California’s unemployment insurance fund debt grows

California has borrowed $11 billion from the federal government in recent years to prop up its insolvent unemployment insurance fund. The loans kept benefits flowing to millions of laid-off workers, but now the bill is coming due.

The state recently sent $303.6 million to Washington, the first of what could be many years of interest payments required to service its debt to Uncle Sam. It will have to pony up at least a half-billion dollars in 2012 and even more in coming years. The state, which already is struggling to close a massive budget deficit, probably will be forced to make even deeper cuts to schools, law enforcement and other basic services.

In the meantime, California employers in January will be hit with a mandatory surcharge of about $25 per employee to begin paying down the principal on the federal loan.

California operates one of the nation’s most expensive unemployment insurance systems. But the taxes needed to fund it, 100% of which are paid by employers, aren’t sufficient to support the system.

Although jobless benefits are about the same as the national average, costs have exploded because so many Californians have lost their jobs and been unable to find new ones quickly. California’s September unemployment rate of 11.9% is the second highest in the nation, behind only Nevada at 13.4%. About 2 million Californians are unemployed; a third of them have been out of work for a year or more.


Other states are struggling as well. Thirty-four states have borrowed $39 billion to pay unemployment benefits that have mounted during the worst downturn since the Great Depression of the 1930s.

Still, experts say California’s system is fundamentally out of balance and in need of a major overhaul to return it to solvency.

“Do you raise taxes even more, cut benefits or some combination?” said Joseph Henchman, vice president of the Tax Foundation, a nonpartisan Washington think tank. “Eventually you run out of gimmicks … borrowing, bonds, moving the payroll into next year … and you pay the piper.”

Unemployment insurance is a joint federal-state government program that began in 1935 to help people during the height of the Depression. In most states, the federal government charges employers an annual base rate of 0.6% on the first $7,000 of each employee’s wages, and sets minimum benefits levels that must be paid to jobless workers.

States are responsible for administering the program. They can establish benefit levels more generous than the federal minimum; most require employers to collect taxes on a higher threshold of workers’ wages to pay for them. California, however, does not. It is one of just six states where employers pay unemployment insurance taxes on only the first $7,000 of a worker’s annual income.

Federal loans are available when states run short of tax money to pay benefits. Uncle Sam automatically raises employers’ tax rates if states can’t repay. A 0.3% hike, known as a surcharge, will take effect in January.

That will be tough on many struggling businesses in a down economy. So President Obama is proposing a compromise: The federal government would grant a two-year suspension of state interest payments and employer tax surcharges. After that, the wage threshold to calculate unemployment insurance taxes would be boosted to a minimum of $15,000. The change would cost California employers an estimated $13 billion between 2012 and 2018, according to the Legislative Analyst’s Office.

California’s state unemployment insurance program provides a maximum of 26 weeks of benefits of up to $450 a week. Congress approved 10 extensions that added as much as 73 weeks of additional benefits to some long-term unemployed workers, depending on the severity of an individual state’s jobless situation. Those programs are set to expire at the end of the year unless renewed, ending benefits for about 1.8 million people nationwide, including 305,400 in California, according to the National Employment Law Project, an advocacy group for low-wage and unemployed workers.

It’s unclear whether Washington lawmakers will approve another extension despite the anemic labor market, or how hard they will push measures that force states to deal with their deficits.

In the absence of federal action, some states are moving to close the gap on their own. Six states — Arkansas, Florida, Illinois, Michigan, Missouri and South Carolina — have reduced the number of weeks of state eligibility below the once-universal 26 weeks. Florida, Rhode Island and South Carolina have made it tougher to qualify for benefits.

In California, labor unions and advocates for the unemployed and working poor already are pressuring the administration of Gov. Jerry Brown to raise employer taxes.

“We’ve got to face the reality of our underfunded unemployment system. It is simply unsustainable,” said Angie Wei, a lobbyist for the California Labor Federation. “There is simply no feasible solution but to raise employer taxes above the bare federal minimum.”

Republican legislators and the business community disagree.

“The best way to fix the unemployment insurance fund problem is to put Californians back to work,” said Senate Minority Leader Bob Dutton (R-Rancho Cucamonga). The governor and Democrats should join Republicans in the more general task of fixing the state’s allegedly unfriendly business climate, he said.

Previous efforts to fix California’s broken unemployment insurance system have proved futile. Business lobbyists blame much of the problem on a decade-old law that increased weekly checks to their current levels. So far, no one is clamoring to reduce benefits in California. But raising unemployment insurance costs definitely remains a non-starter for the California Chamber of Commerce, policy advocate Marti Fisher said.

“Any additional taxes on employers,” she said, “are going to be counterproductive for job creation and stabilizing the economy.”