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ResizeThe unemployment insurance fund, which paid out almost $662 million in checks in July as California's jobless rate reached 7.3 percent, is expected to have a deficit of $1.6 billion at the end of 2009.
That shortage will force it to borrow from the federal government for only the second time since the program was established in the 1930s.
If no steps are taken to increase the fund's revenue or reduce its payouts, its deficit is projected to hit $3.5 billion by the end of 2010.
Interest on the federal loans could reach nearly $91 million by September 2010 and total millions more before the debts are paid off, adding to the state's fiscal problems as lawmakers grapple with a seemingly endless series of budget deficits.
Since 2002, eight other states have had to borrow money from the federal government to shore up their unemployment funds, according to the U.S. Department of Labor. More appear headed for trouble.
The National Employment Law Project, a New York-based advocacy group for the unemployed, said in May that as many as 18 states, including California, could have trouble maintaining the solvency of their unemployment funds in a recession.
Unemployment funds in New York, Ohio, Michigan and Missouri were most at risk of insolvency,
Michigan's unemployment fund had $225.3 million in outstanding federal loans at the end of August. Officials there blame the red ink on an unemployment rate that has risen to 8.5 percent and an earlier decision to cut employer taxes.
New York has taken out short-term loans every year since 2002 when tax revenue is slow coming in during spring. But officials there are growing increasingly concerned that they could be forced into additional borrowing if there is a flurry of new unemployment claims later this year. They also blame their funding problems on an outdated tax system.
California, meanwhile, has the largest backlog by far of pending unemployment eligibility appeals. It also has the third slowest record in the country of processing those cases, according to the Department of Labor.
Appeals are typically filed by workers who have been denied unemployment benefits for one reason or another. California had 42,230 appeals pending in July. Florida was second with 14,219.
Federal standards require states to issue decisions in 60 percent of their appeals within 30 days after they are filed. They must reach decisions for 80 percent of appeals within 45 days.
In California, just 6 percent of appeals were being decided within 30 days and only 20 percent within 45 days, according to the Department of Labor's July figures.
Failure to meet those requirements could cost the state federal grants to help support its unemployment insurance program.
Jehan Flagg, the acting executive director of the state's Unemployment Insurance Appeals Board, concedes that the state's record in processing appeals is "actually pretty dismal." But she said the federal government rates the quality of those decisions—when they finally do get made—as "quite high."
"We just haven't done well historically," she said. "When you talk to employees about it, you get a lot of reasons for (the backlog). Some of them include being short-staffed."
She questioned that explanation, however, noting the department had a hiring binge 10 years ago when it added judges to hear appeals.
Laura Fournier said she waited six weeks for a hearing after she was denied unemployment benefits following a fruitless search for a job in the computer industry when she moved back to California in May from New Mexico.
"I've been in turmoil ... waiting for someone to hear my appeal," she said after getting a hearing at the board's office in Sacramento. "It's been a long, arduous thing that I didn't think would take that long. I don't understand why it had to."
She was told to expect a ruling within two weeks.
In July, the board voted 4-1 to fire Jay Arcellana, who was serving as both its executive director and chief judge, because it doubted his ability to eliminate the backlog, said Paul Feist, a spokesman for the state Labor and Workforce Development Agency.
He said the board already has taken some steps to reduce the backlog, including assigning more judges to the initial level of the appeals process. The state also is working with the federal government to determine the reason for the backlog and devise a plan to reduce it.
In addition, officials need to consider changes in the way California pays for unemployment benefits, said Deborah Bronow, a deputy director of the Employment Development Department. The schedule of employer taxes set up 24 years ago to pay benefits hasn't kept up with the need, she said.
"This financing structure has lost its elasticity," she said.
California lawmakers approved legislation in 2001 that raised weekly unemployment benefits from a maximum of $230 to a top scale of $450 but did not adjust employer taxes to make up for the additional cost.
The department testified at the time that the unemployment fund eventually would go broke without an increase in revenue. But raising employer taxes would have required a two-thirds vote and almost certainly would have been blocked by Republicans, who are a minority in the Legislature but whose votes are needed to reach the necessary threshold to pass tax bills.
A dozen states had higher average weekly unemployment benefits in the first quarter of 2008 than the $307 paid the typical out-of-work Californian, according to Department of Labor figures.
Unemployed California workers who qualify for benefits typically get checks equal to half their wages, up to the maximum of $450 a week. State benefits last up to 26 weeks, although some of the unemployed qualify for another 13 weeks paid for by the federal government.
There were 1.3 million Californians looking for work in July, about half of whom qualified for unemployment benefits, the Employment Development Department said. Others included new entrants to the workforce, such as recent college graduates who had yet to find a job, and people whose benefits had expired.
The insurance fund was forced to borrow $214 million in 2004, but the state's economy rebounded enough that it was able to stay in the black until the recent downturn hit. It will have enough money to make it through the rest of this year, but will have to begin borrowing again from the federal government next spring, Bronow said.
California employers pay unemployment taxes based on a percentage of the first $7,000 of an employee's annual wages, the minimum allowed by the federal government. Their tax rates vary depending on the stability of their workforces, with the maximum rate—6.2 percent—generating $434 a year per worker.
Emily Clayton, policy coordinator for the California Labor Federation, said the fact that employers pay taxes on only the first $7,000 in wages is the root of the fund's financial problems.
"In 1983, that $7,000 represented about a third of the average wage," she said. "Today that represents about an eighth of the average wage. It's clearly not kept pace with wages and inflation in the state.
"By all rights, the employers should be paying enough into the fund to make the fund solvent."
States that avoid shortages in their unemployment funds maintain adequate tax rates and bases to build up reserves during good times, said Maurice Emsellem, policy co-director for the National Employment Law Project. California uses a form of "pay-as-you-go funding" that is "completely irresponsible," he said.
Compared with other states, the $7,000 in wages on which unemployment taxes in California are based is low, while the tax rates employers pay are somewhere in the middle, said Robert Callahan, a policy analyst for the California Chamber of Commerce.
California had the third highest average unemployment tax rate last year—4.18 percent. But 42 states based those taxes on more than the first $7,000 in employee wages, and 19 had higher taxes as a percentage of total wages, according to Department of Labor figures.
Callahan said all ways to eliminate the fund's red ink have to be considered, including tightening eligibility standards.
"The whole idea behind unemployment insurance is that when the economy's down, people have money in their pockets to continue spending," he said. "But at the same time, there's ways to tighten up what we're paying out in California. ... When you double benefits without offsetting reforms, the fund just can't take it."
Assembly Speaker Karen Bass, D-Los Angeles, said the Assembly will hold hearings on the fund's looming shortfall and consider legislation next year to deal with the problem.
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Associated Press Writers Kathy Barks Hoffman in Lansing, Mich., and Richard Richtmyer in Albany, N.Y., contributed to this report.
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On the Net: http://www.edd.ca.gov/
