California’s borrowing to pay unemployment benefits will balloon to $26.7 billion by the end of next year as state funds prove inadequate to cover the costs of unprecedented joblessness caused by the COVID-19 pandemic, a new report warns.
Even as the economy is rebounding, unemployment remains high, and the debt is forecast to grow beyond the $24.3 billion estimated for the end of this year, state officials said.
Business leaders said Friday that as borrowing from the federal unemployment trust fund is paid back by higher payroll taxes, state officials must tap more of a projected budget surplus to lessen the financial hit on employers already struggling to recover from the economic shutdown of the last year.
“If they don’t do anything more, businesses are going to end up having to pay that tax at a critical time of our economic recovery,” said Rob Lapsley, president of the California Business Roundtable. “If some [businesses] are teetering on the edge of a fiscal cliff, it could drive them right over the edge, and they go out of business.”
California has processed a record 22.5 million unemployment claims since the COVID-19 pandemic began in March 2020, and the state has paid $150 billion in benefits.
The report, released this week by the state Employment Development Department, poses a new challenge for Gov. Gavin Newsom and legislators after months of unresolved problems with the unemployment system.
Employers pay federal and state taxes into unemployment insurance funds on behalf of each employee on their payroll. When the fund runs low, states can tap into assistance from the federal government to ensure that regular benefit payments can continue to be paid.
But money borrowed from the federal government is paid back through an increase in the payroll tax that gradually rises each year, hitting more than 3% after 10 years, until the debt is repaid.
The EDD debt forecast report noted that employer contributions are estimated to increase from $4.8 billion this year to $6 billion next year. The independent Legislative Analyst's Office estimates that the total debt may not be paid off until 2031.
The expanding debt has touched off a dispute among state leaders over how much of the surplus should be put toward reducing the burden on businesses.
Newsom recently announced that the state is projected to have a tax windfall of $76 billion, in addition to $27 billion the state will receive from the federal American Rescue Plan.
The governor has proposed using $1.1 billion of the federal funds for unemployment costs.
“It shows the commitment we have to get a jump-start on that payment,” Newsom said last month, when he unveiled his budget proposal. “Every state in the country will struggle over the course of many, many years to pay back that debt, as we did in the last recession, the Great Recession, when it took a number of years.”
During the recession of a decade ago, California borrowed $10.7 billion from the federal trust fund to pay unemployment benefits; it took the state from 2011 to 2018 to repay the debt.
This time, California is one of 19 states that have had to borrow a combined $53 billion from the federal trust fund to cover unemployment benefits during the pandemic. Other states that took loans include Massachusetts, Illinois, New York and Texas, but California has borrowed the most by far — more than 40% of the total.
The $1.1 billion proposed by the governor is “a step in the right direction,” according to Jennifer Barrera, executive vice president of the California Chamber of Commerce.
“However, in order to protect small businesses and other employers devastated by the pandemic from the risk of increased taxes and more economic uncertainty, the state needs to be far more aggressive in paying off the entire debt as soon as possible,” Barrera said.
As an alternative to Newsom's plan, the Legislature has proposed $2 billion in payroll tax credits to small employers, spread over 10 years. The two sides are still negotiating on the proposals, and Lapsley has proposed that a working group be formed to resolve the issue. He said even the legislative proposal of $200 million a year is not enough to prevent burdensome tax increases on businesses, and would hit the service and hospitality industries especially hard.
The state's response to the unemployment system debt has been called inadequate by some lawmakers.
“If it is not addressed in a significant and substantial way, it will lead to higher taxes paid for and by our already struggling small businesses,” said Assemblyman Vince Fong (R-Bakersfield), vice chairman of the Assembly Budget Committee.
Some legislators noted that EDD officials said the agency has identified at least $11 billion in benefits paid on fraudulent claims. While the vast majority of fraud occurred on claims in a federal program, some of the fraud payments are liabilities of the state.
“This debt was incurred because of the mismanagement of our state government, not by our local small businesses,” Fong told colleagues during Monday's floor debate on the budget. “The lack of action will only lead to a higher tax burden that hardworking Californians will have to bear in the future.”
In October, the EDD thought California's loan balance might hit $48 billion this year, but the estimate was revised downward after some officials cited factors that include many employers transitioning large numbers of employees to remote working.
Still, the new debt projection has business leaders worried.
“The bottom line is that saddling California businesses with what is estimated to amount to a $26.7-billion tax increase or more over the next 10 years will divert resources away from their ability to regain losses sustained during the pandemic shutdowns and will hamper California’s overall economic recovery,” said Barrera.
This story originally appeared in Los Angeles Times.