Unemployment insurance crisis looms in the United States

Amid much self-congratulation about bipartisan co-operation, the California Assembly voted 76-0 Monday to allow the federal government to extend unemployment insurance benefits by up to 20 weeks.

Amid much self-congratulation about bipartisan co-operation, the California Assembly voted 76-0 Monday to allow the federal government to extend unemployment insurance benefits by up to 20 weeks.

This rare bit of unanimity followed some minor changes in the legislation that had stalled earlier. And it reflected the simple fact that lawmakers could assist jobless Californians with what they regard as free money – billions of federal bucks that, of course, Washington will be borrowing since it’s running big deficits.

There’s no such unanimity – indeed, not even a hint of consensus — on what to do about a far more serious unemployment insurance issue, the vaporization of the state Unemployment Insurance Fund (UIF) that pays basic weekly payments to hundreds of thousands of jobless workers.

The UIF, which is financed by a payroll tax paid by employers, once boasted of a nearly $6.5 billion balance. That was in 2001 and it enticed the Legislature and then-Gov. Gray Davis to nearly double unemployment benefits from a maximum of $230 per week to $450.

The recession that hit California shortly thereafter, coupled with the increased benefits, quickly depleted the UIF, and by 2004 the state was borrowing from the federal government to keep the checks flowing.

The UIF regained solvency and reached a $3.6 billion reserve as the state emerged from recession, but when the economy declined again with the bursting of the housing bubble, that cushion quickly evaporated.

The UIF went negative again in January and is already hundreds of millions of dollars in the red, kept afloat only with another loan. And that means that UI payments, now running $7 billion a year, would dry up in California without the federal largesse.

The UIF’s looming insolvency was apparent six months ago, and the Schwarzenegger administration floated some notions of how to deal with it, but has made no progress. Likewise, a couple of bills on the issue have been introduced by Democrats – basically increasing payroll taxes – but there’s been no action on that front either.

There are four ways to make the UIF solvent again – 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 resistance from employers while labour unions and other employee groups oppose the latter two.

The fact that Gov. Arnold Schwarzenegger and the legislature have already sharply increased taxes to help bridge a yawning state budget deficit complicates the matter even further, as does the fact that more budget deficits loom.

Federal loans and UI benefits extensions will keep the checks flowing for a while, but both are very temporary. Sooner or later, Schwarzenegger and the legislature will have to hold their political noses and swallow some of the four distasteful remedies, and the longer they wait; the bigger the dose will have to be.

Dan Walters writes for the Sacramento Bee newspaper in California.

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