California’s unemployment insurance (UI) fund debt is projected to increase to $20.8 billion by the end of 2024 and continue growing in 2025, according to the January Unemployment Insurance Fund forecast released by the Employment Development Department (EDD).
The debt – owed to the federal government for loans that allowed the state to continue issuing UI benefits – has grown since the COVID-19 pandemic and the subsequent economic downturn, which caused a large increase in UI claims. California’s fund was deemed temporarily insolvent April 29, 2020, and permanently insolvent June 3, 2020.
The UI fund ended 2022 with $19.1 billion in loan debt, increasing to $20 billion at the end of 2023. The amount owed to the federal government is projected to continue to grow to $21 billion by the end of 2025.
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.
The Federal Unemployment Tax Act (FUTA) credit typically allows employers to deduct 5.4 percent of their tax liability. However, when a state’s UI fund becomes insolvent and federal loans are needed to pay unemployment insurance claims, the credit is reduced at a rate of 0.3 percent annually if the debt remains unpaid for two consecutive years. The annual payroll tax increase assessed on employers amounts to $21 per worker.
The tax increase for 2023 totaled $397 million and the expected tax hike will cost employers a cumulative $858 million this year, the EDD reported.
Employers’ total UI taxes were $5.3 billion in 2023 and are projected to be $5.1 billion in 2024 and $5.2 billion in 2025, the EDD noted.
Governor Gavin Newsom and the Legislature approved a plan for a $500 million payment of UI fund debt in the 2022-23 state budget, but the plan was changed by the 2023-24 budget, and no debt repayments were made. Nor are any repayments included in the governor’s initial 2024-25 budget proposal that was released this week.