State's unemployment fund short by billions UNEMPLOYMENT

Gov. Arnold Schwarzengger tells reporters that he and lawmakers will try to quickly solve the state's $21.3 billion budget deficit without taxes, gimmicks or much borrowing, after appearing at a prayer breakfast in Sacramento, Calif., Thursday, May 21, 2009. (AP Photo/Rich Pedroncelli) less Gov. Arnold Schwarzengger tells reporters that he and lawmakers will try to quickly solve the state's $21.3 billion budget deficit without taxes, gimmicks or much borrowing, after appearing at a prayer ... more Photo: Rich Pedroncelli, AP Photo: Rich Pedroncelli, AP Image 1 of / 1 Caption Close State's unemployment fund short by billions 1 / 1 Back to Gallery

California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment Development Department.

This latest fiscal crisis won't immediately affect the 1.1 million Californians now collecting benefits because the state is using an interest-free federal loan to cover their checks.

But the state is supposed to repay that loan and restore its unemployment fund to solvency by 2011 - and right now, policymakers aren't sure exactly how to do that, or at what cost.

"The deficit that California looks like it is facing is staggering," said Bud Bridger, fiscal officer for the unemployment insurance program.

To rebalance the system and pay back the federal loan, lawmakers must raise payroll taxes on employers, reduce benefits for recipients, or both.

In 2009 and 2010, the state expects to pay out $29 billion in benefits. It will collect just $11 billion. Counting the small positive balance that was in the fund at the end of 2008, the result is a $17.8 billion deficit at the end of 2010.

State leaders have seen the problem coming.

Unemployment insurance is funded primarily by a payroll tax that costs employers up to $434 per employee, per year. That formula hasn't been changed since 1985.

Meanwhile, the current maximum jobless benefit of $450 per week was increased to that level in stages starting in 2002.

In November, Gov. Arnold Schwarzenegger proposed a tax increase on employers and benefit cuts to recipients to fix the fund.

The governor proposed to make employers pay an additional $56 to $417 per worker per year starting in 2010. He also wanted to cut jobless benefits from $1 to $44 per week starting in 2010.

When Schwarzenegger made that proposal, the state expected a $4.9 billion deficit in 2010. The rapid rise in unemployment since then has more than tripled the expected shortfall. Now the Republican governor's proposal awaits action in a Legislature preoccupied with more pressing budget issues while the governor looks for the political support and the right mix of policies to restore the unemployment fund to solvency.

"The governor believes this has to be addressed in this coming legislative session," said Schwarzenegger spokeswoman Camille Anderson.

How the state got into the unemployment jam is a story with a familiar ring.

Starting in 2002, the Democratic-controlled state Legislature enacted benefit increases that raised the maximum weekly payment from $230 to $450 - which they were able to do by a majority vote.

But Democrats lacked the two-thirds margin to change the 1985 formula under which employers are taxed on only the first $7,000 of each employee's wages. Schwarzenegger's proposal calls for taxing the first $10,500 in wages.

Marc Burgat, chief policy advocate for the California Chamber of Commerce, said the shortfall is the consequence of increasing benefits without increasing funding. He said California should study how other states handle unemployment and consider tightening up "some of the broadest criteria for eligibility" of any state.

Emily Clayton, policy coordinator for the California Labor Federation, said the tax formula should have been changed in 2002, but getting the necessary two-thirds vote was difficult then, as it is now.

Cutting benefits to solve the shortfall would be "fundamentally unfair and economically unsound" during a recession, she said.

If California misses the 2011 federal deadline, the state could have to use $609 million from its general fund to pay interest on that $17.8 billion loan, the state estimates.

Staffers of the Assembly insurance committee said the federal government can, over time, effectively double unemployment insurance taxes on California employers to repay the loan if the state fails to bring the program into balance by itself.

Alicia Trost, spokeswoman for state Senate President Pro Tem Darrell Steinberg, D-Sacramento, said legislative leaders met with business and labor officials Monday to discuss the unemployment issue, but it took a back seat to more pressing problems.

"We're going to have to address it," Trost said. "But the most important thing now is to close the current budget shortfall."