Will California’s Other Deficit Be Eliminated by the Federal Government?

While a new state budget is in place, California has done nothing to eliminate its other deficit – a $10.6 billion-and-climbing hole in the Unemployment Insurance Fund.

Insolvent since January 2009 and kept afloat through federal loans, the fund pays weekly benefits of up to 99 weeks to workers who lose their jobs through no fault of their own.

Two federal plans – one contained in President Obama’s proposed budget and another put forward by the US Senate are aimed at bringing California’s fund – and those in 29 other states – back into the black.

Of the other states with funds in the red, the closest to California’s total is Michigan at nearly $4 billion.

While it’s unclear whether either of the proposals will win approval, the “two comprehensive solvency plans would likely eliminate California’s Unemployment Insurance fund deficit by 2016 and put California on track to develop a sizable reserve by the end of the decade,” according to a report released July 7 by the state Legislative Analyst.

While the federal government has provided loans and forgiven interest for the past several years, California owes the federal government $320 million in interest this September from the state’s already cash-starved general fund.

If nothing changes, the following year the interest payment is $448 million.

The US Senate and President Obama’s proposal will forgive interest payments from states for two years.

In its recently enacted budget, California borrows the $320 million from the Unemployment Disability Fund to pay the interest on the federal unemployment insurance loan, a practice that can’t be repeated more than a few times without bankrupting that fund as well.

Part of the problem is that with over 2 million Californians unemployed, the payouts from the unemployment insurance fund total $11 billion annually.

Employer contributions, however, are only $4.5 billion.

Besides the stagnant economy, other factors contribute to the fund’s gap between cash-in and benefits-out.

Employers pay their unemployment tax, which averages 4.2 percent statewide, on an employee’s first $7,000 in wages – a wage ceiling dating back to 1983. The maximum paid by an employer is $434 per employee each year.

Part of the US Senate and President Obama’s plan is to increase the federal minimum from $7,000 to $15,000. That would mean contributions by employers would rise by 40 percent over current levels from 20145 to 2016.

Besides, the $7,000 wage maximum, another contributor to the fund’s insolvency is 2001 legislation that increased the maximum weekly benefit from $220 to $450 over a four-year period. That increase was one of the reasons the fund teetered on insolvency in 2004.

The legislation did not increase the $7,000 ceiling or the employer tax rate so the same amount of money was supposed to cover roughly doubled benefits.

California’s $450 weekly maximum is slightly higher than the $409-a-week national average.

Which means bringing back California’s entire fund is a politically vexing problem.

There are only three things that can be done to restore the fund to solvency – increase employer contributions, cut benefits or some combination of both.

As they have in the past, employers oppose their taxes being increased – particularly during a recession.

“In a recession like were experiencing this is not the time to increase taxes on employers,” said Marti Fisher, a lobbyist for the California Chamber of Commerce. “We need to rely on our business community to create jobs. We don’t want to cause any more jobs to go away by increasing the tax burden.”

Without a change in federal policy the amount employers contribute will increase automatically.

Federal law says if a state carries a federal loan balance for two consecutive years, employers begin to pay more into the fund.

The federal unemployment tax rate, which is currently .8 percent, can climb to as high as 6.2 percent.

Under current federal law, the amount California employers contribute to the fund would rise by .3 percent on January 1.

At $25 per employee, that’s a roughly $304 million increase.

That amount grows in each subsequent year so that by 2016 – absent a change in the status quo – employers would be paying $1.7 billion more than they do now, about $135 more per employee.

In its report, the legislative analyst offers a plan that contains something for very party involved to dislike.

Like the president and the US Senate, the analyst proposes increasing the taxable wage base from $7,000 to $15,000.

But it would reduce the maximum weekly benefit from $450 to $375 and require that a person earn at least $4,000 over the past year to be eligible for benefits.

Currently, the threshold is $1,125.

That would eliminate the fund’s deficit by 2016, the analyst says.

But doing so means benefits would be reduced by $4 billion and employer contributions would rise by $11 billion.

Not an attractive prospect for either employers or employee groups.

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