California unemployment fund nearly out of money

By Andrew McIntosh
amcintosh@sacbee.com
Published: Monday, Jan. 26, 2009 | Page 4A

For the second time in five years, the state Unemployment Insurance Trust Fund is set to go broke – big time broke.

The fund that pays benefits of up to $450 a week to the jobless sank into the red for the first time in its 60-year history in 2004. California borrowed $214 million from the federal government to continue paying benefits.

With surging unemployment in California driving more people to its rolls, the fund now pays out up to $34 million a day in benefits to the state's unemployed.

This week – possibly even by today – the fund will run out of money, and then will have to rely on a $1.84 billion federal government loan to pay benefits through March.

Proposals to fix unemployment insurance – a benefit whose history dates to the Great Depression of the 1930s – have so far gained little traction. Yet experts argue that without a serious overhaul, California's fund is careening toward a $2.4 billion deficit this year and a $4.9 billion shortfall by 2010.

That could cost taxpayers and businesses in the state millions of dollars in interest on the federal loans.

State legislators are debating a variety of solutions, including larger federal loans, raising payroll taxes for employers by up to 95 percent and cutting benefits by as much as 10 percent for unemployed workers, the latter two options by 2010.

A bill now in the Assembly – ABX3 23 – seeks to grab $900 million in federal funds that may become available, a move groups like the California Chamber of Commerce and the California Manufacturers and Technology Association applaud. But the groups say boosting eligibility for benefits – as the Assembly bill proposes – is unrealistic when California's fund is broke.

The fund's current troubles have been brewing for years.

Legislative Analyst Elizabeth Hill and the California Budget Project, a Sacramento nonprofit group, forecast four years ago that red ink loomed if the fund's "precarious" finances weren't fixed.

"Any economic disruption and corresponding spike in unemployment could plunge the program into insolvency," Hill warned in a report.

Jean Ross, executive director of the budget project, said the fund collects too little payroll tax from the companies that pay for the benefits. Tax rates haven't been raised in decades, she said.

In a fast-rising unemployment situation, Ross said, benefit payments to the jobless quickly exceed payroll tax revenue coming in because legislators voted to boost benefits earlier this decade without matching tax increases.

"There's been an understanding for a long time, the revenue side of this equation needs to be fixed," Ross said.

Policy analysts like Ross and Maurice Emsellam, an Oakland analyst with the National Employment Law Project, which lobbies for better benefits for unemployed workers, have proposed several ideas to stabilize the UI fund and build future surpluses.

But the proposals call for increased contributions from employers – and Ross and Emsellam admit that's something many politicians and business groups find unpalatable.

The California Chamber of Commerce believes fraud contributes to the fund's financial problems. It wants the state to aggressively pursue people it says are taking advantage of the system.

California employers pay for unemployment insurance with a flat tax based on the first $7,000 in wages to each worker, a base set on 1983 pay scales. The maximum paid: $434 per employee, per year.

Forty-two states tax more than the first $7,000 of income, with some taxing as much as the first $30,000, according to a paper written for legislators in November. Last fall, Gov. Arnold Schwarzenegger proposed raising it to $10,500, boosting the maximum tax a business would pay to $850 a year per employee, starting in 2010.

Jason Schmelzer, policy analyst for the California Chamber of Commerce, declined to comment on the proposals. But he said the business group advocates a cautious approach to fixing the fund's finances. That includes a comprehensive look at tax rates and eligibility for benefits, he said.
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Call The Bee's Andrew McIntosh, (916) 321-1215.

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