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California’s unemployment insurance fund continues to sink in a sea of red ink. The fund has been insolvent since 2009, with a current UI fund deficit of over $10 billion.

Projections are that the deficit could grow to $13 billion by 2014.

Already California owes the federal government $10 billion on a loan that has kept the fund solvent. In September 2012 California will owe the federal government a $417 million interest payment. This is real money for a state that is struggling to pay its bills.

It’s an issue I’ve written about before, but which continues to get less scrutiny than public pension problems, education funding, water policy, or a whole host of other public policy issues that plague California.

And while not a workers’ comp issue, it is an issue that may affect lots of injured workers who become unemployed after work injuries. Moreover, solutions to the problem could entail increased costs for employers which add to the overall cost of doing business in California. That’s the constant backdrop for any discussions of workers’ comp reform.

The Legislative Analyst Office has issued a new report on the UI fund.
Key talking points are these:
-Interest payments California owes on the federal loan are a significant
liability for the General Fund. The LAO estimates that over the next decade interest payments on the federal loan could exceed $3 billion.
-UI fund borrowing results in increased federal taxes for California employers as a result of the way credits are figured under FUTA the Federal Unemployment Tax Act).
-there is a structural mismatch between the California UI program’s revenues and its benefits which has contributed to the decline in the UI program’s solvency
-potential federal reforms could help improve solvency, but are stalled politically at the moment in Washington

The LAO report notes that Governor Brown’s proposed 2012-13 budget includes three UI-related proposals which can be summarized thusly:
1. Cover the state interest costs on the federal loan by a loan from the state’s disability insurance fund
2.Create a new revenue source for paying the interest payments California must pay to the feds and to repay monies borrowed from the disability insurance fund for 2011-2012. The source would be a new surcharge on employers. The surcharge would not be to pay down the federal loan principal, but rather to fund the interest costs on the loan.
3.Increase the minimum monetary eligibility requirement. Essentially this would require unemployed workers to have made more money in their base period to qualify for benefits.

The LAO analysis recommends that Governor Brown’s proposals be part of a comprehensive solution. Here is their recommendation:
“Consistent with our previous reports, California’s Other Budget Deficit: The Unemployment Insurance Fund Insolvency and Managing California’s Insolvency: The Impact of Federal Proposals on Unemployment Insurance, we continue to recommend that, in the absence of federal UI reforms, the Legislature adopt a comprehensive plan to ensure the long-term solvency of the UI fund. We suggest that such a plan be balanced, including both actions on the revenue side (increased employer taxes) and the cost side (decreased UI benefits). We have provided examples of balanced plans in the reports mentioned above. As has been discussed previously, the Governor’s proposals fall short of being a comprehensive plan to address the long-term solvency of the UI fund. However, we find that the Governor’s proposals merit consideration if included in a comprehensive long-term solvency plan. If a future long-term solvency plan included increased employer taxes, dedicating a portion of these increased revenues to making interest payments on the state’s federal loan—in a manner similar to that proposed by the Governor—would avoid significant General Fund costs in future years. Also, we concur with the Governor’s assessment that monetary eligibility thresholds should be updated to reflect changes in wage levels.”

The LAO report concludes :
“We recognize that, in light of uncertainty regarding federal UI reforms and the recovery of California’s labor market, the Legislature may wish to take a wait-and-see approach during 2012 and delay enactment of a long-term solvency plan until next year. Enactment of a long-term plan will likely necessitate significant legislative deliberation and compromise among the various stakeholders of the UI system. For this reason, if the Legislature elects to delay addressing UI fund insolvency, we think that is would be premature to enact the Governor’s proposed employer surcharge and monetary eligibility changes. Under this scenario, we would recommend that the Legislature postpone considering the Governor’s proposals until they can be considered as part of a long-term solvency plan. In the interim, continuing the current-year strategy of borrowing from the DI fund to cover the state’s federal interest payment—creating short-term General Fund savings—is warranted by the state’s fiscal condition.”

So, like workers’ comp reform, reform of the UI system awaits a comprehensive approach. Like workers’ comp, it’s an issue with wide implications for powerful California business and labor interests, so the stakes are high.

Stay tuned.

In a coming post I will explore the issue of whether workers appealing treatment denials are required to go through the QME process or whether that is elective.

Here is a link to the LAO report:
http://www.lao.ca.gov/laoapp/budgetlist … KeyCol=555

Julius Young
www.workerscompzone.com
www.boxerlaw.com

Category: Political developments

Julius Young

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