Another $170 Million – EDD Faces Fed Debt Interest Hike

On January 1, the interest rate the federal government is charging the state on its more than $20 billion unemployment insurance trust fund debt rose from 1.68% to 2.61%.

At first blush, that doesn’t look like too much and the rates are still far far below what people are paying for mortgages these days.

But when numbers like $20 billion dollars are involved, every little bit adds up.

With the new rate, the state can expect to have to make an interest only payment of about $500 million dollars instead of the $330 million that was planned for in Gov. Gavin Nesom’s budget for fiscal 2024-25 (the payment is due in September.)

That means that a state already facing a deficit of between $38 billion dollars – that’s Newsom’s happy talk number – and $73 billion – that’s the reality according to the Legislative Analyst’s Office – will have to poke around to find another $170 or so million somewhere.

And unlike the principal – currently at $20,478,102,211.93 – which has no set repayment timeframe, California must make the interest payment every year or the feds will send out the thumbcrushers.

Well, maybe not; at first it will most likely be a strongly worded letter, but making the interest payment – paying the vig, in bookie parlance –  is in fact non-negotiable. Even California’s former labor secretary and now fed nabob, the egregious Acting Secretary of Labor Julie Su, can’t get that waived. 

Which carries a certain irony as Su, by failing to stop the fraud that bilked the EDD of at least $32  (probably closer to $40) billion dollars, is responsible for the debt in the first place.

The new rate will apply not only to what the EDD must borrow this year – it’s been tapping the feds for about $21 million a day in February to make current unemployment benefit payments – but it also applies to all of the previous debt, hence the higher total interest payment.

In his budget, Newsom allocated $231 million in general fund money and ordered that “$100 million will be funded by the Employment Training Fund, consistent with existing statutory authority that allows the use of these funds for this purpose.”

In other words, a loan from the training people fund to the unemployed people fund.

In 2022, the state owed made an interest-only payment of about $300 million – that was funded by a loan from the disability insurance trust fund.

The annual interest rate (it can vary year-to-year) is derived from a byzantine formula that involves balancing the interest  the federal fund pays out to states that are not on the schnide for their federal unemployment tax contribution vis a vis beggar states (like California and New York and, more recently and not pandemic related, Connecticut and Pennsylvania.)

In other words, states that pay in but don’t borrow earn interest on that money and the borrowing states must pay the same amount the solvent state’s earn.

It is therefore possible that the overall increase in interest rates could drive California’s payment rate even higher next year.

As it stands now, California businesses have already seen their unemployment insurance taxes rise sharply – the state portion has remained the same but the fed “add-on” to repay the debt will continue to increase until the entire debt is paid.  That is expected to take somewhere between 8 and 14 years and cost businesses, in the later years, more than $400 per employee per year in additional taxes.

The funny/sad thing is that California is not collecting enough unemployment insurance taxes to cover current benefit payouts and is continuing to borrow from the same fund the extra taxes are going into to repay the debt ($608 million in February alone.)

The interest hike could extend that time frame, depending on whether or not the rates keep going up or stabilize

And all of this could have been avoided if California had just paid it back when it could. Remember that giant budget surplus of more than $70 billion? Much of that was unused federal covid money that should have been used to pay the then $18 billion in debt – in fact, every other state that had unemployment trust fund debt did exactly that.

Except for New York…and, of course, California.

The EDD did not respond to a request for comment.