It is time to talk straight about California’s Unemployment Insurance (UI) Trust Fund, particularly when many legislators in New York said earlier this year that they were unaware of their state’s situation until informed at a hearing three days prior.  Their fund is broke, and New York planned to start borrowing $350 million per month from the federal government and increase payroll taxes by $300 million per year. Texas this year also saw the need to borrow between $800 million and $1 billion and raise payroll taxes by $800 million.

We’re not New York, and we’re not Texas – today. But we could be tomorrow, unless we act prudently with regard to our own UI Fund. As I testified before the Senate Labor and Industrial Relations Committee in February and the Assembly Insurance Committee in March, it is incumbent upon all of us to educate ourselves about the health of our state’s UI system so that we don’t end up like a Texas or a New York and have to borrow, with interest, from the federal government. “I wasn’t aware” will not be allowed as an excuse for an insolvent UI Fund in this state.

The first thing to be aware of is that our fund is already considered insolvent by many UI experts, based on a couple different measures, and we have been for some time.  This has not been of tremendous concern, until now, because of the design of our financing system. We have a range of tax schedules, providing ample flexibility and taxing capacity, which has permitted us to weather ups and downs in the economy.

This has all just changed, however, because of last year’s SB 40 (opposed by employers, supported by organized labor and signed by Governor Gray Davis) and its extraordinary benefit increases – a 95 percent increase in the maximum benefit over four years – and its dramatic impact on our UI Fund reserves.

The enormous cost of SB 40 has been a moving target.  Information provided to employers when SB 40 was signed last October assured everyone there would be no tax increase in 2003. But by January, that changed and we were informed SB 40 would indeed cause a $550 million employer tax increase in 2003. Then, in February, a new forecast showed a double tax increase to $882 million in 2003 for California employers. The latest March forecast now pegs the 2003 payroll tax increase at nearly $1 billion, and it doesn’t stop there. Taxes in 2004 are forecast to increase by another $700 million, and another $825 million in 2005, meaning employers will pay $5.2 billion more in payroll taxes over the next three years! We shudder to think what the next forecast will tell. At the same time, the fund balance forecast for year-end 2002 has plummeted from $6.2 billion to $3.8 billion over these four sets of forecasts. This represents a remarkable 40 percent variance in forecasts by the same state agency, the Employment Development Department (EDD).

Now let’s look at the employer UI tax rate schedules. In the latest March forecast, the employer tax schedule for 2004 rises to the highest schedule in law (except for a 15 percent emergency solvency surcharge). Even so, the 15 percent surcharge will kick-in for the first time ever in 2005, then we are forecast to retreat back to the highest schedule and appear to stay there indefinitely. This is the most serious threat to our UI Fund and the most important concept for us all to understand. SB 40 has flat-lined the UI Fund and destroyed the flexibility of our financing system, which is what has enabled us in the past to sustain our UI Fund through economic cycles. SB 40 has essentially shrunk us to a one-rate system, a recipe for disaster and insolvency.

Despite the mass infusion of employer taxes over the next three years, SB 40 has over-obligated the reserves and financing system. Even with the rosy economic scenario being used by EDD for the March forecast, returning us to an annual unemployment rate of 5.0 percent by 2006 (which we have hit only once in the last 20 years), the UI Fund is still in trouble. California’s UI financing system has been rendered incapable of sustaining an economic downturn.

Meanwhile, a report has surfaced in the San Francisco Chronicle (March 26) citing confidential data that official government statistics overstated the number of California job-holders last September by 108,000. The most recent UCLA Anderson Forecast released on March 27, predicts the weakest job creation in California since the early 1990’s, with unemployment rates hovering around 6.4 percent through 2003, none of which has been taken into account in the current UI Fund forecasts.

Exacerbating the situation is special session legislation (SB 2XXX) introduced by Senator Richard Alarcon, the SB 40 author, and backed by Governor Davis and the California Labor Federation/AFL-CIO. The bill, pending in the Assembly, would provide unprecedented “retroactive” UI benefit increases. The California Taxpayers’ Association opposes this retroactive benefit proposal. How could we not, given what we know? But perhaps this legislation will provide a forum for education and debate about the future solvency of California’s UI Fund and the economic repercussions of SB 40, before it’s too late.

(More information on SB 2XXX, the retroactive benefit proposal, and UI Fund solvency issues are available at the Cal-Tax web site, www.caltax.org.)