Paying for unemployment

California’s unemployment insurance fund became insolvent nearly two years ago, and federal interest-free loans to shore it up — and to allow the state to keep paying laid-off workers without hiking the cost to businesses — are due to run out at the end of the year. The problem is basic: With unemployment at 12%, the fund is paying out far more to unemployed workers than it is taking in from employers, who fund the program through unemployment taxes. The shortfall, projected to reach $20 billion by the end of 2011, is now so large that economic recovery alone will be insufficient to set the fund on a sustainable track. Major restructuring is needed, and that will take concessions from businesses and laid-off workers, as well as additional assistance from the federal government.

So far, lawmakers have failed to approve the necessary restructuring legislation, because of a familiar situation: The interested parties have drawn battle lines.

Employers don’t want to pay more in unemployment insurance taxes, which currently can reach $490 per eligible employee per year. And they have a point, which extends beyond their bottom lines: At times of high unemployment, it’s not in California’s interest to jack up what is essentially a payroll tax. The state should be doing its best to encourage hiring, not making it more costly.

Employers in other states pay, on average, a maximum per-employee tax almost double what California businesses pay. But the state’s nonpartisan Legislative Analyst’s Office reports that when considering the average, rather than the maximum, per-employee tax, businesses here bear a higher burden than elsewhere.

The unemployed and their advocates, meanwhile, are unwilling to see a reduction in the benefits that help keep their families fed and sheltered while they look for work. Nor would it be in the state’s interest to have a growing unemployed workforce that has no insurance money to put back into the economy, or that becomes even more costly by having to resort to welfare programs.

The fund’s insolvency threatens to interrupt payments to workers and to impose automatically increased taxes on businesses, and without federal relief the state will begin to shoulder interest payments that could reach $500 million a year. To restore sustainability, it will be necessary to increase unemployment insurance taxes to fend off borrowing costs and to restore a fund balance that is healthy enough in good years to be able to weather the next recession. But benefit cuts too must be part of the solution; insurance payouts may have to be limited to workers who have earned more and worked longer. The maximum weekly benefit may have to be reduced. And lawmakers, in seeking the proper balance, should also urge the federal government to extend the amount of time the state may receive interest-free loans, to give California — and other states in similar circumstances — some needed breathing room.