California’s Other Deficit: At $10 billion, it’s Big Bucks

Greg Lucas
Reporter for Capitol Weekly and Publisher of California’s Capitol website

Crossposted on Capitol Weekly

It’s California’s other deficit.

The one that doesn’t get talked about much.

At just under $10 billion, this deficit is a bigger financial hole than the one in the state’s General Fund.

But Gov. Jerry Brown and the federal government have a plan for erasing the deficit, which will take more than five years:

Force California’s employers to pick up most of the multi-billion dollar tab.

California’s Unemployment Insurance Fund has been insolvent since January 2009, kept afloat only through federal loans.

About $10 billion worth to date.

And counting.

California and 27 other states are in debt to the federal government for money fronted them to keep paying weekly benefits to the glut of workers who’ve lost their jobs through no fault of their own over the past three years.

The Golden State is by far the biggest debtor.

New York is second deepest in the hole at $3.5 billion. Add Pennsylvania and North Carolina’s debt to New York’s and it’s still less than California.

“Over the years, we’ve not been able to take in enough to offset the cost of unemployment benefits,” said Loree Levy, a spokeswoman for California’s Employment Development Department. “That deficit grew quite large during the Great Recession and we need to pay back those loans and get solvent again.”

Like the state budget, the only way to get solvent is to collect more revenue, reduce spending or a combination of both.

For the Unemployment Insurance Fund, employers are the revenue source and the “spending” is the benefits paid to unemployed workers – up to 99 weeks, under changes contained in 2009’s American Recovery and Reinvestment Act.

In California, the federal government pays 100 percent of the costs after week 26. California’s weekly maximum benefit is $450, a little above the $409 national average.

The Democratic governor’s budget plan would impose a surcharge on employers averaging $39 per employee, starting in January 2013.

That would raise over $470 million next year – enough to cover the annual interest on the loans the state has received from the federal government.

Brown would increase that surcharge to an average of $61 per employee in 2014 – another $732 million from employer pockets — to cover that year’s interest charges and begin paying off loans from the state’s Unemployment Compensation Disability Fund that were used to pay the state’s $303 million interest due in 2011 and this fiscal year’s  $417 million federal nut.

The loans prevent the payments coming from California’s cash-starved General Fund.  But they must be repaid by 2016 or the disability fund will go toes up as well.

Brown’s surcharge is a significant hit on business owners.

California employers now 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.

That’s one of the ongoing problems with the fund.

With just under 2 million Californians unemployed, the Brown administration predicts benefit payments of $7 billion in 2012 and employer contributions of $5.4 billion.

Also contributing to the chronic imbalance, the maximum paid by a business owner is $434 per employee each year.

In its first year, the Democratic governor’s proposed surcharge would boost per employee payments to $473, a 9 percent increase.

Payments the following year would be $485, a 14 percent increase.

Brown says the surcharge would fall to an average of $41 by 2017.

The California Chamber of Commerce has opposed previous moves to increase employer unemployment contributions, including a November 2008 plan by Gov. Arnold Schwarzenegger.

Increasing taxes on business during a recession could harm their ability to create new jobs, the chamber argued.

“We do not yet have all the details of Gov. Brown’s plan and therefore have not yet taken a position,” said Marti Fisher, a lobbyist for the chamber.

Brown says his surcharge would require a two-thirds vote of lawmakers for approval. Given the refusal of GOP lawmakers to back even allowing voters to decide whether they want to raise their own taxes, the surcharge’s passage is shaky.

At best.

Said Brown at his Jan. 5 press conference unveiling his budget proposal: “You cannot make the Republicans vote to increase taxes on businesses right now.”

It’s also unclear how hard Brown will press for the surcharge given expected opposition to it from business groups whose support he’s soliciting for a November ballot measure to temporarily increase state sales and income taxes to help balance his budget.

If enacted, the surcharge would come at a time when employers are already being forced to pay more unemployment insurance tax to the federal government.

Under the joint federal-state program, established as part of the Social Security Act of 1935, individual states have great latitude in establishing the parameters of their unemployment program: how generous the benefits, how many weeks of eligibility, how much employer contributions should be.

The federal government acts as a safety net, charging an unemployment tax of its own which pays for administrative costs as well as federally approved extensions of eligibility and loans to insolvent state funds.

In states that have been borrowing from the federal government for two straight years, the U.S. Department of Labor imposes a 3 percent reduction in a tax credit employers receive, resulting in increased federal unemployment tax liability.

The revenue from the increase is earmarked for reducing the principal on the federal loans.

That .3 percent boost – about $21 to $23 per employee, the Brown administration estimates – began for California businesses Jan. 1.

Each year following, until the state fund is made solvent, another .3 percent is added until the entire credit is eventually eliminated and employers pay the maximum federal unemployment tax rate of 6 percent on the first $7,000 on each employee’s wages.

Brown estimates this year’s .3 percent increase will cost employers almost $300 million. The addition of another .3 percent in 2014 takes the annual total to $616 million.

Absent a change in the status quo, five years from now – when the administration says the fund will still be insolvent — employers will be paying some $1.8 billion more than they do now, about $135 more per employee.

“It would be just one more thing laid on our already burdened businesses,” said Senate GOP Leader Bob Huff of Diamond Bar, adding that what he knew of Brown’s proposal his caucus wouldn’t embrace it.

“We’re already at a competitive disadvantage to neighboring states and other countries. We’re trying to grow our job base, not drive it off to other areas.”

Said Assembly GOP Leader Connie Conway of Visalia:

“This proposal would hurt job creators and add to the number of unemployed Californians at a time when our economy is slowly on the mend.  Instead of just tinkering around the edges of this problem, we should work to restructure the program to find a balanced solution that is fair to both workers and employers.”

The Democratic governor also would tighten benefit eligibility to reflect a more than doubling in the minimum wage to $8.00 since eligibility rules were last adjusted.

Today, to qualify for minimum unemployment benefits, a person must earn $1,300 within a single quarter of a year or $900 in a single quarter and $225 during the remaining three quarters.

Brown would up that to $3,200 in a single quarter and $1,920 in a quarter plus an additional $480 in the other three.

The changes save $30 million, the administration estimates.

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

In 2001, legislation increased the maximum weekly benefit from $220 to $450 over a four-year period, causing the fund to teeter on insolvency in 2004.

The legislation included no increase in the amount of taxable income or the employer tax rate causing the same size pot of money to cover roughly doubled benefits.

In his 2012 budget, President Obama proposed increasing the federal minimum from $7,000 to $15,000 but the idea was rejected by Congress.

Last July, the Legislative Analyst proposed a similar plan to lower benefits by $4 billion – shrinking the maximum weekly payout from $450 to $375 – and increasing employer contributions by $11 billion. It was not considered.

To cope with their fund imbalances, 25 states have increased their taxable wage base, boosting the national average to $13,500, according to an October 2011 report by the Washington, D.C. – based Tax Foundation.

Twenty states increased minimum and maximum tax rates in 2010. Some, like South Carolina, cut the number of weeks of eligibility – in its case from 26 to 20. Michigan fell to 20 weeks in January.

“At some point, the federal government may make revisions in employer contribution requirements for regular unemployment benefits that could help improve each state’s fund solvency,” Levy said.

“But the fact is the system we have now is antiquated and no longer meets our needs. Chances are California lawmakers will still have to take some kind of action to revise the state’s funding structure.”

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