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Alabama’s Unemployment Insurance Woes Have Roots in a Happier Time

Alabama’s unemployment insurance trust fund is the latest to collapse under the weight of the Great Recession.

A year ago, the state’s fund had $395 million in it, but by the end of last month, it was nearly empty. Since then, the state has borrowed more than $27 million just to keep benefit checks flowing – triggering a hefty tax increase on businesses and potential cuts for unemployed workers just as the economy is struggling to recover.

Alabama’s trust fund was able to break even over the past few years, despite having a very low tax rate (the 38th lowest in the U.S.), because an economic boom kept unemployment low, and the state offered bare-bones benefits.

Ideally, a state’s fund grows during boom times so that when recession hits, reserves are available to keep it afloat. Alabama’s reserve level, however, stayed put at about six months' worth, below the national average and far below the 18 months many experts recommend.

(Read more about states’ poor unemployment insurance planning here, in our collaboration with public radio’s Marketplace.)

Twenty states besides Alabama have also borrowed. Because of a provision in the stimulus package, there is no interest on the borrowing until 2011. But Alabama has faced the same difficult decision other states have made: reduce benefits or increase taxes just as the economy is struggling to emerge from deep recession.

So far, there are no planned reductions in benefits, which would be a tough sell in Alabama, which had the second lowest benefits in the nation last year – just $207.08.

That may change, however, because the state is running out of tax options. Starting in January, businesses will be charged the highest tax rates allowable under the state system, up to 6.8 percent. It is unclear if that will be enough.

Like many other states that have run into trouble, Alabama also taxes employers only on the first $8,000 of each worker’s income. That is only $1,000 more than the federal minimum of $7,000, which was set in 1983 – just after an unemployment insurance system breakdown caused by the last deep recession.

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