Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Employment Development Department (5100)

The Employment Development Department (EDD) is responsible for administering the Employment Services (ES), the Unemployment Insurance (UI), and the Disability Insurance (DI) programs. The ES program (1) refers qualified applicants to potential employers; (2) places job-ready applicants in jobs; and (3) helps youths, welfare recipients, and economically disadvantaged persons find jobs or prepare themselves for employment by participating in employment and training programs.

In addition, the department collects taxes and pays benefits under the UI and DI programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contributions for DI. It also collects personal income tax withholdings. In addition, it pays UI and DI benefits to eligible claimants.

The budget proposes expenditures totaling $6.7 billion from all funds for support of EDD in 2001-02. This is a decrease of $26 million, or 0.4 percent, over estimated current-year expenditures. The budget proposes $30.5 million from the General Fund in 2001-02, which is a reduction of $4.7 million (13 percent) compared to 2000-01.

Disability Insurance Tax Rate Now Complies With Current Law

From January through March 2000, the Disability Insurance (DI) contribution rate was below the level required by current law. Since April of 2000, the DI tax rate has complied with statutory requirements. Despite a low balance of $5 million in December 2000, the Employment Development Department projects that the DI Fund will be able to pay anticipated claims without the need for short-term borrowing from the General Fund.

Background. The DI program provides benefits to workers who are unable to work due to non-work-related illness, injury, or pregnancy. The DI program is financed by a payroll tax on workers' earnings.

Statutory Formula for Setting the DI Contribution. Section 984 of the Unemployment Insurance Code specifies a methodology for the Director of EDD to set worker contribution rates for the DI Program each January. Section 984 also grants the Director discretionary authority to reduce or increase the statutory "formula" rate by 0.1 percent. The statute also requires the Director to prepare a public statement by October 31 of each year which declares the rate of worker contributions for the succeeding calendar year.

Rate Setting Process for 2000. The statutory formula for setting the DI tax rate for calendar year 2000 produced a rate of 0.8 percent, which at the Director's discretion could be reduced by 0.1 percent to 0.7 percent. However, the rate was left unchanged from the 1999 rate at 0.5 percent until April 2000. Thus, between January and March 2000, the DI rate was below the level required by statute. Effective April 1, 2000, EDD increased the DI rate to 0.7 percent, a level that complied with statutory requirements.

Rate Setting Process for 2001. The statutory formula indicates that the worker contribution rate be 1 percent during calendar year 2001. Exercising his discretionary authority to reduce the rate by 0.1 percent, the Director announced a rate of 0.9 percent for calendar year 2001. We note that this rate complies with current law.

Fund Condition. Since reaching a peak of $1.8 billion at the end of 1995-96, year-end DI fund balances have declined steadily, reaching $157 million in June 2000. The trend toward lower fund balances largely results from decisions by the current and past EDD directors to use their discretionary authority to reduce the DI contribution rate by 0.1 percent below the "formula" rate. We note that the period from January through March of 2000, when the rate was below statutorily required levels, further increased stress on the fund. In December 2000, the fund reached a low of about $5 million. Despite the low balance, EDD projects that the fund will be able to pay anticipated benefit claims without the need for short-term borrowing from the General Fund because contributions into the fund are now exceeding claims. The fund is projected to have a balance of $360 million at the end of June 2001, rising to nearly $900 million at the end of June 2002.

Unemployment Insurance Benefits in California

The Unemployment Insurance (UI) program provides weekly benefits to unemployed workers who become jobless through no fault of their own. Benefit levels are set by state law and have not been increased since 1992. We review the UI program and estimate the cost of increasing the maximum benefit to a level of wage replacement in 2002 that would be roughly equivalent to that of 1992.

Background. The UI program provides weekly, unemployment insurance payments to workers who lose their jobs through no fault of their own. To be eligible for benefits, a claimant must be able to work, be seeking work, and be willing to accept a suitable job.

The UI program is a federal-state program, authorized in federal law but with broad discretion for states to set benefit and employer contribution levels. The program is financed by unemployment tax contributions paid by employers for each covered worker. We note that California law allows a part-time employee to file a UI claim.

Statutory Benefit Level. State law establishes benefit levels. Currently, the maximum weekly benefit is capped by state law at $230 per week for 26 weeks. The amount of benefits available is based on the claimant's earnings in the "base period." The "base period" is a 12 month-long period. The quarter within the base period in which the highest wages were received generally determines the weekly benefit amount. To qualify for benefits in California, a claimant must have generally earned at least $1,300 in the highest quarter of the base period.

Current Benefit Payments. The purpose of UI is to ensure that at least basic necessities, (food, shelter and clothing) can be met while an active search for new employment takes place. In California benefit payments vary depending on the claimant's base period earnings. According to EDD:

• About 50 percent of UI claimants receive between $40 and $149 per week in UI benefits.
• 25 percent of unemployed workers receive between $150 to $229 per week in UI benefits.
• The remaining 25 percent of unemployed workers receive the maximum wage benefit amount of $230.

