California appears to be on track to repay its unemployment insurance (UI) fund debt to the federal government by the end of the year.
The payback is due to the declining unemployment rate in California, combined with the higher tax rate state employers have been paying since the beginning of 2011.
California’s deficit is projected to be paid off this year, returning the federal tax rate to the normal 0.6%, if the economy continues as predicted and no state or federal structural changes are made to the system. As a result of the Great Recession that began in 2009, California remains the only state carrying debt to the federal fund (the U.S. Virgin Islands also owes the federal fund).
UI Fund Insolvency
The UI fund that pays benefits to eligible individuals is funded entirely by employers. California’s UI Trust Fund technically ran out of money to pay benefits and became insolvent in January 2009, and by November 2009 the state had borrowed more than $5.5 billion from the federal unemployment fund to pay benefits to California’s unemployed.
As of September 2012, outstanding federal loans to 28 states totaled $37 billion, with California comprising more than 27% of the total. At the end of 2012, California’s outstanding federal loan was $10.2 billion, more than $6.5 billion greater than the next highest state loan, New York. By the end of 2016, California’s loan fell to $3.9 billion due to increased federal taxes on employers.
In 2011, 10 states had loans exceeding $1 billion (but less than $2 billion). Eight states eliminated their outstanding debt in 2014, and an additional five states eliminated their debt in 2015. The remaining states eliminated debt in 2016, leaving only California and the U. S. Virgin Islands with debt.
Seven states issued tax-exempt bonds to restructure their UI trust fund debt before 2014. The other five states either utilized special funds or addressed solvency issues early in the year and did not have deficits as high as other states.
In 2015, UI debt was eliminated by five states — Indiana, Kentucky, New York, North Carolina and South Carolina — all of which cut benefits and/or raised taxes.
California has not made UI system changes to address the insolvency but rather has relied upon the increasing federal tax on employers to pay down the debt.
California’s total unemployment rate has decreased to 4.3% (December 2017), from 7.5% in 2014 — significantly lower than the high of 12.1% in 2010. The rate increased steadily from 2006 to 2011 before beginning a gradual reversal. California’s unemployment rate remains higher than the national rate of 4.1% (U.S. Bureau of Labor Statistics).
The large increases in the ranks of the unemployed for so many years, coupled with benefit increases in 2001, led to a dramatic increase in expenditures from the UI Trust Fund. The regular UI benefit payments were $5.4 billion in 2015, and were forecast to be $5.4 billion in 2016, $5.6 billion in 2017, and $5.4 billion in 2018.
Total benefits paid out from the trust fund have finally been trending downward; however, the benefit payout projected for 2019 is slightly higher at $5.5 billion.