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California's Unemployment Insurance Debt

Original post made by stephen levy, University South, on Nov 7, 2010

There was an article in the LA Times this morning that prompted a radio interview I just did on the state's growing unemployment insurance fund debt.

Web Link

Here is the background.

The State Unemployment Insurance Fund collects taxes from employers to pay the state portion of unemployment insurance claims. All of the extended benefits are paid by the federal government.

The UI tax rate ranges from 1.5% to 6.2% depending on a company's history of claims and taxed paid. The tax is levied on the first $7,000 of wages for a maximum of $434.

When unemployment rises the fund in California and other states often goes into debt with the federal government loaning states the money to continue paying benefits. But the money has to be paid back and while historically this has not been a problem, the depth and length of the recession has left CA with debts likely to exceed $10 billion.

There are two roads to solution--a state policy change or a federally mandated and increasing tax on employers until the debt is repaid. Moreover if the state does not quickly move toward solution the federal government will start charging interest of $400 million, which will come from the General Fund and reduce the money available for other uses like education.

The Governor and others have offered multi=part solutions in the past and the Legislative Analyst has released similar recommendations in an October report.

Web Link

The multi-part solution is to raise the taxable base from $7,000 (CA has the lowest allowable base), raise the maximum tax rate and reduce the maximum weekly benefit.

All three steps seem necessary given the size of the debt and the slow pace of job growth in the state and country.

This will be an interesting first test for Governor-elect Brown and the legislature--a far easier test than the state budget will be. These discussions should start immediately.

Two facts argue for hope. This is a well-known problem and the Governor has offered a compromise proposal that can be a starting point. Second, the federal government will start raising the tax rate here and in any other state that does not make progress.

There is no longer a do nothing solution.

Comments (16)

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Posted by Gene
a resident of Midtown
on Nov 7, 2010 at 12:52 pm

Stephen,

Thank you for that informative article from the LA Times.

Why can't we make the corporations pay for us, since they are the ones that fire us? California has a very good future, but only if we agree to a socialist future, one where people are put ahead of profits!

With the current fascist victory in the federal election, but not in Califoria, we need to insist that our socialist allies in the state legislature demand economic justice! You are right, we can no longer do nothing. We need to make corporate power pay more. We can eventually defeat them!


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Posted by stephen levy
a resident of University South
on Nov 7, 2010 at 1:26 pm

stephen levy is a registered user.


The choice here is a state solution which will almost certainly involve higher taxes and, perhaps, reduced benefits or a federal solution that will involve higher taxes and interest payments for as long as it takes to pay back the debt.

The unemployment insurance fund is designed to be self funded and one way or another that will happen.

I can't tell whether Gene is being sarcastic. But the rhetoric in his post is not helpful to solving problems in CA. I would hope most people are tired of labels after the last election.

The choice about how this happens is ours to make.


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Posted by Gene
a resident of Midtown
on Nov 7, 2010 at 3:21 pm

Stephen,

Of course, the solution will require more monies, but why should that come from the workers? It should come from the capitalists that run their corporations in our state. We should control them, instead of them controlling us! Our future is socialism. Why do you quibble about this, Stephen?


 +   Like this comment
Posted by Boris
a resident of Barron Park
on Nov 8, 2010 at 8:56 am

Why stop at socialism? Let's go communism all the way! Take away from the rich (evil corporations) and give to the poor.


 +   Like this comment
Posted by Natasha
a resident of College Terrace
on Nov 8, 2010 at 10:51 am

Why can't the people and Oil Companies in Texas bail us out? They have plenty of money and low taxes. Surely they can afford to help out a sister state in need.


 +   Like this comment
Posted by common sense
a resident of Midtown
on Nov 8, 2010 at 10:27 pm

So let me get this right - An employer sees a pickup in business, and need to take a risk (what if there is another downturn) by hiring more workers; they have a choice between higing in California or outsourcing. If they hire in California they face an additional liability, while if they outsource they don't have to deal with these additional taxes, especially if there is a downturn. I can see why unemployment is so high.


