Look for Increase in Unemployment Insurance Costs
With California’s unemployment rate soaring to 7.7% in August 2008, California’s unemployment insurance (UI) fund could be broke by January. The Sacramento Bee reported that the fund is paying out as much as $27 million in benefits daily.
In fact, the just-released Employment Development Department’s (EDD) October 2008 Unemployment Insurance Fund Forecast reflects that the UI fund is projected to have a balance of $0.6 billion at the end of 2008, and to be in a deficit of $2.4 billion by the end of 2009. A year later—by the end of 2010—the UI fund is projected to have a deficit of $4.9 billion if changes are not made to its financing structure. It is projected that UI benefits will exceed UI contributions by $7.2 billion for the three-year period of 2008-2010. With increasing unemployment, benefit payments are projected to be $6.8 billion in 2008, $8 billion in 2009, and $7.6 billion in 2010, as compared to $5.1 billion for 2007.
The Governor issued an October 31, 2008, statement in response to the Forecast, confirming that he “will work with the Legislature during our upcoming special session to address the unemployment insurance system's imbalances. We must take action now because the longer we wait, the worse the situation will get for the system and for California families who rely on it.” The Governor also promised to ensure that unemployed workers continue to get benefits while the Legislature worked to fix the system.
It isn’t simply California’s increase in unemployment that is causing the problem. According to USA Today, California doubled benefits in 2001 but did not raise its tax rate. California’s tax base—on the first $7,000 in employee earnings—is the lowest allowed by federal law, and has not changed since 1983. However, California employers’ UI contributions are currently based on the “F” contribution rate schedule, plus a 15 percent surcharge, which is the highest allowed and is required by law when the trust fund balance falls below a specified level. According to the Oakland Tribune, “forty two states now tax more than the first $7,000 of employee earnings. In fact, federal law requires a base maximum tax rate of at least 5.4 percent for state unemployment insurance taxes; California is right at that federal minimum.”
The shortage in the fund will force it to borrow from the federal government for only the second time since the program was established in the 1930s. As recently as late 2003, California was forced to ask the federal government for a loan. In 2004, employer rates went up dramatically, while employers were also on the hook to pay back the loan. Like the situation that sometimes occurs with community college fees, legislators raised benefits significantly back in 2002, but then found it impossible to pay the promised benefits without seeking a loan and raising employer rates when the economy faltered. Counter intuitively, rates went up at the worst possible time for employers. Moreover, a loan carries interest at a time when the state’s General Fund cannot absorb further hits.
If rates go up, the increases will not impact K-12 districts. That is because there is an Unemployment Insurance Adjustment for K-12 Revenue Limits. The formula provides additional revenues to offset any increase in the UI rate. The Unemployment Insurance Adjustment reimburses a K-12 district for any increase in costs for unemployment insurance since 1975-76 (ref. Education Code Section 42241.7). Unfortunately, California community colleges receive no similar adjustment when UI costs go up. There are theoretically several options for returning the fund to solvency. For example, the employer payroll tax could be increased by increasing the base from the current first $7,000 of employee salary to require tax to be paid on more salary or weekly benefits could be reduced. Or, California could do as several states do and require employees to contribute.. We think it is unlikely that we’ll see weekly benefits reduced or employees required to contribute.
It isn’t much of a consolation, but California is not alone in experiencing problems with its UI fund. A September article in USA Today indicated that New York, Ohio, and Michigan are also projected to deplete their UI funds this year or next year. Moreover, 32 state trust funds were said to be below the federally recommended level of cash reserves.
—Deborah Harmon