If you've been paying attention to California's chronic budget problems, you know that they fundamentally stem from a disastrous decision in 2000 by then-Gov. Gray Davis and legislators of both parties to squander a one-time windfall of revenue on permanent spending increases and tax cuts that could not be sustained over the long haul.
It was, however, just one of three similarly irresponsible decisions during Davis' governorship, which was cut short by his recall in 2003.
A second was to sharply increase state worker pensions on the assurances of the union-dominated California Public Employees' Retirement System that they could be financed from investment earnings without additional burden on taxpayers. That wrongheaded move now costs state taxpayers about $2 billion a year, adding to the budget woes.
The third, which garnered very little attention when it was made in 2001, was to nearly double unemployment insurance benefits, from a $230-per-week maximum to $450, because the Unemployment Insurance Fund was running a $6 billion surplus. This has turned out to be a fiscal disaster as well.
When legislators passed that measure, the dot-com bubble had already burst, and the state was already beginning to experience an economic downturn. Within three years, in fact, the surplus was gone, and the state was forced to seek a $1.4 billion emergency loan from the federal government to keep benefit checks flowing to jobless workers.
The UI Fund bounced back as the economy recovered and as UI taxes were raised to their maximum legal level. But the current recession, with more than a million Californians unemployed, is putting new strains on the UI Fund. A new report from the Employment Development Department says that it could be upside down by next year.
Although revenue from the payroll tax on employers is projected to hit $5.2 billion this year, EDD expects that $6.5 billion in benefits will be paid out, and that will continue in 2009. The EDD report says "the UI Fund could become insolvent if no action is taken" and the difference between solvency and insolvency clearly is the benefit boost enacted in 2001.
Nobody is getting rich collecting unemployment checks, to be certain, but the politicians who control UI benefits and taxes have a responsibility to be prudent about both. California is already levying a maximum payroll tax, so the state's only alternative may be to borrow again from the feds – thus emulating what the state's been doing to keep its deficit-ridden budget afloat.
But that's not a penalty-free strategy either.
Continuing to borrow could result, under federal law, in the state's employers losing tax credits for federal unemployment insurance taxes, effectively increasing their UI tax burden. And the state general fund would have to pay interest on the loan.
Simply put, it's another fiscal mess created by political expediency that ignores long-term economic reality.
Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.
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