California LAO analysis of insolvent UI fund

For years, I've charting the decline into insolvency of the California Unemployment Insurance Fund. The fund balance now rests near all time lows of negative ten billion dollars (-$10,000,000,000). A negative balance is possible and California can continue to pay unemployment insurance claims only because of loans from the federal government for which it is now paying interest.

Even if California runs a $1 billion surplus in 2013, it would need to do so for more than 10 years in a row and put every penny of that surplus toward repaying the federal government for the unemployment loans plus interest. It is possible that the federal government will forgive these gigantic loans some day, but for now, my expectation is that California will have to repay the loans.

The Legislative Analyst's Office (LAO) recently released an Overview of the Governor's Budget in California. On page 37 of the report, the insolvent unemployment fund was addressed:

Federal Loans Total About $10 Billion. The UI Fund has been insolvent since 2009, primarily reflecting recession-related growth in unemployment benefit payments that exceeded the available fund balance. The state has borrowed from the federal government since 2009 to continue paying unemployment benefits, and the outstanding loan from the federal government is projected to be $10.2 billion at the end of 2013. The Governor’s budget does not propose a solution to the ongoing UI Fund deficit, but instead specifies that the Secretary for Labor and Workforce Development will initiate a series of meetings by February 1, 2013 to discuss solutions to repay the federal loan and stabilize the financial condition of the UI Fund. The budget also assumes a $291 million General Fund interest payment on the federal loan for 2013-14.

Effects of the Continuing Insolvency. For each year that the state carries a federal loan balance, UI taxes paid by employers are incrementally increased. The proceeds from these increased tax revenues are used to pay down the principal on the state’s federal loan. Absent corrective action, the administration projects that the federal loan will not be fully repaid until sometime after 2020. Until then, state interest payments on the federal loan remain a significant annual liability.

Recommend Various Actions to Address Program’s Financial Health. We have previously found that California’s UI program has a structural mismatch between its revenues and benefit costs that predates the recent recession and cannot be sustained for the long term. In our October 2010 report, California’s Other Budget Deficit: The Unemployment Insurance Fund Insolvency, we recommended a balanced approach of tax increases, benefit reductions, and eligibility changes to address the long-term financial health of the UI program. These policy options are still viable, and could be phased in over several years if the goal were to minimize the potential adverse economic effects of such proposals on UI beneficiaries and employers.

The LAO analysis highlights the continued, long term insolvency of the fund, the ongoing interest expense to the state, and the increasing cost to employers to try to rebuild a positive fund reserve. This is another legacy from the Financial Crisis in 2008.