Gov. Jerry Brown regularly warns that California is overdue for an economic downturn that could devastate tax revenues.
Even a moderate recession, his administration projects, could cost the state $60 billion in lower revenues over three years, underscoring the need to build a hefty reserve as a cushion.
Brown’s “rainy day fund” tops out at scarcely a fifth of that $60 billion figure, so it’s a weak insurance policy at best, but at least it’s better than nothing.
However, “nothing” is a pretty accurate appraisal of another, albeit more obscure, fund that also would he hammered by recession – the one that pays unemployment insurance benefits to jobless workers.
Last month, the U.S. Department of Labor issued its annual report on the condition of state unemployment insurance programs and declared that as of Jan. 1, California was the only state with a zero “solvency level.” In fact, it’s the only one to still owe the federal government for loans it took out to prop up its Unemployment Insurance Fund (UIF) during the Great Recession.
California had to borrow heavily because during Gray Davis’ governorship, he and the Legislature sharply increased unemployment benefits without raising payroll taxes to pay for them, drawing down what had been a healthy UIF reserve and leaving it too weak to handle a sharp increase in payouts when recession struck a few years later.
When the state could not repay the loans, the feds indirectly raised payroll taxes on California employers, which are expected to finally erase the debt this year.
The state’s own report on its UIF, issued last October, projects that it will end 2018 with a positive balance of $1.8 billion, and 2019 with $2.3 billion, but those are very weak numbers for a program that pays out more than $5 billion a year in benefits even in good economic times.
The state Employment Development Department report concedes that “the current financing structure leaves the UI Fund unable to self-correct and achieve a fund balance sufficient to withstand an economic downturn.”
During periods of high payrolls and low unemployment, such as this one, the UIF should be building reserves that could cope with an economic downturn, when claims for jobless benefits increase. During the Great Recession, California’s unemployment rolls doubled to more than two million.
However, that’s not happening because payroll taxes on employers are only barely keeping up with unemployment insurance outflows now.
The Department of Labor report tells us that other states are doing what they need to do, raising unemployment insurance reserves by nearly $46 billion since they hit bottom in 2010. It measures those reserves by how many years those state funds can remain solvent in recession, with Wyoming’s and Oregon’s the healthiest at 2.17 years and California’s the unhealthiest at zero years.
There are four ways to make California’s UIF truly solvent – raise the payroll tax rate, widen the wage base on which the rate is paid (it’s now $7,000 a year), reduce benefits and/or tighten eligibility for benefits.
The first two draw opposition from employers while the latter two are politically impossible in a Democratic Legislature closely tied to unions. It’s a political stalemate, and unless it’s resolved, California’s UIF will be clobbered in the next economic downturn, once again forcing California to go begging to Uncle Sam for another bailout.