This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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Davis Vetoes UI Bills
By Carol Evans

Vetoes of legislation to increase unemployment insurance and workers compensation benefits, bills that would have added billions of dollars to the costs of doing business in California, were major highlights of the legislative year for the California business community.

While Governor Gray Davis' veto of the workers compensation bill was anticipated, based on his earlier commitments to business, rejection of UI measures was considered a much closer call.

In the end, the governor said a 65 percent increase in UI benefits for most workers, phased in over three years, would have increased costs those years by a total of $1.74 billion. And, he said in his SB 546 (Solis) veto message: " this increase in benefit costs could place the solvency of the UI Fund in jeopardy."

Further, the governor said, "California's robust economic prosperity is continuing, and California is experiencing its lowest unemployment rate in decades."

The governor also vetoed AB 2477 (Wiggins), which would have changed a fundamental component of the UI program to determine benefit eligibility. The governor said it was not worth the administrative costs for the state and employers to provide a relatively small benefit increase. Allowing use of an alternative base period to meet UI eligibility requirements would have required claim-by-claim scrutiny, which is expensive and time-consuming, the governor said.

In his consideration of the legislation, the governor was armed with veto-requesting letters from Cal-Tax. On SB 546, Cal-Tax stressed that there were neither offsetting eligibility changes nor financing reforms, and consequences would be devastating.

"The following scenario demonstrates the devastating consequences that could occur were SB 546 enacted," Cal-Tax President Larry McCarthy wrote on September 5. "We already know that SB 546's unprecedented (four-year) $3 billion benefit cost is predicated on current, extremely healthy economic conditions and a low unemployment rate. What would happen, however, if we are to experience a hiccup in the economy and see declines similar to the economic conditions of the early 1990s?

"According to projections by the Employment Development Department (EDD), it would not be a pretty picture. If benefits were increased per SB 546, with no changes in eligibility or the financing structure, by just 2002, employers and the UI Fund would be on the brink of disaster."

To wit:

• SB 546 would drive the state to the highest UI tax ever imposed on California businesses, the "F" schedule plus a 15 percent emergency solvency surcharge.
• The UI Fund would be on the verge of bankruptcy - facing a $1.4 billion debt in 2003, and a $3 billion debt in 2004, even with employers paying the highest possible tax.
• For the first time in the state's history, California would be forced to borrow from the federal government to continue paying UI benefits.
• Since California would have already exhausted the statutory taxing capacity of the UI financing system, the state would have to substantially increase employer taxes, above and beyond the emergency solvency surcharge, just to maintain the system, not to mention some sort of financing mechanism to pay off the billions of dollars in loans.

"Clearly, SB 546 is a dangerous approach to increasing UI benefits in California," Cal-Tax told the governor. "From the employers' perspective, and for the sake of California's UI program, we need to consider comprehensive changes to the entire program, including raising the maximum weekly benefit, updating eligibility requirements, and modifying the financing system to accommodate those changes."

Carol Evans, 
policy consultant at Cal-Tax, is a long-time participant in the UI debate in Sacramento, including the 1989 negotiations that established the current schedule of employer taxes and UI benefits.

Cal-Tax also noted that AB 2477 would have allowed those with extremely limited attachment to the labor force to qualify for benefits. On an annual basis, the $33 million of benefit increase does not justify the $7 million in additional administration burden, the governor said in his veto message.

SB 546 sought to increase weekly UI payments from a maximum of $230 a week to $380, and also annually index the maximum benefit to increases in the state average weekly wage. This, according to newspaper reports, would have placed California eighth in the nation compared to 42nd today. (Massachusetts has the highest weekly maximum, $573.)

Proponents stressed that California hasn't had a UI benefit increase since 1989.

However, as Cal-Tax pointed out, proponents like to "cherry-pick statistics" that make California look as though it is providing an insufficient benefit. Telling the entire story, however, shows that California ranks first in allowing entry into the program, and comparing the average employer tax rate on total wages ranks California equal to the national average. Therefore, if the organized labor proponents of SB 546 "want California to be like other states, and if we don't want to increase the tax burden above other states, some compromise is necessary on eligibility."

The historic tradeoff for lower UI benefits has been broad eligibility. Therefore, Cal-Tax states, "Any benefit increase will be opposed by employers unless it is accompanied by meaningful eligibility reforms."

How is eligibility now determined? The U.S. Department of Labor has recently recommended that states require an individual to have worked at least 20 weeks to become eligible. However, in California, an individual can qualify as soon as he or she earns $1,125, be it in one day, or fewer than five weeks, if earning at the $5.75 minimum wage.

Why is solvency an issue? The UI Fund experienced a dramatic drawdown on reserves during the last recession and is gradually rebuilding. It went from reserves of $5.4 billion in 1991 to a low of $1.7 billion in 1995. Beginning in 1996, the fund began to recover and, through higher employer taxes and less unemployment, it is forecast to end 2000 with a balance of $5.6 billion.

California ranks below the national average in three fund adequacy tests used by the U.S. Department of Labor as it publishes solvency ratings: the UI Fund as a percent of total wages; the fund's ability to pay benefits for 18 months when costs rates are as high as any prior year, and the number of months benefits are held in reserve.

This UI benefit legislation was passed by the Legislature without any understanding of its true effect, including which claimants would be helped and which would not, and which employers would be most affected. Would there be an increase in the number of employers whose taxes do not cover costs of the program?

Also, the California Legislature needs to be aware of and analyze a number of other issues, such as UI reforms under consideration at the federal level. Allowing extended benefits to kick in earlier, for example, could bring additional pressure on California's UI financing system.

Meanwhile, the legislative debate over California UI benefits is expected to be renewed in December, after the 2001-02 Legislature takes the oath of office.

Therefore, Cal-Tax states, "Any benefit increase will be opposed by employers unless it is accompanied by meaningful eligibility reforms."