California continues to have one the highest unemployment rates in the nation and economists predict a slow but steady recovery. In 2009, California’s unemployment insurance program ran out of funds, forcing the state to borrow from the federal government to pay unemployment benefits, as well as borrow money from the State Disability Insurance Trust Fund to pay the interest on the federal debt. It is expected that by the end of 2013, California will have an outstanding balance of approximately $10 billion due to the federal government and another $900 million due to the state.
Federal law requires California employers to repay the $10 billion loan, which is accomplished by annually reducing California employers’ federal tax credits (FUTA). Over the past two years, these credits have been reduced resulting in almost $870 million in higher federal unemployment taxes for employers. Under federal law, these automatic tax credit reductions will grow increasing unemployment insurance costs to employers until the loan is repaid or the maximum federal tax rate is reached. State law requires the loans that were obtained to pay the federal interest in 2011 and 2012 to be repaid beginning June 2016.
While existing law requires California employers to repay these federal and state loans, it does not address the structural defects in the unemployment insurance financing structure that led to this crisis. The state needs a sustainable unemployment insurance system that protects both workers who are temporarily unemployed through no fault of their own, and employers trying to put people back to work. However, the system has not been updated since 1984 and is structurally unsound.
Over the past few months, Gov. Jerry Brown and his Administration have been working with both business and labor to discuss California’s insolvent unemployment trust fund. Discussions have been focused around achieving solvency while considering the financial impact to employers and the economy, creating a solvent fund with a reserve that can withstand future downturns, avoid borrowing and federal tax increases, establish a system that provides a more equitable cost sharing ratio among employers based upon usage of the program and improve the integrity of the program through eligibility reforms.
Discussions will continue as business and labor seek equitable solutions that will preserve the integrity of the system and protects the safety net. For any increases in the taxable wage base or tax rates to occur a two-thirds vote of the Assembly and the Senate must be reached.