The California Chamber of Commerce and a broad-based coalition of employer organizations are strongly supporting Governor Gavin Newsom’s budget proposal to help reduce the record debt in the state’s Unemployment Insurance (UI) Fund. More than 60 statewide business organizations and local chambers of commerce, representing tens of thousands of employers with hundreds of thousands of workers, are urging the Legislature to adopt this proposal.
Governor Newsom is proposing that $3 billion be paid toward UI debt over two years, covering the state’s responsibility for distributing fraudulent payments, as well as a partial but meaningful portion of the UI Fund’s outstanding $19.7 billion insolvency.
In a letter sent to members of the state Legislature on January 19, the coalition pointed out, “Given that California has had back-to-back budget surpluses, now is the right time to use a portion of this year’s surplus to help reduce the present insolvency, which will lessen the state’s own future obligations while simultaneously covering the cost of UI fraud and helping minimize future tax increases on California’s recovering businesses.”
Benefit to Employers, State
California’s UI fund has been insolvent for two years, and every California employer will face a tax increase of $21 per employee in 2023 and more tax increases every year thereafter.
Since the UI Fund went insolvent, the CalChamber has been leading a coalition to seek state assistance with this unprecedented pandemic-caused debt. When California saw a budget surplus in 2021, the coalition asked the Governor and Legislature to address the problems in the UI fund, but ultimately the Legislature removed aid from the budget.
The resulting per-employee taxes will hit labor-intensive fields, such as restaurants, hospitality and tourism, the hardest. These are the very same industries that the COVID-19 pandemic has already hit the hardest, and which need support to rebuild and re-hire their workforces. More broadly, all employers in California will be disincentivized toward re-hiring when facing increasing per-employee taxes until this insolvency is paid off.
Paying down this insolvency will also benefit the state, as it is responsible for paying the interest on any outstanding UI loan from the federal government. As an example, the January budget includes a $470.1 million interest payment by the state to the federal government. The state also can anticipate similar, though slowly declining interest payments in the coming years for as long as the fund remains insolvent. In other words: the sooner the debt is paid off, the sooner the state can stop paying this annual cost.
Background on UI Fund
California’s UI program is funded exclusively by employers via state and federal taxes on wages. Employees do not pay any UI taxes. These employer contributions are deposited in the UI Fund of the U.S. Treasury Department. States withdraw money from their account in the trust fund exclusively to pay UI benefits. If a state trust fund does not have adequate funds to pay benefits, as California experienced in May 2020, a loan is made from the federal fund so that all employee claims can be paid.
Generally, the contribution rate for an employer is 0.6% of wages, up to $7,000 of wages per per employee per year, which is $42, assuming the state is in compliance with UI laws and the state’s fund is solvent.
If a state’s UI Fund is insolvent for more than two years, however, that tax rate increases by 0.3% each year or $21, until the fund becomes solvent, creating a steadily growing tax increase on the state’s employers. If the fund remains insolvent for 18 years, the maximum rate is $420 per employee per year.
UI Fund Insolvency
The COVID-19 pandemic created unprecedented unemployment numbers, which drained the state’s UI Fund to an unprecedented level. By May 2020, California’s UI Fund was depleted and falling quickly into debt, which meant California had to begin borrowing money from the federal government to pay the ongoing unemployment benefits to more than a million unemployed workers.
The rapid rise in claims for unemployment also led to historic levels of fraud. The State Auditor’s office found that the Employment Development Department (EDD) was unprepared for the surge of claims and internal review processes failed to catch substantial fraud.
According to recent estimates, California distributed at least $20 billion in benefits to fraudulent claims, with an estimated $1.3 billion coming from California’s UI Fund and the remainder coming from federally funded benefits programs.
Without the $3 billion payment into the fund from the Governor’s proposed budget, California employers will be left paying the cost of this fraud.