California’s unemployment insurance fund has a stubborn multibillion-dollar problem

One of the sorriest episodes in the annals of state government was the managerial meltdown in the state Employment Development Department when millions of Californians lost their jobs due to shutdowns ordered by Gov. Gavin Newsom to battle COVID-19.

Simultaneously, the agency botched countless legitimate claims for unemployment insurance benefits while handing out billions of dollars to fraudsters, a disaster that CalMatters reporter Lauren Hepler detailed last year, to wit:

“A year-long CalMatters investigation found that the EDD was primed for disaster by years of failing to heed red flags, stalling reforms and abruptly abandoning a pre-pandemic effort to get ahead of exploding online fraud – issues that rose to the top of political agendas and budgets around recessions, but were never really fixed as governors, legislators and federal regulations changed,” Hepler wrote. “Once it all boiled over in the spring of 2020, California got the worst of both worlds: tens of billions of dollars lost to fraud, and workers who lost their financial stability, their homes or, in extreme cases, their lives.”

There is, however, a third element to the EDD catastrophe that still haunts the state and is likely to mushroom again if the state’s economy turns sour: an immense debt to the federal government.

The Unemployment Insurance Fund, or UIF, supported by payroll taxes on employers, is the source of payments to jobless workers under ordinary circumstances.

However, the fund cannot fully absorb claims for benefits even in relatively prosperous times. The problem stems from a two-decade-long political stalemate that began in 2001 when former Gov. Gray Davis and the Legislature sharply increased benefits, absorbing most of the unemployment fund’s $6.5 billion reserve.

When the Great Recession struck a half-decade later, the UIF quickly ran out of money and EDD borrowed about $10 billion from the federal government to cover the increased outflow. The state did not repay the loans, so the feds raised payroll taxes on employers to retire the debt.

The Great Recession debt was paid off in 2018, but two years later COVID-19 layoffs hammered the nearly depleted unemployment fund. Once again, the state borrowed money – nearly $18 billion – to keep benefits flowing.

In 2022, federal officials again raised payroll taxes on employers to offset the fund’s deficit and retire the debt – about $21 per worker, per year. A new EDD report says the unemployment fund’s debt had increased to $20 billion by the end of last year and is expected to reach $21 billion by 2025.

There is a widespread misconception that the debt stems from the explosion of unemployment insurance fraud. The fraud almost entirely involved federally financed extended benefits for workers who did not qualify for state benefits, and has no direct relationship to the state’s debt.

Today, the UIF still struggles to pay benefits even though unemployment is, in historic terms, relatively low. EDD says it’s paying out about $6.7 billion in benefits each year, but state payroll taxes are generating barely $5 billion a year.

Thus, the fund is growing steadily weaker and would be completely incapable of dealing with even a mild economic downturn, forcing the state to borrow even more money from the federal government.

This should be a massive embarrassment for a state whose governor boasts of its global economic standing. But there are no indications that the decades-long stalemate is softening.

Unions want taxes to be increased, either by expanding the taxable wage base of $7,000 a year or raising the tax rate, currently just over 3%, to make the UIF healthier. Employers, meanwhile, say they are already paying more to retire the debt and want reforms in benefits.