State’s Worker Disability Fund Falls Way Short

Just one year after it reported a surplus of almost $300 million, the state fund that pays disability benefits to about 650,000 California workers has been forced to borrow money to make it through the end of the year.

Officials of the Employment Development Department blame a series of faulty projections and an unexpected rise in claims for creating a $50-million deficit by year’s end in the state’s $1.2-billion Disability Insurance Fund.

The director of the employment department, Kaye Kiddoo, told a legislative hearing Tuesday in Los Angeles that without immediate financial aid, the fund will run out of money within weeks

Emergency Loan

Gov. George Deukmejian has agreed to an emergency $40-million loan from the state’s general fund to keep benefit payments going. Even so, the deficit is likely to nearly double by the end of 1986 and some lawmakers and other state officials believe that the only way out is to cut disability benefits or increase the amount withheld from the paychecks of an estimated 10 million California workers.

Assemblyman Jerry Eaves (D-Rialto), chairman of an Assembly subcommittee that oversees the disability insurance, said he believes there is little sentiment for cutting benefits, leaving few options other than raising worker contributions. But he predicted opposition to raising contributions next year because of upcoming elections and Deukmejian’s often-stated pledge to oppose higher taxes.

“I’m going to make a strong effort to attack this problem and resolve it,” Eaves said. “It doesn’t make any sense to sweep it under the carpet because we’re coming up for an election.”

Kevin Brett, Deukmejian’s deputy press secretary, declined to say what the governor will do next year until a long-range study is completed by his staff. But Brett acknowledged that Deukmejian “is not considering an increase in (disability) withholding.”

The Disability Insurance Fund, supported entirely by deductions from the paychecks of most California workers, covers illnesses or injuries that are not job-related as well as pregnancy leave. In the case of about 400 firms, employers pay the disability premiums for their employees as an added benefit. The fund is managed by the state Employment Development Department.

Current Deduction

The state currently withholds 0.6% of employee earnings up to $21,900 to finance weekly benefits that range from $50 to $224 for periods as long as one year. The payroll deduction will rise to 0.9% beginning in January, a decision made by the employment department even before the deficit was discovered. That means California workers will be paying a maximum of $197 in 1986, up from $131 this year, with no guarantee that the fund will remain solvent.

The amount withheld from checks has fluctuated widely under a complex and inflexible formula that the Employment Development Department must follow in setting the rates each October. Economists are allowed to take into account only what has happened to the fund in the previous six months and not other factors such as changes in the economy or long-term economic forecasts. The state also is barred from increasing disability payroll deductions beyond 1% without legislative approval--a maximum of $219 for those making $21,900 or more.

Although the fund has reported large surpluses in almost every year ($286 million in 1984, for example), employment department officials said they were caught off guard by a number of events.

Last year, for example, several laws took effect that increased weekly benefits to a maximum of $224, up from $175, and allowed claims to be paid for a full year, rather than 39 weeks, the previous limit. By the time those added benefits began to show up in more costly claims, the withholding rate already had been set.

27% Increase

Thomas W. Hayes, the Legislature’s auditor general, told the subcommittee in a report Tuesday that disability benefits climbed 27% in the last year and that the amount collected from paychecks could not keep up. Claims had been on the decline for the previous eight years.

Among the largest benefit increases were those paid for pregnancy leaves. Werner Schink, the Employment Development Department’s chief economist, said pregnant women used to claim benefits for an average of six weeks. That has risen to 11 weeks and more women are filing claims, he added.

“One thing we have to take into consideration is that estimating is an art, it’s not a science,” said Hadley Johnson, chief program analyst for the legislative analyst’s office.

The department could have headed off the immediate crisis last year by increasing disability withholding by 0.1% under emergency powers granted by the Legislature. Kiddoo, however, refused, saying in October, 1984, that the situation did not seem so serious.

While that would have averted the immediate crisis, economists say it would have done little to prevent an even larger deficit at the end of 1986 if the increase in claims continues.

State of Emergency

Deukmejian also could have solved the problem by taking advantage of a law that allows the governor to declare a state of emergency and cut benefits. The governor chose not to take that politically unpopular course and instead decided to lend the disability system $40 million from the general fund this month.

What to do about the disability fund could emerge as a contentious issue when the Legislature convenes its 1986 session next month. Eaves said he fears that election-year politics might convince the governor to authorize another emergency loan rather than agree to an increase in disability withholding. That, he said, would only compound the problems in future years.

“Deukmejian ran his campaign on (the promise of) no tax increases and he has vetoed them all and I think this would be considered a tax increase,” Eaves said. “That’s why I’m not sure that even if we do pass something next year that it will be anything more than another veto.”

Deukmejian spokesman Brett said the governor cannot respond to such “hypothetical” predictions and, as far as Deukmejian is concerned, “we have addressed the short-term difficulties.”