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State unemployment benefits in the crosshairs

@CNNMoney May 9, 2011: 2:36 PM ET
States may cut unemployment benefits

NEW YORK (CNNMoney) -- The jobless may soon find their state unemployment check is not in the mail.

A growing number of states are looking to cut back on jobless benefits to minimize the increase in unemployment taxes businesses pay. State officials are concerned that these tax hikes could deter companies from hiring.

Some states, such as Michigan, Florida and Arkansas, are debating reducing the number of weeks that the jobless can collect state unemployment. Others, including Indiana, want to limit the number of people eligible for benefits.

The changes generally would not affect the nearly 4.3 million people currently receiving state benefits. But reducing state benefits will limit the time a person can receive federal unemployment benefits, which can last up to another 73 weeks.

States in Crisis: Full coverage

The problem stems from the massive increase in jobless claims during the Great Recession. The surge drained state unemployment trust funds, forcing states to borrow from a federal fund to cover their 26 weeks of unemployment benefits.

Some 32 states now owe $45.7 billion to the fund, and could have to pay about $1.4 billion in interest this year. The burden will fall mainly on businesses, which will have to pay more in unemployment taxes.

This wouldn't be the first time states reduced benefits. During the 1980s recession, states took out $28 billion in loans, adjusted for inflation. More than 40 states subsequently cut payments and eligibility.

Fewer checks coming

Michigan lawmakers just voted to cut state unemployment benefits by six weeks. Gov. Rick Snyder is expected to sign the bill, which would make the state the first to provide less than 26 weeks of benefits.

The change would take effect early next year.

The state, which has an unemployment rate of 10.4%, owes more than $3.9 billion to the federal fund. Businesses are facing a tax hike of as much as $240 million this year to cover the repayment costs, according to the state's Chamber of Commerce, which lobbied heavily for the bill.

"It is a huge win for job providers, who will save nearly $1 billion over three years as a result of this legislation," the group said in a statement.

Democrats, including U.S. Rep. Sander Levin of Michigan, criticized the move. More than 171,000 people drew more than 20 weeks of regular UI benefits in 2010, with 130,000 of these drawing 26 weeks, Levin said in a statement.

Meanwhile, Florida lawmakers are moving toward the same goal.

In the Sunshine State, those laid off after Aug. 1 could receive six fewer weeks of benefits, if a bill that recently passed the state House of Representatives becomes law.

And if Florida's unemployment rate should fall to 5% or less, the jobless would receive only 12 weeks of benefits. (Currently, the unemployment rate stands at 11.9%.)

Right now, companies are scheduled to pay a minimum of $72.10 per employee, up from $25.20 last year, to help cover Florida's $2.2 billion debt to the federal unemployment trust fund.

The bill would reduce the tax hike by about $18 per employee, sending companies a message that Florida is business-friendly, said Rep. Doug Holder, a Republican who sponsored the bill, which is now before the state Senate.

"It's a disincentive to move to the state of Florida with a new business or for a business that's here to expand if they have to pay all this money per employee," Holder said.

Limiting benefits to 20 weeks won't affect that many people, according to Holder. That's because the unemployed claim an average of 17.7 weeks of state benefits.

And it helps them by requiring they undergo a skills review before they can receive benefits, Holder said.

Consumer advocates, however, are concerned that the unemployed will lose a critical means of support if the bill passes.

"Limiting at this crucial time people's access to the safety net impacts their survival," said Joseph Phelan, community director for Florida New Majority, a left-leaning group.

Arkansas lawmakers, meanwhile, are looking to shave a week off the time its residents can collect benefits. The legislation, which passed the state Senate and is now under consideration in the House, would also freeze benefits at the current maximum of $451.

The measure is expected to save the state up to $75 million a year, said Sen. Jonathan Dismang, the bill's sponsor who noted that Arkansas offers more generous benefits than its neighbors. It would help the state restore its unemployment trust account, which currently owes $311 million to the federal fund.

Fewer recipients

Indiana Gov. Mitch Daniels recently signed into law a bill that limits eligibility for unemployment benefits and changes the way payments are calculated, starting in July 2012.

It also reduces the scheduled increase of unemployment taxes on businesses. So now companies will pay a maximum of $703 per employee, rather than $903. Last year, the rate was $392.

The law is designed pay off the state's $2.1 billion debt to the federal fund by 2019. Three-quarters of the cost will be shouldered by businesses, but one-quarter will be borne by future jobless.

Indiana: An island of calm in state budget storms

The savings will come because fewer people will be eligible for benefits. For instance, temporary employees and those on extended leave will not qualify. Neither will workers on planned short-term shutdowns or those who accept voluntary buyouts.

Also, the law caps the maximum payment at the current $390 a week.

And it changes the formula for calculating benefits, taking into account what claimants earned over the course of a year, rather than the highest quarter. So people who earn most of their pay in one period will likely see their benefits reduced.

It's "more than fair" for the unemployed to foot one-quarter of the bill since lawmakers increased benefits several times over the past decade, said Rep. Dan Leonard, a Republican who sponsored the bill. Companies, meanwhile, will still see a big tax hike.

"You can't argue that businesses won't pay their share," he said. To top of page

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