When Jerry Brown returned to the governorship in 2011, he pledged to clean up the state’s finances and pay off a “wall of debt.”
Brown defined the debt rather narrowly, however, as $33 billion borrowed from banks, special funds and school aid to cover budget deficits during the Great Recession.
One of the debts that Brown omitted was the $10 billion that California borrowed from the federal government to keep unemployment checks flowing to jobless workers.
The state’s Unemployment Insurance Fund, or UIF, became insolvent in 2009 and California, like some other states, sought relief from Washington.
Recovery from that recession has been underway for nearly a half-decade, but California still has more than a million unemployed workers and is still paying out about $6 billion a year in benefits to a third of them.
The UIF is still insolvent – nearly $7 billion in the hole – and in 2012 the feds began whittling down California’s debt by raising taxes on the state’s employers, about $3 billion so far and rising, plus hundreds of millions in interest.
It’s expected that the feds will collect nearly $4 billion more over the next two years to reduce the debt further.
The debt will disappear eventually, probably in 2019, 10 years after the UIF went into the red, but that still would leave the fund in precarious position.
The federal tax on employers is on top of the regular payroll taxes they pay to the state. The state taxes are virtually equal to the benefits being paid out – roughly $6 billion a year into and out of the UIF. Therefore, even when the federal debt is paid, the UIF will still be insolvent, or nearly so.
“If changes are not made to the current financing structure, the UI Fund will continue to be in a deficit,” the Employment Development Department says in a recent UIF situation report.
California got into this pickle because in 2001, when the UIF had a $6.5 billion reserve, the Legislature and then-Gov. Gray Davis decided to boost benefits sharply – nearly doubling them, in fact – without raising payroll taxes to pay for them.
The extra benefits reduced the fund balance, leaving it unable to cope with sharp increases in claims for benefits when recession hit the state six years later.
It was irresponsible, akin to the big increases in public employee pensions that Davis and legislators also decreed without a plan to pay for them, which also has created a big debt.
The UIF’s precarious position is not a secret to those in the Capitol. Brown made a token proposal to raise state payroll taxes to bolster the fund but has not made it a priority.
Employers, having been saddled with the federal tax increase, are unwilling to see state payroll taxes increased and demand reforms to reduce costs, such as tightening eligibility for benefits. Labor unions are equally unwilling to entertain any reduction in benefits.
With this political stalemate, therefore, the most likely scenario is that if and when recession hits, California will once again seek a bailout – perhaps before the current debt is repaid.