Over half of state unemployment insurance funds face insolvency

A significant – and often overlooked — result of what’s been dubbed the Great Recession is that in just over half of the 50 states, the programs that pay unemployment insurance to workers who’ve lost their jobs are insolvent, leading states to borrow more than $39 billion from the federal government to keep writing checks.

California, which has the largest unemployment program in the country, has the dubious distinction of leading 34 other states and the Virgin Islands in borrowing:  $8.5 billion as of April 5, according to the U.S. Department of Labor. At $3.8 billion, Michigan is second, although 12 states owe at least $1 billion.

“Our current economic slowdown has led to unemployment rates in California much higher than economists had predicted, and that has put an additional strain on our unemployment insurance system,” GOP Gov. Arnold Schwarzenegger said back in October 2008, adding prophetically, “The longer we wait, the worse the situation will get for the system and for California families who rely on it.”

The Employment Development Department predicted in October 2009 that unless employers pay more or the unemployed receive less generous benefits, California’s Unemployment Insurance Fund will end this year $18.4 billion in the red and a staggering $27.3 billion in 2011 – all money that would need to be repaid to the federal government.

“It’s the 800-pound gorilla in the living room,” said Sen. Denise Ducheny, a San Diego Democrat who chairs the upper house’s budget committee and carried unsuccessful legislation in 2009 to stabilize the fund. “And the consequence is if we don’t do something, employers are going to pay significantly more and our budget problems will get worse.”

As part of the 2009 American Recovery and Reinvestment Act stimulus package, interest on federal loans doesn’t begin to accrue until January 1, 2011. But given the magnitude of California’s debt, it’s unlikely the state will meet the September 30, 2011 interest payback deadline.

Using the federal government’s 2008 interest rate of 4.8 percent, a $27.3 billion loan would cost California’s already cash-starved general fund, $1.3 billion in interest alone.  “With this type of budgetary pressure applied to the Legislature, the idea of an unemployment insurance tax increase for employers could gain traction,” said Marti Fisher, a lobbyist for the California Chamber of Commerce.

In part, California and the unemployment insurance funds of other states were swamped by the rapid increase in unemployment generated by the recession. California’s unemployment rate leaped from 7.7% in September 2008 to 12 percent one year later, increasing the ranks of the unemployed by 1 million persons.  California paid $9.1 billion in benefits in 2008 – twice the two previous years combined.

Like some other states, California also increased benefits which employer contributions eventually became insufficient to pay for. Rather than saving surplus funds for lean years, some states, like Indiana in 2000, dropped the tax rate for employers and increased benefits borrowed from their funds in good times then found themselves unable to repay in bad.
“When there’s money and everyone is being paid right, the tendency is to cut rate, to rebate things are fiscally solid instead of saving for when things are not,” Ducheny said. “And this is very difficult time right now economically to raise that unemployment tax.”

As part of the compromise creating the Social Security Act of 1935, states were given wide discretion on how to operate their unemployment insurance programs – both on how much to pay in and how much to pay out.  But there are still only three things that can be done to restore the fiscal health of California’s fund – and those of other states: Increase employer contributions, cut benefits or some combination of both.

According to ProPublica.org, a non-profit Internet-based news service, employers in 36 states will pay higher unemployment insurance rates this year. The largest increase is Hawaii where the rate per-employee rises $980 to $1,070.

This is the second time in five years California’s fund has faced insolvency. The state predicted the fund would go into the red early in 2004 but a boost in the economy and employment averted that.  At the time, the Legislative Analyst warned, “another recession could easily send the fund back into insolvency.”

Part of California’s problem with its fund is structural.  There are eight contribution rates for employers, the lowest being AA that, in theory, would be level employers pay when the fund is flush.  When the fund is heading toward insolvency or is already in the hole, the highest schedule, F+, is used which is 6.2 percent.   Employers are also currently paying an additional 15 percent surcharge required by law when the fund’s balance dips below a certain level.

Even in relatively good economic times, contribution rates have not fallen below C. In part, that’s because employers pay their unemployment tax based on the first $7,000 in wages paid to each worker – a federally set minimum dating back to 1983 when the average income was $15,000 instead of today’s $50,000. The maximum an employer pays is $434 per employee each year.

Ducheny’s bill would have tripled the $7,000 to $21,000. Republican opposition  – GOP votes are needed to reach the two-thirds majority needed to pass tax increases – stalled the bill.

Forty-two states tax more than the first $7,000. Alaska’s wage base is $32,700. Iowa’s is $23,700. Colorado’s $10,000.     Besides California, Arizona, Florida, Louisiana, Indiana, Mississippi, South Carolina and Tennessee remained at the $7,000 minimum in 2009, the U.S. Department of Labor reported.

However, a December 2009 survey by the National Association of State Workforce Agencies found 24 states planned to increase their wage base this year. Tennessee, Indiana and Florida were among those passing legislation to do so. Tennessee increased its base to $9,000, applying it retroactively to January 1, 2009. Florida increased its minimum to $8,500.  Indiana climbed to $9,500 then backed off, returning to the $7,000 wage base for 2010.

The survey also logged 28 states, which said the tax rate businesses shoulder would also increase this year.   Sixteen states index the tax rate, automatically increasing it to meet fund demand.

Also contributing to the insolvency of California’s fund is the Golden State’s version of Indiana’s mistake of one year earlier — 2001 legislation that increased the maximum weekly benefit from $220 to $450 over a four-year period.  However, the legislation did not increase the $7,000 minimum or the rate so the same amount of money was supposed to cover roughly doubled benefits.

California’s $450 weekly maximum is slightly higher than the $409-a-week national average. California’s average weekly payout however is $330. In November 2008, Gov. Arnold Schwarzenegger offered a plan to restore the fund’s fiscal health – similar to legislation pending now in New Jersey to restore that fund’s fiscal health.  Schwarzenegger proposed increasing the taxable wage ceiling from $7,000 to $10,500.

Schwarzenegger estimated the per-employee payment businesses would pay to range from $56 to $427.  The governor’s proposal would have increased the maximum tax per employee from $434 to $851. The national average is $995.  To save $300 million, eligibility would have been made slightly harder by the governor – a claimant would need to work 7.5 weeks per year rather than the current 3.5.

California’s massive budget shortfall, opposition to the governor’s proposed tax increase from employers, and opposition to it from employee groups who didn’t want to see eligibility curtailed ensured the plan went nowhere.

No new proposal to restore solvency has surfaced.