Reworking California’s jobless fund

Swamped with more unemployed residents than any other state, California has paid a staggering sum in jobless benefits over the last six years — nearly $40 billion. But the state didn’t have nearly enough money in its unemployment insurance fund to handle all the claims from idled workers, so it borrowed heavily from the federal government to cover the shortfall. Now Washington is starting to take its money back, at the expense of California employers and taxpayers. The state should come up with a better way to shore up the long-neglected fund.

Unemployment insurance is financed by state and federal taxes on employers. In California, workers are eligible for benefits if they lose their jobs or have their hours cut significantly through no fault of their own. The state pays the initial benefits, up to a maximum of six months. The federal government kicks in extra weeks of aid when jobs are unusually scarce, as they have been in the latest downturn.

Although 32 states’ unemployment programs needed a bailout from Washington, California was singularly ill-prepared for the last recession. The milder slowdown in 2001 had left its unemployment insurance trust fund empty in 2004, so when unemployment started to climb in 2007, the fund was soon rendered insolvent again. It has since borrowed about $10 billion from Washington, far more than any other state.

The borrowing has drawn two responses from the federal government. First, it is raising the tax on California employers by 0.3%, or $21 a worker, each year until the debt is repaid. That may not sound like much, but it is projected to cost employers an extra $1.9 billion by 2016. And second, the feds are making state taxpayers pay interest on the debt, a charge that amounts to roughly $300 million a year.

The overwhelming debt stems from the state’s unwillingness to build up a sensible reserve in the trust fund. That’s not because lawmakers were lavishing the unemployed with cash. The state’s average weekly payment of $294 is among the smallest in the country.

A more likely culprit is the unusually low unemployment tax burden the state imposes on employers (and, indirectly, on their workers, whose wages often are reduced to offset the cost of unemployment insurance). The state caps the amount of wages subject to taxation at the lowest level in the nation — $7,000 per worker. The cap hasn’t budged since 1984, while average state wages have almost tripled. The low cap means that unemployment taxes are relatively lighter on companies with high wages than those with low pay scales. And it helps explain why employers collectively pay a much smaller percentage of their wages into the trust fund than they did in the 1960s and ‘70s.

Employers acknowledge that they’re going to have to pay more into the fund in the future. But they’ve also called for the state to cut the costs of the program by making it harder for part-time employees to qualify for benefits and reducing the amount that workers can collect before their benefits are exhausted. In addition, they’ve suggested that the state consider issuing bonds to raise the money to repay its trust fund debt.

It doesn’t make sense to reduce benefit levels when there are still many more applicants for jobs than there are openings. And issuing bonds would be a more costly way to pay off the debt in the long run, considering how little the federal government demands in interest. But it’s worth considering whether benefits should be available to so many people who are only marginally in the workforce. The state sets such a low earnings threshold to qualify for benefits, it may be paying benefits to those who don’t need to work as well as those who do.

Even if the state manages to trim the costs of its program, it needs more revenue to be sustainable. The challenge for lawmakers is finding a way to do so without stunting the state’s already sluggish growth. The faster companies grow, the lower the demand for unemployment benefits and the higher the revenue in the trust fund. As they search for consensus on how to repay the trust fund debt, lawmakers and the Brown administration have to balance that call for growth against the responsibilities of employers to repay the debt and the need for a program resilient enough to survive the next recession without a bailout.