State’s Jobless Benefits Fund at Risk of Running Dry in 2004

California’s unemployment insurance program will run out of funds to pay jobless workers by early next year, state officials warned Thursday, making it highly likely that employers will have to pony up more money to keep the troubled system afloat.

The program’s finances are deteriorating so rapidly that the state Employment Development Department announced it was forming a special panel to discuss overhauling the system, which is fast being drained by a crush of jobless claims as California’s economy continues to struggle.

The agency’s main options include borrowing from the federal government or increasing the unemployment insurance taxes on employers -- neither of which would sit well, given the rancor over the state’s budget crisis and growing complaints from businesses.

Employers, who foot 100% of the cost of jobless benefits by paying a tax on the first $7,000 of employees’ wages, were already hit with an increase in their unemployment insurance rates early this year.

California officials had hoped that the increase, along with a recovering economy, would help the state avoid a meltdown in the jobless benefits program. But a weak labor market and long stretches of joblessness for many have battered the state safety net, which is paying out cash benefits to about half of California’s 1.1 million unemployed workers.

At the end of May, the unemployment trust fund stood at $3.2 billion, half of what it was a year ago. State officials project that the fund will fall into the red by January and could be $1.1 billion in the hole by the end of 2004 if steps aren’t taken to inject more money into the system.The health of the fund “has changed dramatically as the result of the prolonged recession,” said EDD spokeswoman Loree Levy. “We need to come up with some solution ... as soon as possible.”

She said the panel, which will consist of representatives from labor, business, the public sector and academia, will probably explore a number of options.

Among the obvious, she said, would be borrowing from a federal fund set up specifically to help states bridge shortfalls in their unemployment insurance programs, a path already taken during this economic downturn by Texas, New York, Minnesota, Missouri, Illinois and North Carolina.

But that is just a stopgap. Levy said the panel probably would take a hard look at the program’s taxable wage ceiling, which has remained at $7,000 since 1984 and is among the lowest in the nation. Raising that ceiling would require legislative action, a move that appears highly unlikely this year, given the other fiscal crises that are consuming lawmakers’ attention in Sacramento.

“The odds of the Legislature doing something at this time are slim and none, and slim left town,” said Senate President Pro Tem John Burton (D-San Francisco).

Business leaders, for their part, were outraged on Thursday to hear that state officials would even be considering another tax on businesses at a time when so many were fighting for survival. In recent years, California companies have been hit with a flurry of increases in their business costs, from rising minimum wages to higher energy rates and soaring workers’ compensation premiums.

“This is like pouring water on a drowning man,” said Jack Stewart, president of the California Manufacturers and Technology Assn. “California businesses are already struggling to stay afloat.”

Stewart said he and other business leaders had opposed legislation passed in 2001 that boosted jobless benefits this year and will nearly double the maximum payout by 2005. Employers had warned the Legislature that raising jobless benefits without first reforming California’s unemployment insurance system would wipe out the trust fund. Stewart also said that California’s safety net extended benefits to part-time workers and others who would be ineligible for such assistance in most states.

“We told them that this was going to bankrupt the system -- and we were right,” Stewart said.

Claims for jobless benefits have spiked as unemployment in the state has jumped from a pre-recession low of 4.7% in early 2001 to 6.6% in May. And the workers receiving benefits are staying jobless longer. The average duration of a claim is currently 19 weeks, up from 15 weeks in 2001. The maximum amount of time most workers can receive benefits is 26 weeks.

The system also is being strained by higher benefits. In January of this year, the maximum weekly benefit increased to $370 from $330 last year and $230 in 2001. The top weekly benefit will increase to $410 next year and hit $450 in 2005.

Another factor in the larger payouts is that so many jobless workers have come from high-wage sectors, such as technology, that have qualified them for the maximum benefit. The average weekly benefit amount is currently $242, up 43% since 2001.

California has a so-called “flexible funding” system that results in employers paying lower unemployment tax rates in boom years when unemployment is down and there are fewer demands on the trust fund. The flip side is that they have to shell out more during recessions through higher rates to keep up with rising claims.

Employers were hit with an increase earlier this year, which calls for companies with the best claims histories to pay $63 per employee annually and those with the worst histories to pay $378 per employee.

Existing law would allow the state to require employers to contribute even more next year, which would boost the lowest rate to $91 per employee and the top rate to $434, according to Levy. However, EDD officials have calculated that, even with that projected increase, the fund would still end 2004 more than $1 billion in the red.

Any way you slice it, said Inland Empire economist John Husing, employers will be forced to pay more to bail out the program, adding to the burgeoning business costs that are hampering job growth in California.

“It’s just one more straw to break their backs,” Husing said. “And one more reason that California is not going to recover as fast as the rest of the nation.”