Unemployment insurance: California’s ‘urgent’ $20 billion problem

California’s unemployment insurance fund is $20 billion in debt, putting the state in a terrible position in case of a recession. 

The deep debt — incurred during the COVID-19 pandemic as millions of people lost their jobs and the state borrowed money from the federal government for unemployment benefits — is on Gov. Gavin Newsom’s mind.

He cited it as a factor in his recent veto of a bill that would have allowed striking workers to be eligible for unemployment benefits, mentioning that the state is paying hundreds of millions of dollars of interest on the debt.

It’s also top of mind for businesses, which face an increase in required contributions toward the state’s unemployment insurance fund as a result. And it’s on the minds of those who are concerned about whether the state’s unemployment system can handle another crisis such as a pandemic or a recession. 

The unemployment insurance fund had regular solvency issues even before the pandemic. Now the situation is more dire, with the Employment Development Department issuing a spring forecast that the debt — which the Legislative Analyst’s Office has said does not include the infamous unemployment fraud that mostly involved temporary federal benefits that the state doesn’t have to pay back — would grow to $19.7 billion at the end of the year. In addition, the state Legislative Analyst’s Office said this summer that for the first time during a period of job growth, it expects California’s unemployment insurance fund to have fewer contributions coming in than benefits being paid out.

“The administration’s forecast of a UI trust fund deficit adds urgency that may not have existed last year, making this one of the key issues facing the Legislature in the near future,” said Chas Alamo, principal fiscal and policy analyst for the Legislative Analyst’s Office.

But this is just one example of the ongoing battle among workers, labor and business in California, and how politicians have to navigate that tension.

Debt could cost California billions just in interest

It is difficult to gauge the urgency the governor and state legislators feel about the debt. 

Southern California Democrats Sen. Anthony Portantino and Assemblymember Chris Holden, co-authors of the bill Newsom vetoed citing concerns over the size of the debt, declined to comment on the debt. Lerna Kayserian Shirinian, a spokesperson for Portantino, said “the senator will continue to have conversations with the administration and others on that issue.”

Alex Stack, a spokesperson for the governor, referred to Newsom’s veto of the bill as one way the governor is avoiding increasing costs for businesses. Another way, he said, is that “the state has been covering interest payments instead of pushing that cost to employers.”

“The administration’s forecast of a UI trust fund deficit adds urgency that may not have existed last year, making this one of the key issues facing the Legislature in the near future.”CHAS ALAMO, PRINCIPAL FISCAL AND POLICY ANALYST, LEGISLATIVE ANALYST’S OFFICE

The required repayment of the debt has triggered automatic tax increases on employers, which under federal law are responsible for paying down the principal, while the state typically pays the interest. The governor last year proposed using $3 billion from a projected budget surplus to pay off some of the debt, but ended up paying only $250 million toward the principal. The state has since swung to a budget deficit, and this year paid $306 million in interest by borrowing from the disability insurance fund.

Alamo has forecast that depending on interest rates, the debt could cost the state anywhere from a total of $3 billion to $7 billion in interest payments for the next several years, possibly through 2033. The state also borrowed from the federal government for unemployment benefits during the Great Recession; that debt cost the state $1.4 billion in interest payments from 2011 until 2018, when it was paid off.

Longstanding fund problems

The California unemployment insurance fund’s solvency problems go way back. 

The fund was solvent as recently as 2018 and 2019, but still below the recommended standard of having enough funds to distribute benefits for a year, according to Department of Labor data analyzed by the Century Foundation, a progressive think tank that advocates for equity in domestic and foreign policy. In 2017, and each year before that going back to 2009, the fund had been insolvent. The last time the state’s unemployment insurance fund met the standard was 1990.

The current debt has triggered a $21 increase per employee that employers must pay in payroll taxes starting this year. Employers’ rate will keep rising an additional $21 per employee each year until the state pays off the debt to the federal government, for a total of $945 per employee through 2031, according to projections by the Legislative Analyst’s Office based on the average state unemployment insurance tax rate.

