‘Trump bump’ rescues California’s unemployment fund
America’s economic recovery has benefited California more than most states because the real estate crash hit the Golden State a lot harder. In other words, we’ve had to claw our way up from a deeper hole.
The good news is that the strength of the recovery is impressive. Hourly wages have jumped by four dollars since the start of the Great Recession. Unemployment has dropped to 4.3 percent, a record low since 1976 when California started keeping track of the data. The new $190 billion general and special fund budget that Gov. Brown proposed last month is an all-time record and $26 billion more than just two years ago. By any metric California’s economy, the 5th largest in the world, is strong.
While California’s progressive legislators seize any opportunity to trash President Trump, the undeniable truth is that most Californians will benefit from the federal tax-reform bill both from increases in their paychecks as well as largess from their employers handing out raises and bonuses.
There is also good news for the state’s businesses community, which will see lower payroll taxes. Back in 2001, the state Legislature — in a decidedly short-sighted move — increased unemployment insurance benefits to a maximum amount of $450 a week for 26 weeks. Increasing benefits by that amount without increasing payroll taxes was a recipe for disaster. That disaster struck with the onset of the recession in 2008. One year later, the state depleted its unemployment insurance fund reserve and went into insolvency, where the fund remains today. In order to continue paying out unemployment benefits, California borrowed $10.2 billion from the federal government between 2008 and 2012.
Under law, California is prohibited from repaying the loan principal out of general or special funds, but can repay the interest due the federal government. The only way to repay the loan back is either by increasing payroll taxes or decreasing benefits. Because California politicians could not reach agreement on how to solve this problem, the federal government acted for them, automatically increasing payroll taxes to settle the debt.
The consequences of the insolvency of the Unemployment Insurance Fund have been dramatic for California businesses and taxpayers. According to the non-partisan Legislative Analyst’s Office, California will end up paying nearly $1.5 billion in interest payments to the federal government out of the state’s general fund. And California employers are estimated to have paid over $2.5 billion in increased federal payroll taxes in 2017 alone, solely for the purpose of making the fund solvent. Increased wages and job growth from the “Trump bump” have helped to repay this loan quicker then might otherwise have been possible.
The unemployment insurance debacle is yet another example of the federal government riding to the rescue and bailing us out. The good news for California employers is that the federal loan will be paid off sometime this year, meaning more money can be invested in businesses and returned to workers.
However, the respite may be short-lived. As is inevitable in the cyclical nature of economies, what goes up must come back down. The nine-year expansion of California’s economy will not last forever and may already be starting to contract. In order to avoid yet another structural budget problem (see also: the general fund and unfunded pension liabilities) it is imperative the Legislature act now to restore sustainable benefit levels before the next recession. Otherwise, the Trump administration may once again have to bail out California.
Jon Coupal is president of the Howard Jarvis Taxpayers Association. This column appeared in the Orange County Register on February 4, 2018.