The next governor inherits California’s unemployment fund swamp

from Dan WaltersCalMatters

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There are 61 candidates for governor in this week’s primary, one of whom will be inaugurated in January. Given the vast array of unresolved issues that Gov. Gavin Newsom will leave to his successor, one can almost feel sorry for whoever it is.

One little-discussed issue involving workers and their employers, involving many billions of dollars and a quarter-century in the making, is the financial quagmire that is California’s unemployment insurance system.

When the system works as intended, employers pay a tax into the unemployment insurance fund on the first $7,000 of each worker’s annual salary. Then, when an employee is laid off or has reduced hours, he or she can collect up to $450 per week for up to 26 weeks from the fund.

However, the program has been defunct since the Legislature and then-Gov. Gray Davis benefits sharply increased in 2001on the assumption that the cost can be met from a $6.5 billion fund balance.

Higher benefits drained the fund, and when the Great Recession hit six years later, rapidly rising unemployment, the sudden spike in payouts forced the state to borrow about $10 billion from the federal government.

Instead of paying off the loan, the state allowed federal payroll tax increases to begin, which slowly reduced the debt. However, the fund never recovered.

And when 3 million Californians lost their jobs in 2020 due to pandemic-related shutdowns, the state can only cover benefit claims by again borrowing heavily from the federal government. It initially borrowed $17.8 billion, which later grew to over $20 billion.

The feds also funded a range of specialized benefits outside the regular program, which became a textbook example of deception. The Department of Employment Development stamps reams of applications, some from inmates at state prisons, with little or no vetting.

There is a widespread but mistaken belief that fraud is why the state’s unemployment insurance fund is deep in the red. In fact, the two are completely separate situations.

Other states also borrowed money to keep benefits flowing during the pandemic, and all but California have repaid their loans. Newsom and the Legislature are again authorizing a federal payroll tax increase, $1.6 billion this year, to slowly pay down the debt and its interest. Department of Employment, in a new report, estimates that by the end of 2026 the fund will be more than $22 billion in the hole.

Meanwhile, the program’s finances continue to deteriorate as state payroll taxes fail to keep up with the drain on benefits, even though the state is no longer in recession.

More than a million workers in California are out of work, and the state’s unemployment rate, currently at 5.3 percent, is tied with Delaware and Nevada the highest of any state.

The new fund report estimates that it will receive $4.9 billion in payroll taxes this year while paying out $7.1 billion in benefits, a discrepancy that is expected to continue indefinitely.

Closing the gap would require either cutting benefits or raising payroll taxes by increasing the tax rate or broadening the base, which is now capped at $7,000. However, since the 2001 benefits increase, there has been a political stalemate between employers and unions.

There is some discussion of expanding the unemployment insurance system to include a new class of workers’ compensation benefits whose jobs become redundant due to the wider use of artificial intelligence.

Before politicians pursue this idea, they need to figure out how to break the deadlock, pay off the massive debt and make the system financially sound. Inaction – their response so far – will only dig the hole deeper.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.