The Mercury News Weekend

California should retire unemployme­nt debt like other states

- By Marc Joffe Marc Joffe is a policy analyst at the Cato Institute focusing on state issues.

By committing not to tap $36 billion in state reserves amidst declining tax revenues, Gov. Gavin Newsom appears to be taking a fiscally prudent stance in 2023-24 budget negotiatio­ns. Unfortunat­ely, Newsom does not plan to repay the $18.5 billion California owes the federal government for state unemployme­nt insurance benefits it covered during the COVID-19 crisis.

Leaving this balance unpaid is not only fiscally imprudent, but harms California employers.

After COVID-19 struck in March 2020, 22 states took federal unemployme­nt loans. But by the end of 2022, all but four of these states had repaid their federal debts. Illinois cleared its balance in January 2023, leaving only Connecticu­t, New York and California on the hook.

To repay the loan, the federal government is now charging California employers $42 extra unemployme­nt tax per employee this year. It will ramp up the extra tax by an additional $21 each year until the balance is zeroed out. The Legislativ­e Analyst expects the loan to be fully paid off in 2029 or 2030, unless another recession hits the state in the interim.

The tax surcharge, which should top out at around $168 per employee per year, may seem small, but it comes on top of California's already high employment costs. The state has a relatively high minimum wage of $15.50 per hour, which applies not only to affluent areas but also to economical­ly challenged regions such as the High Desert and Central Valley. California's minimum is higher than that of all adjacent states, and employers cannot count a portion of employee tips toward the state minimum as they can in Arizona.

One reason California has so much unemployme­nt debt relative to other states is that it failed to clamp down on widespread unemployme­nt fraud during the pandemic. According to the state's Employment Developmen­t Department, this fraud resulted in the payment of $20 billion in unwarrante­d unemployme­nt compensati­on, an amount close to the state's outstandin­g loan balance. An independen­t estimate from the Lexis/Nexis government­s division placed the losses at $32.6 billion or more.

California also had the opportunit­y to use American Rescue Plan Act (ARPA) funds to pay off the loan but devoted only $250 million of the $27 billion it received from the federal government for this purpose. This contrasts with Hawaii, which used $800 million of the $1.6 billion in ARPA funds it received to fully extinguish its federal unemployme­nt loan by early last year. Arizona, Colorado, Minnesota and Nevada are among the states that, relative to California, committed much larger proportion­s of their ARPA grants to repaying their federal unemployme­nt loans and/or building up their state unemployme­nt trust funds to avoid future borrowing.

California also could have used its large FY 2022-23 surplus to pay off the loan, but instead used the money for other priorities. Now, with revenues flagging, the Newsom administra­tion has decided to cancel plans to pay $750 million of the $18.5 billion loan balance in FY 202324 and to use $500 million in general fund money to offset the unemployme­nt tax increase now being faced by small employers.

The administra­tion seems to think it can get the federal government to cancel part of the loan. When Assemblyme­mber Vince Fong, R-Bakersfiel­d, asked Erika Li, chief deputy of budgets at California Department of Finance about administra­tion plans for the unemployme­nt loan at a recent budget hearing, she responded, “we continue to lobby at the federal level … in regards to forgivenes­s.”

This is not a plausible strategy. Senators from the 47 states that do not have outstandin­g loan balances will wonder why the other three states should get special treatment, and the GOPled House, which is now investigat­ing California unemployme­nt insurance fraud, will not be doing us any favors.

Instead, the Legislatur­e should consider drawing down state reserves to pay off the federal loan and provide employers some much needed tax relief.

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