California’s Unemployment Insurance Trust Fund Is Now ‘Structurally Insolvent’ Under Weight of Pandemic Loans
California’s Unemployment Insurance (UI) Trust Fund that pays out state benefits is now “structurally insolvent,” according to a recent report.
The Legislative Analyst’s Office noted the debt crisis involving the California Employment Development Department’s (EDD) UI trust fund on July 7.
The state report was released following last week’s “May Fund Forecast” report by the EDD. It said that a temporary surcharge, which state businesses are currently paying to cover the agency’s multi-billion dollar debt to the federal government, may continue to be in place for some time.
The additional taxes being paid by employers will offset the $20 billion in federal loans taken by the state to cover UI benefit payments during the pandemic and related stimulus measures.
The money that California is using to pay claimants’ benefits, is already guaranteed by the feds, no matter what financial condition the EDD is in.
California is one of the two states that has remaining debt from the pandemic and accounts for 73 percent of that debt nationwide, with New York accounting for the rest.
According to California Globe, the EDD has been called one of the most mismanaged agencies in the state, with government insiders allegedly calling it “the place where state careers go to die.”
California Will Take Years to Pay Off Debt
The EDD said that even without the debt incurred from the state’s pandemic response, which is the cause of the latest insolvency and tax hike, California would still have had to borrow money over the next few years.
The report said this would continue even in a “good” economy and that the structural insolvency would need at least two to five years to fix.
“Historically, benefit payments have only exceeded contributions during major economic downturns—most recently, during the pandemic and Great Recession,” the EDD report said.
“For the first time, the fund is expected to be out of balance durg a period of job growth.”
The EDD believes that the surcharge fee will now last about 15 years and not the six or seven years as originally projected in order to pay back the $20 billion borrowed from Washington.
California lost about $40 billion to unemployment fraud during the pandemic, most of which could have been prevented early on, with a state fraud prevention identity security system.
However, the disgraced former labor department chief Julie Su, who was aware of the problem the whole time, waited months to install an anti-fraud system.
Taxpayers Paying for State Mismanagement
The EDD expects to take in about $5.3 billion in UI tax money over the next couple of years to pay off some of the debt.
The unpopular surcharge tax will cost each California employee about $1,500 over the next 15 years, with rates starting at $21 per employee and rising until it hits $420 a year until the federal loan is paid off.
The insurance department expects to pay out an extra $2.6 billion in benefits and overheads, which is more than it will receive in the next two years.
This will raise the amount the UI trust fund owes to its creditors from $17.6 billion to about $20.3 billion by the end of 2024, despite the extra $1.2 billion raised in extra taxes, according to the May report.
This includes interest, which was projected add an extra $300 million a year to the debt.
Rob Moutrie, a policy expert with the California Chamber of Commerce, told the California Globe, that his organization is “disappointed to see that California businesses will be paying an extra tax for even longer than expected.”
Moutrie said that California’s UI fund “was never intended to be used by the state as a society-wide social safety net” and that most other states made sure they were able to immediately pay off any pandemic debt they incurred.
It has been hoped by many advocates that this latest scandal will force a reform of the agency. But action may require additional UI taxes to address the issue, making it unpopular with the state’s politicians and the public.