California’s Unemployment Insurance (UI) Fund ended 2022 with a deficit of approximately $18.2 billion and is projected to end 2023 with a $16.3 billion deficit, according to a new report from the Employment Development Department (EDD). The figures represent debt owed to the federal government, and the ongoing debt triggers employment tax increases for California employers.
The data was included in the EDD’s most recent update, dated October but not released to the public until December.
California’s unemployment insurance fund, which provides unemployment benefits to residents who lose employment, is funded by a tax on employers based upon a percentage of the first $7,000 in wages paid to each employee. The fund has hovered in and out of insolvency over the past two decades, fueled by unemployment spikes associated with the Great Recession and then the COVID-19 pandemic.
Employers typically are able to deduct 5.4 percent of their tax liability through the Federal Unemployment Tax Act (FUTA) credit. When a state’s UI fund becomes insolvent and federal loans are needed to pay unemployment insurance claims, however, the credit is reduced and employers pay higher taxes.
As a result of federal loans taken during the Great Recession, businesses paid $9.6 billion in additional payroll taxes from 2011 through 2017, when the UI fund returned to solvency. The fund ended 2019 with a $3.3 billion surplus, but was devastated by the rise in unemployment associated with the COVID-19 pandemic and an estimated $31 billion in fraudulent benefits paid to scammers.
The state began taking federal loans in 2020 to keep up with rising benefit claims. Unlike many other states that used federal COVID relief funding to pay down their debt, California used federal funding for other purposes. As a result, the debt has remained high.
Lawmakers proposed several pieces of legislation last year that would have appropriated billions in general fund revenue to pay down the debt. However, Governor Gavin Newsom and lawmakers approved only a $250 million payment to the UI fund in the 2022-23 enacted budget, along with an additional $500 million described as a “guarantee” to be appropriated in the 2023-24 budget. The funds will not be appropriated unless approved in the new budget, so the funds are not in fact guaranteed.
Business payroll taxes increased January 1 and will continue to increase an additional $21 per employee for every year the debt to the federal government remains. According to the EDD’s forecast, total receipts to the UI fund totaled $6.2 billion in 2022 and are expected to increase to $6.4 billion in 2023, while benefit payments were approximately $4.8 billion in 2022 and projected to increase to $4.9 billion in 2023.