An updated unemployment insurance fund forecast released by the Employment Development Department (EDD) estimates that California will have a negative $24.3 billion balance by the end of 2021, an improvement from October’s forecast of negative $48.3 billion.
Heading into 2020, California’s UI fund had a surplus of $3.3 billion. In response to the COVID-19 pandemic and the resulting economic shutdown, the fund became temporarily insolvent within months and permanently insolvent by June 3, 2020.
The beleaguered unemployment insurance system – funded by taxes on California employers – was targeted by international crime syndicates, prisoners and other scammers, resulting in the EDD admitting that as much as $31 billion in benefits were paid to scammers – approximately 30 percent of all UI disbursements.
California began taking federal loans to pay unemployment insurance claims. The state ended 2020 with a loan balance of approximately $17.8 billion. To date, California has borrowed approximately $22 billion from the federal government to pay unemployment benefits. Interest on the loans has been delayed several times by the federal government, but will begin accruing September 1 at the rate of 2.2777 percent.
In October, the EDD estimated the fund would end 2021 with a $48.3 billion deficit. The latest report describes a better-than-expected outlook and recovery from the pandemic. With California fully reopening the economy with some modifications, unemployment numbers are projected to drop from 1.95 million in 2020 to 1.6 million in 2021 and 1.5 million in 2022.
Unless California fully repays the federal loans by September 1, employers will be hit with higher employment taxes to fund the system. Employers are expected to pay the maximum tax rate for the foreseeable future, according to the EDD, unless changes are made to the financing structure.
Since California ended 2020 with a UI fund deficit and also is expected to end 2021 in a deficit, the federal government will begin reducing the Federal Unemployment Tax Act credit 0.3 percent annually until there is no longer an outstanding loan balance.
Under the current forecast, credit reductions will begin in 2022, with higher federal taxes coming due in 2023. Employers are expected to pay $4.8 billion in taxes in 2021, and another $6 billion in 2022.
Prior to the pandemic, the last federal UI loans came during the Great Recession when California took approximately $10 billion in loans. As a result, California employers paid $9.6 billion in higher taxes over seven tax years (from 2011 to 2017) to repay the balance.
With a UI deficit of almost three times the Great Recession amount, employers are expected to pay significantly higher taxes to repay the latest loans – and cover the EDD’s failure to prevent fraud – unless California allocates state funds or receives federal dollars to reduce employers’ burden.