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Posted by chris
a resident of University South
on Nov 8, 2010 at 11:02 pm

California is among the vast majority of states that are borrowing unemployment funds from the Federal government. How are other states handling this? Clearly, the taxable base needs to increase.


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Posted by anonymous
a resident of another community
on Nov 9, 2010 at 10:08 am

"How are other states handling this? "

Ask Texas. Lately, folks are bragging about how Texas has all the answers, that we need to run Calif more like Texas.

" Texas faces a budget crisis of truly daunting proportions, with lawmakers likely to cut sacrosanct programs such as education for the first time in memory and to lay off hundreds if not thousands of state workers and public university employees.

Texas' GOP leaders, their eyes on the Nov. 2 election, have played down the problem's size, even as the hole in the next two-year cycle has grown in recent weeks to as much as $24 billion to $25 billion. That's about 25 percent of current spending.

The gap is now proportionately larger than the deficit California recently closed with cuts and fee increases, its fourth dose of budget misery since September 2008."


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Posted by Keep-Taxes-Low
a resident of Community Center
on Nov 9, 2010 at 11:15 am

Some thoughts:

1) Reduce the time frame of UI payouts.
2) Require public service after a certain time (say 1 day a week after 12 weeks). If a person does not find employment after say 8 more weeks, then another day's service would be required. And so on ..
3) Increase the contribution of employees to pay for this "benefit".
4) Require a residence period before payouts possible.
5) UI payments to US citizens, or green-card recipients, only.
6) Non-qualified non-residents would not be expected to contribute to UI funds.
7) UI recipients should be required to take on-line skills assessments, so that the State Employment officials can better understand the skill base of the state's unemployed workers.

The idea that this situation can only be fixed by "more taxes" is typical of those whose only solutions are: "tax and spend".


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Posted by chris
a resident of University South
on Nov 9, 2010 at 8:00 pm

Keep-Taxes-Low,

I guess you would just rather keep the unemployed doing nothing or meaningless projects.

Wouldn't it make more sense to have work on repairing roads or building new rail lines?

Yes, you would have to pay some taxes but they will be a benefit to society.

Of course, you are all about me-me-me, with no thought of social good.


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Posted by Keep-Taxes-Low
a resident of Community Center
on Nov 10, 2010 at 10:02 am

> I guess you would just rather keep the unemployed
> doing nothing or meaningless projects.

Let the record show that these are your words, not mine. If we keep the status quo, what are these people doing, other than cashing their Unemployment Checks? What "social good" (whatever that is), can you demonstrate that would be better than having these people involved in "meaningless" projects like: sweeping the downtown streets, picking up paper along the highways, policing city parks, cleaning up the litter on the shores (ocean, lake and bay)?

During the Great Depression, the Roosevelt Administration managed to put a lot of people to work in the WPA and CCC. The results of these projects can still be seen today (mostly in the East Coast States).

I don't think that any work is "meaningless" .. but it seems that you do. Sitting around waiting for the mailman being more meaningful than actually "giving something back" for their unemployment benefit checks.


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Posted by keep self esteem
a resident of Downtown North
on Nov 10, 2010 at 10:41 am

I think most unemployed collecting unemployment would be happy to do productive work. Especially well-managed part-time work with a clear and achievable goal. This would allow them to continue hunting for a job, possibly gain or refresh skills, and build more contacts or a reputation.

It makes things tough to have a big gap of doing nothing on a resume, especially for older workers.


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Posted by stephen levy
a resident of University South
on Nov 10, 2010 at 5:53 pm

stephen levy is a registered user.

To review the basics about the CA Unemployment Insurance Fund.

The fund is supported by taxes on employers and pays benefits to unemploped workers.

The current maximum tax is $490 per worker per year. It is levied on the first $7,000 of wages and the rate varies depending on the employer's claim experience.

The weekly benefits range from $40 to a maximum of $450 per week with an average of $300 per week. The state benefits are paid for a maximum of 26 weeks. Extended benefits approved by Congress are paid for by the feds.

In normal times the UI fund has nothing to do with the state budget.

