BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 908 (Gomez) - Disability compensation: disability insurance ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: September 4, 2015 |Policy Vote: L. & I.R. 4 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: September 10, |Consultant: Robert Ingenito | |2015 | | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. However, it was referred to the Committee pursuant to Senate Rule 29.10 (b), which only provides the option to (1) hold the bill, or (2) return the bill as approved by the Committee to the Senate floor. Bill Summary: AB 908 would make specified changes related to State Disability Insurance and Paid Family Leave benefits. Fiscal Impact: The Employment Development Department (EDD) estimates that increasing the specified benefit duration and wage replacement level would result in increased payments from AB 908 (Gomez) Page 1 of ? the Disability Insurance Fund of $651 million in 2017, rising to $1 billion by 2021, assuming no change to the program's current utilization rate. If utilization were to rise, benefit payments would be commensurately higher. EDD estimates that covered workers would pay an additional $300 million in 2017, rising to $994 million in 2021, resulting from the bill's increase to the wage ceiling related to covered workers' contributions. EDD would likely adjust the worker contribution rate, from 1.0 percent to 1.1 percent beyond 2018 (assuming no change to the program's current utilization rate), to ensure benefit payments can be maintained. If utilization were to rise, the worker contribution rate would be higher. EDD would incur one-time IT-related costs, likely in the high hundreds of thousands of dollars, to implement the provisions of the bill. Background: The California State Disability Insurance Program (SDI) was created in 1946 and is administered by EDD. The SDI program covers about 13 million workers. Current law requires coverage for employees working for employers in excess of $100 in a calendar quarter. Exceptions include certain domestic workers and governmental employees. Disability benefits are payable when a covered employee suffers a wage loss and cannot work due to pregnancy or illness/injury not related to their job. Benefits are payable for a maximum for 52 weeks. EDD data indicate that in 2013 there were about 634,000 total claims filed with a total of $4.5 billion in benefits paid. The average benefit amount was $479 with approximately 15.7 average weeks per claim. Paid Family Leave (PFL) is established within the State Disability Insurance program, and provides benefits to individuals who take time off of work to care for a seriously ill child, spouse, parent, or registered domestic partner, or to bond with a new minor child due to birth, adoption, or foster care placement. California was the first state to implement a PLF benefit, which also covers about 13 million residents in the State. In 2013, PFL was extended to workers who take time off of work to care for a seriously ill parent-in-law, grandparent, AB 908 (Gomez) Page 2 of ? grandchild, or sibling. In 2014, about 204,000 PFL claims were filed, 90 percent of which were filed to take time off to bond with a newborn child. The SDI program is paid for by the proceeds of an employee payroll deduction whose proceeds are deposited into the Disability Insurance (DI) Fund. The DI Fund pays out the DI and PFL benefits. PFL claims are approximately 12 percent of total payments from the DI Fund. The SDI contribution is set at 0.9% of the first $108,160 of wages in 2015. Both the rate and the wage ceiling are adjusted annually by EDD according to a specified formula. At the end of 2014, the DI fund was projected to have reserves of $3.3 billion. Unlike SDI benefits, income from PFL has been deemed taxable by the Internal Revenue Service. Under PFL, workers can claim a cash benefit set at 55 percent of "base period" wages for up to 6 weeks. The maximum weekly benefit is currently set at $1,104 and is adjusted every year based on the statewide average weekly wage. The average claim in 2013 paid $527 per week for 5.4 weeks. Proposed Law: This bill would make various modifications to the PFL and SDI programs, including the following: Increasing the wage replacement benefits such that: o Wage replacement would increase to 80 percent for individuals whose wages (as calculated under current law) are under one-third of the statewide average weekly wage for both PFL and SDI (which translates to $18,992 annually or less). o Wage replacement would increase to 60 percent for individuals whose wages (as calculated under current law) are over one-third of the statewide average weekly wage for both PFL and SDI. AB 908 (Gomez) Page 3 of ? o The bill would establish a $50 minimum weekly benefit and a maximum weekly benefit linked to the maximum weekly worker's compensation temporary disability weekly benefit amount. Eliminating, after January 1, 2017, the waiting period for PFL and including legislative reporting language, as specified, for EDD on the projected costs and potential benefits of eliminating, reducing, or modifying the DI waiting period. Increasing the benefit duration under PFL from 6 weeks to 8 weeks. Increasing, after January 1, 2017, the SDI taxable wage ceiling to $150,000 and thereafter indexing it, as specified. Allowing for implementation on January 1, 2017 for all provisions except the report from EDD on DI waiting periods. The report would be due by October 1, 2016. Related Legislation: SB 770 (Jackson, Chapter 350, Statutes of 2013) expanded the definition of family to include in-laws, siblings and grandparents. Staff Comments: As noted previously, EDD projects that the bill would result in increased benefits payments of $651 million in 2017, AB 908 (Gomez) Page 4 of ? partially offset by $300 million in increased contributions from higher-income covered employees, with both numbers rising in the out years. However, these figures assume no change to utilization rates. If, for example, utilization of PFL increases in response to the bill, the annual increase in benefit payments would be higher. As an order of magnitude, EDD estimated for a previous version of the bill that a 10 percent increase in usage could increase benefit payments by about $150 million, likely triggering an increase in the contribution rate paid by covered employees. Also as noted previously, benefits for SDI (including PFL) are funded through worker contributions. These amounts under current law are a percentage of income, up to a ceiling ($104,378 in 2015). Based on 2015 May Revision data, EDD estimates that the contribution rate for workers (assuming no change in utilization) would increase in 2018 from an estimated 1.0 percent under current law to an estimated 1.2 percent with enactment of the bill, an increase of 0.2 percentage points. However, the long-run impact is estimated to be 0.1 percentage point higher than current law. Under existing law, the maximum contribution rate is capped at 1.5 percent, and the formula used to determine the rate was designed to ensure solvency during economic downturns when fewer workers are contributing. The General Fund borrowed $303 million from the fund in 2011-12 and another $308 million in 2012-13. Repayments of these loans to the fund are scheduled in 2015-16 and 2016-17, respectively. Under current law, the DI Fund is projected to have a reserve balance of $3.1 billion in 2016. EDD estimates that the cumulative additional benefits paid as a result of the bill for the five year period 2017-2021 would be $4.4 billion. Over the same five-year period, EDD estimates that the bill would result in cumulative additional contributions by covered employees of $4.9 billion. EDD guidelines suggest that a reserve of 25 percent is desirable to ensure the DI Fund's ongoing solvency. The Senate Appropriations Committee heard a previous version of this bill on July 6th, 2015; among other things, it only expanded PFL benefits (not SDI benefits), and did not raise the ceiling related to covered workers' contributions. It was placed AB 908 (Gomez) Page 5 of ? on the Committee's Suspense File, and was subsequently passed to the Senate Floor with author's amendments that delayed implementation dates and narrowed the scope of the bill. -- END --