California Short Another $7.4 Billion

Great reporting by Denis C. Theriault at the Mercury News Another California crisis: Unemployment fund facing $7.4 billion deficit

Already grappling with one multibillion-dollar budget deficit, cash-strapped California now is facing a crisis in its unemployment insurance fund — source of the tens of millions paid each week to jobless residents.

Amid record unemployment, the fund will likely finish the year $7.4 billion in the red, according to the latest projections from the state’s Employment Development Department. Just to keep checks coming, California has had to reach into Uncle Sam’s pockets for some $4.7 billion to date.

The state must return what it borrows by 2011 — or face hundreds of millions in interest payments that would come at the expense of funding for schools, parks and social services.

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The system is funded by employers who pay taxes based on their employees’ wages. An increase in the number of people seeking unemployment benefits means a reduction in the wage base that replenishes the system. Currently, the fund is gushing what amounts to $40 million a day in benefits.

Record unemployment, however, is only part of the problem.

Earlier this decade, the Legislature increased unemployment benefits, which at the time were among the nation’s most meager. But a proposal to raise employer contributions to fund that expansion failed because it required a two-thirds vote.

Employers pay unemployment taxes only on the first $7,000 each worker earns. That makes California’s cap on taxable wages the lowest in the nation, officials say, and it means the state doesn’t save enough money in good times to weather signifficant downturns.

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That interest is accruing at 5 percent annually. By late 2011, California’s bill on interest alone could approach three-quarters of a billion dollars, which the state would have to pay from its already-strapped general fund.