Employers Face Higher Unemployment Charge
By HOWARD FINE
First it was workers’ compensation, then healthcare. Now California’s unemployment insurance system is about to crack,and employers are being asked to pay the bill.
In three weeks, the state plans to send a letter notifying employers they’ll have to pony up at least $136 more per worker next year to add $2 billion into the state’s shaky unemployment insurance trust fund.
Even with the infusion, the state projects the employer-supported fund will be at least $1.2 billion in the red by the end of 2004, thanks to higher unemployment benefits put in place just as the economy began to weaken.
As a result, the state Employment Development Department plans to 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.
“This hit comes on top of all the massive increases in workers’ compensation and healthcare costs, which already have forced employers to cut to the bone,” said Julianne Broyles, lobbyist for the California Chamber of Commerce in Sacramento.
The pending insolvency of the unemployment fund presents another headache for incoming Gov. Arnold Schwarzenegger when he takes office next week.
During the recall campaign, Schwarzeneg-ger 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 added tax on employers.
“He is aware of the problem and is working with his policy advisers on the best solutions,” said H.D. Palmer, a Schwarzenegger spokesman. “It’s been clear for months that measures that the Legislature passed and Gov. Davis have signed have put pressures on the (unemployment) fund to the point where it borders on insolvency.”
Palmer was referring to two bills by Sen. Richard Alarcon, D-Van Nuys. One measure nearly doubled weekly payments to unemployed workers during a four-year period. The other made the first of these higher benefits retroactive to layoffs since the Sept. 11, 2001, terrorist attacks.
No decisions have been made on freezing or rolling back these hikes, according to Palmer.
“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 is found to reduce fraud or cap benefits to unemployed workers.
California isn’t alone in seeking federal loans. Other states including New York and Texas have received similar loans as their own funds were drained by a surge in claims amid the recession and fallout from the terrorist attacks.
But in California those problems were compounded by a 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 Alarcon bill and signed into law two years ago by Davis.
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 payouts, the fund will run out of money early next year and accumulate a deficit of $1.2 billion to $1.4 billion by year’s end.
When the fund goes in the red, it triggers a 15% 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 jobs and reduce the number of unemployed faster than expected. But erasing the deficit entirely is seen as unrealistic, especially given the average $40 per week increase in benefits that kicks in Jan. 1.
An Aug. 5 Employment Development Department forecast shows the fund will remain in the red through at least 2007.
A state task force on unemployment insurance met for the first time in August. The group, made up of employer and labor representatives, looked at three options. Two involved higher taxes on employers, either by increasing the amount of taxes paid per worker or reducing the number of tax categories.
The other alternative involves the state selling a revenue bond to pay off the federal loan right away. The bond, in turn, would be paid off in 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 (unemployment) taxes.”
Alarcon, who chairs the Senate insurance committee, said he favors another option: increasing employer contributions to the 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 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 employees who are fired for misconduct or who voluntarily quit don’t get payments.
But labor and the Democrat-controlled Legislature likely will resist these changes. Even if Schwarzenegger were to support the moves, they still would need to a two-thirds vote in the Legislature.
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 workers, whether they have been laid off or not. In many cases, the EDD has been unable to detect these bogus claims before making payments.
“We had one small private college in Orange County that reported 60 unemployment insurance claims that 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 more investigators to go after suspected fraud, bringing it under control will take years. And that would do little to address the short-term cash crunch the fund now faces.
Fine is a staff writer with the Los Angeles Business Journal.
