive at the same total of contributions as the shared costs ratio method. The result is

a proportional sharing of costs that is directly related to each tax rate interval and resolves the inequities

of the shared costs ratio method. Minimum rated employers see the smallest percentage increases while

the maximum rated employers see the greatest increases. As seen in the table on the next page, the total

distribution of unemployment insurance taxes remains unchanged while each experience rating level will

see a change that is proportional to the starting base. Note that total tax contributions remain the same.

17

TAX CONTRIBUTION BREAKOUT BY INTERVAL

Base +Shared =New Taxable Ratio *Shared =New Proportional Rate Cost Ratio Wages Distribution Cost Factor Distribution

Ratio Rate (1,000's) (1,000's) Factor Rate (1,000's) 0.59% 1.50% 2.09% $4,168,158 $87,114 1.815 1.07% $44,6380.74% 1.50% 2.24% $1,379,233 $30,895 1.815 1.34% $18,5260.94% 1.50% 2.44% $1,272,891 $31,059 1.815 1.71% $21,7181.14% 1.50% 2.64% $768,637 $20,292 1.815 2.07% $15,9051.34% 1.50% 2.84% $763,199 $21,675 1.815 2.43% $18,5631.59% 1.50% 3.09% $535,550 $16,548 1.815 2.89% $15,4561.84% 1.50% 3.34% $419,876 $14,024 1.815 3.34% $14,0232.09% 1.50% 3.59% $418,253 $15,015 1.815 3.79% $15,8672.34% 1.50% 3.84% $255,643 $9,817 1.815 4.25% $10,8582.59% 1.50% 4.09% $400,003 $16,360 1.815 4.70% $18,8052.79% 1.50% 4.29% $328,518 $14,093 1.815 5.06% $16,6373.04% 1.50% 4.54% $188,220 $8,545 1.815 5.52% $10,3863.44% 1.50% 4.94% $149,469 $7,160 1.815 6.24% $8,9263.54% 1.50% 5.04% $137,061 $6,908 1.815 6.43% $8,8073.79% 1.50% 5.29% $127,704 $6,756 1.815 6.88% $8,7854.14% 1.50% 5.64% $230,993 $13,028 1.815 7.51% $17,3584.64% 1.50% 6.14% $219,867 $13,500 1.815 8.42% $18,5175.14% 1.50% 6.64% $190,735 $12,665 1.815 9.33% $17,7955.64% 1.50% 7.14% $138,004 $9,853 1.815 10.24% $14,1286.14% 1.50% 7.64% $120,717 $9,223 1.815 11.14% $13,4546.64% 1.50% 8.14% $208,423 $16,966 1.815 12.05% $25,1206.74% 1.50% 8.24% $681,655 $56,168 1.815 12.23% $83,393

TotalTaxContributions $437,664 $437,664Table 2

18

Solution continued - The alternative chosen could be done in conjunction with an “Economic Emergency” Schedule E added

to the current tax rate table to be used in economic downturns when the trust fund is in danger of a

negative balance. Keep in mind this in itself does not resolve the issue of inequities in our current system

and that Proportional Sharing is designed to do so. Emergency Schedule E would allow for the rebuilding

of the trust fund where Proportional Sharing will not do this. Schedule E, Economic Emergency, would

take effect once the trust fund balance is less than forty percent of the desired level of the fund. This

would be the most aggressive schedule and would help rebuild a depleted trust fund or could help to keep

the trust fund from a zero balance. Avoiding a zero balance would keep the state from borrowing from

the federal government. A negative trust fund balance for more than two years will adversely impact all

employers through loss of FUTA (Federal Unemployment Tax Act) credit or an additional assessment

made on the employer’s unemployment tax rate to pay back a federal loan. A more aggressive schedule

has the potential to bring all employers back down the schedule from to D and then C at a more rapid

pace; thereby lowering the employer’s unemployment tax rate. It could help to lower shared costs as

well. Please see the additional schedule listed on the next page.

19

EMPLOYER TAX RATE SCHEDULE

Line No.

Employer's Benefit Ratio is: A B C D E

1 0.00‐0.39 0.20 0.35 0.50 0.65 0.752 0.40‐0.59 0.35 0.50 0.65 0.80 0.923 0.60‐0.79 0.50 0.70 0.90 1.00 1.154 0.80‐0.99 0.70 0.90 1.10 1.20 1.385 1.00‐1.19 0.85 1.10 1.30 1.40 1.616 1.20‐1.39 1.00 1.30 1.55 1.65 1.907 1.40‐1.59 1.15 1.50 1.75 1.90 2.198 1.60‐1.79 1.30 1.70 1.95 2.15 2.479 1.80‐1.99 1.45 1.90 2.15 2.40 2.7610 2.00‐2.19 1.60 2.10 2.40 2.65 3.0511 2.20‐2.39 1.75 2.30 2.60 2.85 3.2812 2.40‐2.59 1.90 2.50 2.80 3.10 3.5713 2.60‐2.79 2.05 2.70 3.05 3.35 3.8514 2.80‐2.99 2.20 2.90 3.25 3.60 4.1415 3.00‐3.19 2.35 3.10 3.50 3.85 4.4316 3.20‐3.59 2.50 3.40 3.80 4.20 4.8317 3.60‐3.99 2.80 3.80 4.25 4.70 5.4118 4.00‐4.39 3.10 4.20 4.70 5.20 5.9819 4.40‐4.79 3.40 4.60 5.10 5.70 6.5620 4.80‐5.19 3.70 5.00 5.50 6.20 7.1321 5.20‐5.59 4.00 5.40 6.00 6.70 7.7122 5.60‐5.99 4.30 5.40 6.00 6.70 7.7123 6.00‐6.39 4.60 5.40 6.10 6.80 7.8224 6.40‐6.79 4.90 5.40 6.10 6.80 7.8225 6.80‐7.19 5.20 5.40 6.10 6.80 7.8226 7.2 5.40 5.40 6.10 6.80 7.82

Table 3

20

Proposed Amendments:

Amendment changes based on the recommendation that Alabama lawmakers enact the Proportional

Sharing factor method to apply shared costs to schedules C and D, and adopt the use of economic

emergency schedule E for use in critical economic conditions. Proposed changes are in italics.

