The state has borrowed $11 billion from the federal government in recent years to pay jobless benefits, requiring hundreds of millions of dollars in interest payments to service its debt.

By Marc Lifsher, Los Angeles Times
October 25, 2011

Reporting from Sacramento— California has borrowed $11 billion from the federal government in recent years to prop up its insolvent unemployment insurance fund. The loans kept benefits flowing to millions of laid-off workers, but now the bill is coming due.

The state recently sent $303.6 million to Washington, the first of what could be many years of interest payments required to service its debt to Uncle Sam. It will have to pony up at least a half-billion dollars in 2012 and even more in coming years. The state, which already is struggling to close a massive budget deficit, probably will be forced to make even deeper cuts to schools, law enforcement and other basic services.

In the meantime, California employers in January will be hit with a mandatory surcharge of about $25 per employee to begin paying down the principal on the federal loan.

California operates one of the nation’s most expensive unemployment insurance systems. But the taxes needed to fund it, 100% of which are paid by employers, aren’t sufficient to support the system.

Although jobless benefits are about the same as the national average, costs have exploded because so many Californians have lost their jobs and been unable to find new ones quickly. California’s September unemployment rate of 11.9% is the second highest in the nation, behind only Nevada at 13.4%. About 2 million Californians are unemployed; a third of them have been out of work for a year or more.

Other states are struggling as well. Thirty-four states have borrowed $39 billion to pay unemployment benefits that have mounted during the worst downturn since the Great Depression of the 1930s.

Still, experts say California’s system is fundamentally out of balance and in need of a major overhaul to return it to solvency.

“Do you raise taxes even more, cut benefits or some combination?” said Joseph Henchman, vice president of the Tax Foundation, a nonpartisan Washington think tank. “Eventually you run out of gimmicks … borrowing, bonds, moving the payroll into next year … and you pay the piper.”

Unemployment insurance is a joint federal-state government program that began in 1935 to help people during the height of the Depression. In most states, the federal government charges employers an annual base rate of 0.6% on the first $7,000 of each employee’s wages, and sets minimum benefits levels that must be paid to jobless workers.

States are responsible for administering the program. They can establish benefit levels more generous than the federal minimum; most require employers to collect taxes on a higher threshold of workers’ wages to pay for them. California, however, does not. It is one of just six states where employers pay unemployment insurance taxes on only the first $7,000 of a worker’s annual income.

Federal loans are available when states run short of tax money to pay benefits. Uncle Sam automatically raises employers’ tax rates if states can’t repay. A 0.3% hike, known as a surcharge, will take effect in January.

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