California's unemployment fund has $10.3 billion deficit

This story is taken from Sacbee / Business

Published Tuesday, Nov. 09, 2010

California businesses already pay some of the highest unemployment taxes in the country – and the tab is likely to increase.

The recession and the Legislature's decision years ago to raise benefits have drained the state unemployment insurance fund, which now has a estimated $10.3 billion deficit.

The nonpartisan Legislative Analyst's Office, in a recent report titled "California's Other Budget Deficit," said the state will probably need to raise unemployment taxes on employers as well as reduce benefits to bring the fund back in balance.

Raising the tax would require a two-thirds vote in both houses of the Legislature and might be politically impossible. Gov.-elect Jerry Brown has promised not to raise taxes without voter approval.

But pressure is growing on Sacramento to fix the system soon – whether it wants to or not. California has borrowed about $8.5 billion from the federal government to keep benefits flowing, and the repayment obligations are coming due.

"The longer we go without a fix, the bigger the hole becomes," said Loree Levy, a spokeswoman for the Employment Development Department, which doles out the benefits.

She said the U.S. government is scheduled to bill the state about $362 million in interest next year. The Legislature would have to find the money somewhere to pay it; it wouldn't be allowed to dip into the unemployment fund, she said.

There's more. Starting in 2012, if the loan balance isn't repaid in full, higher federal unemployment-benefit taxes are scheduled to hit employers in California (Employers pay both federal and state unemployment taxes).

The increase in the federal portion of the tax wouldn't be much at first – an extra $21 a year for each worker on the payroll. But the increase would ramp up year after year. By 2016, employers in California would be paying an extra $196 per year per worker, according to the LAO's report.

That would translate into nearly $2.2 billion a year in higher taxes for all California employers combined.

As it stands now, California businesses pay an average of $419 a year per employee in unemployment insurance. That's 24 percent above the national average, according to the LAO report.

Levy said figures compiled by EDD show California's taxes are "somewhere in the middle" compared to other states.

Employers say an increase would harm the state's business climate. But they acknowledge that it would be impossible to slash benefits deeply enough to cure the problem without at least some kind of tax hike.

"Benefit reductions alone won't fix the fund," said Marti Fisher, a lobbyist with the California Chamber of Commerce. "But taxing employers right now is a bad idea because of the economy. We do not want to see another hit to employers."

She and others hope Washington will provide some debt relief to California – and the other 31 states that have borrowed from the U.S. government to pay unemployment claims. Several states are lobbying the federal government for some kind of deferral on repayment until the economy improves.

The economic stimulus plan gave states a delay on their interest payments. But that runs out Dec. 31, and California will have to make its $362 million interest payment next fall unless another waiver is granted.

"We're certainly working on getting support for relief for states and businesses," said Doug Holmes of Strategic Services on Unemployment & Workers' Compensation, a business lobbying group in Washington, D.C. "California … quite frankly could use the relief."

Holmes said California has borrowed more than any other state.

California had to borrow from Washington to pay unemployment benefits in 2004, following the dot-com recession. But the state repaid the debt so quickly, it didn't owe any interest.

"The economy rebounded pretty quickly back then," Levy said.

This downturn has been longer and deeper. More than 1.2 million Californians have lost their jobs since the recession began in December 2007, and this time people have been out of work longer. Unemployment pays 50 percent of a person's lost wage, up to a maximum of $450 a week.

Contributing to the problem: In 2001 the Legislature nearly doubled benefit levels without raising taxes. In 2008 Gov. Arnold Schwarzenegger proposed raising taxes and cutting benefits, but the plan went nowhere in the Legislature.

Over the last two years combined, the state has paid out $20.6 billion in benefits while taking in $9.9 billion in taxes, Levy said. That's left California's unemployment fund with a deficit of $10.3 billion, which is expected to grow to $13.4 billion next year.