Yet Another Daunting Problem for California’s Next Governor

Besides a projected budget shortfall of $21.3 billion in their first year in office, California’s next governor also faces an unemployment insurance fund that will end 2011 at least $13.4 billion in the red, according to the state Employment Development Department.

The insolvency of the fund, which is financed through employer contributions, will have an impact on the state’s cash-starved general fund next September when the state owes the federal government $362 million in interest on loans from Uncle Sam that have allowed the fund to keep issuing checks to out-of-work Californians.

“The magnitude of the (unemployment insurance) fund insolvency is so great at this point it poses significant financial risk of the state and employers,” wrote the Legislative Analyst in an October 20 report assessing the fund’s condition and offering strategies to bring it back into balance.

With over 2 million California’s unemployed, the payouts from the fund total $11 billion annually. Employer contributions, however, are only $4.5 billion.

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.”

The state began borrowing from the federal government in January 2009 but part of the federal economic stimulus package waived interest owed on borrowed funds for 2009 and 2010.

Some 30 states also have unemployment insurance funds in the red.

Fisher said the chamber supports efforts by some other states to convince the federal government to waive interest payments for an additional two years – saving California some money and hopefully allowing the economy to improve.

Even in relatively good times, contribution levels by employers tend to lag behind demand.

In part, that’s because 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 is $434 per employee each year.

Like the rest of the state budget, the unemployment insurance fund has major systemic problems. The $7,000 wage maximum is one of them.

Another 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 for the fund teetering on insolvency in 2004.

The legislation did not increase the $7,000 ceiling or the 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.

In November 2008, Gov. Arnold Schwarzenegger offered a plan 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 proposed increasing the maximum tax rate 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 estimated the per-employee payment increases to range from $56 to $427 – depending on the type of employee.

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

To save $300 million, eligibility would have been made slightly harder by the governor – a claimant would need to work 7.5 weeks per year rather than the current 3.5.

The massive budget shortfall, opposition from employers and employee groups who didn’t want to see eligibility reduced ensured the plan went nowhere.

Now, the legislative analyst says, the GOP governor’s proposal isn’t enough to bring the fund back into balance.

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