California’s unemployment insurance system is so poorly funded it pays 2004 wages

Now that the Legislature has mostly gone home and the governor has signed or vetoed all the bills, it’s time for them to reflect on the most pressing problems to address in 2024. Fixing California’s dysfunctional unemployment insurance system should be a top priority.

The pandemic recession along with this year’s bill to extend unemployment insurance benefits to striking workers certainly focused the press on the system. But the coverage has generally concentrated on mismanagement of claims and fraud and not on the larger systemic problems of underfunding and benefit inadequacy.

How many Californians know that unemployed workers still get the same maximum ($450) and minimum ($40) they received in 2004? How many know that our unemployment insurance fund goes broke every time we have a recession and has to rely on federal loans to pay benefits? And how many know that they as taxpayers – and not the employers who are supposed to pay the costs of the unemployment system – pay billions of dollars when the state’s General Fund covers the interest on these loans? 

California’s average weekly wage in 2004 was $806. It is now $1,651. Unemployment benefits were intended to replace at least 50% of a worker’s lost wages. What happened?

Every time labor groups seek benefit increases, powerful business interests oppose them by saying the unemployment fund cannot afford them and, of course, they are unwilling to increase their meager contributions to pay for them.

In his veto message of Senate Bill 799, the bill to make striking workers eligible for benefits after two weeks on the picket line, Gov. Gavin Newsom noted that the “UI financing structure has not been updated since 1984 which has made the UI Trust Fund vulnerable to insolvency,” and used this as his reason for the veto.

What business interests don’t want to talk about and governor doesn’t seem to understand is that the primary reason the fund is in such bad shape is that the 1984 update changed the funding model from a “forward funded” or “countercyclical” one in which employers pay more in good times to build up a healthy reserve to a “pay as you go” one, which reduces employer costs in good times and increases them in bad times.

Reaganomics carried the day in 1984 when George Deukmejian was governor.

California governors and legislators have been aware of the financing problem for many years. Various administrations have issued reports and convened “stakeholders” meetings on it. The nonpartisan Legislative Analyst’s Office has written reports on it. Every year the U.S. Department of Labor publishes a “State Unemployment Insurance Trust Fund Solvency Report.” 

It doesn’t take much research to design a functional unemployment insurance system. The state of Washington pays maximum weekly benefits of $1,019 and minimum benefits of $323. Two years ago, it cut employer contributions and still paid its benefits without a loan.

California still has a taxable wage ceiling of only $7,000 per employee, the federally required minimum since 1983. All but three states have higher ceilings and many have indexed them to wage inflation.

Washington’s is now $67,500.

Most states also have either higher minimum or maximum tax rates (or both) than California. To protect their taxpayer from footing the bill for interest on federal UI loans, many states surcharge their employers to cover the cost.

Why then hasn’t California enacted legislation to correct our problem? When the solely worker funded State Disability Insurance Fund faced insolvency in the 1990s, the state took immediate action to fix its financing model. The SDI Fund currently pays a maximum weekly benefit of $1,620, indexed to inflation.

There are plenty of examples California can emulate to fix its unemployment insurance system. The governor and Legislature just need to summon the courage to defy powerful business interests and do it.