When the Nice Recession struck California 17 years in the past and a whole lot of 1000’s of staff misplaced their jobs, the state’s unemployment insurance coverage system crashed.
The employer-financed program rapidly exhausted its skinny reserves, on account of a short-sighted political choice six years earlier.
In 2001, the Unemployment Insurance coverage Fund had a $6.5 billion optimistic steadiness. However the governor on the time, Democrat Grey Davis, owed huge political money owed to unions that financed his 1998 marketing campaign. He repaid them by doubling unemployment insurance coverage advantages, contending that the seemingly hefty reserve may cowl them with out elevating payroll taxes on employers.
When recession struck, the insurance coverage fund quickly leaked purple ink and the state borrowed about $10 billion from the federal authorities to keep up money funds. When the state didn’t repay the mortgage, the feds raised payroll taxes for practically a decade to retire the mortgage.
It ought to have been a lesson for political policymakers about immediate gratification and monetary duty, however it wasn’t.
Shortly after the $10 billion mortgage was paid off, California was hammered by the COVID-19 pandemic, and upwards of three million staff misplaced their jobs because the state ordered office closures.
As soon as once more, the unemployment insurance coverage program had nearly no reserves to cowl the sharp enhance in claims. As soon as once more it borrowed from the federal authorities, this time for $20 billion, and as soon as once more its failure to repay compelled the feds to extend payroll taxes.
Along with a double dose of economic issues, the Employment Growth Division has additionally skilled managerial failures.
In 2011, Elaine Howle, the state auditor, laid out the division’s shortcomings in a sharply worded report, however when the pandemic hit, they as soon as once more grew to become evident. There have been large glitches in responding to legit claims for insurance coverage advantages, whereas the division gave tens of billions of {dollars} to fraudsters.
In the meantime employers are nonetheless repaying the final mortgage, and the state’s insurance coverage fund is continuous to run deficits, unable to cowl present advantages of practically $7 billion a yr.
With that historical past in thoughts, one other watchdog company, the Legislative Analyst’s Workplace, is urging an entire overhaul of unemployment insurance coverage, declaring the system “is broken.”
Noting that the present state payroll tax can’t absolutely cowl present advantages, a lot much less construct reserves, the LAO report initiatives a “perpetually outstanding federal loan” to maintain funds flowing that should be repaid with curiosity.
The report proposes a four-part robust love strategy to a disaster that has been constructing for greater than 20 years and can’t clear up itself, to wit it advises the state to:
• Enhance the taxable wage base from $7,000 per employee to $46,800, tying it to the precise advantages of as much as $450 every week. It “would place California among the ten states with taxable wages bases above $40,000 and all other Western states.”
• Undertake two payroll tax charges, one to cowl present advantages and one other to rebuild reserves. The mixed fee of 1.9% could be utilized to the $46,800 wage base.
• Base employers’ tax charges on their adjustments in employment, thus imposing increased prices on employers that scale back their variety of staff.
• Refinance the federal mortgage with a bond backed by payroll taxes and state loans from its inner sources to cut back total curiosity prices.
There could also be different alternate options, maybe affecting advantages, however the principle factor is that doing nothing will simply perpetuate this disaster — though the politics of the difficulty are daunting.
It’s been a political stalemate for practically a quarter-century, pitting unions in search of to guard, and even enhance, advantages in opposition to employers who don’t wish to shoulder elevated taxes. Successive governors and legislative leaders have shunned engagement, preferring to kick the can down the highway.
Dan Walters is a CalMatters columnist.
