California’s other $20 billion budget deficit

Unbelievably, California is not only facing a $20 billion deficit for the 2010-2011 budget, the state Employment Development Department just forecasted a $20 billion deficit in the Unemployment Insurance Fund by the end of 2011, up from $6.2 billion in 2009. 

They said it could have been worse, but they expect that a quicker recovery from the recession should increase employment, thus lessening unemployment payouts. Well, maybe, but some are concerned that we’re heading into a double dip recession. If so, then EDD employment estimates will be overly optimistic. 

The official unemployment rate for California (PDF) is a steep 11.9%, with Imperial County at a depression-like 27.5%. Remember, these are the official rates, and don’t count those who are no longer counted or the under-employed.  California has been borrowing from the federal government since Jan. 2009 to pay UI benefits. Interest on the loans begins accruing in Jan. 2011 and must be paid by Sept. 2011 according to the EDD May 2010 UI Fund Forecast (PDF).  California is expected to pay out $11.4 billion in UI benefits in 2010, yet contributions from employers, their primary source of income in normal times,  is just $4.4 billion, with $500 million coming in from other sources.  By the end of 2010, the deficit is projected to be $15.3 billion. 

It seems the State of California consistently produces overly optimistic budgets and financial projections that then need to be revised downward, often sharply. This is no way to run a government. While I’m sure they try to get the numbers right, political calculations and machinations almost certainly interfere with the process. The California public deserves realistic projections.  

Democrats recently floated a goofy plan to finance the deficit by borrowing massively from the state soda bottle fund for 20 years, then getting Wall Street to front the money now.  I am not making this up. However, a recent audit showed the fund had overstated their balance by $158 million, thus probably ending any chance of this reckless program being implemented. We can’t keep borrowing from the future to pay today’s bills. 

So, California waits for the equivalent of a Hail Mary Pass, a bailout from D.C. or maybe forgiveness of some of the debt.   One solution would be to raise employer’s payroll taxes, probably drastically. However, this would cause a tsunami of protest from powerful business interests, as well as almost certainly causing some businesses to leave the state, the exact opposite of what is needed. 

An end to the recession would certainly help, but that’s hardly guaranteed anytime soon. Even if it does end soon, California will still face massive debt and budget problems for years to come, as will New York and Illinois.  Will the feds do a bailout? Is California Too Big To Fail?

And how many other massive deficits are lurking out there that we don’t know about?