Bringing California’s Unemployment Insurance Fund Out of the 1930s

The Legislative Analyst’s Office recently released its
report on the state Unemployment Insurance (UI) fund ("California’s Other Budget
Deficit: The Unemployment Insurance Fund Insolvency"). It is a well-written
report, summarizing the current insolvency ($8.5 billion and growing), the
staggering imbalance in revenues and benefit payments ($11.3 billion in
benefits paid to workers in 2009, with only $4.5 billion collected), and the absence
of legislative agreement on how to address the insolvency.  

Though the condition of the Fund has been known and written
about some time, the LAO  report  received wide  attention in the California press, coming on
the heels  of  our ballooning  state budget deficit ($25 billion and
counting). In the week since the report’s 
release, I’ve been asked by several legislative staff about the Fund’s
future, and the possibilities of raising payroll taxes or altering benefits
(two options put forward). Here in a nutshell is my response, having followed
the Fund’s activities for more than 30 years.

1. Take no action
in the next few months, as we wait to see the federal response to possibly
waiving interest on the federal loan to California:

California is by no
means alone in its UI Fund deficit. It is  one of 33 states operating UI fund deficits,
and receiving federal loans. A number of 
Governors (Democrat and Republican), state UI departments and workforce
departments have made  request  for waiving interest payments  for two more years, until the national economy
recovers.  Mr. Steve Carter, government
relations director of TALX and UI expert, 
estimates the chances of this request being granted at 50-50, given the
high number of states affected.(There also has been an attempt to waive the
loan amount itself, but Mr. Carter gives this no chance of success.)  The interest issue is important as for
California’s loan, interest  may total around
$250 million by the end of 2011.

Further,  the federal
GAO issued a report calling for a change in the FUTA wage base, from the
current $7000 to some significant increase. 
Any action that the federal government takes in raising the wage base
will impact California-which is at the $7000 level.

2. Like the State Budget, the UI Fund financial solution
will be over a period of years, though the financing plan should be drawn up in
the next four months-building on several plans drawn up over the past 2 years :

Probably the last thing we want to do is raise payroll taxes
(either the rate or the wage base) during a time of our highest unemployment
since World War II and a reluctance of employers to hire, even as other
economic indicators rebound.  In previous
periods over the past few decades when the Fund surplus went down or even went
into the red, the economy rebounded sufficiently so that payroll tax revenues
grew and replenished the Fund.  That will
not happen this time-our deficit is too great. 
Over the past two years, numerous stakeholder meetings have been held
and several plans drawn up on UI fund financing. Our next effort should build
on these.

3. Place any UI fund resolution in the broader context of
reforming our UI system, addressing the socialization of costs and
re-employment role: Most important, resolving our UI fund solvency must be
put in the broader context of bringing California’s UI system up to date from a
system rooted in the 1930s. The UI system was established by the Social
Security Act of 1935. Even at that time there was concern that technology was displacing
industrial workers and would lead to continued high unemployment . But the UI
system was meant to address short-term unemployment and tide over workers until
they could find other jobs. The system came to be funded by employer
contributions, with amounts determined by number of workers and a rate based on
prior claims made against the individual employer.

There are a number of major inefficiencies and inequalities
in the current system. Among these: (1) costs are socialized so that the
majority of employers must bear the costs not only of their own prior claims
but of whole sectors, particularly agriculture, that are subsidized; (2) As the
system has gone to the internet, UI fraud has become more sophisticated and
needs constant updating in combating; (3) re-employment efforts have improved
over time, but the system is still benefits-based. 

Bottom line:  We have
a UI system in California that neither serves employers nor workers. It is time
for a broader overhaul than the financing mechanisms of the Fund.