Businesses Asked to Fund State Borrowing Costs – Nonprofits Find Safe Haven

In 2009, the California unemployment insurance trust fund became insolvent. Now, almost four years later, the state continues to borrow heavily from the federal government and other state accounts to cover the deficit and make payments on the ever-increasing interest.

In California, where a 10.8 percent unemployment rate is reported with general good feelings, unemployment insurance presents more than one challenge to nonprofits as the state’s UI fund continues to fall deeper into insolvency. With plans to borrow more than $312.6 million from the state Disability Insurance Fund, how will nonprofits remaining in the state UI system counter the hefty bill coming at them?

While there is no good answer, nonprofits which have 10 or more employees are urged to consider leaving the state system to become reimbursing employers who only pay for the costs of the claims submitted by their former employees.

Because the financial recovery continues to trudge along for nonprofits, many of which cannot expect to return to pre-Recession levels of funding for 10 or more years, according to a recent study, it is important that nonprofit leadership continue to successfully assess the options available to them.

Nonprofits: What We’ve Learned

When the state UI fund ran out of money in 2009, during the height of the financial crisis, California had an unemployment rate of 11.3 percent—the fourth highest in the country—and about 1.75 million unemployed workers. Today, the rate remains still high at 10.8 percent.

But many nonprofits made it through the Recession relatively unharmed and in fact were able to raise their hiring 5 percent over a three year span as more help was needed by beneficiaries.

Although a high number of small agencies were forced to close, and many medium-sized agencies had to merge with larger organizations, nonprofits are used to tightening up their belt loops and surviving tough financial times to continue providing benefits to their community.

How can this knowledge be used to help California and other states facing high UI costs?

With the largest unemployment insurance deficit in the nation, cash-strapped California has already borrowed from the state Disability Fund once before, but little is being done to systematically change the way that the state releases funds for UI. (Both loans must be repaid within four years of their initial borrowing date, but no way to repay them has been presented.)

Counter-intuitive though it may be, by removing your nonprofit from the state UI tax system and instead paying only for your own UI claims you allow your agency to do more with the money you have and for the mission you’ve committed to. This action, in a small way, also calls for UI reforms across the nation as more nonprofits leave the state system for the cost savings found in self-reimbursing.

To learn more about how you can leave the state system and become a reimbursing employer, visit www.ChooseUST.org/501c3-unemployment-alternatives/ or sign up for an upcoming webinar.