This Time, Governor Newsom Lied About the EDD

This story has two aspects, one simple and one complicated, complicated with a capital B for bureaucracy.

First, the simple part – Governor Gavin Newsom lied. Not an obfuscation, or a missing context thingy, or a matter of interpretation – just a plain ol’ lie.

He did it in his veto message regarding the bill to allow striking workers to apply for – and receive – unemployment benefits. One of the reasons he gave for vetoing the bill was as follows:

“Any expansion of eligibility for UI benefits could increase California’s outstanding federal UI debt projected to be nearly $20 billion by the end of the year and could jeopardize California’s Benefit Cost Ratio add-on waiver application, significantly increasing taxes on employers.”

The problem is that California has not applied for a “Benefit Cost Ratio add-on waiver” – don’t worry, it will be explained in the complicated part – and cannot by federal law apply to the Department of Labor for one until 2025.

Clearly the governor was fishing for some kind of technical excuse to calm the unions and justify the veto beyond the commonsense – but politically untenable – answer of “Are you kidding me? We’re broke, you voluntarily gave up your job, and now you want us to pay you?!?!?”

Come 2025, only a few things are sure things in California – the sun will rise in the west, the homeless problem will still see tens of thousands out on the streets, the EDD will still be insolvent, and the high speed rail authority will release a new report featuring lower ridership projections, increased costs, and excuses for further delays.

Applying for a waiver is not one of those things because it might not even be necessary – and now for the complicated part.

For background – during the pandemic, the state’s Employment Development Department (who says bureaucrats have no sense of irony?) had to borrow billions of dollars from the federal government to meet its unemployment claims costs.  The EDD would not have had to do so if it had not managed to lose somewhere between $32 and $40 billion dollars to fraud, the vast majority of which could have been easily prevented at a cost of about $5 million dollars or so for “bolt-on” security software that would have worked even with their ancient systems.

Then-EDD overseer, and now federal Acting Secretary of Labor Julie Su, has consistently claimed she “shut the door” the moment she found out about the fraud and that California was hit just like every other state.

Those two statements are lies – she knew of the rampant fraud for months and California was hit twice as hard (even adjusting for population) than any other state –  as well, but beside the point for now.

Due to the gross negligence, the EDD’s “unemployment insurance trust fund” – that’s where the benefit money is kept and in theory (but not in practice in California), grows in good years to cover bad years – now owes the feds (as of Friday midnight) $18,871,249,591.54 in interest and principal on the debt, even after paying off $301 million in interest on September 30.

This month, just to cover current benefit payments, the EDD has been borrowing even more money – $19 million dollars a day, in fact.

If the EDD had managed to stop even just half of the fraud – in other words, if Su had acted just a few months earlier than she did-  the UI trust fund would have no debt and be solvent.

The state must pay back the debt, but, unlike 48 other states, it chose not to use some of its left over pandemic money to do so (remember that $72 billion dollar surplus? A lot of that was federal COVID money.)

Instead, the governor and legislature decided to let California businesses pay for their mistake.

Once the feds realized that the state was not going to pay it back directly, they began increasing the federal portion of the unemployment taxes business pay.  Typically, the federal unemployment tax is .06% of earnings but only up to the first $7,000 dollars earned; that means that every employer in the state pays $42 per year per employee.  The feds use that money to cover certain programs but mostly to build up their own trust fund so that it can lend states money to cover their shortfalls.

The intent of the program, in part, is to help backstop catastrophes like the pandemic, but mostly it was meant to be able to help out individual states experiencing a serious temporary shortfall – think steel industry closures in Pennsylvania, garment factories moving overseas from Louisiana, Boeing experiencing a downturn in Washington, etc.

The program was not intended to cover fraud, mismanagement, and incompetence and it was certainly not meant to be used to cover on-going normal costs as it does now for California even despite the state’s existing debt.

To pay back the debt, the federal tax increases with each passing year until it is gone – in California’s case, that is going to take a very long time.  The current “best guess” estimate is at least 12 years to pay it down, depending upon the economy and the annual amount paid (unlike a mortgage or pretty much any other loan ever, there is no set amount or even a timing repayment schedule.)

Here’s a chart provided by the Department of Labor to illustrate the increase (to simplify, each year is an annual bump of $21 per employee (plus the usual $42) maxxing out at $420 per year, or ten times the normal rate):

But this chart does not tell the whole story, because in “year 3” an “add-on” is, well, added on.  See below:

(NOTE – ignore the word “reduction” – that refers to the fact that the federal rate can technically go as high as 6% but the feds keep it at .06% as a matter of practice, so the reduction is technically the amount reduced from that notional 5.4% gap meaning the reduction and the add-on are the kinda the same thing.  Oh, and defining which “year” the state is currently in is also a bit tricky as the state has a July 1 fiscal year, the feds have October 1, and the calendar year, of course,  January 1. –  told you it was complicated.)

Basic                  Additional                  Total FUTA

Year                     Reduction             Reduction                      Rate

1                             0.0%                     0.0%                            0.6%

2                              0.3                        0.0                               0.9

3                              0.6                      2.7 Add-on                  1.2 or more

4                              0.9                      2.7 Add-on                  1.5 or more

5                              1.2                     BCR Add-on                 1.8 or more

.                                .                                .                                 .

.                                 .                                .                                 . 

19                            5.4                      BCR Add-on                   6.0

Therefore, said the Department of Labor, starting next year – calendar not fiscal year, so January 1, 2024 – the federal tax rate will almost certainly be a total of 3.9%, or $273 dollars per employee, or seven times the normal rate, which is paid in 47 other states (Connecticut just joined California, New York, and the Virgin Islands in owing the feds money.)

Therefore, with the “add-on” the federal unemployment burden will reach $420 per employee per year in about 9 years, at least three years before the debt is actually paid off.

As noted in the chart, in year 5, or 2025, the specter of the BCR add-on rises.  

So what is the “benefit cost ratio?”  It is different from the flat 2.7% add on in that it is based on a formula, this formula in fact:

“The Benefit-Cost Ratio (BCR) add-on formula is: Max [Five-year Average State Unemployment UC Outlays ÷ Taxable Wages, 2.7] – Average Annual State Unemployment Tax Rate on Total Wages. “

Typically, said a Labor Department spokesman, the BCR is higher than the flat 2.7% add-on. 

And it is at that point the state could apply for the BCR waiver Newsom said the state has applied for.

But the waiver would only be applied for if the BCR is higher than 2.7% because that add-on stays no matter what.

Oh, and if the state does apply in 2025, Julie Su may not be there anymore to approve the waiver.

To get the waiver – if it is needed – the state, among other things, “must not have taken any action (including legislative, judicial, or administrative actions) during the 12-month period ending September 30 in the year of the waiver request that would reduce the state’s UI trust fund solvency for the period ending September 30. The state’s ongoing borrowing has no direct impact on that consideration (note – that last bit is amazing; I wish my bank had that policy.)”

It is unclear if the fact that the fund is currently “structurally insolvent” will play a role in any decision on a waiver.  However, Newsom is correct in that adding the burden of strike pay to the UI trust fund would have been an “action” that could have jeopardized the waiver application.

Sort of correct – adding strikers would have jeopardized a 2025 waiver request if it had been signed into law next year – this year, this time around, he could have signed it September 29, 2023 and been all clear for 2025.

So he lied about that, too.

(Charts provided by the Department of Labor)