Companies Face Emergency Fees On Jobless Fund

Staff Reporter

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 at a faster rate than expected.

As a result, the fund balance is expected to drop to a point that automatically triggers a 15 percent "emergency solvency surcharge" next January and possibly another 15 percent 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 additional $110 per employee for 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 percent 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 percent, down from a revised 6.9 percent for December, but up slightly from 6.4 percent the year before. Los Angeles County's January unemployment rate was 6.6 percent.

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. Last week's UCLA economic forecast projected only 0.7 percent 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.

Triple hit

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 Sept. 11, 2001 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 Sept. 11, 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 this past Dec. 31. That prompted the automatic trigger of the $36 per employee per year hike in the unemployment insurance tax paid by employers.

The Feb. 27 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 percent of the total wages and salaries paid in the state, the level at which the 15 percent "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 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."

Lobbying increases

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.

"A freeze is like kicking the unemployed workers when they are down, and under no circumstances will I ever support it," said Richard Alarcon, chair of the Senate Labor and Industrial Relations committee. Alarcon carried the unemployment benefit increase bill during the 2001 session; a bill to postpone those benefit increases would have to pass his committee.

Alarcon said the hikes in unemployment benefits would serve to stimulate the economy. "The unemployed spend every dime of that unemployment benefit, which puts that extra money back into the economy."

Attacking fraud

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, said fraudulent claims and overpayments on legitimate claims cost $600 million a year.

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. "And the computer system that the state EDD is using is so ancient that they can't flag the fraudulent claims, so they keep coming on the same individual (employee) accounts, year after year."

Broyles said several companies have been notified of unemployment claims made using social security numbers of workers who are still employed full-time at those companies. "That's just a tiny example of what's going on here."

State legislation passed last year ordered the EDD 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. EDD officials last week said the task force has been created and is now meeting to consider reforms.

"Everyone is in agreement that the system is antiquated and has to be revised," said EDD spokeswoman Loree Levy.

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 percent emergency surcharge from taking effect next Jan. 1.

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