California’s unemployment insurance morass will become the next governor’s problem

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

One little-discussed issue affects workers and their employers, involves many billions of dollars and has been building for a quarter century — 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 wages. Then when an employee is laid off or has hours of work reduced, he or she can collect up to $450 a week for up to 26 weeks from the fund.

However, the program has been dysfunctional ever since the Legislature and then-Gov. Gray Davis sharply increased benefits in 2001, on the assumption that the cost could be absorbed by a $6.5 billion balance in the fund.

The higher benefits drew down the fund, and when the Great Recession struck six years later, rapidly expanding unemployment, the sudden spike in payouts forced the state to borrow about $10 billion from the federal government.

Rather than repay the loan, the state allowed a federal payroll tax hike to kick in, slowly reducing the debt. However, the fund never recovered.

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

The feds also financed an array of specialized benefits outside the regular program, which became a textbook example of fraud. The Employment Development Department rubber-stamped a deluge of applications, some of them from state prison inmates, with little or no scrutiny.

There is a widespread, but erroneous, belief that fraud is why the state Unemployment Insurance Fund is deeply 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 once again allowing a federal payroll tax increase, $1.6 billion this year, to slowly retire the debt and its interest charges. The employment department, 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 because state payroll taxes aren’t keeping up with the outflow of benefits, even though the state is no longer in recession.

More than a million California workers are jobless and the state’s unemployment rate, currently 5.3%, is tied Delaware’s and Nevada’s for highest of any state.

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

Narrowing the gap would require either reducing benefits or raising payroll taxes by increasing the tax rate or expanding the base, now limited to $7,000. However, ever since the 2001 benefit increase there’s been a political stalemate, pitting employers against unions.

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

Before politicians pursue that notion, they should figure out how to break the impasse, pay off the huge debt and make the system financially sound. Doing nothing — their response to date —will just dig the hole deeper.