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 have a hefty cushion of reserves.
Brown’s “rainy day fund” tops out at scarcely a fifth of that $60 billion, so it’s a weak insurance policy at best. Still, 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 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.
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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 erase the debt this year.
The state’s own report on its UIF, issued last October, projects 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 even in good economic times.
The state Employment Development Department report concedes “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, like now, the UIF should be building reserves. 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.
During the Great Recession, California’s unemployment rolls doubled to more than 2 million. There are four ways California can prepare for another such surge – 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; the latter two are politically impossible in a Democratic Legislature 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 a bailout.
Dan Walters writes on matters of statewide significance for CALmatters, a public-interest journalism organization. Go to calmatters.org/commentary.