The fund had a $6 billion shortfall last year and will add $7 billion in 2010 and if nothing is done another $7 billion in 2011.

When the fund has a shortfall benefits are paid by borrowing from the federal government, which CA and many other states have done.

THESE FUNDS MUST BE REPAID. In additon the state is charged interest on borrowings that last longer than a year. If the funds are not repaid by the state the federal government will slowly raise taxes on employers and keep raising them until the loan is repaid. The interest costs would be in the $1-2Billions by 2012 or 2013, which would come from the General Fund and compete with education and health care.

California can craft a solution to avoid federally mandated tax increases and continuing interest payments.

The LAO, the present Governor and the legislature have all recommended versions of plans that 1) increase the taxable wage base from $7,000 (the lowest in the nation, 2) increase the maximum tax rate (until the system is in balance and 3) reduce benefits in some fashion.

As in most CA money decisions gridlock has prevailed EXCEPT now there is a federal hammer that will enforce a solution and cost us a bundle in interest costs without addressing the benefit side of the program.

So Californians have to decide whether to solve this ourselves or let the feds do it.

The LAO has done the math and neither benefit cuts alone (in the realm of possible) or tax increases alone (could but not the LAO recommendation) can solve the problem so we are left with the some of both solution that drives ideological folks nuts.

CA has a worse problem compared to other states because we had a larger jump in the number of beneficiaries and because our UI funding system barely breaks even in good years.

Many posters here are reflective of why we have budget gridlock at the state and federal level. This is a math and policy problem--not best solved by blaming people or advocating solutions that either have no chance or don't come close on the math.

So I am interested in how folks feel about the two choices--steadily increasing federal UI taxes on employers plus lots of interest or a state solution of taxes and benefit cuts that more quickly eliminate the interest payments.



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Posted by Keep-Taxes-Low
a resident of Community Center
on Nov 10, 2010 at 6:25 pm

> The fund is supported by taxes on employers and pays benefits
> to unemploped workers.

If memory serves, other States partially fund UI with contributions from workers. There is no reason that California should not shift some of this burden onto those who ultimately reap this benefit.

> Extended benefits approved by Congress are paid for by the feds.

"Paid for by the Feds" means "borrowed from the Chinese". When money is borrowed by the Feds, it generally is paid back with interest. So, the cost-to-the-taxpayers to compensate people to not work is generally much higher than the dollar amount paid out. This payback can take decades, meaning that our children, and grandchildren, will be taxed to pay people to do nothing in 2010.

> which would come from the General Fund and compete
> with education and health care.

Perhaps .. but certainly "health care" is not a legitimate function of government at either the State or Federal level. This is another of those "wealth redistribution" scams, that has brought the US to a $200T unfunded liability for various "social programs". Reducing the State's commitment to "health care" will be another of those programs that will have to take the "long walk" to the chopping block.

> benefit cuts that more quickly eliminate the interest payments.

Benefit cuts put pressure on people to get back to work as quickly as possible. It also might provide motivation to move to other places (or states) where there might be work.

And there are the possibilities of WPA/CCC-style outlets for some unemployed, facilitated at the State level, to help provide meaning work to help people stay busy, and at the same time provide UI payouts.



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Posted by Keep-Taxes-Low
a resident of Community Center
on Nov 10, 2010 at 6:34 pm

Some more information on the Unemployment Funding issues --

The Costs and Consequences of Unemployment Benefits on the States:
Web Link


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Posted by stephen levy
a resident of University South
on Nov 20, 2010 at 1:22 pm

stephen levy is a registered user.

The Wall Street Journal reported today that 41 states had increased their unemployment insurance taxes this year--to stay solvent or to begin paying off federal loans. This was through increased tax rates and/or increases in the taxable wage base.

Some states also are trimming benefits.

This is a nationwide problem caused by the length and depth of the recession and is not particular to California alone. For example, Texas has borrowed $1.6 billion and is considering issuing bonds so they can repay the federal government and avoid interest charges and automatic federally imposed tax increases.

This remains a critical issue for CA to resolve and not let fester in our now normal argue and do nothing mode of operation.


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