“California’s business community is terribly concerned about our state’s unemployment insurance fund debt and the increased taxes it is bringing to businesses and will continue to bring for the next decade,” said Rob Moutrie, a policy advocate for the California Chamber of Commerce. “We believe all the factors affecting California’s unemployment insurance fund, including eligibility issues and EDD’s failures, must be considered when looking at the unprecedented debt.”

But others say the state’s system to fund unemployment has for years been structured to favor businesses in the first place. 

“Big businesses haven’t been paying the true cost of unemployment for decades,” said Alissa Anderson, a senior policy fellow at the California Budget & Policy Center, who said she plans to speak with Portantino’s office about the issue. Anderson added that shifting unemployment insurance debt to the state, as businesses have called for, is “a backdoor tax break for businesses.”

The state’s unemployment fund is funded by a variable percentage tax, currently 3.46%, on employers based on the first $7,000 each employee earns, the minimum taxable wage base required by federal law — a base California has not raised since 1983. That same wage base also applies to employers of both high-wage earners and low-wage earners, even though high-wage earners are eligible for higher unemployment benefits when they lose their jobs. Other states have raised their taxable wage bases as high as 100% of average weekly wages; in states like Washington, the taxable wage base this year is $67,600.

“Big businesses haven’t been paying the true cost of unemployment for decades.”ALISSA ANDERSON, SENIOR POLICY FELLOW, CALIFORNIA BUDGET & POLICY CENTER

Economists say the fact that California’s taxable wage base has been the same for so long is one of the main reasons its unemployment fund is consistently underfunded or insolvent. Another reason is that the state has added benefits and eligibility over the years without adjusting how the system is funded.

“California never has sufficient funding,” said Stephen Wandner, senior fellow at the National Academy of Social Insurance and author of the book “Transforming Unemployment Insurance for the Twenty-First Century: A Comprehensive Guide to Reform.” Wandner called it “unreasonable… to have fairly generous benefits and extremely weak financing. It’s not sustainable.”

“The last time I checked, 1983 was about 40 years ago,” Wandner added. “What’s happened since then? Wages and prices have gone up every year.” In his book, Wandner recommends that states such as California should index their taxable wage base by setting it at 50% or more of the Social Security taxable wage base, or by indexing it to wage growth.

But Alamo, of the state Legislative Analyst’s Office, said that while the state’s wage base is lower than others, the percentage employers pay on that wage base is actually greater than the percentage employers in many other states pay on higher wage bases. “The amount contributed on behalf of workers is pretty middle of the pack,” he said.

Businesses want a working group

The state should take action to address the problems with the fund, said Jenna Gerry, senior staff attorney for the National Employment Law Project who covers unemployment insurance issues in California.

“People need to understand the historic nature of this, and that something needs to be done now,” Gerry said, adding that fixing the system is also an equity issue in a high-cost state. The state’s unemployment benefit has been at a maximum $450 a week since 2005. “Who can live on that in California?” Gerry asked. Gerry added that the state needs to fix the unemployment fund’s solvency issues before it can raise the benefit limit.  

Bill Sokol, who teaches labor law at San Francisco State University, said the system to fund unemployment insurance hasn’t changed all these years because the business lobby is strong. Sokol also said labor is fighting for more pressing issues that affect employed workers, not unemployed ones. 

“What companies pay for UI is never going to be a top priority for unions, but it’s a top priority for business,” Sokol said. “This leaves it to the politicians to decide it’s for the greater good” to fix the unemployment insurance system, he said.

“People need to understand the historic nature of this, and that something needs to be done now.”JENNA GERRY, SENIOR STAFF ATTORNEY, NATIONAL EMPLOYMENT LAW PROJECT

Lorena Gonzalez Fletcher, head of the California Labor Federation, agreed. She said that the governor has used the unemployment insurance debt “as an excuse” not to sign Portantino’s bill — which was cosponsored by the federation — but that she hasn’t “heard anything else” about how Newsom plans to address the debt. 

