California Did NOT Default on its Federal Unemployment Debt

While Governor Newsom and the legislature’s decision to foist the re-payment of a federal debt caused by the laughably destructive EDD onto the backs of California businesses remains unconscionable, recent reports that the state is “defaulting” on the debt are false.

In fact, just in the past week or so California re-paid nearly $1.8 billion – or about 10% – of the principal on the loan.

The debt reduction was not covered by the general fund or by Newsom hitting the Powerball and then generously donating the proceeds – it was in fact the first of many of such barrels of annual re-payment cash made possible by the increase in the unemployment insurance taxes paid by California companies.

The debt, which topped out a couple years ago at about $20 billion, was incurred during the pandemic when the EDD ran out of money to pay unemployment claims.  True, if the EDD had literally done anything about the $40 or billion lost to fraud early on in the pandemic then it wouldn’t have had to borrow anything from the federal government, but, sigh, if wishes were horse’s asses… 

Note: it does not appear any EDD employee lost their job over the debacle and one of them – it’s chief Julie Su, in fact – is poised to join President Biden’s cabinet as the next Labor Secretary.  Well, maybe not so fast: Julie Su directed department staff to not cooperate with federal immigration agents if they appeared at any commission office looking for illegal aliens.

The vast majority of unemployment insurance taxes – including the debt “surcharge” imposed – are paid towards the end of April, hence the recent payment which lowered the debt principal from $18,649,176,425.21 on May 2 to $16,983,931,343.61 on May 8 (the debt currently remains about the same and nothing went to pay down the approximately $178 million in interest, which by law must be paid by October 1 of each year).

In 2021, the state’s Legislative Analyst’s Office issued a report that detailed the debt and its potential re-payment. The report states that – short of the state using general fund monies – it would take until about 2030 to pay down the debt through a surcharge (technically, a federal not state surcharge – a bit like a wage garnishment except the wages are increased to cover the garnished amount.)

The surcharge will increase each year from 2022’s $42 per employee by an additional $21.  Depending upon how long the debt will actually take to pay, this means every business will be paying an extra $400 or so per employee in total.

It should be noted that California incurred 40% of the total federal unemployment insurance debt created by the pandemic and that it remains one of only three states  – the other two are New York and Connecticut – to not have already paid the money owed back in its entirety.

Like many other states, California could have chosen to take a portion of the un-spent federal COVID grants it received to repay the entire debt immediately – and still have billions left over – but chose not to, instead dumping it into the the many new projects that have recently been created by Newsom and legislature.

While using money given to you to repay money the same entity simultaneously lent you sounds a bit odd – don’t let your deadbeat brother-in-law hear about the idea – it is not only legal but appropriate and what California should have done, said Marc Joffe, a policy analyst with the Cato Institute.

“The COVID money should have been used to pay the debt; instead it went to Newsom’s laundry list of programs,” Joffe said. “Other states did so, but California shifted the burden to employers already struggling with the state’s other onerous taxes and regulations.”

It is that shifting of the debt – the unnecessary, unvoted-upon imposition of triple-taxation – onto the backs of people who were in no way responsible for creating it that is, yet another, seemingly unconscionable decision made by Newsom and the legislature.

And, yet again, the EDD – oddly, it seems, as it is surely the truth that they see this as good news – did not reply to a request for comment.

Go figure.