Businesses Asked To Bail Out State Fund for Jobless

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Businesses Asked To Bail Out State Fund for Jobless

By HOWARD FINE

Staff Reporter

First it was workers’ comp, then health care now California’s unemployment insurance system is under strain and employers are being asked to pay the bill.

In three weeks, the state will send a letter notifying employers that they will have to pony up at least $136 more per employee next year to pump an additional $2 billion into the state’s shaky unemployment insurance trust fund.

Even with this infusion, the state projects that the employer-supported fund will be at least $1.2 billion in the red by the end of 2004, thanks to increases in unemployment benefits that were put in place just as the economy began to weaken.

As a result, the state Employment Development Department will seek a loan next month of at least $1.2 billion from a federal unemployment insurance fund all but guaranteeing higher payroll taxes on employers for years, at least until the loan is repaid.

“This hit comes on top of all the massive increases in workers’ compensation and health care costs, which have already forced employers to cut to the bone,” said Julianne Broyles, lobbyist for the California Chamber of Commerce.

The pending insolvency of the unemployment insurance trust fund presents another headache for incoming Gov. Arnold Schwarzenegger when he takes office next week. During the recall campaign, he repeatedly said he wanted to ease the tax and regulatory burden on business to help spur the state’s economy and create jobs. But given the condition of the trust fund, Schwarzenegger will be hard-pressed to come up with a solution that doesn’t include at least some additional tax on employers.

“He is aware of the problem and is working with his policy advisors on the best solutions possible,” said H.D. Palmer, spokesman for Schwarzenegger. “It’s been clear for months that measures that the Legislature passed and Governor Davis have signed have put pressures on the UI fund to the point where it borders on insolvency.”

He was referring to two bills authored by Sen. Richard Alarcon, D-Van Nuys: one measure nearly doubled weekly payments to unemployed workers over a four-year period; the other made the first of these higher benefits retroactive to layoffs that occurred since the Sept. 11 terrorist attacks.

Palmer said no decisions have been made on the possibility of freezing or rolling back these benefit hikes. “It’s another on a long list of migraines that he has to deal with.” he said.

A federal loan may buy some time, but ultimately employers will be on the hook to repay those loans unless a way can be found to reduce fraud or cap benefits to unemployed workers.

Fund Squeeze

California is not alone in seeking loans from the federal government. Several other states including New York and Texas have received similar loans as their own unemployment insurance funds were drained by a surge in claims due to the recession and fallout from the Sept. 11, 2001 terrorist attacks.

But in California those problems were compounded by a simultaneous series of hikes in unemployment benefits that nearly doubled the maximum weekly benefit from $230 in 2001 to $450 by 2005. Those hikes were contained in the bill by Alarcon and signed into law two years ago by Davis.

“The benefits were increased, but the rest of the system wasn’t modified to accommodate those benefit increases,” said Bill Rosendahl, L.A.-area senior vice president of Adelphia Communications who earlier this year was tapped to moderate a state task force on the unemployment insurance crisis.

As a result, the trust fund, which had a surplus of nearly $6 billion as recently as 2001, has plummeted to $500 million as of last month. Assuming current levels of benefit payouts, the fund will run out of money completely sometime in January or early February and accumulate a deficit of $1.2 billion to $1.4 billion by December 2004.

When the fund goes in the red, it automatically triggers a 15 percent surcharge on the employer-paid payroll tax; next year will be the first time in the fund’s history that such a surcharge will be levied on employers.

Unusually strong economic growth could spur higher-than-expected levels of job creation and reduce the number of unemployed faster than expected. But erasing the deficit entirely is viewed as highly unrealistic, especially given the average $40 per week increase in benefit levels that kicks in on Jan. 1. An Aug. 5 EDD forecast shows the fund will remain in the red through at least 2007.

Long-term solutions

At its initial meeting last August, the Rosendahl-moderated task force, consisting of employer and labor representatives, looked at three options. Two of those involved higher taxes from employers, either by increasing the amount of taxes paid per employee or reducing the number of tax categories.

Employers vigorously oppose these options, saying they amount to a permanent tax increase. But labor groups say the moves are necessary for the long-term stability of the fund. Also, California Labor Federation spokesman Nathan Ballard said that California’s wage threshold for the unemployment insurance payroll tax of $7,000 is well under the national average of $12,000 and way below the $26,000 threshold in neighboring Oregon. (A $7,000 wage threshold means that employers pay unemployment insurance on the first $7,000 in wages a worker earns.)

The other alternative involves the state selling a revenue bond to pay off the federal loan immediately. The bond, in turn, would be paid off over five to 10 years through higher assessments on employers.

“At least this would spread the pain out over a number of years,” Broyles said. “The downside is that long after this crisis has passed, employers would be paying higher UI taxes.”

Alarcon, who chairs the Senate insurance committee, said he favors another option: increasing employer contributions to the UI trust fund in times of economic growth to build up a reserve for use in lean times.

“Employers are being asked to put more money into the system at the worst economic times and it shouldn’t work that way,” Alarcon said.

Broyles and other employer lobbyists are pushing for cuts on the cost side of the UI system. They want the final two rounds of benefit hikes postponed until the fund has enough of a surplus to handle them. They also want eligibility standards tightened, so that employees who are fired for misconduct or who voluntarily quit do not receive payments.

But these changes are likely to be resisted by labor groups and the Democrat-controlled Legislature. Even if Schwarzenegger were to support the changes, they would still need to garner a two-thirds vote in the Legislature.

“Just as it’s unfair to ask employers to contribute a greater share when the economy is not doing so well, it’s also bad public policy to take away benefits from unemployed workers when jobs aren’t readily available,” Alarcon said.

Above all, employers want more of a crackdown on fraud, which Broyles estimated is costing employers about $750 million a year.

“With these higher benefit levels, we are seeing organized fraud rings pop up all over the state,” Broyles said. These rings steal employer payroll data and file claims on the employees, whether they have been laid off or not. In many cases, the EDD has been unable to detect these fraudulent claims before making the UI payments.

“We had one small private college down in Orange County that reported 60 unemployment insurance claims had been made on its workers, even though all of them were still employed at the college,” Broyles said. “You add that up and that’s at least $250 per week for 26 weeks for 60 employees.”

But even if the state had the money to hire additional investigators to go after suspected fraud, bringing it under control will take a sustained effort over several years. That would do little to address the short-term cash crunch the fund now faces.

“We have to move on this in the next few months,” Rosendahl said. “As time goes on, the deficit grows and it’s going to become more and more difficult to pull a rabbit out of the hat.”

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