Employers Face Added Costs for Unemployment Insurance
By HOWARD FINE
As if California employers needed more bad news, another dose is coming.
A new state report finds that the state’s unemployment insurance trust fund,funded by employers to cover benefits to unemployed workers,is being depleted faster than expected.
As a result, the fund balance is expected to drop to a point that automatically triggers a 15% “emergency solvency surcharge” next January and possibly another 15% surcharge in January 2005.
This would be the first time in the fund’s history that such a surcharge would be enacted and it would result in every employer in the state being taxed, on average, an added $110 per worker each year.
That’s on top of an average $36 per employee hike in the same tax that kicked in on Jan. 1, making for a total increase in the employer tax of nearly 60% in 24 months.
State officials and lobbyists said a combination of the slow economy and recently enacted unemployment benefit hikes is to blame for the rapid depletion of the unemployment insurance trust fund.
In January, the state’s unemployment rate was 6.5%, down from a revised 6.9% for December, but up slightly from 6.4% the year before. Orange County’s unemployment rate is about 4%.
Slow Job Growth
While the jobless rate is far below the levels seen during the last recession, there is increasing concern the economic slowdown could drag on through next year. The recent University of California, Los Angeles economic forecast projected only 0.7% job growth statewide through 2003 and a similarly meager level of job growth for 2004.
According to the forecast, government job cutbacks from the state budget deficit and the anticipated impact from the looming war with Iraq are likely to be major drags.
The annual benefit hikes, passed by the state Legislature in 2001, take the maximum weekly unemployment benefit from $230 as of December 2001 to the current level of $370 and $450 by Jan. 1, 2005.
At the time they were enacted, employer groups bitterly opposed the hikes, saying they would deplete the trust fund.
The hikes started taking effect as the state’s economy was reeling from the dot-com collapse and the terrorist attacks. As the economy slowed, more people were laid off and filed unemployment claims that have to be paid out of the unemployment insurance trust fund.
What’s more, last year the Legislature passed a bill making the unemployment benefit hikes retroactive to September, creating a one-time $500 million hit to the fund.
According to the forecast from the California Employment Development Department, the trust fund has fallen from $5.8 billion as of last June 30 to an estimated $3.7 billion on Dec. 31. That prompted the automatic trigger of the $36 per employee per year hike in the unemployment insurance tax paid by employers.
The report further projects the fund balance will drop to $1.7 billion by the end of this year. That would be less than 0.6% of the total wages and salaries paid in the state, the level at which the 15% “emergency solvency surcharge” is automatically triggered.
Even after this emergency injection of employer dollars, the report finds that the fund balance is expected to remain at $1.7 billion as it absorbs the next unemployment benefit hike. If that’s the case, the emergency solvency surcharge would be triggered once again in January 2005, creating that second $110 per employee charge for businesses.
“Given the current projections, we don’t see the fund recovering at all in the near future,” said Carol Evans, vice president of the Sacramento-based California Taxpayers’ Association. “We could be staying on this emergency surcharge for at least the next three or four years, which means that every year, employers would be hit with higher taxes.”
To avoid these increases, employer groups and the California Taxpayers’ Association are lobbying for a freeze on unemployment benefit levels until the fund builds back a reserve margin of at least $4 billion. That would shelve the remaining two unemployment benefit hikes.
But that proposal is meeting stiff resistance from the Democrat-controlled Legislature and is not likely to make it out of committee.
With a freeze on the benefit hikes looking unlikely, employer groups are pursuing another tack: lobbying to enact reforms that would cut fraud and abuse. Julianne Broyles, a lobbyist with the California Chamber of Commerce in Sacramento, said fraudulent claims and overpayments on legitimate claims cost $600 million a year.
Cutting Fraud
Broyles said the reforms must include an updated claims tracking computer system and more frequent claims notifications to employers, now once-a-year, so that fraudulent claims can be rooted out more quickly.
“It’s no secret that there are organized fraud rings tapping into the unemployment insurance system,” Broyles said.
State legislation passed last year ordered the Employment Development Department to convene a task force of employers, state officials, unions and other affected groups to look at ways to improve the unemployment insurance system and report back to the Legislature by the end of this year. Department officials last week said the task force has been created and now is meeting to consider reforms.
“Everyone is in agreement that the system is antiquated and has to be revised,” Employment Development Department spokeswoman Loree Levy said.
Even if such changes are enacted, they will not shore up the fund in time to absorb the next round of benefit hikes or to prevent the 15% emergency surcharge from taking effect next Jan. 1.
Fine is a staff writer with the Los Angeles Business Journal.
