So you think the California budget deficit is dire?

It’s been called California’s other budget deficit. And it certainly hasn’t had near the attention of the state’s $25.4 billion budget gap between revenue and spending commitments.
But it’s almost as dire.

California’s employer-paid Unemployment Insurance Fund is insolvent.

The fund had a deficit of $10.3 billion in 2010, a deficit that is growing to what the state projects will be a $13.4 billion hole this year.

Without increasing the amount of money businesses pay into the fund or reducing thebenefits paid to out-of-work former employees – or some combination of the two – the fund will stay insolvent.

“For the foreseeable future,” says the Legislative Analyst in an October 2010 report.

President Obama’s 2012 budget proposes some changes in the system that, starting in 2014, are aimed at bringing California and the unemployment funds of other states back into balance. Federal legislation has also been introduced attempting to accomplish roughly the same thing as the Democratic president.

But both require the approval of Congress and Republicans have been, at best, tepid on the proposals.

Without some change, later this year the state’s cash-starved general fund must pay an estimated $362 million in interest to the federal government, which has loaned California $10.4 billion through March 21 to allow benefits to continue  without interruption.

Starting in 2012, current federal law will also increase the .8 percent in federal taxes employers pay by .3 percent annually to help replenish the fund.

While a .3 percent increase doesn’t seem that large it amounts to roughly $300 million. After three years, nearly $1 billion in new costs would be shouldered by California businesses.
The Legislative Analyst and others have warned about the fund’s deteriorating fiscal health for a number of years. It teetered on insolvency in 2004 but an uptick in the economy prevented it.

Saying prophetically, “the longer we wait, the worse the situation will get for the system and for California families who rely on it,” Gov. Arnold Schwarzenegger pitched a plan in 2008 that would have raised employer contributions and reduced benefits.  Lawmakers also introduced two other proposals.

None went anywhere – largely because businesses oppose increasing their payment and employee groups don’t want benefits reduced.

Politically, in the eyes of state lawmakers, it’s preferable to have the federal government order employers to pay more than cast a vote to do so.

And so, despite repeated warnings, the fund grows ever redder.

“If changes are not made to the financing structure,” the Employment Development Department said in its October 2010 forecast of the fund’s condition, the deficit grows to $16 billion in 2012.

In part, the fund’s problems are similar to those being experienced by California’s general fund. The recession sharply increased demand for unemployment benefits, while employers contributed less.

California’s unemployment rate was 6.5 percent in March 2008, 11 percent in March 2009 and 12.8 percent in March 2010. As of February the unemployment rate is 12.5 percent.
A record $22.9 billion in unemployment benefits – more than $14 billion from the federal government – was paid to 1.7 million jobless Californians in 2010, the department said in a February press release.

The imbalance between the volume of unemployed and the amount of employer fund payments created a situation in which California paid out an estimated $9.3 billion in state funds in 2010 but received only $5.2 billion from businesses, according to the department’s October 2010 forecast of the fund’s condition.

This year, the department expects the fund to pay out $8.8 billion in state money and collect $5.8 billion from employers.

Since January of 2009, California has bridged the gap with loans from the federal government – $10.4 billion worth as of March 21, according to the U.S. Department of Labor.  

Although California has by far the largest outstanding loan balance – more than double that of Michigan, the next closest state at $3.9 billion – it certainly is not alone.

As of March 21, in addition to California, 31 other states owed the federal government $35.5 billion.

Among states with multi-billion borrowings are New York at $3.6 billion, Pennsylvania at $3.5 billion, Illinois at $2.8 billion, North Carolina at $2.7 billion, Ohio at $2.5 billion, Florida at $2.2 billion, Indiana at $2.1 billion, New Jersey at $1.9 billion and Wisconsin at $1.6 billion.  

Like California, for most states they’re suffering a double-whammy: At the same time their unemployment insurance funds crater, so do their budgets.

California is one of 44 states and the District of Columbia projecting a budget shortfall for the fiscal year beginning July 1.

These shortfalls, as California is painfully aware, come on top of sizable budget holes in the current and previous fiscal years.

Nationwide in the fiscal year ending June 30, states posted a record $191 billion in cumulative budget shortfalls, according to a March 2011 report by the Washington, D.C. based Center on Budget and Policy Priorities.

“States’ current fiscal conditions remain extremely weak even as the economy appears to be moving in the direction of recovery,” the report says, which predicts the next fiscal year could be “as difficult … if not more difficult” for states than the previous two because of less federal stimulus money.

Unlike California’s general fund whose coffers are filled by sales, income and corporate tax revenue, the unemployment insurance fund has one source – businesses.

Employers paid an average rate of 4.2 percent in 2009 on the first $7,000 of each of their employee’s wages up to a maximum of $434.

However, the fund’s condition has now pushed employers to the maximum tax rate – 6.2 percent – plus a 15 percent insolvency surcharge.

Financial pressures were also placed on the fund by 2001 legislation that increased the maximum weekly benefit from $220 to $450 over a four-year period.

The legislation did not increase the $7,000 taxable wage amount so the same amount of money was supposed to cover roughly doubled benefits.

California’s $450 weekly maximum is slightly higher than $409-a-week national average.

The $7,000 is a threshold set by the federal government in 1983 when an average salary was $15,000 instead of today’s $50,000.

California is one of only five states that remain at $7,000. Several states – Oregon, Hawaii and Idaho among them – impose the tax on income of more than $30,000.
In his 2008 proposal, Schwarzenegger sought an increase in taxable wages to $10,500 and a boost in the maximum tax rate for employers from 6.2 percent to 8.1 percent.
Brown has offered no plan to improve the fund’s fiscal condition.

Combined, Schwarzenegger’s proposed increases would have generated $4.1 billion in additional revenue for the fund – still not enough to balance it.

President Obama’s budget includes a provision sought by business groups in several states, including the California Chamber of Commerce, to waive interest payments on federal unemployment fund loans for 2011 and 2012.

That would spare California its estimated $362 million payment this fall.

The 2009 American Recovery and Reinvestment Act waived interest payments through January 1 of this year.

Obama’s budget would also not ratchet up payments by California employers by .3 percent in 2012.

But he raises minimum taxable wages from $7,000 to $15,000 in 2014.

Doing so, at least in California, would roughly balance revenues entering the fund with benefits being paid out but probably not be sufficient to cover the costs of repaying federal loans.

The Legislative Analyst’s Office is conducting a more in-depth assessment of the impact of Obama’s plan on California’s fund balance.

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