When Gov. Jerry Brown talks about reducing the state's "wall of debt," he carefully limits it to about $30 billion in budget deficits, mostly money owed to schools and community colleges.
One of the debts he omits is the $10 billion-plus that California borrowed from the federal government to keep unemployment insurance flowing to jobless workers after the Unemployment Insurance Fund ran out of money a couple of years ago.
At one point, Brown did suggest that payroll taxes on employers be boosted to pay the principal and several hundred million dollars a year in interest on the debt, but that went nowhere. So the state has been borrowing money from the Disability Insurance Fund, collected from employees, to pay the interest.
Meanwhile, the feds want their money back, so they have been incrementally increasing employers' payroll taxes to recapture the money. The extra payroll levies are nearly $600 million this year, are projected to grow to $2.6 billion a year by 2019 and will remain in force until the debt is repaid.
Employers, especially small employers, are beginning to grate at the new tax bills, seeing them as another impediment to adding more workers to their payrolls, especially in combination with new health costs under the Affordable Care Act.
The extra taxes refuel a perennial debate over California's unemployment insurance program's benefits and costs.
Twelve years ago, when the state's economy was doing well, the Unemployment Insurance Fund had a $6.5 billion balance. Then-Gov. Gray Davis and legislators – both under heavy pressure from unions – nearly doubled UI benefits to a maximum of $450 a week.
The action's underlying dynamics were very similar to what had occurred two years earlier on state employee pensions – increasing benefits on the assumption that fat trust fund balances would pay for them without raising taxes.
When the economy soured, the pension action blew up and so did the UI boost. The Unemployment Insurance Fund quickly went bust as unemployment soared to double-digit percentages and the state began borrowing money from Washington to keep checks flowing.
Lobbyists for business groups now float the notion of a grand deal to stave off the steady increases in federal unemployment insurance taxes – perhaps a low-interest bond issue to pay off the debt, a payroll tax increase to repay the bond, offset by cost-cutting reforms aimed at tightening eligibility for benefits.
It would be a hard sell. One reason Brown's earlier proposal failed is that he, too, wanted programmatic changes to reduce costs, and union-friendly legislators balked. Meanwhile, Capitol politicians could just sit on their hands and let the feds collect their debt through ever-higher payroll taxes.