Dodson Consultants In The News

This article appeared today in California Executive.

Unemployment Fund Running on Fumes, Facing Tough Decisions
October 23, 2008
California's unemployment insurance program will dip into the red in a matter of months if lawmakers fail to take swift action, according to a recent report by the state Unemployment Fund. But since all employers pay into the joint state/federal program, which provides supplemental income to unemployed workers, any fix likely will put additional tax pressure on already struggling businesses.

Further exacerbating the problem is the state's rising unemployment rate, estimated at 7.7% in September by the Employment Development Department (EDD), which manages the unemployment insurance program. There are major differences on how to fix the program, but all stakeholders agree that doing nothing is not an option.

Assemblyman Juan Arambula (D-Fresno), chair of the Assembly Jobs and Economic Development and Economy Committee, says a solvent unemployment insurance fund is in everyone's best interest.

"What I've seen in my part of California is that if unemployed workers don't have some income, it has an impact on the overall economy, including small businesses, and has the potential to create a downward spiral," Arambula says.

Many small business owners and their advocates, however, say there are better options and now is not the time to pile an additional tax burden on the backs of employers.

"If we look at taxing in just one area, it will have a negative impact on jobs and small businesses in general," says Michael Shaw, California legislative director for the National Federation of Independent Business. "We want to be sensitive to the needs of those who are losing jobs, but we also want to make sure the small businesses can still create these jobs."

Making Sense Of A Complex System
Federal law provides the framework and funds the administrative and extended benefit funding for each state's Unemployment Insurance Fund, while state payroll taxes fund regular unemployment insurance benefits. Federal law requires state employers to pay a tax on the first $7,000 of each employee's wages (taxable wage base), at the very minimum.

Depending on an employer's "experience rating," which takes into account how often an employer's workers use the funds, payroll taxes for the fund can be as high as $485 per employee per year.

California is one of only eight states that tax the minimum $7,000 taxable wage base, while the average among all states is $13,774, according to information supplied by the Assembly Insurance Committee and Assembly Budget Subcommittee No. 4 on State Administration. So as wages increase, the amount of money paid into the fund does not increase proportionately.
The two Assembly committees responsible for fixing the fund are waiting for policy suggestions from the EDD, lawmakers say. The fund will be short $1.6 billion by the end of 2009, more than doubling to $3.5 billion by the end of 2010, according to the report.

If a solution is not reached, then the state will have to request a loan from the federal government and repay it with interest, Arambula says.
"If we were not able to make payment on the loan, then the federal government would take action and collect from employers directly, which to me would be the worst of all worlds," he adds.

Assemblyman Michael Duvall (R-North Orange County) says that the last few months of the year are typically lean times for the fund, due to the cyclical nature of how the tax is collected. At a joint committee hearing about the issue earlier this month, he says he was told the fund would be in the red sometime in January, "which is actually when the money starts coming in because it's the New Year."

"This is something that gets sent out to the media and everyone gets scared," says Duvall, referring to it as a recurring theme. "The real problem is today's economy and the fact that they gave more benefits than they should have."

Searching For Solutions
Sacramento has a few options to consider, including but not limited to an increase in the taxable wage base, although Assemblywoman Patty Berg (D-Eureka) says nothing is on the table yet. Berg, who terms out at the end of the year, says the key issue is the taxable wage base.
"We have the lowest taxable rate base in the nation by federal law. That has to change; it would provide an immediate fix," says Berg, who also would like the EDD to update its information technology infrastructure, extend benefits beyond the current 26 weeks and make changes that would allow more coverage for seasonal workers.

Duvall believes benefits should not be extended beyond 26 weeks if there is no way to pay for it and says that while IT upgrades are needed, they need to come up with realistic priorities.
Thomas Dodson, principal of Sacramento-based Dodson Consultants, concedes that most employers would be willing to pay a "perceived equitable amount" to keep the fund healthy, but believes in a more holistic approach. He says the fund provides benefits to too many people for whom the system was never intended to cover, including part-time workers, and should not also be extended to seasonal employees.

Some lawmakers suggest increasing the taxable wage base from $7,000 to $28,500, Duvall says, which would effectively quadruple the contribution of employers whose workers earn at least $28,500. Says Duvall, "It's just a bad time to do this."

One main complaint among employers (including Duvall, a longtime business owner himself) is a perceived lack of planning for hard times. Some states have a system that stockpiles a surplus when the economy is strong in anticipation of down times, called "counter-cyclical funding," when more people usually collect the benefits, according to a report by the California Senate Office of Research.

"There's a rule in business that says for every good year, you want to plan and budget for four years of bad times," says Dodson, who believes the Democrat-dominated state legislature often lacks fiscal restraint in its policy decisions. "Downturns are going to happen. Our elected officials have to make better decisions."

Because of the experience rating - which is set at the highest rate for new businesses - companies that regularly over-hire and then lay off excess staff pay a somewhat higher rate than companies that rarely (or never) reduce staff. But this, say Dodson and Duvall, needs to be reformed as well.

Pointing out that the unemployment rate is much higher in the Central Valley and other areas impacted by the housing slump, Duvall suggests employers in those regions and/or industries that experience more employment volatility should pay a higher rate: "It has to be divided up to where the benefits are going."

John Arensmeyer, founder and CEO of Sausalito-based advocacy organization Small Business Majority, also sees room for improvement in how the experience rating is structured and applied.

"In theory, those contributing more to the problem should shoulder more of the weight," he says.

Other suggestions, many of them in response to a query by Small Business California, an advocacy group based in San Francisco, include the following: Increase enforcement to reduce instances of fraud, require a modest employee contribution, make sure beneficiaries are in fact looking for work, prohibit highly paid temporary contractors from collecting benefits, reform the EDD appeal process to make it more employer-friendly and give more incentives to create jobs in the first place.

But simply raising payroll taxes doesn't sit well with most business owners, as Jennifer Kushell, president and co-founder of Marina Del Rey-based YS Interactive Corp. laments.
"I'm not sure what the solutions are, but raising payroll taxes will just make it all the more difficult for small business owners to justify hiring more people or increasing benefits and compensation to our existing employees," Kushell says. "Small business owners need all the help they can get in growing their businesses, let alone keeping them alive."

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