Tax Foe Davis Quietly OKs New Payroll Bite

While publicly reluctant to hike taxes, Gov. Gray Davis quietly signed legislation that will raise payroll deductions by as much as $74 next year to boost state disability benefits for workers.

But the bigger deduction will not be enough to pay for the expanded benefits, which Davis’ labor allies helped push through the Legislature this year, interviews and internal state documents suggest.

In fact, the California State Disability Insurance fund could be insolvent by August, some administration aides warn, and fall $279 million into the hole by the end of 2000. The shortfall will result from the legislation, signed by Davis in October, that boosts weekly benefits to a maximum $490 from the current $336.

The state disability insurance fund, which covers about 11.8 million Californians, provides benefits to about 700,000 individuals a year who cannot work because of illness, pregnancy or injuries suffered off the job.

“This is a prime example of legislating by wishful thinking, and not on the facts,” said Julieanne Broyles, a California Chamber of Commerce executive who tracked the bill, SB 656 by Sen. Hilda Solis (D-La Puente).

Davis faces a troubling dilemma. He could bail out the disability fund with a loan from general tax revenue. But the fund would have to repay a loan, which would add to pressure for a rate hike next year.

Davis also could ask lawmakers to raise the rate when they return in January. But in an election year, when all 80 Assembly seats and half the 40 state Senate seats are up for grabs, lawmakers probably would shudder at casting a vote for what is viewed as a tax increase.

The governor could cut disability benefits. But that would anger his labor allies and many other Democrats.

Most California workers this year paid $158 into the state disability insurance fund--0.5% on the first $31,767 of annual income. Under the new legislation, they will pay the same 0.5% rate next year. But the base will increase; the tax will be levied on their first $46,327 in wages--so their deduction will rise by $74, to $232.

Memos from Davis’ Employment Development Department say that to keep the fund solvent, the administration should have raised the rate to at least 0.7% and possibly to 0.8%. That would have hiked the disability tax to $370 a year for higher-wage workers.

But “the governor absolutely doesn’t want to take more money out of people’s paychecks,” said his Cabinet secretary, Susan Kennedy, explaining the decision to freeze the rate at 0.5%.

Law Governing Fund Criticized

Kennedy blames the law governing the disability fund for much of the problem. The law requires an “obscene” reserve in the hundreds of millions of dollars, she said, adding that Davis intends to seek legislation loosening that requirement and granting him more flexibility.

“Not a single person is going to lose benefits,” Kennedy said.

Organized labor leaders who champion the program view it as an insurance policy, and call the payroll deductions “premiums,” not taxes. The Davis administration echoes that position.

“This is not a tax increase,” said Davis spokesman Michael Bustamante. “A tax can be used for anything. . . . This is an insurance program which can only be used for one purpose--benefits for people who are injured. The people who pay into it are the same ones who access it when they need to go on disability.”

Some Democrats say they hope that Davis will invoke his executive powers and grant a rate hike on his own in coming days. But the administration already has rejected Employment Development Director Michael Bernick’s request for the rate hike, which he says is needed to keep the program from going broke.

A Nov. 15 memo from Bernick to Kennedy warns that the decision to keep the rate at 0.5% “creates significant legal ramifications.”

“Based on statutory requirements, the rate may be announced at either 0.7%, 0.8% or 0.9%,” the memo says.

In a separate memo, the Employment Development Department requests authorization to tell the Legislature that the fund will become insolvent next year, and asks for “specific guidance to address the insolvency, the potential for litigation, and responses to public inquiries about the insolvency.”

What became of the requests is unclear, although the Legislature has received no notice that the fund faces insolvency.

As lawmakers voted on the bill earlier this year, they received several analyses showing that Davis would be required to raise the disability insurance tax rate to at least 0.7% of employees’ pay to cover the higher benefits. Republicans opposed the bill, largely because they viewed it as a tax increase.

Bill Received Little Fanfare

Davis signed Solis’ bill Oct. 10, the deadline for him to sign or veto the hundreds of bills approved at the end of the 1999 legislative session. Not normally shy about issuing detailed press sheets, the governor sent out 45 releases in October announcing that he had signed or vetoed scores of bills.

The release saying that he had signed Solis’ bill appeared Oct. 12, in the last paragraph of the 45th release issued that month announcing his action on bills. The one sentence devoted to the bill said merely that disability benefits would rise. It made no mention of any increase in the amounts that would be withdrawn from workers’ paychecks.

In past years, disability insurance benefits were tied to benefits that workers receive when they suffer job-related injuries and collect workers’ compensation. But during the recession in 1992 the disability fund went broke, prompting then-Gov. Pete Wilson to cut disability benefits.

To make the fund solvent, Wilson raised the tax rate to 1.3% in 1994. By 1995, the fund had a reserve of $1.7 billion, after the state paid out $1.8 billion in benefits. Starting in 1995, Wilson began cutting the disability tax rate, pushing it down to 0.5% in 1997, where it remains. At the same time, the fund’s reserve has fallen to $205 million.

Davis administration officials believe that before leaving office last year, Wilson, a Republican, should have set the rate at 0.6% for 1999. But after incurring the wrath of conservatives in his party for raising taxes during his first years in office, Wilson refused tax hikes in his second term.

By the time Democrat Davis took office in January, lobbyists for organized labor were eager for an increase in the benefit package. By boosting the maximum weekly disability check to $490, the Solis bill once again brings disability insurance benefits on par with workers’ compensation benefits.

Although the state administers the fund for most California workers, some private employers pay some or all of the disability premium as part of their benefit packages.

However, with the rate at 0.5%, some employers may find that their program is financially unsound. As a result, they may be forced to join the state disability system, thus adding more pressure to it.

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A Bigger Bite Out of Paychecks

For the first time since 1996, California workers can expect an increase in their payroll deductions for state disability insurance. The money will partly finance an increase in benefits for disabled workers. The tax still will be lower than the peak in 1994, when most workers paid $413 annually.

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Worker’s annual pay: $ 46,327 or more

2000 payroll deductions: $232

1999 payroll deductions: $158

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Worker’s annual pay: $40,000

2000 payroll deductions: $200

1999 payroll deductions: $158

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Worker’s annual pay: $30,000

2000 payroll deductions: $150

1999 payroll deductions: $150

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State Disability Insurance facts:

The average duration of claims is 12.6 weeks.

The fund paid $1.9 billion in benefits in 1999, up from $1.8 billion each year since 1995.

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Times staff writer Virginia Ellis contributed to this story.