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Other Budget Issues

Last Updated: 5/20/2011
Budget Issue: Use of federal incentive funds for implementation of Alternative Base Period
Program: Employment Development Department
Finding or Recommendation: Consider using federal American Recovery and Reinvestment Act (ARRA) incentive funds to offset General Fund costs at the Employment Development Department. By setting aside additional ARRA funds, the Legislature could offset EDD General Fund costs of about $30 million in 2011-12 followed by annual General Fund savings of about $23 million through 2014-15.
Further Detail

Unemployment Insurance (UI). The UI program provides benefit payments to workers who have lost their job through no fault of their own. Since 2009, California has consistently paid more in UI benefits than it has collected in revenues. To continue payment of benefits despite this shortfall, the state has obtained quarterly loans from the federal government which now total around $11 billion. Beginning in September 2011, the state will start paying interest on this loan to the federal government.

Alternative Base Period (ABP). In 2009, the Legislature authorized the Employment Development Department (EDD) to make automation and programmatic changes in order to incorporate an ABP into the UI program. An ABP allows unemployed workers with more recent attachments to the labor market to qualify for UI benefits sooner than would have been the case under prior law. The Governor’s budget estimates that the annual administrative costs of operating the ABP would be about $16 million.

ABP Results in New Federal Incentive Funds.   In May 2011, EDD made sufficient progress on ABP development to certify to the U.S. Department of Labor (DOL) that it would fully implement an ABP in September 2012. When DOL approves this certification, likely in June 2011, California becomes eligible to receive $839 million in federal incentive funds. These funds may be used for repayment of the state’s federal loan or funding of certain administrative costs within EDD. However, due to technical issues related to the UI loan, if the Legislature wishes to appropriate funds for EDD administrative costs it must do so prior to June 30, 2011. Otherwise all of these incentive funds would be applied to the state’s outstanding loan balance.

Governor’s Proposal. The 2011-12 May Revision includes an appropriation which would set aside a total of $48 million of these federal incentive funds to cover annual costs of administering the ABP program from 2012-13 through 2014-15.  Absent this set aside, these ABP costs would likely have been borne by the General Fund (at least for the near term). The remaining $791 million in incentive funds would be applied to the state’s federal loan, resulting in ongoing annual debt service savings of around $30 million beginning in 2012-13.

Alternative Approach. By setting aside an additional $120 million for EDD administrative costs in 2011-12 through 2014-15, the Legislature has an opportunity to realize significant General Fund savings. Specifically, this would result in $30 million in savings in 2011-12 and ongoing annual savings (slightly less than 2011-12 savings due to increase debt service costs) of approximately $23 million through 2014-15. We note that in the years beyond 2014-15, it would also result in slightly higher debt service costs of approximately $6 million per year until the state repays its outstanding federal loan.

Conclusion.  The amounts presented above represent the maximum savings that can be achieved over the next four fiscal years.  The Legislature could elect to set aside a smaller amount resulting in less General Fund savings.  Also, the Legislature could opt to set aside some funding for other EDD initiatives.  In deciding whether to set aside additional funds for EDD administration, the Legislature should carefully weigh the benefits of near term General Fund savings against future increased debt service costs and a small decrease in the reduction to the UI loan balance. Given the short time frame in which these funds would need to be set aside, the Legislature may wish to consider taking action in separate legislation.