Benefits Last Increased in 1992. As noted above, state law establishes benefit levels, and benefits were last increased in 1992. This change was the final increment of a three-year phased-in maximum benefit increase mandated by Chapter 1146, Statutes of 1989 (SB 600, Roberti). We note that recent legislation, SB 546 (Solis), would have gradually increased the maximum weekly benefit to $380 by January 2003. The bill was vetoed, in part because it lacked a financing mechanism, and therefore would have adversely impacted the UI Fund.

Wage Replacement Over the Life of the Program. As noted above, the maximum benefit was raised to $230 in 1992. At that time, this maximum benefit level represented 39 percent of the average weekly nonagricultural wage in California. Figure 1 (see next page) tracks the percent of wages replaced by UI benefits since 1956. We define the term "wage replacement" as the maximum UI benefit at the time divided by the average weekly nonagricultural wage. In other words, that portion of a claimant's earnings that are substituted by benefits is the "wage replacement." As of December 2000, the maximum UI benefit of $230 replaced 30 percent of the average weekly nonagricultural wage. As the figure shows, this is an all-time low.

Comparison to Other States. Among the 50 states, California's average weekly benefits paid are low. Specifically, California's average weekly benefit amount is a little over $159 versus a national average of about $222. Put another way, California ranks 49^th, ahead of only Mississippi, which pays its claimants an average of about $157 per week. Among the ten most populous states, California has the lowest average weekly benefit, about $56 less than the next lowest state, Georgia. We note that nearly all California workers are covered by UI. This may not be the case in other states.

The maximum UI benefit level is a policy decision for the Legislature. Below we discuss the costs of increasing the maximum benefit level to a level of wage replacement roughly equivalent to 1992, the last time benefits were increased.

Cost of Restoring UI Benefits to 1992 Wage Replacement Level. During calendar year 2000, the UI program paid benefits in the amount of $2.8 billion to about 14.8 million workers. If the Legislature wanted to raise the level of the wage replacement to the 1992 level, the maximum benefit level would need to be raised from $230 to $300. With this increase, the maximum weekly benefit would then replace about 39 percent of average weekly nonagricultural wages.

According to EDD, increasing the maximum weekly benefit amount would raise total benefit payments by $178 million in calendar year 2002, $261 million in 2003, $269 million in 2004, and $275 million in 2005.

Financing the Benefit Increase. One way to finance the benefit increase would be to raise the taxable wage base. Currently, employers pay unemployment taxes on up to $7,000 in wages paid to each worker. To finance the proposed increase with no adverse impact on the UI Fund, the $7,000 ceiling would have to be raised by $700 to $7,700. This increase in the taxable wage base would raise the average annual cost to the employer by $19 for each employee who reaches the $7,700 taxable wage.

Summary. The UI benefit levels are a policy decision for the Legislature. Benefits have not been increased since 1992. Raising benefits in 2002, to a level of wage replacement equivalent to 1992, would raise the average annual cost to employers by $19 per employee.

Federal Welfare-to-Work Block Grant Program

California received $367.6 million in Welfare-to-Work block grant funds from the Department of Labor. Recent federal legislation extended the deadline for expending Welfare-to-Work funds from July 2002 until July 2004.

Background. The Balanced Budget Act of 1997 (Act) authorized the federal Department of Labor (DOL) to provide Welfare-to-Work grants to states and local communities. The Welfare-to-Work program was largely intended to complement the Temporary Assistance for Needy Families (TANF) program by providing additional assistance to hard-to-employ TANF recipients who had specific barriers to employment. States must provide a $1 match for every $2 of Welfare-to-Work grant funds awarded. To date, matching funds have been budgeted in the Department of Social Services.

Initial Conditions of the DOL Grants. California received $367.6 million from the Department of Labor in two allocations. The state was required to allocate, by formula, 85 percent of the funds to local Workforce Investment Boards (formerly known as Private Industry Councils [PICs]). The remaining 15 percent was used for state administration and a competitive grant program. In 1998, California allocated $161.9 million to local boards. In 1999, an additional $150.6 million was allocated. Under the original provisions of the Act, California had three years to expend the federal funds and the necessary state match.

California's Spending Rate. As of September 30, 2000, California spent a total of $91.5 million of the first grant, about 57 percent. Only 7.9 percent of the second-year grant has been expended. The expenditure rate varies widely among local areas.

Extension of Spending Deadline. The Department of Labor Appropriations Act (P.L. 106-554) extended the deadline for expending Welfare-to-Work funds. Specifically, the act extends the availability of Welfare-to-Work funding from three to five years from the original start date. This means that the first-year grant's deadline is now extended to June 2003. Similarly, the second-year deadline is extended to July 2004. The extension period also applies to matching funds. We note that, absent this extension, it appeared likely that California would be unable to expend all of its federal funds.

As noted above, the extension also applies to the state match. Please see our CalWORKs analysis for a discussion of the budget for matching funds.

Legislature Needs Spending Plan for Discretionary WIA Funds

The Governor's budget provides no details on the proposed expenditure of $43.6 million in Workforce Investment Act discretionary funds. We recommend that the Legislature not appropriate these funds until the administration presents an expenditure plan which is reviewed for consistency with legislative priorities.

