California’s fund for paying unemployment insurance is broke.

With one in every eight workers out of a job, the state is borrowing billions of dollars from the federal government to pay benefits at the rate of $40 million a day.

The debt, now at $8.6 billion, is expected to reach $10.3 billion for the year, two-thirds greater than last year. Worse, the deficit is projected to hit $13.4 billion by the end of next year and $16 billion in 2012, according to the California Employment Development Department, which runs the program.

Interest on that debt will soon start piling up, forcing the state to come up with a $362-million payment to Washington by the end of next September.


That’s money that otherwise would go into the state’s general fund, where it could be spent to hire new teachers, provide healthcare to children and beef up law enforcement.

Continued borrowing, meanwhile, means that employers face an automatic hike in their federal unemployment insurance taxes, pushing up annual payroll costs $21 a year for each worker.

Those costs are expected to more than double over the next five years if California continues to borrow from the federal government.

“It’s a fiscal problem for elected officials in our state,” said Todd Bland, director of social services at the nonpartisan Legislative Analyst’s Office. “The deficit is ongoing and will continue to grow.”


The state Legislature has turned away two attempts to raise payroll taxes to fix the deficit and ignored a similar proposal by Gov. Arnold Schwarzenegger.

Now California’s governor-elect, Jerry Brown, has to devise a way to minimize the tax burden on employers without drastically slashing benefits for the jobless — and get lawmakers on board.

Neither Democrat Brown nor his Republican opponent in last week’s election, Meg Whitman, publicly focused on the bulging deficit in the unemployment insurance fund.

California heads a list of 32 states that have been forced to borrow a total of $41 billion so far from the federal government to pay claims.


Putting the fund back into balance, at least theoretically, shouldn’t be overly complicated, experts say.

“You can increase your contributions, decrease money going out of the fund as benefits, or do a combination of both,” said Employment Development Department spokeswoman Loree Levy. “But the hole will keep getting bigger the longer that we go without addressing the problem.”

California’s unemployment insurance program began heading toward insolvency when the state started hemorrhaging jobs in late 2007. The fund took out its first loan from the federal government early last year as the worst recession since the Great Depression devastated the economy.

Over the last three years, the total of unemployment insurance benefits paid out by the state rose 122% and the number of claims climbed 119%.


As a result, California last year paid out $11.3 billion in regular unemployment insurance benefits while collecting only $4.2 billion in payroll taxes from employers.

The disparity has been exacerbated by a 2001 law that nearly doubled maximum benefits to $450 a week for up to 26 weeks but didn’t raise the payroll tax on employers. The average benefit now is $307 a week for 17 weeks.

In an Oct. 20 report, Mac Taylor of the Legislative Analyst’s Office suggested that lawmakers adopt a strategy that includes hiking the unemployment insurance tax rate and raising the individual income limit used to calculate the tax closer to the national average of $14,321, while at the same time reducing benefits by a modest amount.

Finding that middle ground has been difficult in recent years.


The unemployment insurance fund has depended on the same source of revenue since 1984: a tax based on a worker’s first $7,000 of annual wages, the minimum level allowed by federal law.

California is one of only six states in the nation that collect taxes using a wage threshold that low. Next year, three of those six states plan to raise their wage thresholds.

An effort to address a short-term deficit in the unemployment insurance fund went nowhere in 2004. Lawmakers and lobbyists for employers and labor unions lost interest in an overhaul after the economy recovered from the bursting of the dot-com bubble.

Four years later, Schwarzenegger took another stab at the problem. He proposed both raising revenues collected from employers and tightening eligibility requirements for some jobless workers seeking benefits.


Schwarzenegger’s proposal, which was largely ignored by lawmakers, would have raised the threshold on taxable income to $10,500 per employee and increased the maximum state tax rate to 8.1% from 6.2%.

“The Legislature didn’t have the political will to act,” said Jeff Wyly, a spokesman for the governor’s Labor and Workforce Development Agency. “The Republicans don’t want to raise taxes, and the Democrats don’t want to reduce benefits. That’s where the problem lies.”

That paralysis continued during the latest two-year legislative session. Two bills that attempted to increase unemployment insurance payroll taxes died soon after they were introduced.

Chances for raising unemployment taxes on employers seem just as remote for the upcoming legislative session that begins in December. Lawmakers are expected to focus most of their attention on how to fill a potential $12-billion gap in next year’s state budget.


For his part, Senate President Pro Tem Darrell Steinberg (D- Sacramento) recognized that he couldn’t ignore the growing unemployment insurance fund deficit.

“We have to tackle this one early on,” he said. “We know what the options are. There’s the benefit side and there’s the fee side on employers. We have to look at both very closely.”

Getting any tax increase through the Legislature is a daunting task because of the constitutional requirement that it be approved by a two-thirds vote in both the Assembly and the Senate.

“It’s a high bar,” said Angie Wei, a lobbyist for the California Labor Federation. “But, somehow the system has to get more money into it.”


Wei hopes that Brown’s election will give organized labor the leverage it needs to bring employers to the bargaining table and agree to beef up the unemployment insurance fund.

Business, however, has little appetite for any type of tax increase.

“In the current economic situation, any tax increase will result in fewer jobs being created,” said Michael Shaw, the California legislative director for the National Federation of Independent Businesses.

He wants Congress and the Obama administration to continue granting states a waiver that forgives interest charges on federal loans. The waiver is scheduled to expire Dec. 31.


Keeping the waiver could buy California time while it waits for the economy to strengthen, said Marti Fisher, a lobbyist for the California Chamber of Commerce.

“If we have increased revenues and we get some relief from federal government, we can figure out the best approach” to fixing the system, she said.

Some business advocates believe companies will have to bite the bullet.

“Probably we have to do something in the benefit area and we have to raise taxes,” said Scott Hauge, executive director of Small Business California, a San Francisco advocacy group.


“I’d rather have something planned to deal with the issue,” he said, “than not do anything and have things come down that are unintended and could be worse.”

marc.lifsher@latimes.com