California unemployment fund faces insolvency after $55B fraud, burdening businesses with payments

California’s unemployment insurance fund is facing a dire financial situation. The fund has been deemed “structurally insolvent” as a result of the staggering $55 billion that was lost to fraud and overpayment during the COVID-19 crisis. This has led to a substantial loan of $21 billion in unemployment benefits from the federal government, which the state is currently unable to repay. The mounting debt poses a significant challenge for California’s unemployment system.

The state is currently requesting loan forgiveness from the Acting United States Secretary of Labor. Interestingly, this same person was California’s Secretary of Labor during the COVID-19 era and was responsible for overseeing the state’s fraudulent payments. Shockingly, the state paid out almost $1 billion to felons in prison who filled out fraudulent paperwork. Despite this scandal, California Democrats have put forth a proposal to increase unemployment insurance taxes fivefold and almost double unemployment benefits.

California borrowed $17.8 billion in 2020 to sustain payments from its unemployment insurance fund. It is estimated that this number will increase to $20.8 billion by the end of 2024 due to insufficient payments. The projected growth in unemployment, from 804,000 Californians in 2022 to 930,000 by 2025, will result in an increase in benefits payments from $5 billion in 2022 to $6.8 billion by 2025, unless there are any legislative changes. Even before the COVID-19 crisis, California’s unemployment insurance fund was already facing solvency issues. However, the state’s non-partisan Legislative Analyst’s Office has declared the program “structurally insolvent” due to $55 billion in fraud and overpayments.

According to the January report by the LAO, the UI Trust Fund forecast reveals a concerning trend. It states that in 2023, UI benefit payments surpassed state payroll tax contributions by $1.3 billion. The report further predicts that this imbalance will continue to grow, reaching approximately $1.6 billion annually in both 2024 and 2025. It is worth noting that such a deficit in benefit payments compared to contributions has previously only occurred during significant economic downturns, including the recent pandemic and the Great Recession.

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If a state’s unemployment insurance fund is in debt to the federal government for two consecutive years, employers will face an automatic tax increase to repay the loan. This tax increase will amount to $21 per worker per year. As a result, by the fifth year, the tax will have increased by $105 above the initial level.

According to the data, each worker will see an increase of $21 per year, which translates to a substantial $400 million increase in annual revenue. Despite this growth, the current payments are insufficient to cover both existing claims and the principal owed to the federal government. Consequently, the state is left with two choices: seeking debt forgiveness from the federal government or implementing unemployment tax hikes beyond the automatic federal increases.

At the end of 2023, the office of Acting U.S. Secretary of Labor Julie Su made an announcement regarding the possibility of waiving state repayment to the federal government for ineligible benefits. The state of California, which administered $55 billion in ineligible benefits, sent a letter in February 2024 to Su, requesting federal approval for debt forgiveness as noted by the California state auditor.

If federal forgiveness fails to materialize, the state is contemplating a significant increase in unemployment taxes from 0.1% to 0.5%, as well as a substantial rise in weekly maximum benefits from $450 to $700. However, State Sen. Maria Durazo, D-Los Angeles, the author of SB 1434, recently canceled the bill’s initial hearing, possibly in light of the impending decision letter from the U.S. Department of Labor.

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Durazo’s office has yet to respond to media inquiries as of the time of publication.

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