By Steve Levy
California's Unemployment Insurance DebtUploaded: 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.
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.
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.