Background. The federal Workforce Investment Act (WIA) of 1998 replaced the Job Training Partnership Act which provided employment training services to youth and adults. The goal of WIA is to strengthen coordination among various employment, education, and training programs. As required by WIA, the Governor appointed a 63-member Workforce Investment Board in December 2000. The board advises the Governor on the operations of the state's workforce investment system. We note, however, that board actions are not binding on the Governor.

Pursuant to federal law, 85 percent of WIA funds ($629.9 million in federal funds in 2001-02) are allocated to Local Workforce Investment Boards (LWIBs, formerly known as PICs). The remaining 15 percent of WIA funds ($94.5 million) may be used by the state for discretionary purposes, such as administration, statewide initiatives, or competitive grants.

Current-Year Expenditures. In 2000-01, discretionary WIA funds totaled $94.5 million. With the exception of $15 million for the Caregiver Training Initiative, the 2000-01 Governor's Budget included no specific WIA expenditure plan. Instead, the Governor, working with recommendations from the state board, determined how WIA funds were allocated. In 2000-01, $21.7 million was used for administrative costs at EDD and the state board. The remaining $72.8 million was used for various discretionary programs.

Figure 2 (see next page) shows estimated WIA expenditures in the current year, and a proposal by the administration to the state board for expenditures in the budget year. As the figure shows, about $16 million is allocated to required WIA activities in both 2000-01 and 2001-02. These required activities include technical assistance for LWIBs and certain programs for youth. We note, however, there is no federally mandated minimum spending threshold for these activities and therefore the amount could be modified.

Budget-Year Expenditure Plan. Like the current-year allocation, the budget-year WIA discretionary funding is estimated to be $94.5 million. As shown in Figure 2 (see next page), the proposal for 2001-02 allocates similar amounts for administration and statewide program expenditures. The remaining $59.7 million is proposed for unspecified proposals, initiatives, and required activities.

In separate analyses, we indicate that the Legislature may wish to consider the option of using part of the WIA funds for (1) efforts to implement Proposition 36 and (2) a Los Angeles County Medicaid demonstration project. The Proposition 36 proposal is discussed under the "Crosscutting Issues" section of this chapter, while the Los Angeles County proposal is discussed as part of our analysis of the Medi-Cal Program.

Analyst's Recommendation. In order to exercise its oversight and budget review responsibilities, the Legislature needs a complete expenditure plan for WIA funds. Because the Governor's budget provides no details on how it will expend $43.6 million, we recommend that the Legislature not appropriate these funds until an expenditure plan is presented and reviewed for consistency with legislative priorities.

National Emergency Grant Program

In order to streamline the process for allocating National Emergency Grant (NEG) funds to local entities, the Governor's budget includes a provision that exempts federal NEG augmentations from the midyear legislative review process prescribed in Section 28 of the 2001-02 Budget Bill. Although streamlining the authorization process is desirable, we recommend (1) deleting of the proposed budget provision and (2) incorporating estimated NEG expenditures into the "regular" budget process. This approach streamlines the allocation process while preserving legislative oversight.

Background. Under the NEG program, states may request federal funds to provide readjustment assistance (for example, retraining) to workers that face dislocation due to unforseen events, such as a flood or a freeze. During the last four fiscal years, annual NEG funding for California has ranged from $17 million to $74 million. After the EDD receives these funds, they are allocated to local entities, usually local Workforce Investment Boards, to provide readjustment assistance to displaced workers. Typically, EDD obtains the authority to expend the additional federal funds by submitting a letter to the Legislature pursuant to Section 28 of a given budget act.

Streamlining the Process. The Governor's budget includes a provision in Item 5100-001-0869 that would exempt NEG funds from
Section 28 notification to the Legislature. The administration indicates that it is proposing this provision in order to allocate NEG funds to dislocated workers more quickly. Although we agree that reducing the time it takes to move emergency funds to dislocated workers is desirable, we believe the Legislature needs to retain oversight over this process. In our view, the reduction in processing time for NEG funds could be achieved by incorporating a request for NEG federal expenditure authority into the Governor's budget. The amount of proposed expenditure authority could be set at the average of annual NEG expenditures over the past four years, about $45 million. In the event that NEG expenditures ultimately exceed $45 million, the EDD could seek additional budget authority through the Section 28 process with a waiver of the standard 30-day review period. In fact, all recent NEG federal augmentation proposals have included such a waiver request and the Legislature has concurred with the need for these waivers.

Analyst's Recommendation. We recommend that the Legislature delete provision 3 of Item 5100-001-0869. We further recommend that EDD submit a budget change proposal for the 2001-02 budget to provide EDD with the authority to expend up to $45 million in NEG funds. This approach streamlines the process while maintaining legislative oversight. If during 2001-02, EDD obtains NEG funds in excess of $45 million, EDD and the Director of the Department of Finance may request, in their Section 28 letter, a waiver of the 30-day waiting period.