Davis Raises Disability Insurance Deductions

SACRAMENTO —  Succumbing to pressure from lawmakers, Gov. Gray Davis has agreed to raise workers’ payroll deductions--some for the second time this year--to protect the state’s disability insurance from insolvency.

Effective April 1, Davis told lawmakers, he will increase payroll contributions for disability insurance from 0.5% to 0.68%, a move that will reduce take-home pay for about 11 million California workers.

For those earning $5.75 an hour, or $11,960 a year, about 46 cents a week more will come out of their paychecks. Workers who draw an hourly wage of $22.27, or $46,327 a year, will pay about $1.79 more a week.

It is the second time in recent months that Davis has taken action affecting the disability program. Legislation that he signed into law raising weekly benefits from a maximum $336 to $490 took effect Jan. 1. That increased the amount of income tapped for workers’ contributions to the fund from $31,767 to $46,327, taking up to $74 a year more from earners in that category.

Davis’ latest decision ends weeks of behind-the-scenes wrangling with lawmakers, who complained that the governor’s earlier refusal to increase the rate of withholdings had forced the program to teeter dangerously close to bankruptcy.

Officials of his own administration had warned that by August the program would be insolvent.

The governor’s office “should have raised it sooner and they didn’t,” said Senate President Pro Tem John Burton (D-San Francisco) “I have no idea what led them not to do what they should have done in the first place, but I’m sure they had valid a reason.”

Davis’ press secretary, Michael Bustamante, said the governor never would have allowed the program to go belly-up and that there was always the option of borrowing from other state funds to keep it afloat.

“I don’t want anyone to get the impression that they risk not having disability insurance available,” he said. “ . . . No individual was ever in danger of not being able to have disability insurance.”

He said the governor had delayed making this week’s decision because he was trying to set a rate that would not have to fluctuate from year to year.

California is one of only five states that offer a disability insurance program. Benefits financed by mandatory payroll contributions are provided to about 700,000 individuals each year who cannot work for at least eight calendar days because of pregnancy or non-job-related illness or injury.

By law, the director of the Employment Development Department is required to recommend by Oct. 31 of each year a rate for worker contributions that will ensure its financial health. The governor then sets the rate effective Jan. 1.

In the last year of the Pete Wilson administration, the recommended rate was 0.6%, but the governor opted to keep it at 0.5%, the same as the previous year. As a result, reserves had fallen dramatically by the time Davis got his first recommendation last October for a rate hike to 0.7% or even 0.8%. Like Wilson, Davis decided to keep the rate at 0.5%, a decision that state actuaries said was inadequate.

Assembly Speaker Antonio Villaraigosa (D-Los Angeles) and Burton wrote Davis a letter threatening to conduct hearings to focus public attention on the problem.

“We are concerned about how benefits will continue to be financed once the fund becomes insolvent,” they wrote. “We want to avoid excessive charges to workers to compensate for the under-financing of benefits at the .5% rate.”

The Senate Industrial Relations Committee had a hearing on the problem scheduled for Wednesday, but postponed its meeting after learning from the governor’s office that Davis planned to increase the rate April 1.

For many businesses, the decision is expected to be onerous, forcing them to reprogram payrolls midyear and creating problems for those with systems not designed for two digits past the decimal point.

“They’ve never changed the rate in the middle of the year before. It’s never happened in the history of the fund,” said John Bredehorn, president of VPA Inc., the largest administrator in California of self-insured disability insurance plans.

Davis is “not doing it out of the goodness of his heart; he’s doing it because the Legislature understands the law requires him to do it.”

About 400 California corporations have elected to establish their own disability insurance programs. California law allows companies to opt out of the state program, but they must set employee contribution rates at or below the state’s rate and they must offer benefits that mirror or exceed the state’s.

When Davis initially declined to increase the state worker contribution rate, Bredehorn said, dozens of companies were forced to abandon their self-insurance programs because they were in the same boat as the state, without enough revenue to keep their programs solvent.

“It made things really awkward for many of the employers in the state that have voluntary plans,” he said. “Now that he’s finally planning to increase the rate, they’re going to be really upset.”