With joblessness at a 12-year high and expected to head higher, California’s fund for paying unemployment benefits is about to go broke.
The fund, sustained mainly by taxes on employers, is projected to be deeply in the red as soon as March.
And the administration of Gov. Arnold Schwarzenegger is alarmed that it may have to keep the fund afloat by borrowing from the federal government and using state money to pay nearly $100 million in interest over two years.
At stake is the stability of a 73-year-old program that began during the Depression. In July, California paid unemployment benefits worth $567.4 million and received 267,000 new claims for jobless benefits.
Under the program, eligible workers can receive maximum benefits of $450 a week, depending on their previous earnings. Benefits last as long as 26 weeks, and many out-of-work people can qualify for a 13-week extension, recently approved by Congress.
Unemployment checks won’t bounce, even if the fund goes bust, the Employment Development Department says. But labor experts warn that growing deficits could prove costly to employers, workers and the state.
According to the latest projections, which already appear optimistic, the hole in the fund could exceed $1.6 billion at the end of 2009 and $3.5 billion by December 2010 -- unless the economy turns around dramatically.
A threat to unemployment benefits is frightening, said John Menou, a union bricklayer from Corona, who’s been out of work sporadically because of the drop-off in construction. “I can’t believe it’s going to be in the red. That’s terrible,” he said. “There are a lot of people who don’t get on unemployment until they really need it.”
Right now, the fund is out of whack, said Todd Bland, a labor issues specialist at the nonpartisan California legislative analyst’s office. “The current system of benefits and revenues cannot be sustained over future business cycles.”
But a long-term fix will require the support of business and labor unions and could involve hiking taxes on employers, cutting benefits, tightening eligibility for workers or some combination thereof.
Policymakers have been reluctant to do any of those since facing a similar but smaller unemployment cash crunch four years ago. They ducked a decision because the fund’s reserve began to grow in 2005, as the state recovered from the dot-com bust at the decade’s start.
Negotiations on a long-term fix stalled once the economy turned around, said Robert Callahan, a lobbyist with the California Chamber of Commerce. “Rather than addressing the problem, it got put on the back burner,” he said. “But this time, we don’t anticipate having that good luck.”
At the moment, little is being done to bolster the unemployment fund. Administrators at the Employment Development Department acknowledge that their system for financing benefits, unchanged for three decades, is outdated.
The head of the program, Deborah Bronow, said her department was modeling various solutions and briefing legislators and their staffs as well as business and labor union lobbyists about the severity of the situation.
“What we’ve always consistently said is that the fund would eventually go broke,” Bronow said.
Don’t expect a quick solution. Schwarzenegger is bogged down with the bigger problem of trying to pass a two-month-late state budget, and no negotiations are expected before next year. Avoiding insolvency in the unemployment fund will be an administration priority early in the 2009 legislative session, said Camille Anderson, a spokeswoman for the governor.
Passing any bailout plan won’t be easy. Both political parties and business and labor interests must compromise. What’s more, a two-thirds “supermajority” vote of the Legislature would be needed to approve any tax increase. That would mean some Republicans in the state Assembly and Senate would have to violate pledges to “vote against any and all efforts to increase taxes.”
Business lobbyists are interested in reducing benefits and tightening eligibility. “Increasing taxes is not the answer,” said Michael Shaw, legislative director of the National Federation of Independent Businesses, which represents 35,000 small companies in California.
One reason the fund got into trouble, he said, was the Legislature’s approval of a 2001 bill that nearly doubled weekly benefits, making them the 12th-highest in the nation.
Labor advocates, however, are pushing for a tax increase. California, they note, taxes employers only on the first $7,000 of a worker’s annual pay. That is the minimum allowed by federal law and far less than what’s collected by 44 other states, the District of Columbia and the U.S. Virgin Islands.
The idea of reducing the level of unemployment payments angers organized labor. “Cutting benefits in the middle of a recession would be economically devastating,” said Angie Wei, a lobbyist for the California Federation of Labor. “It would be politically stupid, and we will not stand for it.”