California State Capitol. (Photo: Kevin Sanders for California Globe)
Can California’s Broken Unemployment Insurance System Be Saved?
Instead of paying down debt when California had higher revenues and the budget ‘surplus’ Newsom and Democrats went on a spending spree
By Katy Grimes, December 4, 2024 2:55 am
“The State’s Unemployment Insurance (UI) Financing System Is Broken. The state’s UI program is supposed to be self-sufficient—that is, the system should collect enough funds to pay for benefits over time.”
That is the opening paragraph of the Legislative Analyst’s Office new report on “Fixing Unemployment Insurance” in California.
This does not bode well.
“Unemployment benefits now routinely outpace incoming tax contributions, leading to a costly reliance on federal loans and constraining the state’s options to improve the program.”
As the Globe reported in November:
Gov. Newsom’s administration was so grossly negligent during his lockdown of the state, the EDD, the state’s unemployment agency, allowed tens of billions of taxpayer dollars to be lost to fraud.
The estimate on how much the EDD lost is anywhere between $31 Billion and $40 Billion sent to to illegitimate claimants, state and federal prisoners, international fraud rings, all of whom simply walked right into the department’s completely unprotected system, the Globe reported in 2023.
The House Committee on Oversight and Accountability investigated the California EDD after the Trump administration provided the EDD with over $1.8 billion to cover the department’s additional administrative costs caused by the pandemic.
That money must be paid back. The EDD started to re-pay the $1.8 billion after Gov. Newsom and the state legislature colluded to foist the re-payment of the federal debt onto the backs of California businesses.
The Legislative Analyst reports that employers will pay an additional 1.2 percent federal surcharge in 2025 (equivalent to $84 per worker).
The LAO continues:
The state’s broken UI system now presents mounting consequences:
- Annual Shortfalls Will Balloon Outstanding Federal UI Loan.
- Loans Will Become a Permanent Feature of UI and a Major Ongoing Taxpayer Cost.
- UI Program Will Be Unable to Build Reserves Ahead of Next Recession.
“Although a federal surcharge on businesses will help repay the federal loan, the surcharge cannot help the state build reserves after the loan is repaid,” the LAO reports. This is because the surcharge turns off once the loan balance reaches zero. Absent the federal surcharge, little or no reserves would be on hand at the start of the next recession, further increasing the state’s reliance on costly federal loans.”
Instead of paying down debt when California had higher revenues and/or the budget “surplus,” Newsom and Democrats went on a spending spree of longterm social welfare programs, which the state now cannot afford. Therefore, private sector businesses will be paying off the governor’s debt – debt which could have been avoided had Newsom and his appointees taken their jobs seriously.
The LAO recommends the Legislature increase the taxable wage base from $7,000 to $46,800, tying the taxable wage base to the amount of UI benefits a worker can actually receive ($450 per week).
Unemployment Insurance (UI) is paid by the employer. “Tax-rated employers pay a percentage on the first $7,000 in subject wages paid to each employee in a calendar year,” the EDD says. “The UI rate schedule and amount of taxable wages are determined annually. New employers pay 3.4 percent (.034) for a period of two to three years. We notify employers of their new rate each December. The maximum tax is $434 per employee per year (calculated at the highest UI tax rate of 6.2 percent x $7,000.)”
The LAO explains that the taxable wage base is the amount of earnings that are taxed to fund benefits. That is, employers do not pay UI payroll taxes on worker earnings above the taxable wage base.
“State UI programs are supposed to be self-sufficient—that is, the system should collect enough funds to pay for benefits over time,” the LAO says, stating the obvious.
The LAO says the UI trust fund will run annual operating deficits over the next several years. However, the LAO takes issue with the Newsom administration’s rosy economic forecast for California:
“The administration’s forecast, which assumes a steady economy, estimates deficits of a bit under $1 billion through 2025. Our assessment, which examines many potential future paths for the state’s economy, similarly finds deficits are very likely to persist regardless of the trajectory of the economy,
with an average outcome yielding deficits of around $2 billion per year for the next five years. This outlook is unprecedented: although the state has, in the past, failed to build robust reserves during periods of economic growth, it has never before run persistent deficits during one of these periods.”
