Unemployment Fund Surcharge Could Lead to Layoffs

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Unemployment Fund Surcharge Could Lead to Layoffs

By HOWARD FINE

Staff Reporter

Jennifer Corbett-Shramo received a shock recently when she found out that rising unemployment insurance taxes would cost her janitorial firm $16,000 each month.

“We had just raised our rates because of workers’ compensation and other costs and now we have had to go back to our clients and request another increase,” said Corbett-Shramo, chief executive of Pacific Building Care. “Some of our clients have left us.”

By the end of next month, virtually every employer in the state will have to write a check for a double-blow that’s coming all at once: a hike in unemployment insurance rates, plus an additional 15 percent surcharge.

The cause: the state Unemployment Insurance Trust Fund, an employer-funded pool established to pay weekly benefits to unemployed workers. Just four years ago, the fund had a surplus of $6 billion. But clobbered by the recession, the Sept. 11 terrorist attacks and three rounds of benefit hikes, the fund has just about run out of money.

“The bills are much higher than many thought they would be,” said Julianne Broyles, director of employee relations and small business with the California Chamber of Commerce.

The dwindling of funds late last year automatically triggered an increase in the payroll tax rate paid by employers, along with a first-ever surcharge. The total increase averaged about $136 per employee, but for firms in high-turnover industries like janitorial services the increases were much higher.

Pacific Building Care’s rates went up 70 percent on the nearly 1,000 janitors on its payroll who clean buildings in downtown Los Angeles and throughout L.A. and Orange counties.

So far, the Irvine-based firm has had to lay off only one administrative employee, but Corbett-Shramo said that could change unless some relief comes.

For now, that appears unlikely. Even the recent increases haven’t been enough to stave off the fund’s collapse, and in December, the Schwarzenegger administration had to seek a $1.3 billion emergency loan from the federal government to keep the fund from falling $1.2 billion into the red by the end of this year.

California is not alone in its unemployment benefit troubles: 14 other states have also sought and received loans from the federal government.

The state faces a crunch this September, when interest on the loan starts to come due. Because employers are now paying the maximum tax allowed by law, the interest must be paid out of the general fund, as would any future shortfalls in the fund. And with benefit increases slated for each of the next two years, the fund is projected to be in the red at least through 2007.

The only bright spot is a slowdown in the number of unemployment claims rolling in.

“We’ve had slightly fewer claims than we expected last December when we applied for the loan,” said state Employment Development Department spokeswoman Suzanne Schroeder. “That’s allowed the fund to stay in the black a few extra weeks. But barring some miraculous turnaround, the fund is still headed into the red and we expect to start borrowing any week now.”

And the fund’s ongoing problems are not helping the overall job situation.

For most firms, rising unemployment taxes are not by themselves likely to cause layoffs or consolidation. But coupled with out-of-control workers’ compensation and health care costs, there’s much less incentive to hire.

“This is just another in a long line of costs that California companies are facing,” said Ross DeVol, economist with the Milken Institute in Santa Monica. “Cumulatively, these costs are prompting many companies to ask whether it’s worth adding additional labor. And it gives other companies reason to ask an even more fundamental question: ‘Should I consider remaining in business here in California or moving as much as I can elsewhere?'”

Slow road to reform

Although overshadowed by the battle over workers’ compensation reform, efforts are under way in Sacramento to fix the unemployment insurance trust fund. But the reform effort is not proving easy.

Employers and their Republican allies want the future benefit increases put on hold, along with a tightening of eligibility standards for unemployment payouts.

In addition, Broyles said, the Legislature must limit payouts only to those workers who are laid off as companies downsize. Currently, she said, the state is paying benefits to many workers who leave a job voluntarily or are fired with cause. Broyles estimated this abuse is costing the fund at least $250 million a year.

Labor unions and some of their Democrat allies in the Legislature want to leave the benefit increases and current eligibility standards in place; they favor raising the current cap on employer tax rates so that employers would pick up all future shortfalls.

Over the last six weeks, both sides have met separately with the Schwarzenegger officials. In addition, a working group composed of both labor and employer representatives and led by an official with the EDD has been looking for a compromise proposal.

Schroeder would not comment on the progress of those meetings. But according to some people familiar with the discussions, the proposal would involve a temporary delay of benefit hikes and modest reforms to eligibility standards.

Legislative leaders say they are ready to move any plans that emerge forward. To date, nine “spot bills” have been introduced, all “placeholders” for future legislation. Among those who have introduced bills is state Senate Labor and Industrial Relations Committee Chairman Richard Alarc & #243;n, D-Van Nuys, who last week announced plans to run for mayor of Los Angeles in 2005.

“The senator’s concern is that we resolve the insolvency of the UI trust fund while both protecting workers and sparing businesses from anything that would further damage the economy,” said Alarc & #243;n spokesman Luis Patino.

However, Patino and others watching the reform efforts say it will likely be several weeks before legislation actually begins to move forward.

“Right now, the energy and urgency is on workers’ comp, as it should be,” Patino said. “Once that’s resolved and we hope it gets resolved this month then we can transfer that energy over to this problem.”

But that may come too late to save several jobs at Pacific Building Care. Corbett-Shramo said she’s now considering layoffs, along with other cost-saving measures.

“Like everything else, all we’ve seen is the cost of this tax going up and up and up,” Shramo said. “Right now, we’re looking for any reduction that we can get.”

Unemployment Fund Blues

Employers feel the pain of rising tax rates.

The hit: Employers are paying at least $136 more, on average, per employee in unemployment insurance payroll taxes

Why the fund collapsed: Dot-com bust and ensuing recession; layoffs forced by Sept. 11, 2001 terrorist attacks; three rounds of benefit hikes during better times

Proposals to fix the fund: Postpone future benefit hikes; tighten eligibility standards and crack down on fraudulent claims

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