California's Unemployment Insurance Fund, or UIF, ran out of money 3 1/2 years ago as the worst recession since the Great Depression tightened.

Ever since, with benefits to jobless workers far outstripping revenue from payroll taxes, the state has been borrowing money from the federal government to maintain weekly checks, averaging nearly $300 a week, to hundreds of thousands of recipients.

The UIF now owes the feds well over $10 billion and has to pay more than $300 million a year in interest. But with its budget plagued by chronic deficits, the state can't afford the interest payments so it has borrowed the money from the Disability Insurance Fund, which has a balance exceeding $2 billion.

While the UIF is financed by employer-paid payroll taxes, the DIF gets its money from payroll taxes on employees.

The Legislature's new budget includes another $300 million-plus loan from the DIF to pay the interest on the UIF's debt.

That debt appears to have stabilized, due to slight improvements in the economy that generate more payroll taxes, but not enough to pay the interest.

Nevertheless, the Legislature ignored Gov. Jerry Brown's proposal to raise payroll taxes slightly, about $50 per employee per year, to cover interest payments and repay the DIF – probably because he also wanted to tighten unemployment eligibility.

The feds, however, are not ignoring the situation. They want their money back, and are penalizing California for its tardiness in repaying its UIF debt by incrementally raising taxes on employers by about $300 million this year, and prospectively twice as much next year.

The UIF situation is a mini-version of the state's much larger budget imbroglio and also mirrors the state's public pension problem – politicians making long-lasting spending decisions with little or no thought to long-term fiscal consequences.

Eleven years ago, when the economy was doing well and the UIF had a $6.5 billion balance, then-Gov. Gray Davis and the Legislature, bowing to union pressure, nearly doubled the program's benefits to a maximum of $450 a week.

A year earlier, they had squandered most of a one-time budget revenue windfall on permanent tax cuts and new spending, and two years earlier they had sharply increased pension benefits for roughly the same reasons.

All three of those expedient – and irresponsible – decisions now are haunting the state as enhanced spending commitments unsupported by revenue have led to deficits and debts.

The state has borrowed from bankers and special funds to cover budget deficits and from the federal government to cover those enhanced UI benefits. And it has ignored hundreds of billions of dollars in unfunded liabilities for pensions and retiree health care – hoping for a miracle, it would appear.

© Copyright The Sacramento Bee. All rights reserved.

• Read more articles by Dan Walters

Order Reprint