California unemployment insurance system is “broken,” according to the nonpartisan Legislative Analyst’s Office.
The LAO released its December report focusing on the state’s unemployment insurance system, finding that California owes the federal government $20 billion that it borrowed during the COVID-19 pandemic to keep providing benefits.
The big picture: Per the report, tax revenues routinely fall short of covering the costs for unemployment benefits.
- The LAO projects the system to average a deficit of around $2 billion per year for the next five years.
- “The outlook is unprecedented: although the state has, in the past, failed to build robust reserves during periods of economic growth, it has never before run persistent deficits during one of these periods,” the report reads.
What we’re watching: The LAO expects the annual shortfalls to add to the $20 billion outstanding federal loan, with the loan growing by billions of dollars before federal surcharge taxes are high enough for California and employers to begin making progress toward repaying the loan.
- Businesses could face a perpetually outstanding federal loan, on which the state would have to make interest payments on, since the state will need to continue borrowing from the federal government to make up the shortfall.
- California taxpayers will likely be on the hook for around $1 billion in interest payments annually.
- The LAO projects that California will have little or no reserves on hand at the start of the next recession.
How to fix it: The LAO recommends a full redesign of the unemployment insurance system to ensure that contributions cover benefit costs in most years and to build a reserve that can be tapped into during recessions.
- One necessary step, according to the LAO, is to increase the taxable wage base from $7,000 to $46,800. That would bring the taxable wage base in line with the $450 per week benefits people can receive through unemployment insurance.
- The LAO recommends that California should also use a standard tax rate of 1.4% and a reserve building tax rate of 0.5%.
- Further, the LAO recommends the Legislature transition to a new experience rating system that bases employers’ tax rates on increases or decreases in their employment, instead of an exact accounting of their former workers’ unemployment insurance costs.
- Lastly, the LAO recommends that the state refinance the federal loan with a revenue bond paid back by employers and new borrowing that would be paid back by California’s General Fund.
