UI fund still broken

By CMTA Staff

Capitol Update, Oct. 15, 2010

California’s unemployment insurance (UI) fund continues to bleed. California employers are the only ones responsible for funding UI benefits which they pay through an annual tax.

Due to California’s high unemployment rate and large deficit, the state has now borrowed $8.4 billion from the federal government to pay UI benefits. The interest on this loan comes due next year and can only be paid with general fund dollars or a special assessment on employers, but cannot be paid with dollars from the UI trust fund. The interest may be as high as $500 million.

California is among 32 states that have borrowed from the federal government for UI. We account for three quarters of the $40.4 billion owed by the states.

Although the federal government pays for the extended benefits, California’s UI trust fund is still facing a large deficit. We will also likely have a double digit unemployment rate throughout 2011. Unlike the 2001-2002 recession, California has not been able to bounce back and employers’ contributions reflect the high unemployment with decreased funding.

In addition to the national recession, California’s UI fund began facing trouble in 2002 when the state legislature increased the weekly benefits paid but did not change the employer contributions or tighten eligibility to offset the additional costs. The UI tax structure, with employers being taxed on the first $7,000 of an employee’s earnings, has also not changed since 1984.

The State legislature will have to address the UI deficit soon. The options for reform include raising the tax wage base from $7,000 to as high as $21,000; reducing weekly benefits and enhancing fraud enforcement; changing eligibility requirements, reforming the safety net into a re-employment tool or a combination of these.

CMTA will continue to monitor the UI fund and fight to minimize the financial impact that employers will undoubtedly face.

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