In summary
The legislative analyst has a plan to fix the “structural insolvency” of the unemployment benefits fund — but businesses aren’t happy and it’s unclear if lawmakers will get on board.
California’s elected officials aren’t saying much about how they plan to address festering problems with state unemployment benefits after a recent government report called the system “broken.”
State analysts have suggested changes that may be unpopular with voters and donors, such as tax increases. So maybe it is not surprising that, even as they return to Sacramento and stake out political ground for this year’s legislative session, key state lawmakers did not answer repeated queries about the issue, nor did the office of Gov. Gavin Newsom, even though Newsom spoke in vague terms about it at a couple of press conferences.
California’s unemployment insurance fund is $20 billion in debt to the federal government and underfunded more often than not. The nonpartisan Legislative Analyst’s Office, which has been sounding the alarm about the solvency of the fund since 2009, on Dec. 2 released a comprehensive proposal to fix its problems, as well as a warning that it expects the program to have deficits of $2 billion a year for the next five years. The system is funded by a payroll tax paid by employers.
“Tax collections routinely fall short of covering benefit costs,” the analyst’s office said in the report. “Both our office and the administration expect these annual shortfalls to continue for the foreseeable future.
“Tax collections routinely fall short of covering benefit costs.”
California Legislative Analyst’s Office, report on “Fixing Unemployment Insurance”
How the state got to this point is a bit complicated. When millions of Californians lost their jobs in 2020, the state did not have enough reserves in the fund and had to borrow money from the federal government to pay unemployment benefits. The analyst’s office explicitly said in its report that the shortfall was not caused by the unemployment insurance fraud that grabbed headlines, though — the sheer volume of unemployment during the pandemic exacerbated the fund’s systemic issues.
The bottom line, according to the analyst’s office: Unless the state addresses ongoing problems with the fund, the massive debt won’t be paid down anytime soon; the state will have to keep borrowing from the federal government for the fund, especially in case of a recession; and it will all keep costing California taxpayers and businesses for years to come.
That could set off a vicious cycle: If there is mass joblessness again, California would not have enough money to pay unemployment claims and would need to add to its already huge debt. And because businesses would continue to see increased employment taxes, that could affect how many people they choose to hire or retain.
Chas Alamo, principal fiscal and policy analyst at the office and a co-author of the report, told CalMatters: “In the coming years, businesses will pay more in (unemployment insurance) taxes than they do today due to escalating charges under federal law to repay the outstanding loan that was needed because the state did not have a reserve to cushion UI costs during the pandemic.”
Now the question is whether California officials and lawmakers will heed the calls to take any action at all.
Few ideas from lawmakers
Assemblywoman Liz Ortega, a Democrat from Hayward and chairperson of the Assembly’s labor and employment committee, is reviewing the report.
In an email to CalMatters, Ortega suggested that unemployment payments should be more generous — in contrast to the analyst’s report, which suggested growing the system’s tax revenue and stemming losses.
Ortega noted that California’s $450 maximum weekly unemployment insurance benefit has been stuck at that amount for two decades, while the costs of everything from rent to gas to bread have gone nowhere but up. Some experts have voiced similar sentiments, adding that the limited nature of California’s benefits makes it a laggard nationally.
“Since 2004, no governor and no Legislature has done anything about (unemployment insurance),” Ortega wrote. “Democrats are losing the working class. And Republicans are not an alternative. Both parties have an opportunity to show we are different than our predecessors.”
Sen. Lola Smallwood-Cuevas, a Democrat representing Los Angeles and chairperson of the state Senate’s labor, public employment and retirement committee, was unavailable for comment. The office of Sen. Marie Durazo, who last year introduced legislation meant to try to fix the system but then requested its first hearing be canceled, did not return several requests for comment.
Gov. Gavin Newsom’s office would not answer questions about his specific plans for this story, though Newsom addressed the issue at press conferences last month and this week.
This week, the governor said he has had “difficult private conversations on this topic going back years” with state lawmakers; tried to come to an agreement with them during the past two budget negotiations when the state had budget surpluses; and will continue to work with them on the issue.
But Sen. Suzette Martinez Valladares, a Republican from Santa Clarita, said in an email that the governor “chose to squander the budget surplus in his first term instead of fixing his broken unemployment insurance system.”
Newsom is now expecting a budget surplus instead of a deficit, but any potential repayment of the debt is not going to be in his January budget while he “negotiates the terms” with the Legislature through the May budget revision, he said this week.
The governor said it’s a “different makeup, different Legislature, different moment, different time. This will be our third attempt to see if we can make some progress.”