There are different ways to “sculpt” a solution, Gonzales Fletcher said, including lowering the percentage all employers pay into the fund but bumping up what employers of higher-wage workers are required to pay. 

That gets into the fact that employers of different sizes have differing concerns. 

Small Business Majority, a national nonprofit organization that advocates especially for under-resourced entrepreneurs and small businesses, wants to address equity issues including the disproportionate effect the funding system has on smaller businesses. 

Bianca Bloomquist, the organization’s California policy director, called the system “regressive” and said it will be important to gather data about its impact on small businesses. Bloomquist added that a well-funded unemployment insurance fund is vital because small businesses understand that “when a community is suffering (from unemployment), small businesses suffer.”

Click here to read the full article in CalMatters

Interest on the Debt and a Responsible Debt Ceiling

With the debt ceiling now reached, it is clear we must increase in the amount of money the United States government can legally borrow.

President Joe Biden and most Democrats have taken the position that we should increase the spending limit with no changes, modifications, or reforms.

Republicans—and Democratic Senator Joe Manchin—have said it would be irresponsible to simply extend the government’s ability to run up more debt without curbing spending. Any debt ceiling increase should be done in a responsible way, with serious reforms to the pattern of government spending, that will move us back toward a balanced budget by 2033.

The sheer weight of the interest on our growing national debt should convince anyone concerned about America’s future that the Republicans and Manchin are right.

According to the May 2022 Congressional Budget Office report, the United States is going to add $16 trillion to the national debt between now and 2033 (I’m sure that projection would be much higher now). That additional deficit spending will give the United States a debt as high as 109 percent of gross domestic product in 2027.

If the current uncontrolled spending pattern does not change, by 2030 paying interest on the national debt will cost more than the entire defense budget. By 2033, America will be spending nearly $200 billion more on interest payments than on our national security ($1.19 trillion in interest versus $998 billion in national security).

According to the CBO, all this spending will drive up interest rates—which will of course further drive up interest payments. It currently projects three-month U.S. bonds to jump nearly 400 percent (from 0.6 percent to 2.3 percent) and 10-year U.S. bonds will jump 80 percent (2.1 percent to 3.8 percent) over the next decade. This crushing interest will be borne by taxpayers.

This interaction between the debt and interest rate creates a vicious cycle. The more you borrow, the more pressure there is for inflation. The more inflation, the higher interest rates get. Higher interest rates mean bigger interest payments on the debt.

This cycle of government demanding money to cover its deficits also crowds out capital for the private sector—and ultimately weakens economic growth and job creation. We have watched the European welfare state system for 70 years. It has crowded out economic growth and increased unemployment and underemployment. We’ve seen downward cycles of bigger welfare states transferring more money from taxpayers to those who cannot find work—and thus increasing the number of unemployed. (In some cases, European countries have bailed out their neighbors and only made problems worse.)

I know it is possible to balance the budget because we have done it before. When I was Speaker of the House, we began negotiations with President Bill Clinton, a Democrat, which led to the only four consecutive balanced budgets in our lifetime.

The American people understand that the current deficit-spending machinery of big government is unsustainable. A new Rasmussen poll reports that only 24 percent of Americans favor raising the debt ceiling with no spending cuts.

By contrast, 73 percent believe it is reasonable to cut spending—and 62 percent favor modest cuts in all agencies. There are no sacred cows.

Every dollar we save is a deficit dollar we will not have to pay interest on in perpetuity.

The path forward is clear—and required for our survival.

First, we must get spending under control. Second, we must get to a balanced budget. Third, we must sustain the balance and start paying down the national debt.

Click here to read the full article in Newsweek

Once again, CalPERS state worker rate is raised

State PensionsCalPERS actuaries recommend that the annual state payment for state worker pensions increase $602 million in the new fiscal year to $5.35 billion, nearly doubling the $2.7 billion paid a decade ago before the recession and a huge investment loss.

