California’s huge budget deficit, coupled with the state’s relatively high level of unemployment, has become a major obstacle to reducing the billions of dollars in debt incurred to pay for unemployment benefits.
Rising unemployment caused by the COVID pandemic has pushed the state’s unemployment insurance trust into insolvency. And over the past year, unemployment in California has risen again, reaching 5.3% in February, the highest rate of any state. March employment figures will be released on Friday.
To keep the welfare program running at a time when employer-paid taxes for unemployment benefits are insufficient, Sacramento has borrowed billions of dollars from the federal government. The debt now stands at about $21 billion and growing, a growing burden on the state’s deficit fighters and on businesses that pay into the unemployment insurance program.
Payroll taxes paid by employers increase not only to cover unemployment benefits, but also a state surcharge and a gradually increasing federal surcharge to help pay down the principal on the debt. But the tax increases are not enough to cover the enormous loan taken out by the state, or at least not in time.
California has already paid more than $650 million in interest on the loan – and about $550 million more is due on September 30.
“Businesses will continue to see the slow boil eat away at their margins,” said Robert Moutrie, senior policy advocate at the California Chamber of Commerce.
Higher taxes will hit small and medium-sized businesses particularly hard in sectors such as restaurants and tourism, he said.
“It just adds to the burden and costs of operating here and causes businesses to consider operating elsewhere,” Moutrie said.
While the pandemic is largely to blame for California’s massive unemployment insurance debt — and much attention has been paid to dollars lost to fraud — analysts and advocacy groups of workers’ rights highlights another problem: even during more normal economic times, the state often fails to do so. I do not collect enough unemployment insurance taxes to cover unemployment benefit claims.
“The fundamental problem is that for decades, policymakers have not required businesses to pay enough into the (unemployment insurance) fund to finance the benefits workers actually need,” said Amy Traub, senior researcher and policy analyst at the National Employment Law Project. .
“So there is a structural deficit that underlies this moment of crisis with this enormous debt to the federal government.”
The data also shows that unemployed Californians remain unemployed much longer than the national average, increasing the total amount of benefits. And California workers are claiming unemployment benefits in disproportionate numbers.
The state currently accounts for about 20% of the nation’s unemployment benefit claims, well above its 11% share of the labor force. This partly reflects the state’s higher unemployment and corresponding increase in layoffs and applications for unemployment benefits in the tech industry and other sectors, but also its relatively easier eligibility rules and its low re-employment rate.
Last year, unemployed Californians received an average of $385 per week, which was only about 28 percent of the average wage. Both figures are lower than national averages, according to Department of Labor statistics. (The wage replacement rate is approximately 50% for minimum wage workers in California.)
From surplus to deficit
But California also stands out as an outlier in how it has managed, or mismanaged, the program.
When COVID hit in March 2020, unemployment in the United States soared to 14.8% a month later and led to unprecedented claims for unemployment benefits, forcing California and many other states to borrow from the federal government to continue paying their benefits. Nearly every other state has since repaid those loans, some with pandemic relief money they also received from Washington.
Today, only New York and California, as well as the Virgin Islands, still owe money on unemployment insurance loans.
Analysts said California could have used some of the $43.5 billion the state received under the American Rescue Plan Act to pay down debt. Instead, state officials spent the relief money on other purposes, including providing additional stimulus checks to residents.
“California had options and they chose the spending option over the responsible option,” said Matt Weidinger, a senior fellow at the American Enterprise Institute who has written extensively on the unemployment insurance program. He said rising employer payroll taxes would eventually trickle down to employees in the form of lower wages.
“California distributed relief at a time when people and businesses were struggling, from covering rent and utility bills to small business grants – helping those hardest hit by the pandemic while stimulating the economy,” said Alex Stack, spokesman for Gov. Gavin Newsom. “This is in addition to paying off $250 million in unemployment fund debt.”
State legislative analysts have been careful not to criticize policy choices made during this extremely uncertain time.
Some, however, suggested that officials might have thought the state had a large margin of financial security to emerge from the pandemic in 2021-22. Then, Sacramento was flush with cash, thanks to huge tax revenues. And the interest rate on the federal UI loan two years ago was at a historic low of 1.6%.
But not only has the interest rate on the loan since increased to 2.6% – and could rise further – what were once huge surpluses now constitute a projected record budget deficit of more than $70 billion in 2024- 2025, according to a February update from the California Legislative Analyst’s Office.
The state’s economic downturn, marked by declining technology investment and rising overall unemployment, has led to unprecedented declines in tax revenue.
Faced with such budgetary constraints, California authorities had no choice but to abandon their plan to spend $1 billion to reduce the principal of the unemployment insurance loan.
What is the solution ?
The California Employment Development Department, which oversees the state’s unemployment insurance program, said it would rely on increased federal taxes on employers to pay down the debt.
Currently, California employers pay a federal unemployment insurance tax of 1.2% on the first $7,000 of wages per employee, but this tax will gradually increase each year as long as California is in debt, reaching more than 3,000. 5% after 10 years. And analysts say it may take at least that long to pay off the debt.
Businesses also pay a state unemployment insurance tax, also on the first $7,000 of wages, based on their layoff history, plus a surcharge if there is a shortfall in the unemployment benefits fund.
Combining the state and federal shares, a new California employer, for example, would look at paying about $500 in UI taxes per employee this year, almost double what it normally would.
“California’s apparent plan to rely on (federal tax) revenue to repay the loan avoids addressing solvency in the state’s UI law and places the burden of the increase unemployment benefits during the pandemic on employers,” said Doug Holmes, former Ohio unemployment director. insurance program and currently president of the consulting company UWC.
In California, business groups say it is unfair that employers are shouldering a growing burden when they are not responsible for the pandemic or the temporary lockdowns imposed on them, leading to layoffs and increased demands unemployment. They argue it will only add to the state’s already higher business costs, which have pushed some California businesses to relocate to Texas, Nevada and other states.
Traub, of the National Employment Law Project, said employers need to pay more to make the calculations work and ensure the unemployment trust system is viable over the long term.
Sacramento collects unemployment insurance taxes on the first $7,000 of wages per employee per year. Traub noted that most other states have a significantly higher taxable wage cap: New York at $12,500; New Mexico at $31,700; and Washington state, the highest, at $68,500.
“Increasing the taxable wage base must be part of the solution,” Traub said.
California lawmakers are now considering an increase, which many agree is necessary. “It’s very reasonable,” said Michael Bernick, an employment lawyer with Duane Morris in San Francisco.
Bernick was EDD director in the early 2000s when, under Gov. Gray Davis, the state increased the maximum amount of weekly unemployment benefits to $450 per week — but without raising taxes to cover the highest payments. students.
Writing in a report with Holmes, Bernick recommended a number of steps the EDD could take to strengthen the state’s unemployment benefits program, including tightening eligibility standards and modernizing computer systems and agency communications. But by far the biggest policy change needed is to help unemployed workers move into new jobs more quickly.
In 2022, California workers remained unemployed for an average of 18.1 weeks, compared to 14.5 weeks nationally, according to a study by former Labor Department senior actuary Robert Pavosevich.
In California that year, 47 percent of recipients took the full 26 weeks of unemployment benefits. Nationally, only 27% have exhausted all available weeks of benefits.
“These numbers are striking and highlight how much the system needs to be reshaped,” Bernick said. “How do we get people back to work quickly? This is both good for businesses and workers, but also for the unemployment fund.”
This story was originally published in the Los Angeles Times.
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