During his December press conference, the governor said that as economic conditions improve, the state should be able to “take some big chunks” out of the debt. “We want to make sure we don’t do it on the backs of employers,” he said.
That’s in line with what some business groups are saying. They agree that the fund needs fixes, but disagree with parts of the proposal that require them to increase their contribution to the solution. As required by federal law, businesses are currently having to pay additional taxes to help the state pay back its debt to the U.S. government — and the legislative analyst expects those federal surcharges to be necessary at least through the next decade.
“The legislative analyst focuses on how businesses can pay more,” said Brooke Armour, president of the California Center for Jobs and the Economy, an arm of the California Business Roundtable. “(The system) is broken, and the only way the state is looking to fix it is to put it on the backs of business.”
Rob Moutrie, a policy advocate for the California Chamber of Commerce, echoed that sentiment. “Simply a large increase in employer taxes is not the solution,” Moutrie said. “We believe that issues such as eligibility and anti-fraud measures need to be addressed in this discussion.”
Alamo, from the Legislative Analyst’s Office: “We focus on putting forth deeply researched, impartial recommendations to improve state government. These recommendations aim to balance various tradeoffs.”
How we got here
One of the key reasons for the persistent shortfall is that to fund California’s unemployment insurance benefits the state taxes all employers on just the first $7,000 each employee earns — whether the employer is a mom-and-pop operation with low-wage workers or a corporation whose employees earn six figures. That amount, called the taxable wage base, has stayed constant since 1983. Experts have long said that California needs to follow other states in raising the taxable wage base to ensure the system is adequately funded.
Stephen Wandner, author of the book “Transforming Unemployment Insurance for the Twenty-First Century: A Comprehensive Guide to Reform,” told CalMatters that “California has gotten so far behind. You’ve got all of these states that have adjusted their system as time goes on.”
“What’s being proposed makes a great deal of sense,” he added.
The office’s proposal has four main parts, including three that deal with revamping the system to try to boost the amount of money that goes into the fund:
- Increase the taxable wage base from $7,000 to $46,800, which the analyst said would adequately fund the current maximum weekly unemployment benefit.
- Redesign employer tax rates: A standard tax rate would be applied toward the main fund, and a portion would be applied toward building a reserve fund for use during recessions. The rate would total 1.9% on the taxable wage base of $46,800.
- Shift to a new system that would base employers’ tax rates on increases or decreases in their number of employees, instead of basing the rates on their former workers’ unemployment insurance costs.
- The fourth part proposes a way to repay the U.S. government by splitting the responsibility between California taxpayers and businesses. It would involve refinancing the debt through a revenue bond paid back by employers, and borrowing from the state’s pooled money investment account paid back from the general fund.
Alamo said the multi-part proposal is needed because “the landscape has shifted” since the previous reports by the analyst’s office about the issue. “Now, the state faces a structural insolvency in the UI trust fund, and raising (the) taxable wage base is not alone sufficient to restore solvency,” he said.
“California has gotten so far behind. You’ve got all of these states that have adjusted their system as time goes on.”
Stephen Wandner, author, “Transforming Unemployment Insurance for the Twenty-First Century”: A Comprehensive Guide to Reform”
Although the state has a hard enough time affording the modest unemployment benefits it offers, lawmakers over the years have proposed but failed to expand eligibility for the benefits — such as for striking workers or for undocumented immigrants. Advocates have also called for raising the maximum $450 weekly benefit, which has been stuck at that amount since 2005.
“When it comes to unemployment insurance benefits, California lags,” said Amy Traub, a senior researcher and policy analyst at National Employment Law Project. “You want the benefit to rise as inflation rises.” But Traub, who said she plans to talk with the state’s lawmakers about the legislative analyst’s “solid” recommendations, acknowledged that changes in benefits and eligibility can’t happen unless the state addresses the systemic issues with the fund.
As for small businesses, the state’s low taxable wage has a disproportionate impact on them. Bianca Blomquist, California policy director for Small Business Majority, a nonprofit advocacy group, urged equitable reform and said the need to fix the funding system for unemployment benefits is so urgent that other business groups’ “no-new-tax argument won’t keep flying.” She said a well-funded system “enables workers to get back into the economy,” which can have direct and indirect effects on small businesses.
But Blomquist expressed concern about the recommendations by the legislative analyst to change the system to be based on increases or decreases in the number of workers companies employ. “We know there are industries with super high turnover,” she said. “We’d want to prevent a punitive system (for them).”
Also, Blomquist said the system could use some other changes. For example, to qualify for unemployment benefits, people need to prove they are looking for jobs. “If folks could receive benefits while setting up their businesses, that would be a benefit for (people of color) and women,” she said.
