Unemployment fund running out
State may become first to borrow to pay benefits
Within the next couple of weeks, California’s unemployment insurance fund — which was the mostinsolvent state fund coming into the coronavirus crisis — will run out of money. It’s vying with New York and Ohio to be the first state fund to go negative since the last recession.
People receiving unemployment benefits won’t notice a difference because when a fund runs dry, a state can borrow from the federal government to keep benefits flowing. California has been authorized to borrow, and will probably start “at the end of April or beginning of May,” Loree Levy, a spokeswoman for the Employment Development Department, said in an email.
Going into debt will matter to California employers that survive the coronavirus crisis, because they will start paying higher taxes in a few years to retire it, unless Congress provides some relief. “The bad news for everyone is that California will spend years paying off these loans through higher unemployment insurance taxes, which will make it harder for businesses to rehire as we come out of this crisis,” said Jared Walczak, director of state tax policy with the Tax Foundation.
The insurance fund is used to pay regular state unemployment benefits to laidoff workers. The money comes from a tax that employers pay for each person on their
payroll.
During recessions, payroll taxes decline and unemployment claims rise, so many states build up reserves during good times. During the 200709 recession, California didn’t have enough reserves to pay claims. in part because of 2001 legislation that raised benefits (for the first time since 1992) without increasing taxes. That bill gradually raised the maximum weekly benefit to $450 in 2015, where it still stands.
In early 2009, California started borrowing from the federal government to pay claims. The government doesn’t demand payment until a state has had a loan for two full years. So in 2012, California’s employers began repaying the principal through a surcharge on their unemployment taxes that started small but grew bigger each year until the debt was retired in 2018. The state paid the interest on the loan, totaling about $1.4 billion.
Thanks to record low unemployment rates, by the end of 2019 the fund had built a $3.26 billion surplus, which was not enough to return the fund to health. Oregon, a much smaller state, had a $5.1 billion surplus.
Every year, the Department of Labor issues a solvency value for each state fund that basically reflects its ability to pay one year’s worth of recessionera unemployment claims. A value of one is considered “the minimum level for adequate state solvency going into a recession.”
This year, 31 states had a one or higher. California had the lowest value (0.21) followed by New York and Texas (0.36). The highest were Vermont (2.53) and Oregon (2.51). The last time California was solvent by this measure was 1990.
During recessions, Congress usually provides extra, federally funded benefits that state funds don’t have to repay. This year, these benefits include a $600perweek boost that runs from April through July and a program called Pandemic Unemployment Assistance for selfemployed and other people who can’t get regular state benefits. Californians can begin applying for pandemic benefits Tuesday. It also includes an extra 13 weeks of regular state benefits for those who run out.
California’s tax rate for unemployment insurance is “on the low side” compared to other states, Walczak said.
The tax rate consists of two parts: a flat rate that goes to the federal government and a variable rate that goes into the state fund.
Normally the flat rate is 0.6% of each employee’s first $7,000 in annual pay, or $42 a year. This is the rate that goes up when a fund is repaying a federal loan. By 2018, California employers were paying $147 per employee.
The variable rate depends on a company’s industry and “experience rating,” or history of layoffs. And it varies by state. In California it ranges from 1.5% to 6.2% of the employee’s first $7,000 in wages. (The federal Families First Act creates an incentive for states not to “charge” a company’s experience rating for coronavirusrelated layoffs.)
California is one of only five states that caps this taxable wage base at $7,000. In Oregon, the rate is 0.7% to 5.4% on up to $42,100 in wages. In Washington, it’s 0% to 5.4% on $52,700 in wages, according to the labor department.
California’s unemployment benefits are at the average or somewhat below it. Unlike many states, it does not index benefits to wages. So today, almost half of states have higher maximums than California’s $450 per week. California’s average weekly benefit is $338 a week, below the national average of $378.
Walczak predicts that “the vast majority, if not all states” will have to borrow from the federal government to keep benefits flowing until the economy improves. The government has already agreed to waive interest on those loans in 2020, but “some sort of (principal) forgiveness is possible.”
Structuring relief could be tricky. Congress doesn’t want to be seen as rewarding states that carried large deficits in the past nor discourage adequate funding in the future.
Ken Jacobs, chair of the UC Berkeley Labor Center, said California’s habit of borrowing during recessions and paying higher taxes during recoveries is “bad public policy.” The taxable wage base, currently $7,000, “needs to be high enough to serve as insurance, so we are not in the position of borrowing money and paying interest out of the general fund.”
But Rob Moutrie, policy advocate with the California Chamber of Commerce, said “if you increase the tax, people want more benefits and (the fund) gets drained just as quickly.”
He said that unlike the 2008 financial crisis, business can’t be blamed for the coronavirus. Employers “will absorb those costs for the next decade” because they are complying with the state’s shelterin place order, he said. “We don’t disagree with the order.”
The employers paying off the debt years from now, however, won’t necessarily be the same ones whose workers are now receiving benefits.
“What this COVID crisis is exposing is major flaws in the unemployment insurance program on the financing side, benefits side and infrastructure,” said Maurice Emsellem of the National Employment Law Project. “It has been hugely neglected by the federal government, but also at the state level. If we are going to learn anything from this crisis, we need to deal with the basic flaws.”