California employers could be hit with big tax bill for jobless benefits, auditor warns

California employers could face an annual payroll tax increase of as much as $6 billion if California’s unemployment insurance program fails to repay a federal government loan that has kept benefits flowing.

The warning came in a critical state audit of the California Employment Development Department, which distributed $22.9 billion in unemployment benefits last year.

The report concludes that for a decade, the EDD “has consistently failed to perform” at a level the U.S. Labor Department “considers acceptable regarding its timely delivery of unemployment benefits,” State Auditor Elaine M. Howle wrote in a letter to the governor and legislators.


The unemployment insurance fund, insolvent since January 2009, relies on federal loans to pay jobless benefits. The debt is expected to hit $13.4 billion by the end of this year unless state lawmakers and the governor agree to raise payroll taxes, cut benefits or do some combination of both. An interest bill of $362 million is due in September.

By law, the state, which faces a $26-billion general budget deficit, must repay the federal loans to the EDD by November.

EDD’s failure to repay its loans by then would trigger a $325-million federal tax hike next year on employers. That payroll tax bite would rise incrementally to a maximum of about $6 billion if the loan goes unpaid and the state misses interest payments over several years.

Information about the growing deficit in the agency’s funding first arose in 2004, but it hasn’t been high on the Legislature’s or the governor’s priority lists.

“At this point, we can only deal with one deficit at a time,” said Mark Hedlund, a spokesman for state Senate President Pro Tem Darrell Steinberg (D-Sacramento).

The funding shortfall was caused by an unprecedented demand for benefits by Californians who lost their jobs in the worst economic downturn since the Great Depression of the 1930s. The number of initial claims for benefits received by the EDD grew 148% from July 2007 to June 2010, the auditor said.

Meanwhile, California’s unemployment rate increased to 12.3% in June 2010 from 5.3% three years earlier.

California’s unemployment rate stood at 12.4% in January. February’s number, to be released Friday, is expected to be slightly lower.

EDD, which has been without a director for 15 months, acknowledged that it has faced unparalleled challenges.

“EDD made tremendous strides in a time of historic demand for unemployment benefits,” spokeswoman Loree Levy said. “We’ve hired more people and put some automation projects in place,” principally an upgraded telephone service.

Not all of EDD’s difficulties can be blamed on the recession, said Maurice Emsellem, policy co-director of the National Employment Law Project, which advocates for the rights of low-wage workers.

“EDD’s problems seriously predate the recession, but now the agency is trying to play catch-up in the middle of a devastated economy,” he said. “More scrutiny by federal and state officials and maximum transparency is critical to turning the situation around.”

The audit basically agreed with Emsellem.

“The department has struggled to meet certain core performance measures,” the audit said.

The Labor Department last April classified the state as being “at risk” in its ability to fulfill federal requirements for handling unemployment claims in a timely manner.

California is one of only five “at risk” states this year. The others are Indiana, Louisiana, Massachusetts and Rhode Island.

California’s situation could become more dire.

It faces the loss of $839 million in federal stimulus money if it does not meet new legal requirements for calculating benefits for low-wage and part-time workers. EDD said the effort to comply has been hampered by its 30-year-old computer system, which is scheduled to be updated by April 2012, four months ahead of a federal deadline.

The department’s efforts to speed claims processing have been somewhat successful, the audit said. EDD hired and trained 1,000 more workers and authorized more overtime. The number of processed claims rose to 429,000 last June from 173,000 in July 2007, the audit said.

However, “the results of the department’s other efforts to improve its performance have been mixed,” the audit said.

A change in a scheduling system designed to make timely eligibility decisions “appears negligible,” the audit said.

Despite upgrades that increased telephone call volume six-fold, almost 9 in 10 callers could not get through to an agent in the fiscal year ended June 30, 2009, the audit said. That percentage remained high through last May.

To fix the system, the auditor recommended that EDD develop specific goals and milestones for speeding response times on claims. The upgraded phone system, for instance, should limit the need for callers to speak to agents by providing basic information in automated responses.

The new system, in fact, began spurring better performance late last year after the auditor had finished its field work, the EDD’s Levy said.

The number of callers failing to get through to live agents or automated information is down more than 90% from a year ago, she said.