25-4-54 (e)(4) {as revised to incorporate the “proportional sharing factor”}(Trigger to be where Statewide

shared costs reaches 1% or greater)

To determine the “shared cost ratio” for any fiscal year, the net shared costs for such fiscal year shall be divided by the statewide total of taxable wages for the same fiscal year which have been reported by all contributory employers and upon which contributions have been timely paid. The resulting quotient adjusted to the nearest multiple of one-thousandth shall be the “shared-cost ratio”. The shared cost ratio plus the base tax rate of each benefit ratio interval shall be summed to determine the contribution rate for employers used for the next following calendar year. The total of all employer contributions divided by the total of contributions using the base rates only from the benefit ratio intervals applied to those same taxable wages will result in the proportional sharing factor to be applied to each employers’ base rate resulting in a revised tax rate applicable for assessment to all contributory employees for the following calendar year.

25-4-54 (g)(3) {as revised to incorporate new triggering conditions}

d. Greater than 40 percent of the desired level, but less than 70 percent thereof, contribution rates shall be determined under Schedule D. e. Less than 40 percent of the desired level, contribution rates shall be determined under Schedule E.

21

Conclusion The current shared cost ratio method is inequitable in that it levies a higher percentage increase in

unemployment insurance taxes on those employers who contributed least to the shared cost total. The

Proportional Sharing method overcomes these inequities and levies the higher unemployment insurance

taxes on those employers whose benefit charges outweighed their contributions. Clearly, Proportional

Sharing is more equitable and a better method of distributing shared costs. Also, adding a Schedule E to

address trust fund balance issues would help Alabama be better prepared for critical economic conditions.

22

References

1. U.S. Department of Labor (2009). Significant Measures of State UI Tax Systems.

2. U.S. Department of Labor (2009). Significant Provisions of State Unemployment Laws, 2009.

3. Alabama Department of Industrial Relations, (2004). Unemployment Compensation Laws of Alabama, 2004 Edition. Thomson West Publishers.

4. Alabama Department of Industrial Relations (2009). Alabama Handbook of State Unemployment Insurance Financial Data.

5. Alabama Department of Industrial Relations (2010). General UC and Experience Rating Information.

Appendix A 23

Computing a Proportional Sharing Factor Under the current method of costs sharing, costs are shared among employers by applying a shared costs ratio to existing employer tax rates. This has created an inequity for those employers with little or no impact to the trust fund. An alternative (proportional sharing) was developed that eliminated the inequities. This moved the burden from those employers with little or no charges to those employers who contributed most to the shared costs problem. This appendix explains how to compute the proportional sharing factor which enables proportional sharing. This example makes use of the 2009 benefit charges. To establish the computation, there are some givens: net shared costs, paid on taxable wages by employers, Shared Cost Ratio, the schedule in use and taxable wages from the ES 204 Report.

• Net shared costs incurred as of 06/30/2009 equaled $201,910 (thousands). • Paid on taxable wages equaled $13,106,307 as of 06/30/2009 • Shared cost ratio by computation 201,910/13,106,307 = 1.5% as of 06/30/2009 • Tax rate schedule to use—“D” for calendar year 2010 • Taxable wages from ES204 (provided later in table format to correspond with the employer’s benefit

ratio).

Tax rate tables are broken into 26 lines based on the employer’s benefit ratio. Under schedule D, some tax rates are duplicated, resulting in 22 distinct tax rates. Using the shared cost ratio computed above, along with the schedule D tax rates and Taxable wages from the ES204, we are able to compute total tax contributions.

Appendix A 24

The next step is to compute what contributions would equal had there been no shared costs assessed. In other words, we determine what the contributions are based solely on the tax rates from schedule D. Note that all rates have been reduced by .006 to reflect the ESA (Employment Security Assessment) rate that is already included in the tax rate table for each schedule.

With this information, the proportional sharing factor can be computed. The proportional sharing factor is an indication of how much a covered employer would have to pay over their schedule tax rate. The proportional sharing factor is equal to the contribution total with shared costs divided by the contribution total for base tax rates only. From the values computed above we have:

437,664 divided by 241,122, or 1.815

The proportional sharing factor is 1.815. Since this is a factor, it is not added to each base tax rate. Instead, the proportional sharing factor is multiplied by the schedule rate and taxable wages from the ES204. The schedule tax rates and taxable wages are identical to those used to compute total contributions using the Shared Cost Ratio method.

Appendix A 25

Applying the proportional sharing factor results in a new table of contributions which shifts the burden from employers with little or no benefit charges to those employers having more benefit charges than taxes paid for the fiscal year en 06/30/2009. The important thing to point out is that neither the schedule D tax rates nor the taxable wages changed between the tax contributions methods. Under Shared Cost Ratio, a constant value was added to each tax rate. Under proportional sharing factor, each tax rate was multiplied by a constant value. In both cases, the total contribution remains identical, but the overall distribution of tax contributions has changed.

Appendix A 26

As shown in the following chart, the proportional sharing factor method merely redistributes the contributions, but more importantly, it removes the inequities caused by ratio sharing.

Clearly seen below, those minimum rated employers at the lowest tax rate now see the lowest percentage increase while the maximum rated employers see a much larger increase. Those maximum rated employers are now “sharing the burden” of those costs caused by them.