The Unemployment Insurance Fund is projected to end this year with a $22.7 billion debt to the federal government, growing to $22.9 billion by the end of 2026, according to the latest UI Fund forecast from the Employment Development Department.
California’s UI Fund — responsible for providing financial assistance to unemployed residents — has faced financial challenges since the onset of the COVID-19 pandemic. The UI Fund ended 2019 with a $3.3 billion surplus but was quickly depleted due to a sharp rise in unemployment associated with the pandemic – triggered, in many cases, by government-mandated business closures – and fraudulent disbursements.
The UI Fund was declared insolvent, prompting the state to take a large loan from the federal government so it could continue paying claims. The fund ended each year with an unpaid loan debt, totaling $20.5 billion in 2023 and climbing to $21.9 billion in 2024.
The debt has a major impact on California businesses, as employers are forced to pay higher employment taxes to repay federal loans that are outstanding for more than two years.
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, translating to higher taxes on employers until the loans are paid off.
The annual payroll tax increase assessed on employers amounts to $21 per worker. According to the EDD’s report, the FUTA credit phaseout resulted in a $396 million tax increase on employers in 2023, $770 million in 2024, and a projected $1.2 billion in 2025. For the current tax year, employers are able to deduct 4.5 percent of their tax liability.
Unemployment insurance benefit disbursements to unemployed Californians have remained relatively steady in recent years. Disbursements totaled $6.8 billion in 2023, $7.1 billion in 2024, and are projected to total $7 billion in 2025.
California has faced prolonged insolvency in the UI Fund previously. During the Great Recession, the UI Fund was quickly depleted, forcing California to take an $11 billion loan from the federal government. From 2011 to 2018, California businesses faced higher employment taxes to repay this debt.
California Democratic leaders and the Legislative Analyst’s Office recently recommended changes to the state’s unemployment insurance system. In a report released last month, the analyst recommended increasing the taxable wage base subject to the tax to $46,800 (up from $7,000), establishing a reserve-building tax rate and standard tax rate, making changes to the employer experience rating, and refinancing the state’s current federal loan.
Brooke Armour, president of the California Center for Jobs and the Economy, stated that the analyst’s recommendations are too focused on increasing taxes on businesses.
“The legislative analyst focuses on how businesses can pay more,” Armour stated. “[The system] is broken, and the only way the state is looking to fix it is to put it on the backs of business.”
When asked last week about the state of California’s Unemployment Insurance Fund, Governor Gavin Newsom said he is interested in making changes, but did not clarify whether he is considering budgeting for additional payments to pay down the loan or increasing taxes on employers. The governor said he has been having “difficult private conversations on this topic going back years” with state lawmakers.
Republican Senator Suzette Martinez Valladares, vice chair of the Senate Revenue and Taxation Committee, said the governor “chose to squander the budget surplus in his first term instead of fixing his broken unemployment insurance system.”