With California's unemployment rate surging to a 12-year high, the state's unemployment insurance fund is paying out as much as $27 million in benefits a day – and it could be $500 million in the red by January, officials warned Tuesday.

Appearing at an Assembly Insurance Committee hearing, Employment Development Department Director Patrick Henning and Deputy Director Deborah Bronow joined business and labor leaders to discuss how broke the fund will soon become – and how the governor and legislators can return it to financial health.

"From our front porch, we cannot see the land of milk and honey, while out our back door goes $25 million a day," Henning said.

All agreed that the fund, which was set up during the Great Depression, operates using outdated assumptions ill-suited for a modern economy.

"It's a crisis, and we don't use that word lightly," said Assemblyman Joe Coto, D-San Jose, who chaired the hearing.

In May, the EDD forecast a $1.8 billion deficit in the fund by the end of 2009, rising to $3.5 billion by 2010. The forecast was based on an unemployment rate of 6.4 percent in 2008 and 6.6 percent in 2009.

After the state's unemployment surged to 7.7 percent in August, EDD officials tossed those projections out the window.

"The fund is quickly going broke," warned Juan Arambula, D-Fresno, chair of the Assembly Jobs and Economic Development and Economy Committee. "Without changes, it will remain insolvent for the foreseeable future."

The Schwarzenegger administration is considering several options to return the fund to solvency, Henning said. But it may take months, if not years.

They include raising employer-paid unemployment insurance payroll taxes. In California, the assessment is paid on the first $7,000 each employee earns.

Nearby states use higher bases: Nevada $24,600; Oregon $30,200; and Washington $31,400, EDD officials said.

Officials with the California Chamber of Commerce and California Manufacturers and Technology Association said higher payroll taxes will make companies leave the state.

Another option: cut benefits or eligibility to shrink payouts. The average weekly benefit is $307 but can run as high as $450.

Maurice Emsellem, public policy director with the National Employment Law Project, and Emily Clayton of the California Labor Federation said the cuts would hurt families and communities would lose the economic stimulus that unemployment insurance benefits offer.

The state's fund is now entirely funded by employers. But Assemblyman Martin Garrick, R-Solana Beach, asked witnesses if workers should now contribute a share of their earnings. "I don't know if employee contributions are the answer, but I think it's time we look at it," Garrick said in an interview.

Three states require employees to contribute to unemployment insurance, Henning said.

Until the fixes are made, California is seeking a loan from the federal government to help balance the fund through September 2009, EDD spokesman Loree Levy said. The U.S. government has in the past loaned California money for its unemployment insurance fund.

If the state does not make the fund solvent within a couple of years, the U.S. government can remove a federal tax credit for California companies and use the extra cash to balance it.

Barry Broad, an official with the Teamsters, United Food and Commercial Workers, said voters will hold politicians accountable if the fund isn't fixed. He argued rates have been kept too low for years to subsidize companies.

"It's time to get off your tushies and do the people's work," Broad told legislators.

Call The Bee's Andrew McIntosh, (916) 321-1215.