It’s the largest annual state rate increase since CalPERS was fully funded in 2007. And it’s the third year in a row that the state rate increases have grown: up $459 million in 2014, $487 million in 2015, and now $602 million for the fiscal year beginning July 1.

The annual state actuarial valuation prepared for the CalPERS board next week also shows that the debt or “unfunded liability” for state worker pensions grew to $49.6 billion as of last June 30, up from $43.3 billion the previous year.

And as the debt went up, the funding level went down. The five state worker pension plans had 69.4 percent of the projected assets needed to pay future pension obligations last June, a small decline from 72.1 percent in the previous year.

The funding level of the California Public Employees Retirement System, with 1.8 million active and retired state and local government members, has not recovered from a huge loss during the financial crisis and recession.

The entire system (state workers are less than a third of the total members) was 102 percent funded with a $260 billion investment fund in 2007. By 2009 the investment fund had dropped to about $160 billion and the funding level to 62 percent.

Now the total investment fund, which was above $300 billion at one point last year, is valued at $290 billion this week, according to the CalPERS website, and the latest reported funding level is 73 percent.

In recent years, CalPERS has phased in three rate increases for lowering the earnings forecast from 7.75 to 7.5 percent, adopting a more conservative actuarial method intended to reach full funding in 30 years, and getting new estimates that retirees will live longer.

The CalPERS board clashed with Gov. Brown last November when adopting a “risk reduction” strategy that could slowly raise rates over several decades by lowering the pension fund investment earnings forecast to an annual average of 6.5 percent.

Gov. Brown said in a news release the CalPERS risk reduction plan is “irresponsible” and based on “unrealistic” investment earnings. His administration had urged the CalPERS board to phase in the big rate increase over the next five years.

The CalPERS board president, Rob Feckner, said the go-slow decision emerged from talks with consultants, staff, stakeholders and concern about putting more strain on cities “still recovering from the financial crisis.”

The 3,000 cities and local governments in CalPERS have a wide range of pension funding levels, some low and a few with a surplus. If they are able, CalPERS has encouraged them to contribute more than the annual rate to pay down their pension debt.

Brown could have proposed a new state budget in January that gives CalPERS more than the state rate, paying down state worker debt. But legislators may have more urgent priorities and powerful unions want to bargain pay raises.

Critics contending that California public pensions are “unsustainable” often point to a large retroactive state worker pension increase, SB 400 in 1999, that contained a generous Highway Patrol formula later widely adopted for local police and firefighters.

As the stock market boomed in the late 1990s, the CalPERS investment fund, expected to pay two-thirds of future pensions, bulged with a surplus and a funding level that reached 136 percent.

So, while sharply increasing pensions, the CalPERS board also contributed to later funding problems by sharply reducing state contributions from $1.2 billion in 1997 to $159 million in 1999 and $156 million in 2000.

STATE

Much of the $602 million state worker rate increase next fiscal year is for phasing in the third and final year of a rate increase, $266.7 million, to cover a longer average life span now expected for retirees.

The “normal progression” of debt payments added $176.4 million and “investment experience” $89.5 million. Payroll growth of 6 percent in the previous year, instead of 3 percent, added $109.4 million due to new hires and other factors.

All of the $602 million rate increase, if approved by the CalPERS board next week, would be paid by state employers. Usually, only the state, not the employee, pays for increased pension costs, particularly investment shortfalls that cause most of the debt.

But Brown’s pension reform that took effect three years ago is making a small but noticeable change.

Workers hired after Jan. 1, 2013, receive lower pensions, requiring them to work several years longer to receive the same benefit as workers hired before the reform. In the list of changes resulting in the $602 million state increase next year, lower pensions for new hires are a $33 million reduction.

State workers typically pay a CalPERS rate ranging from about 6 percent of pay to 11.5 percent, depending on the job and bargaining by labor unions. The new employer rates range from 26.1 percent of pay for miscellaneous workers to 48.7 percent of pay for the Highway Patrol.

