Throughout his second governorship, Jerry Brown has preached fiscal responsibility – being careful about spending, paying down debt and building up reserves.
It has been, in effect, a repudiation of his two immediate predecessors, Democrat Gray Davis and Republican Arnold Schwarzenegger, who squandered revenue windfalls, ran up debt and left their successors with big deficits.
Brown has been, however, reticent about a big deficit that’s plagued the state’s system of unemployment compensation and left it very vulnerable to a meltdown in the next recession he says is inevitable.
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During Davis’ ill-starred governorship – he was recalled in 2003 – he and legislators couldn’t resist tapping a $5.6 billion surplus that had accumulated in the Unemployment Insurance Fund (UIF), financed by payroll taxes on employers.
Rather than keep it intact as a prudent hedge against recession, Davis and legislators succumbed to pressure from labor unions and nearly doubled unemployment benefits to a maximum of $450 a week.
A very deep recession struck the state a few years later, unemployment more than doubled to more than 2 million idle workers and the UIF was drained to pay their benefits, forcing the state to borrow $10 billion from the federal government to keep the checks flowing.
Schwarzenegger was governor by then, but neither he nor the Legislature wanted to deal with the obvious need to increase taxes on employers, reduce benefits or enact some combination of both.
Two years later, with Brown back in the governorship, the feds started charging interest and the state paid it, $1.3 billion so far, in part by borrowing $612 million from the Disability Insurance Fund (DIF), which is financed by taxes on workers.
The DIF has a $3 billion positive balance, so legislators have also been tapping it for new benefits, such as “paid family leave.”
In 2012, the feds began raising federal payroll taxes on California employers to whittle down the UIF debt.
The extra tax bite is now nearly $2 billion a year, and the debt is expected to drop to $1.3 billion by the end of 2017.
However, that may be just in time for the next recession to strike. The Department of Employment Development says in a recent report, “The current financing structure leaves the UI Fund unable to self-correct and achieve a positive fund balance sufficient to withstand an economic downturn.”
Although unemployment now is just half of what it was during the depths of the recession, the state is still paying out about $5.5 billion a year in jobless benefits, covered by $5.8 billion in employer taxes, which doesn’t leave enough margin to build a much-needed reserve.
No recent governor has been willing to spend political capital to make the UIF truly solvent.
Employers don’t like a state payroll tax increase on top of the other recent burdens imposed, such as minimum wage increases.
Unions and their political allies won’t entertain any benefit reduction, seeing that as a much-hated “giveback.”
Chances are high that when the next recession hits, we’ll once again be forced to seek a bailout from Uncle Sam.