(November 16, 2010) The California Chamber of Commerce recently joined a nationwide coalition of business and trade associations urging Congress to continue waiving interest charges on federal loans for paying unemployment insurance (UI) benefits.

The current interest waiver, is part of the American Reinvestment and Recovery Act (ARRA) and is scheduled to expire on December 31, 2010, with a payment due in September 2011.

“Keeping the waiver could buy California time while it waits for the economy to strengthen,” said Marti Fisher, CalChamber policy advocate. “Benefit reductions alone won't fix the fund and taxing employers right now is a bad idea because of the economy. If we have increased revenues and we get some relief from the federal government, we can figure out the best approach to fixing the system.”

California’s UI Debt

California has the largest UI system in the country. According to the U.S. Department of Labor, the California UI system provides the easiest access to benefits; covers more workers—including part-time workers; pays more claims; and pays more weeks of benefits than any other state in the nation.

California’s UI Fund debt is $8.6 billion now, and is expected to reach $10.3 billion for 2010, two-thirds greater than last year. Worse, the deficit is projected to hit $13.4 billion by the end of 2011 and $16 billion in 2012, according to the California Employment Development Department, which runs the program. Interest on that debt will soon start piling up, forcing California to come up with a $362 million payment to the federal government by the end of September 2011.

Continued borrowing, meanwhile, means that employers face an automatic hike in their federal UI taxes, pushing up annual payroll costs $21 a year for each worker.

Those costs will continue to mount if California continues to borrow from the federal government and until the loan is paid in full.

Glimpse of UI Nationwide

As of November 11, 32 states and jurisdictions continued to have outstanding loan amounts of $40.7 billion with projections that the number of states borrowing could increase to 40 by 2013 with loans of $65 billion. Assuming the current federal interest rate of approximately 4 percent continues, without further relief, states would be required to pay approximately $1.6 billion for 2011 and an increasing amount for 2012.

Although state UI tax rates are set by state legislatures and governors, federal law governs interest on loans to states to pay state unemployment compensation and federally imposed solvency taxes will add to the employer burden.

Federal law prohibits paying the interest from the unemployment fund; therefore, the interest payment must be made from other funds. This creates significant unfunded obligations for states and likely an imposition by state legislatures on employers to pay state surcharges to cover these costs.

In addition to losing the interest waiver after 2010, up to 25 states are scheduled to be subject to federal unemployment tax penalties if loans to pay unemployment compensation are not repaid by November 10, 2011.

CalChamber Letter

In the letter to the congressional delegation, the coalition and CalChamber urged that the following job-creating and deficit-reducing provisions be enacted:

• Extend the waiver of interest on loans to states to pay unemployment compensation through 2012—without a waiver, employers in up to 32 states and jurisdictions are likely to see up to $3.6 billion in increased state taxes to cover this increased cost.
• Waive Federal Unemployment Tax Act (FUTA) penalties on employers in states borrowing to pay unemployment compensation through 2012—without a waiver, FUTA taxes on employer payroll in approximately half of the states will be increased by $2.5 billion for 2011 and a projected $3 billion for 35 states for 2012.
• Enact integrity measures to increase effective UI overpayment recovery by providing for offset of benefit overpayments with income tax refunds and adding the reporting of the first day of earnings to the National New Hire data base to more effectively identify UI claimants who are working while being paid unemployment compensation.
• Provide $30 million in additional targeted administrative UI funding in the 2011 and 2012 fiscal years for automated systems and personnel training to better identify fraud and collect overpayments.  

CalChamber believes these provisions will reduce the costs of unemployment, enable employers to create jobs and provide savings to reduce the federal deficit.

Action Needed

The CalChamber is urging members of the business community to contact their congressional representatives and ask for a vote in favor of provisions to extend for two years the waiver from federally imposed interest on amounts borrowed by states to cover increasing UI costs.

For a sample letter, visit www.calchambervotes.com.

Staff Contact: Marti Fisher