Even with a historic surplus, California lawmakers took their summer break without addressing a looming debt the state owes to the federal government for the unprecedented unemployment benefits it doled out during the COVID-19 pandemic.
Gov. Gavin Newsom has asked lawmakers to pay off a fraction of the $23 billion California owes. But with much of the payments not due for years, legislators and Newsom are still negotiating on how much money to send back to Washington, said H.D. Palmer, spokesman for the Department of Finance.
The standoff worries some business owners because of the way the state funds unemployment benefits. It taxes employers and they’re concerned they’ll be on the hook for years to come for a debt the state in theory could pay off with its budget windfall.
They’re especially aggravated by the well-documented unemployment fraud that cost the state as much as $11 billion, according to state officials.
“Why are we not doing the right thing of paying down this horrible credit card?” said John Kabateck, California state director for the National Federation of Independent Business which advocates for small businesses.
Advocates for social services counter that deficit shows California has not been taxing employers enough to fund it unemployment benefits. Neighboring states like Oregon, for instance, charge businesses more to pay for jobless benefits.
That’s why Chris Hoene, executive director at the California Budget & Policy Center, contends employers should not get a break in paying down the debt.
“The way the system is set up under federal law is that employers pay into the system to help cover the cost of public sector providing benefits to their workforce during periods of high unemployment and economic downturn,” he said. “It wasn’t intended as a system paid entirely for by public sectors.”
California’s unemployment insurance debt
Every year, employers pay into both state and federal unemployment insurance, up to nearly $500 per employee per year. The state money goes into a trust fund to pay for benefits during economic downturns.
California started 2020 with $3.3 billion in its trust fund, but it became insolvent by that summer as the state dealt with a flood of claims for unemployment.
The state now has a $23 billion unemployment debt — more than double of what it had at the peak of the Great Recession — as it has been taking out federal loans to continue paying benefits.
Even though 13 other states have taken out the loans as well, California’s debt represents more than 43% of what’s owed in total to the federal government.
Gov. Newsom in budget negotiations proposed putting $1.1 billion toward paying off the debt. Senior Democratic lawmakers have not agreed to that sum. Instead they want to create a new tax credit for small businesses that would be on the hook for the debt if the state does not pay it off.
The state will start accruing interest on the debt in September and will have to pay those charges out if its general fund.
The interest payments could range from $500 million to $700 million a year, said Chas Alamo, an analyst at the Legislative Analyst’s Office.
Starting in 2023, California businesses will be paying $21 more per employee per year, unless the state pays off the debt, Kabateck said. A report from the Legislative Analyst’s Office forecasts that businesses could be paying as much as $189 per employee per year by 2030, when it expects the debt to be fully paid for.
The federal government did not forgive California’s $10.7 billion unemployment insurance debt as the state came out of the Great Recession, and it took until 2018 to pay it off, said Jared Walczak, vice president of state projects at the Tax Foundation.
“My gut feeling is businesses will be left to pay the bill,” said Manuel Cosme, who owns a tax preparation firm in Vacaville. “We would rather pay our employees more or pay something to their benefit than pay all in taxes.”
Paying down the debt
The latest federal coronavirus relief package, which gave $27 billion to California, allows states to use the money to pay down their unemployment insurance debt.
But Newsom and legislators have found other uses for the money, such as helping Californians pay their utility bills and spending $5 billion to address homelessness and housing shortage.
The debt isn’t urgent, Alamo said.
“The federal trust fund loan operates a lot like a mortgage,” Alamo said. “If I prepay my mortgage, I come into some money and I put in $50,000 on my first month on my mortgage, it doesn’t actually reduce my mortgage cost. It means I’ll pay off my mortgage a couple of years earlier.”
California also has more time to figure out how to pay for the debt, since businesses won’t have to pay until 2023, Hoene said.
“The choice the state faces is putting investments that actually help people and businesses now versus using the funding to pay back the debt the state has over a decade to pay for,” Hoene said. “There really isn’t an urgent reason why this needs to be resolved right now.”
This story was originally published August 13, 2021 5:25 AM.
