Unemployment insurance: California’s ‘urgent’ $20 billion problem
California’s unemployment insurance fund is $20 billion in debt, putting the state in a terrible position in case of a recession.
The deep debt — incurred during the COVID-19 pandemic as millions of people lost their jobs and the state borrowed money from the federal government for unemployment benefits — is on Gov. Gavin Newsom’s mind.
He cited it as a factor in his recent veto of a bill that would have allowed striking workers to be eligible for unemployment benefits, mentioning that the state is paying hundreds of millions of dollars of interest on the debt.
It’s also top of mind for businesses, which face an increase in required contributions toward the state’s unemployment insurance fund as a result. And it’s on the minds of those who are concerned about whether the state’s unemployment system can handle another crisis such as a pandemic or a recession.
The unemployment insurance fund had regular solvency issues even before the pandemic. Now the situation is more dire, with the Employment Development Department issuing a spring forecast that the debt — which the Legislative Analyst’s Office has said does not include the infamous unemployment fraud that mostly involved temporary federal benefits that the state doesn’t have to pay back — would grow to $19.7 billion at the end of the year. In addition, the state Legislative Analyst’s Office said this summer that for the first time during a period of job growth, it expects California’s unemployment insurance fund to have fewer contributions coming in than benefits being paid out.
“The administration’s forecast of a UI trust fund deficit adds urgency that may not have existed last year, making this one of the key issues facing the Legislature in the near future,” said Chas Alamo, principal fiscal and policy analyst for the Legislative Analyst’s Office.
But this is just one example of the ongoing battle among workers, labor and business in California, and how politicians have to navigate that tension.
Debt could cost California billions just in interest
It is difficult to gauge the urgency the governor and state legislators feel about the debt.
Southern California Democrats Sen. Anthony Portantino and Assemblymember Chris Holden, co-authors of the bill Newsom vetoed citing concerns over the size of the debt, declined to comment on the debt.
Alex Stack, a spokesperson for the governor, referred to Newsom’s veto of the bill as one way the governor is avoiding increasing costs for businesses. Another way, he said, is that “the state has been covering interest payments instead of pushing that cost to employers.”
The required repayment of the debt has triggered automatic tax increases on employers, which under federal law are responsible for paying down the principal, while the state typically pays the interest. The governor last year proposed using $3 billion from a projected budget surplus to pay off some of the debt, but ended up paying only $250 million toward the principal. The state has since swung to a budget deficit, and this year paid $306 million in interest by borrowing from the disability insurance fund.
Alamo has forecast that depending on interest rates, the debt could cost the state anywhere from a total of $3 billion to $7 billion in interest payments for the next several years, possibly through 2033. The state also borrowed from the federal government for unemployment benefits during the Great Recession; that debt cost the state $1.4 billion in interest payments from 2011 until 2018, when it was paid off.
Longstanding fund problems
The California unemployment insurance fund’s solvency problems go way back.
The fund was solvent as recently as 2018 and 2019, but still below the recommended standard of having enough funds to distribute benefits for a year, according to Department of Labor data analyzed by the Century Foundation, a progressive think tank that advocates for equity in domestic and foreign policy. In 2017, and each year before that going back to 2009, the fund had been insolvent. The last time the state’s unemployment insurance fund met the standard was 1990.
The current debt has triggered a $21 increase per employee that employers must pay in payroll taxes starting this year. Employers’ rate will keep rising an additional $21 per employee each year until the state pays off the debt to the federal government, for a total of $945 per employee through 2031, according to projections by the Legislative Analyst’s Office based on the average state unemployment insurance tax rate.
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