Under the pension reform, some state workers (most are excluded) are expected
to pay half of the “normal” cost, the estimated cost of the pension earned during a year by a worker, excluding debt from previous years.

Because of an increase in the normal cost, employees hired under the reform by the Legislature, California State University, and the judicial branch would get a small rate increase next year, up from 6 percent of pay to 6.75 percent.

State savings from these and other increases in worker rates must be used to pay down the pension debt. So, even though the state payment under the new CalPERS rate is $5.35 billion, the savings from higher worker rates boosts the payment to $5.462 billion.

 

Article is originally published on Calpensions.com

Voters Finally Starting to Grasp the Debt Crisis

gun spending debt ceilingThe former head of the United States Government Accountability Office has estimated that the national debt is a staggering three times as much as usually publicized. Rather than $18 trillion, the actual number is around $66 trillion.

News reports about government debt at all levels are now more frequent and increasingly alarming. There is little doubt that this is due to the fact that the debt crisis is actually getting worse.

​But it might also be a reflection of a greater awareness on the part of citizens and the news media that debt is a real danger. For those of us who have been warning about government debt for decades, this greater awareness is long overdue.

Understanding all the ramifications of public debt isn’t easy. As to the magnitude of debt, former California legislator and now congressman Tom McClintock used to refer to “MEGO” numbers (My Eyes Glaze Over) meaning that citizens really can’t be expected to comprehend the vastness of numbers – like $66 trillion – with so many zeros behind them.

And it isn’t just the amount of debt that is confusing. In addition to voter approved bonds, normally referred to as “general obligation” bonds, there are a myriad of debt instruments pushed by powerful special interests including revenue bonds, “certificates of participation” and a host of other esoteric instruments created for the purpose of avoiding voter approval.

Other government debt isn’t even reflected by bonds or other instruments. The hundreds of billions of dollars of unfunded pension obligations in California are most certainly debt that ultimately will have to be repaid by taxpayers. And as columnist Dan Walters with the Sacramento Bee just noted, California had to borrow $10 billion from the federal government for the state’s Unemployment Insurance Fund which remains insolvent even though we are told by the political elites that California is in the midst of a vibrant economic recovery.

So why is it, given the complexity of issues related to government debt, that the public is starting to pay attention? First, high profile municipal bankruptcies in Vallejo, Stockton and other cities have wreaked havoc on both taxpayers’ wallets and on public services. There is widespread belief that even Los Angeles itself will be unable to avoid bankruptcy. Second, both the media and taxpayer advocacy groups like Howard Jarvis Taxpayers Association have successfully used the Public Record Act to secure far more detailed information than has been available in the past about employee pay and benefits, including lavish pension benefits. The disclosure of this information has spurred voters to start wondering why our services are second rate while public employee compensation is so high. Third, both private organizations and public entities have vastly improved data bases easily accessible on the internet making these complex issues a little easier to understand. For example, Controller John Chiang has just created a new website called Debt Watch to provide voters with more information about the various bond issuances.

But perhaps the biggest factor in the renewed attention of citizens on debt is personal experience. The 2008 recession left millions with underwater mortgages. Nothing focuses attention like a crisis that hits someone right between the eyes. Government debt in the trillions of dollars is difficult to understand. Not being able to pay one’s mortgage is a lot easier to grasp.

Jon Coupal is president of the Howard Jarvis  Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Cartoon: Indebted Class of 2015

Student Loan cartoon

Steve Sack, The Minneapolis Star Tribune

CA’s $12.3 Billion in Proposed School Bonds: Borrowing vs. Reform

“As the result of California Courts refusing to uphold the language of the High Speed Rail bonds, the opponents of any bond proposal, at either the state or local level, need only point to High-Speed Rail to remind voters that promises in a voter approved bond proposal are meaningless and unenforceable.”

–  Jon Coupal, October 26, 2014, HJTA California Commentary

If that isn’t plain enough – here’s a restatement: California’s politicians can ask voters to approve bonds, announcing the funds will be used for a specific purpose, then they can turn around and do anything they want with the money. And while there’s been a lot of coverage and debate over big statewide bond votes, the real money is in the countless local bond issues that collectively now encumber California’s taxpayers with well over $250 billion in debt.

