Crisis Passes, but Problems of Unemployment Fund Linger

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Crisis Passes, but Problems of Unemployment Fund Linger

By HOWARD FINE

Staff Reporter

After the budget and workers’ compensation, the state unemployment insurance trust fund was supposed to be the next big financial crisis that Gov. Arnold Schwarzenegger and the Legislature were to tackle.

But a funny thing happened over the summer. A $500 million deficit at the fund turned into a $1.3 billion surplus, as jobs were added to the state’s economy and new unemployment claims fell. With the fund’s balance sheet improving, the business and labor groups that have been at odds on how to fix things lost the sense of urgency that could have led to a compromise.

The Legislature adjourned last month without addressing the issue, and a long-term solution that was originally expected this year won’t emerge until the next legislative session. That means any substantial reforms are unlikely to be implemented before 2006.

Yet the fund’s deficit could re-emerge far sooner.

“We do have some breathing room now that we didn’t have at the beginning of the year,” said Rick Rice, assistant secretary for the Labor and Workforce Development Agency, which oversees the EDD. But, he warned, “the structural imbalance in the fund remains and any number of things could happen to put the fund back into insolvency.”

For starters, there’s a benefit increase slated for next Jan. 1 the last of five hikes in benefit levels that raises the maximum weekly payout from $410 per week to $450 per week. That could add tens of millions of dollars in payouts every month.

Also, last week’s UCLA Anderson School economic forecast projected sluggish growth next year, with a 10 percent chance of another recession. A significant slowdown would mean more unemployment claims and fewer new taxes coming in.

“The fund is still in grave danger,” said Michael Shaw, assistant state director for the California chapter of the National Federation of Independent Business.

Getting into trouble

The fund fell into the red earlier this year, after a two-year surge in unemployment claims took its toll, and benefits were increased. Employers were levied a 15 percent surcharge and the state borrowed several hundred million dollars from the federal government. With another hike in benefits scheduled to hit next January, there was intense pressure earlier this year to try to stabilize the fund.

But from May through July, only 589,000 new claims were filed with the state Employment Development Department, down from 744,000 for the like period a year earlier. Meanwhile, from July 2003 to July 2004, the state added 308,000 jobs, boosting its payroll tax revenues.

EDD figures show a positive balance of $1.3 billion, compared with a spring deficit of more than $500 million. (The money borrowed to cover the shortfall has been paid back.)

For months, Schwarzenegger administration officials chiefly Labor and Workforce Development Secretary Victoria Bradshaw have been holding separate meetings with business and labor groups to hammer out a long-term solution to the fund’s problems.

While both sides agree that the fund is structurally unsound, there is a disagreement on how to shore it up. Labor groups are demanding an increase in employer-paid payroll taxes. Currently, taxes are paid on the first $7,000 of an employee’s salary, the lowest such level of any state in the nation. Labor groups want to raise the threshold to at least $20,000.

Employer groups have rejected any tax increase. They want to tighten eligibility requirements and cut down on fraud, including a ban on mailing unemployment checks to post office boxes. “The unemployment insurance system is wracked with fraud,” Shaw said.

The two sides are so diametrically opposed that they refuse even to characterize the talks that have taken place so far as negotiations.

“If you’re in negotiations, that presumes working toward a solution,” said Angie Wei, legislative director for the California Labor Federation. “We’ve had what I call discussions, where everyone states their previously held positions and then goes home.”

Furthermore, the Schwarzenegger administration has taken a slower approach than originally anticipated. Part of that is due to the administration’s focus on workers’ compensation, the budget and a slew of last-minute legislative proposals.

But Rice said a deliberate approach to reform is preferable.

“The last thing we want is legislation that results in unintended consequences, so right now we’re making sure that each side understands the ramifications of every decision,” he said.

Meanwhile, EDD spokeswoman Suzanne Schroeder said the 15 percent surcharge is expected to remain in effect next year.

Some employers may be able to minimize the impact of the tax with better management of their own employment policies. “This is the one payroll tax where employers have some control,” said Sarah Rios, unemployment insurance manager for the Employers Group, a Los Angeles-based human relations consulting firm.

Rios said the payroll tax rate levied on employers varies according to two factors: how many layoffs a firm has made over the past several years and how much money the firm has set aside to pay the tax.

“The more money an employer has in this reserve account, and the more stable their workforce, the lower the payroll tax assessment from the state,” Rios said.

Some firms might be able to cut their tax rate in half over a period of several years, from the standard 6.2 percent on the first $7,000 of an employee’s salary down to 3 percent, she said.

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