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As Capitol politicians struggle with the state budget crisis, they've largely ignored the state's other big deficit that in another year will be as large as the gap in the state budget.

The Legislature's budget analyst, Mac Taylor, said in a report today that the deficit in the recession-battered Unemployment Insurance Fund "is projected to increase to approximately $20 billion at the end of 2011."

With nearly 2.5 million California workers jobless, the UIF is paying out more than $11 billion a year in benefits while collecting just $4.5 billion in payroll taxes paid by employers. It dropped into deficit mode in January 2009 and has been sustained since by loans from the federal government, Taylor noted.

The loans have been interest-free but the state, under current federal law, must begin paying interest next year - $500 million in September 2011 and "growing interest obligations in the out years."

Taylor said the Legislature faces "difficult choices" to return the UIF to solvency, such as reducing benefits and raising payroll taxes, either of which could also have adverse effects on the state's fragile economy. "At a minimum," Taylor recommends, the state should "take prompt action to bring (unemployment) benefits and tax revenues into line so that the accumulated deficit and associated interest obligation stops growing."

Taylor's full report can be found here.


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