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California unemployment insurance program broke and facing expensive default, auditor says

March 24, 2011 | 10:51 am

California employers could face a collective annual tax increase of up to $6 billion if California's unemployment insurance program defaults on a loan from the federal government, the state auditor reported Thursday.

The unemployment insurance fund became insolvent in January 2009 and since then has been supported by a series of loans from the U.S. Department of Labor, the auditor said. The program, which is run by the California Employment Development Department, is expected to be $13.4 billion in the hole by the end of this year unless the Legislature and governor agree to raise state payroll taxes.

By law, the state, which currently faces its own $26-billion general budget deficit, must pay back the loans by November. Failure would trigger an initial tax hike of $325 million next year.

The funding shortfall was caused by an unprecedented demand for benefits by Californians who lost their jobs in the worst economic downturn since the Great Depression. The number of initial claims for benefits received by the department grew 148% from July 2007 to June 2010, the auditor said. California's unemployment rate grew by 132% during the same period.

California's latest unemployment rate was 12.4% in January; February's number will be released on Friday.

"In the face of these challenges, the department has struggled to meet certain core performance measures," the audit said. As a result, the U.S. Labor Department in April officially classified the state as being " 'at risk' with regard to its ability to fulfill federal statutory requirements" for handling unemployment claims in a timely manner.

The state also faces the possible loss of $839 million in federal stimulus money if it does not meet new requirements for calculating benefits by September 2012. That work has been hampered by the department's 30-year-old computer system, the Employment Development Department has said.

The department's efforts to speed up claim processing by hiring more workers and having employees work more hours have been somewhat successful, the audit said. The number of processed claims rose from 173,000 in July 2007 to 429,000 last June.

However, "the results of the department's other efforts to improve its performance have been mixed," the audit said. The benefit of a change in a scheduling system designed to make timely nonmonetary decisions "appears neglible," the audit said.

Despite upgrades that increased telephone call volume sixfold, almost 90% of callers could not get through to an agent in fiscal year 2008-09, the audit said. That percentage remained high in the last fiscal year, based on figures throught last May.

To fix the system, the auditor recommended that the department develop specific goals and milestones for speeding response time on claims. The phone system needs to be upgraded to limit the need for callers to speak to agents and ensure that they get needed information from automated responses.

The department's parent, the California Labor and Workforce Development Agency, has told the auditor it agrees with the findings and the recommendations for improvement and has already begun implementing them.

-- Marc Lifsher

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