California employers could be hit with big tax bill for jobless benefits,
auditor warns
California's debt to the U.S. for covering its unemployment checks the last
two years could reach $13.4 billion by the end of the year. If the loans aren't
repaid by November, a payroll tax will kick in. It starts at $325 million next
year and could rise to $6 billion.
By Marc Lifsher, Los Angeles Times
5:33 PM PDT, March 24, 2011
Reporting from Sacramento
California employers could face an annual payroll tax increase of as much as
$6 billion if California's unemployment insurance program fails to repay a
federal government loan that has kept benefits flowing.
The warning came
in a critical state audit of the California Employment Development Department,
which distributed $22.9 billion in unemployment benefits last year.
The
report concludes that for a decade, the EDD "has consistently failed to perform"
at a level the U.S. Labor Department "considers acceptable regarding its timely
delivery of unemployment benefits," State Auditor Elaine M. Howle wrote in a
letter to the governor and legislators.
The unemployment insurance fund,
insolvent since January 2009, relies on federal loans to pay jobless benefits.
The debt is expected to hit $13.4 billion by the end of this year unless state
lawmakers and the governor agree to raise payroll taxes, cut benefits or do some
combination of both. An interest bill of $362 million is due in
September.
By law, the state, which faces a $26-billion general budget
deficit, must repay the federal loans to the EDD by November.
EDD's failure to repay its loans by then would trigger a
$325-million federal tax hike next year on employers. That payroll tax bite
would rise incrementally to a maximum of about $6 billion if the loan goes
unpaid and the state misses interest payments over several
years.
Information about the growing deficit in the agency's funding
first arose in 2004, but it hasn't been high on the Legislature's or the
governor's priority lists.
"At this point, we can only deal with one
deficit at a time," said Mark Hedlund, a spokesman for state Senate President
Pro Tem Darrell Steinberg (D-Sacramento).
The funding shortfall was
caused by an unprecedented demand for benefits by Californians who lost their
jobs in the worst economic downturn since the Great Depression of the 1930s. The
number of initial claims for benefits received by the EDD grew 148% from July
2007 to June 2010, the auditor said.
Meanwhile, California's unemployment
rate increased to 12.3% in June 2010 from 5.3% three years
earlier.
California's unemployment rate stood at 12.4% in January.
February's number, to be released Friday, is expected to be slightly
lower.
EDD, which has been without a director for 15 months, acknowledged
that it has faced unparalleled challenges.
"EDD made tremendous strides
in a time of historic demand for unemployment benefits," spokeswoman Loree Levy
said. "We've hired more people and put some automation projects in place,"
principally an upgraded telephone service.
Not all of EDD's difficulties
can be blamed on the recession, said Maurice Emsellem, policy co-director of the
National Employment Law Project, which advocates for the rights of low-wage
workers.
"EDD's problems seriously predate the recession, but now the
agency is trying to play catch-up in the middle of a devastated economy," he
said. "More scrutiny by federal and state officials and maximum transparency is
critical to turning the situation around."
The audit basically agreed
with Emsellem.
"The department has struggled to meet certain core
performance measures," the audit said.
The Labor Department last April
classified the state as being "at risk" in its ability to fulfill federal
requirements for handling unemployment claims in a timely
manner.
California is one of only five "at risk" states this year. The
others are Indiana, Louisiana, Massachusetts and Rhode
Island.
California's situation could become more dire.
It faces
the loss of $839 million in federal stimulus money if it does not meet new legal
requirements for calculating benefits for low-wage and part-time workers. EDD
said the effort to comply has been hampered by its 30-year-old computer system,
which is scheduled to be updated by April 2012, four months ahead of a federal
deadline.
The department's efforts to speed claims processing have been
somewhat successful, the audit said. EDD hired and trained 1,000 more workers
and authorized more overtime. The number of processed claims rose to 429,000
last June from 173,000 in July 2007, the audit said.
However, "the
results of the department's other efforts to improve its performance have been
mixed," the audit said.
A change in a scheduling system designed to make
timely eligibility decisions "appears negligible," the audit
said.
Despite upgrades that increased telephone call volume six-fold,
almost 9 in 10 callers could not get through to an agent in the fiscal year
ended June 30, 2009, the audit said. That percentage remained high through last
May.
To fix the system, the auditor recommended that EDD develop specific
goals and milestones for speeding response times on claims. The upgraded phone
system, for instance, should limit the need for callers to speak to agents by
providing basic information in automated responses.
The new system, in
fact, began spurring better performance late last year after the auditor had
finished its field work, the EDD's Levy said.
The number of callers
failing to get through to live agents or automated information is down more than
90% from a year ago, she said.
marc.lifsher@latimes.com
Copyright © 2011, Los Angeles Times