And After Fixing That Pesky Budget Thing, How About the Unemployment Insurance Fund?

The awful economy that has contributed to the state’s record budget gap of $42 billion and, now $24 billion, has also driven the state’s unemployment insurance fund deeper into insolvency.

A new report by the state Employment Development Department estimates that the fund will end 2009 $6.2 billion in the hole and $17.8 billion in the hole if no action is taken to change the way it’s financed.

Previously, the department estimated the fund would be $2.4 billion in the red by the end of 2009 and $4.9 billion in the red by the end of 2010.

But those estimates were made last October and premised on the unemployment rate being 6.7 percent this year and 6.5 percent next year.

 California’s unemployment rate fell from 11.2 percent in March to 11 percent in April.

Nearly 2.1 million Californians are unemployed this year. The state predicts more than 2.2 million will be next year. That’s up from 1.3 million in 2008.

The state expects to only take in $5.3 billion in employer payments to the fund this year and $5.7 billion in 2010.

Because unemployment benefits are a federal mandate the state must keep paying the benefits even if the fund is insolvent. A federal loan allows the state to keep paying benefits.

Under the federal economic stimulus package, that loan remains interest free until January 2011. If the state hasn’t shored up the unemployment fund by then, it will begin paying $609 million in interest on the projected $17.8 billion imbalance picked up by the federal government. Full repayment is required by the end of September 2011.

There are only three ways to restore California’s Unemployment Insurance Trust Fund to solvency – increase employer contributions, cut benefits or some combination of both.

The fund is created by employer contributions based on the first $7,000 in wages paid to each worker, a ceiling that dates back to 1983. The maximum paid is $434 per employee per year.

There are eight contribution rates for employers. The lowest is AA, which, in theory, would be the amount employers pay when the fund is flush. When the fund is heading toward insolvency or is already in the hole, the highest schedule, F+, is used which is 6.2 percent.

Employers are currently paying at the F rate – plus a 15 percent surcharge. The state says employers will continue paying at this rate through 2010.

There are several causes for the fund’s insolvency. The first time in its 6-year history the fund became insolvent was 2004. Part of the reason for that was 2001 legislation that increased the maximum weekly benefit from $220 to $450 over a four-year period.

The legislation did not increase the amount employers paid into the fund to cover the increased benefits and payments to unemployed workers out-stripped payments to the fund from employers.

That imbalance has been exacerbated by the economy.

Last fall, Gov. Arnold Schwarzenegger offered a plan – based on earlier insolvency estimates — to restore the fund’s fiscal health. Schwarzenegger proposed increasing the taxable wage ceiling from $7,000 to $10,500. Forty-two states tax more than the first $7,000.

The governor also wanted to increase the maximum tax rate for employers from 6.2 percent to 8.1 percent.  The higher wage ceiling would generate $2.7 billion. The higher tax rate, another $1.4 billion.

Schwarzenegger estimates the per-employee payment increases of his previous plan to range from $56 to $427 – depending on the employee’s “experience rating.”

“Experience rating,” which determines how much an employer pays is a measure of how often employees have collected unemployment insurance in the past. 

The governor’s proposal would increase the maximum tax per employee from $434 to $851. The national average is $995. 

To save $300 million, the governor seeks a modest reduction in eligibility – a claimant would need to work 7.5 weeks per year rather than the current 3.5 to collect. He has not revised his proposal in light of the new fund imbalance estimate.

The Legislature has shown no sign of doing anything about the problem. In part, that’s because its got its hands full trying to balance the state’s cash-low general fund and, in part, because Republicans are unlikely to cast votes to raise taxes – period – let alone on business owners.

No state has ever defaulted or failed to rebalance its unemployment insurance fund but from the standpoint of a California GOP legislator why should they take the political risk of voting to boost taxes when inaction allows the Democratic president and the Democratic Congress to be the heavy and sharply boost employer contributions to right the fund.

So, in short, the imbalance between payments going in and benefits paid out – even those covered by federal stimulus dollars – will continue.

Businesses will continue, for the foreseeable future, to pay the highest level of contributions allowable and the day of reckoning will occur on the next governor’s watch. 

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