Unemployment fund in red

[ilbegone]

Unemployment insurance severely underfunded

Mediha Fejzagic DiMartino, Staff Writer

10/21/2010

The state's Unemployment Insurance Fund is in the red, and state officials are now arguing just how deep that hole is.

The Legislative Analyst's Office earlier this week projected a $20-plus billion deficit by the end 2011, while the state Employment Development Department on Thursday pegged the figure at $13.4 billion.

"That's still a large deficit that needs addressing by the Legislature to revise the funding structure for (unemployment insurance), but at least it will lower our expected interest owed to the federal government," EDD spokeswoman Loree Levy said.

The fund has been kept afloat by loans from the federal government after running out of money two years ago.

The loans will begin incurring interest next September, at a price tag of $362 million or $500 million - depending who you ask.

With more than 2 million unemployed, the fund's payouts total $11 billion a year and have surpassed the $4.5 billion in employer-paid payroll tax contributions.

The spike in benefit costs is being blamed on the recession, which resulted in more workers than ever applying for unimployment benefits, according to the Legislative Analyst's Office.

The unemployment insurance provides temporary payments to people who are unemployed through no fault of their own and is paid by employers.

According to EDD, the average employer contribution rate in the state is 4.2 percent of "the taxable wage base," the first $7,000 in annual wages paid to employees.

Employer contributions were $4.2 billion in 2009, and are projected to be $4.6 billion in 2010, $5.1 billion in 2011 and $5.4 billion in 2012.

In 2008, Gov. Arnold Schwarzenegger proposed fixing the Unemployment Insurance Fund, which he said was "facing insolvency because of actions that were taken by previous administrations increasing the benefits without increasing the funding."

According to the analyst's office report issued Wednesday, in 2003 the maximum unemployment insurance weekly benefit amount nearly doubled, from $230 to $450. However, the legislation did not raise the taxable wage base nor did it increase the tax rate.

To fix the problem, Schwarzenegger proposed "asking businesses to gradually pay more while we tighten eligibility and benefits slightly."

According to the analyst's office, decreasing unemployment benefits alone cannot address the fund insolvency in the near future, while options involving unemployment tax increases could only hurt California's competitiveness.

Like Schwarzenegger, the analyst's office is recommending that the Legislature make both tax and benefit changes.

"At a minimum, take prompt action to bring UI benefits and tax revenues into line so that the accumulated deficit and associated interest obligation stops growing," the report said.

California employers currently pay a combination of federal and state unemployment taxes of up to $490 per covered employee per week, according to the report. If changes are implemented, the employer tax contribution could easily double.

"If they come up with anything more to tax us on, I don't know how we will stay afloat," said Annette Salce, purchasing manager at Mira Loma-based Langlois Co., which manufactures products for the food service industry. "It's scary."

Marti Fisher, a policy advocate with California Chamber of Commerce, frowned at any solution that worsens the state's business climate.

"The CalChamber believes that the best way for California to combat rising unemployment, and therefore improve the stability of the UI Trust Fund, is to improve the business climate in California," Fisher said. "California ranked as the sixth-worst business climate in the United States in the Milken Institute's 2007 Cost-of-Doing-Business Index. According to that analysis, California has a cost of doing business that is 22.9 percent higher than the average state. Any `fix' for the UI fund has to include a series of policy changes that will improve California's business climate and spur investment and job creation."

The legislative analyst's report also noted that "California is not alone in experiencing a UI fund deficit, as about 30 other states are in deficit situations."