Over the past few weeks we’ve tried to point out that local tax increases – 166 of them on the November 4th ballot at last count, tend to be calibrated to raise an amount of new tax revenue that, in too many cases, are suspiciously equal to the amount that pension contributions are going to be raised over the next few years. For three detailed examples of how local tax increases will roughly equal the impending increases to required pension contributions, read about StantonPalo Alto and Watsonville‘s local tax proposals. It is impossible to analyze them all.

As taxes increase, money remains fungible. More money, more options. They can say it’s for anything they want. And apparently, bonds are no better.

At last count, there are 118 local bond measures on the November ballot. And not including three school districts in Fresno County for which the researchers at CalTax are “awaiting more information,” these bonds, collectively, propose $12.4 billion in new debt for California taxpayers. All but six of these bond proposals (representing $112 million) are for schools. Refer to the list from CalTax to read a summary of what each of these bonds are for – “school improvements,” “replace leaky roofs,” “repair restrooms,” “repair gas/sewer lines,” “upgrade wiring,” “renovate classrooms,” “make repairs.”

To be fair, there are plenty of examples of new capital investment, “construct a new high school,” for example, but they represent a small fraction of the stated intents. On November 4th, Californians are being asked to borrow another $12.3 billion to shore up their public school system. They are being asked to pile another $12.3 billion onto over $250 billion of existing local government debt, along with additional hundreds of billions in unfunded retirement obligations for state and local government workers. They are being asked to borrow another $12.3 billion in order to do deferred maintenance. We are borrowing money to fix leaky roofs and repair restrooms and sewers. This is a scandal, because for the past 2-3 decades, California’s educational system has been ran for the benefit of unionized educators and unionized construction contractors who work in league with financial firms whose sales tactics and terms of lending would make sharks on Wall Street blush. These special interests have wasted taxpayers money and wasted the educations of millions of children. Their solution? Ask for more money.

Nobody should suggest that California’s public schools don’t require investment and upgrades. But before borrowing more money on the shoulders of taxpayers, why aren’t alternatives considered? Why aren’t educators clamoring for reforms that would cut back on the ratio of administrators to teachers? Why aren’t they admitting that project labor agreements raise the cost to taxpayers for all capital investments and upgrades, and doing something about it? If their primary motivation is the interests of students, why aren’t they supporting the Vergara ruling that, if enforced, will improve the quality of teachers in the classroom at no additional cost? Why aren’t they embracing charter schools, institutions whose survival is tied to their ability to produce superior educational outcomes for far less money? Why don’t they question more of these “upgrade” projects? Is it absolutely necessary to carpet every field in artificial turf, a solution that is not only expensive but causes far more injuries to student athletes? Is it necessary to spend tens of millions per school on solar power systems? Does every high school really need a new theater, or science lab? Or do they just need fewer administrators, and better teachers?

And to acknowledge the biggest, sickest elephant in the room – that massive, teetering colossus called CalSTRS, should teachers, who only spend 180 days per year actually teaching, really be entitled to pensions that equal 75% of their final salary after only 30 years, in exchange for salary withholding that barely exceeds what private employees pay into Social Security? Thanks to unreformed pensions, how many billions in school maintenance money ended up getting invested by CalSTRS in Mumbai, Shanghai, Jakarta, or other business-friendly regions?

How much money would be saved if all these tough reforms were enacted? More importantly, how much would we improve the ability of our public schools to educate the next generation of Californians? Would we still have to borrow another $12.3 billion?

Here’s an excerpt from an online post promoting one of California’s local school bond measures: “It will help student academic performance, along with ensuring our property values. If you believe that strong schools and strong communities go hand in hand, please vote…”

Unfortunately, such promises are meaningless and unenforceable. The debt is forever.

*   *   *

Ed Ring is the executive director of the California Policy Center.

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