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. Lerna Kayserian Shirinian, a spokesperson for Portantino, said “the senator will continue to have conversations with the administration and others on that issue.”

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’ rates 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.

“California’s business community is terribly concerned about our state’s unemployment insurance fund debt and the increased taxes it is bringing to businesses and will continue to bring for the next decade,” said Rob Moutrie, a policy advocate for the California Chamber of Commerce. “We believe all the factors affecting California’s unemployment insurance fund, including eligibility issues and EDD’s failures, must be considered when looking at the unprecedented debt.”

But others say the state’s system to fund unemployment has for years been structured to favor businesses in the first place.

“Big businesses haven’t been paying the true cost of unemployment for decades,” said Alissa Anderson, a senior policy fellow at the California Budget & Policy Center, who said she plans to speak with Portantino’s office about the issue. Anderson added that shifting unemployment insurance debt to the state, as businesses have called for, is “a backdoor tax break for businesses.”

The state’s unemployment fund is funded by a variable percentage tax, currently an average of 3.46%, on employers based on the first $7,000 each employee earns, the minimum taxable wage base required by federal law — a base California has not raised since 1983. That same wage base also applies to employers of both high-wage earners and low-wage earners, even though high-wage earners are eligible for higher unemployment benefits when they lose their jobs. Other states have raised their taxable wage bases as high as 100% of average weekly wages; in states like Washington, the taxable wage base this year is $67,600.

Economists say the fact that California’s taxable wage base has been the same for so long is one of the main reasons its unemployment fund is consistently underfunded or insolvent. Another reason is that the state has added benefits and eligibility over the years without adjusting how the system is funded.

“California never has sufficient funding,” said Stephen Wandner, senior fellow at the National Academy of Social Insurance and author of the book “Transforming Unemployment Insurance for the Twenty-First Century: A Comprehensive Guide to Reform.” Wandner called it “unreasonable… to have fairly generous benefits and extremely weak financing. It’s not sustainable.”

“The last time I checked, 1983 was about 40 years ago,” Wandner added. “What’s happened since then? Wages and prices have gone up every year.” In his book, Wandner recommends that states such as California should index their taxable wage base by setting it at 50% or more of the Social Security taxable wage base, or by indexing it to wage growth.

But Alamo, of the state Legislative Analyst’s Office, said that while the state’s wage base is lower than others, the percentage employers pay on that wage base is actually greater than the percentage employers in many other states pay on higher wage bases. “The amount contributed on behalf of workers is pretty middle of the pack,” he said.

Businesses want a working group

The state should take action to address the problems with the fund, said Jenna Gerry, senior staff attorney for the National Employment Law Project who covers unemployment insurance issues in California.

“People need to understand the historic nature of this, and that something needs to be done now,” Gerry said, adding that fixing the system is also an equity issue in a high-cost state. The state’s unemployment benefit has been at a maximum $450 a week since 2005. “Who can live on that in California?” Gerry asked. Gerry added that the state needs to fix the unemployment fund’s solvency issues before it can raise the benefit limit.

Bill Sokol, who teaches labor law at San Francisco State University, said the system to fund unemployment insurance hasn’t changed all these years because the business lobby is strong. Sokol also said labor is fighting for more pressing issues that affect employed workers, not unemployed ones.

“What companies pay for UI is never going to be a top priority for unions, but it’s a top priority for business,” Sokol said. “This leaves it to the politicians to decide it’s for the greater good” to fix the unemployment insurance system, he said.

Lorena Gonzalez Fletcher, head of the California Labor Federation, agreed. She said that the governor has used the unemployment insurance debt “as an excuse” not to sign Portantino’s bill — which was cosponsored by the federation — but that she hasn’t “heard anything else” about how Newsom plans to address the debt.

There are different ways to “sculpt” a solution, Gonzales Fletcher said, including lowering the percentage all employers pay into the fund but bumping up what employers of higher-wage workers are required to pay.

That gets into the fact that employers of different sizes have differing concerns.

Small Business Majority, a national nonprofit organization that advocates especially for under-resourced entrepreneurs and small businesses, wants to address equity issues including the disproportionate effect the funding system has on smaller businesses.

Bianca Blomquist, the organization’s California policy director, called the system “regressive” and said it will be important to gather data about its impact on small businesses. Blomquist added that a well-funded unemployment insurance fund is vital because small businesses understand that “when a community is suffering (from unemployment), small businesses suffer.”

Meanwhile, CalChamber and other business groups in 2021 asked the governor to form a working group to address the fund’s debt and solvency issues.

Moutrie of CalChamber said there has been no meeting about the matter so far, but that he expects meetings to happen next year.

Stack, the governor’s spokesperson, said a working group has not been created, and that Newsom’s office had no comment on a possible push by business groups to discuss the issue.