Legislative Analyst's Office

Analysis of the 2000-01 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 $6.3 billion from all funds for support of the EDD in 2000-01. This is an increase of $25 million, or 0.4 percent, over estimated current-year expenditures. The budget proposes $25.5 million from the General Fund in 2000-01, which is a reduction of $1.7 million (6.3 percent) compared to 1999-00.

Proposed Disability Insurance Tax Rate Does Not Meet Statutory Requirement

Without a rate increase, the Disability Insurance Fund will develop an estimated deficit of $278 million by the end of December 2000. The budget proposes to increase the disability insurance tax rate, but the rate would still be below the level required by current law. The proposed rate will result in a small deficit by the end of December 2000, increasing to a reserve of $304 million by June 2001.

Background. The DI Program provides benefits to workers who are unable to work due to nonwork related illness, injury, or pregnancy. The DI program is financed by a payroll tax on workers' earnings. In 1999, the rate was 0.5 percent of the first $31,767 in annual wages, resulting in a maximum tax of $159. Chapter 973, Statutes of 1999 (SB 656, Solis) increased the maximum benefit payment from $336 per week to $490 per week, effective January 2000. Chapter 973 also resulted in an increase in the wage ceiling (for the tax) from $31,767 to $46,327. The two changes made by Chapter 973 are estimated to be budget neutral.

Fund Condition. At the end of 1997-98, the DI Fund had a balance of $1.1 billion. In 1998-99, the DI disbursements of $1.8 billion exceeded revenues of $1.3 billion; thus, the fund balance was reduced to about $600 million. Without an increase in the current tax rate of 0.5 percent, the EDD projects that the DI Fund will have a deficit of $278 million by December 2000. The Governor's budget proposes to increase the tax rate to 0.63 percent in April 2000 and 0.65 in January 2001. Assuming these rate increases go into effect, the Governor's budget projects that the DI Fund will have a balance of $304 million as of June 2001. We note, however, that even with these rate increases the fund will experience a deficit of $33 million in December 2000. Thus, the fund will need a temporary loan in order to pay anticipated benefit payments.

Statutory Formula for Setting the DI Contribution Rate. 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.

Recent History. During calendar years 1997 and 1998 the DI tax rate was 0.5 percent. In fall 1998, the department determined that the statutory formula would result in a rate of 0.6 percent for calendar year 1999. Using his statutory authority to set rates within 0.1 percent of the formula rate, the Director retained the rate at 0.5 percent for 1999.

Rate for Calendar Year 2000 Conflicts with Current Law. In October 1999, the statutory formula indicated that the tax rate for calendar year 2000 should be 0.8 percent. Thus, the statute requires that the rate be at least 0.7 percent (the formula rate of 0.8 percent less the discretionary authority to reduce by 0.1 percent). The new Director of EDD, however, has not changed the rate (currently 0.5 percent). Instead, the budget proposes an increase to 0.63 percent in April 2000 (and 0.65 percent in January 2001). Therefore, even with the proposed increase, the rate for 2000 would be below the level required by current law. Thus, the budget proposes urgency legislation to set rates at the levels described above. The department estimates that the DI Fund will have a deficit of $33 million as of December 2000. The budget projects a positive balance of $304 million on June 30, 2001.

Caregiver Training, Retention, and Recruitment

As part of the Governor's Aging with Dignity Initiative, the budget includes $50 million ($15 million Workforce Investment Act funds, and $35 million Welfare-to-Work state matching funds) to train, recruit, and retain workers in the caregiver industries. For our analysis of this issue, please see our analysis of the Aging with Dignity Initiative in the Crosscutting Issues section of this chapter.

Update on Workforce Investment Act Implementation

Background. The federal Workforce Investment Act (WIA) of 1998, which replaced the Job Training Partnership Act, provides employment and training services to youths and adults. The goal of the new legislation is to strengthen coordination among various employment, training, and education programs. The act requires states to submit plans for implementing the new program to the Department of Labor by April 2000. Actual implementation of the WIA is scheduled to begin on July 1, 2000.

State Board Appointed. The Governor appointed 63 members to the statutorily required California Workforce Investment Board (CWIB) in December 1999. The board includes four members of the Legislature (two from each house) and representatives from business, labor, education, local government, and the job training provider community. The board is responsible for assisting in the development of the required state plan.

Draft State Plan Released. On January 28, 2000, the CWIB released the draft State Workforce Investment Act Plan for review and comment. During February 2000, the CWIB will hold five public hearings to receive comments on the plan. As noted above, the plan must be submitted to the Department of Labor by April 1, 2000.

Budget Proposal. For 2000-01, the budget proposes an appropriation of $574.5 million in federal WIA funds in EDD's budget. These funds will be expended on training programs and services for adults, economically disadvantaged youths, and dislocated workers. In addition, the budget proposes $3.6 million in federal WIA funds to support the CWIB.

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