A recent report has revealed that California’s Unemployment Insurance (UI) Trust Fund, which pays out state benefits, is now considered “structurally insolvent.” The Legislative Analyst’s Office highlighted the debt crisis involving the California Employment Development Department’s (EDD) UI trust fund on July 7. This information was released following the EDD’s “May Fund Forecast” report last week. According to the report, the temporary surcharge currently being paid by state businesses to cover the agency’s multi-billion dollar debt to the federal government may continue for an extended period.
This additional tax is being imposed on employers in order to offset the $20 billion in federal loans taken by California to cover UI benefit payments during the pandemic and related stimulus measures. It is worth noting that the money California is using to pay claimants’ benefits is already guaranteed by the federal government, regardless of the EDD’s financial condition. California is one of only two states with remaining debt from the pandemic, accounting for 73 percent of the total nationwide debt, while the remaining 27 percent is accounted for by New York.
The EDD has gained a reputation as one of the most mismanaged agencies in the state, with insiders allegedly referring to it as “the place where state careers go to die.” The agency’s mismanagement has contributed to the current insolvency and tax hike caused by the state’s pandemic response. Even without this debt, the report states that California would still have had to borrow money over the next few years due to structural insolvency. The report predicts that it will take two to five years to address this issue.
Historically, benefit payments have only exceeded contributions during major economic downturns, such as the pandemic and the Great Recession. However, for the first time, the UI fund is expected to be out of balance during a period of job growth. The EDD estimates that the surcharge fee will now last for approximately 15 years, instead of the initially projected six or seven years, in order to repay the $20 billion borrowed from Washington.
During the pandemic, California experienced significant losses due to unemployment fraud, amounting to approximately $40 billion. Much of this fraud could have been prevented with a state fraud prevention identity security system. The former chief of the labor department, Julie Su, who was fully aware of the problem, waited months before implementing an anti-fraud system.
Taxpayers will now bear the burden of the state’s mismanagement. The EDD is expected to collect around $5.3 billion in UI tax money over the next couple of years to repay part of the debt. Each California employee will face a surcharge tax of about $1,500 over the next 15 years, with rates starting at $21 per employee and gradually increasing to $420 per year until the federal loan is fully repaid. Additionally, the insurance department anticipates paying out an additional $2.6 billion in benefits and overhead costs, surpassing the funds received over the next two years.
Despite the extra $1.2 billion raised in taxes, the May report indicates that the UI trust fund’s debt to creditors will increase from $17.6 billion to approximately $20.3 billion by the end of 2024, including projected interest of an extra $300 million per year. Rob Moutrie, a policy expert with the California Chamber of Commerce, expressed disappointment that businesses in California will have to endure an extended period of additional taxes. Moutrie emphasized that California’s UI fund was never intended to be used as a society-wide social safety net, and other states made sure to promptly repay any pandemic debt they incurred.
Many advocates hope that this latest scandal will lead to reform within the agency. However, addressing the issue may require further UI taxes, which may not be favorable among the state’s politicians and the general public.