And they say the state’s tax system will fall short of repaying the $20 Billion loan to the federal government as “the balance is set to grow due to the ongoing gap between contributions and benefits.”
What other factors caused this crisis?
During the pandemic, the Legislature passed a new policy to disregard pandemic benefit costs when calculating employers’ experience rating tax rates… exacerbating the state’s long-standing imbalance between benefits and contributions, contributing to the state’s current structural deficit.
What fixes does the LAO suggest?
Increase the Taxable Wage Base. Increase the taxable wage base from $7,000 to $46,800.
Redesign Employer Taxes. Adopt a simple, robust UI tax structure comprised of a standard rate and a reserve-building rate.
Rethink Experience Rating. Transition to a method of experience rating based on each business’ changes in employment, rather than their individual UI contributions and benefits.
Refinance the Outstanding Loan. Repay the outstanding federal loan immediately by using new borrowing, split evenly between: (1) a revenue bond to be repaid by employers, and (2) Pooled Money Investment Account borrowing to be paid by the state’s General Fund.
And the final zinger:
The state’s employers will pay higher UI costs one way or another, the LAO says. “Even if the Legislature does not adopt our recommended solutions, employers will soon pay substantially more in UI taxes than they do today.”
The LAO claims that making their recommended changes now will allow the Legislature to make “strategic choices” about how to repay the federal loan…
Anticipating that the governor and the Legislature, who created this crisis, has any ability to solve it is a fools errand. They avoid any and all oversight of their regulatory agencies – what makes the LAO think lawmakers and Gov. Newsom care enough about employers and the unemployed to do anything to correct the horrific mess they have created?
- Supreme Court to Hear Arguments over Tennessee Ban on Gender Surgery for Trans Youth - December 4, 2024
- Can California’s Broken Unemployment Insurance System Be Saved? - December 4, 2024
- Make California Safe Again: California’s Sanctuary State Law Puts Everyone in Danger - December 3, 2024
RELATED ARTICLES
-
September 16, 2024 -
April 18, 2022 -
It sounds like any path taken will lead to higher costs for employers, making California even less attractive for legitimate businesses. Small Employers will be encouraged to pay employees cash in order to stay in business.
A simple way to fix the system is to create an environment within California that reduces the need for people to be on unemployment. Newsom and the establishment would not be in favor of that as that would require less government interference and the system that Newsom and the establishment favors requires more government. Unemployment Insurance points out the real need for California to have its own version of the Department of Government Efficiency. Until we rid ourselves of useless departments, unelected commissions and bureaucrats we will only continue to get more of the same. California is in need of a radical turnaround that puts the power (money) back in the hands of the people and takes it away from the evil empire (to borrow a Star Wars phrase). The change needed is not complicated, but it does require the current “power” class to lose power which will require pain on their part as they lose power. As I have stated before I believe that this change is coming, and I still continue to believe that it is at the doorstep.
Doesn’t it seem obvious that radical cuts of endless budget foolishness should be done and applied to the EDD disaster that our Dear Leaders created? Pinning the consequences of leadership’s criminal neglect on employers is the MOST UNFAIR action any govt could ever take. But California’s “leadership” routinely sticks it to Californians when they need to be bailed out. There are dozens of examples of it, it’s nothing new. And getting away with this crap only encourages them. The outstanding bill just gets bigger and bigger and bigger each time.
As Katy Grimes pointed out, however, what should be done will never happen, because until we have sensible people in leadership positions (God willing), these circus freaks will continue to do what they have been doing for as long as we can remember. Gruesome will continue to see CA wreckage and chaos and call it an amazing success story. King Liar and Crook. No conscience and certainly no remorse.
Disgusting jerk.