California unemployment insurance fund is deeply in debt

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In summary

California borrows billions of dollars from the federal government to cover unemployment insurance benefits for unemployed workers, but how it will be repaid remains unclear.

A single paragraph on page 180 of Governor Gavin Newsom’s revised 2021-22 budget refers to one of the state government’s most difficult dilemmas – a huge debt it owes the federal government for support payments to the millions of Californians who lost their jobs during COVID. -19 pandemic.

By the end of the year, the National Unemployment Insurance Fund (UIF) is expected to owe more than $ 24 billion which – unless Congress cancels the debt – must be repaid with interest. And if the state doesn’t make its payments, the federal government will increase payroll taxes on California employers to withdraw the loan.

It could have been worse. Newsom’s original budget predicted debt to hit $ 48.3 billion by the end of 2021, but with jobs picking up and the unemployment rate falling, the estimate has been cut in half.

The state began taking out loans when the sudden spike in unemployment linked to last year’s pandemic quickly depleted the UIF. The state is responsible for the first tier of payments to unemployed workers, and by the end of 2020, California had borrowed $ 18 billion to cover its basic payments.

California resorted to the loan because its UIF had one of the most anemic reserves in the country, as the Federal Department of Labor often notes, due to a decades-long political stalemate.

Two decades ago, the UIF had a healthy reserve, but then-Gov. Gray Davis and the Legislature, yielding to union pressure, sharply increased unemployment benefits without raising payroll taxes to pay them due to back pressure from employers.

When the Great Recession hit a few years later, the UIF was quickly depleted and the state borrowed from the federal government to cover benefits, and ultimately owed about $ 11 billion. The debt was repaid through higher federal payroll taxes over 10 years, but the UIF never recovered. Until the pandemic hit, the state was paying around $ 5 billion a year in benefits and collecting just enough taxes to cover them, but not enough to replenish a reserve.

Today, when the state owes twice as much as the previous debt, two big questions arise. How will the debt be repaid and will California ever put its UI program on a solid financial footing?

Newsom’s revised budget offers $ 1.1 billion to pay down debt, but business roundtable urges it to allocate more of the state’s multibillion-dollar budget surplus and / or funds federal relief.

“The treatment of the unemployment insurance fund debt is a critical part of the state’s economic recovery,” Roundtable Chairman Rob Lapsley said in a statement. “Massive debt is an imminent threat to all businesses in California. If left unpaid, the debt will automatically increase taxes on all businesses in the state at a time when they can least afford it. “

“Businesses did not cause this recession and should not bear the burden of paying off this massive debt,” Lapsley added.

However, the left-wing California Budget & Policy Center says $ 1.1 billion is already too much, describing it as “poorly targeted tax relief for businesses that weren’t paying enough into the unemployment insurance system before. the pandemic at the expense of the most important aid to Californians. affected by the economic crisis who need financial support now.

It’s likely that the federal government will raise employers’ payroll taxes again to pay off California’s much larger new debt, making them even less willing to pay more taxes to rebuild the UIF for the next recession.

If this sounds like a never-ending circular crisis, that’s because it is. It is as if consumers are taking out credit card loans to make their credit card payments.



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