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In 1935, Presient Franklin Delano Roosevelt created the first federal unemployment insurance program via the Social Security Act. The program created a national lending pool for states with insolvent unemployment relief accounts. It began by ‘incentivizing’ states to join the program and of course is now a required federal tax on all employers.

Called the FUTA tax, it’s levied on business owners directly for each employee they have. The IRS makes clear on its website, “Only the employer pays FUTA tax; it is not deducted from the employee’s wages.”

Recent news reports illustrated problems with the California Employment Development system such as phony pandemic jobless claims, and frantic callers jamming phone lines with questions that the state’s employment agency struggled to answer.

California’s unemployment system was on dicey footing even before the pandemic, rated as the least financially stable system of all 50 states in February of 2020 by the U.S. Department of Labor in its Unemployment Insurance 2020 Trust Fund Solvency Report.

But there’s yet another problem with the Golden State’s unemployment system that’s been brewing quietly during the pandemic: California now bears the unhappy distinction of having about as much unemployment debt as all other states combined.

The state’s unemployment insurance trust fund, a pool of cash funded by a tax on employers supposedly pays for the benefits claimed by workers. Employers put money into the trust fund on a regular basis via FUTA taxes. Workers receive money from it when they get unemployment benefits.

The federal government loaned money to many states early in the pandemic to shore up their unemployment funds. But two years later, several states have paid off their federal loans, while California’s debt balance remains the highest of any state. Millions have used unemployment benefits during the pandemic, draining existing reserves, and now the state is in debt to the tune of nearly $20 billion. Most states have no debt.

According to a report published by CalMatters, none of the few states with negative trust fund balances come close to California’s negative $19 billion balance. To put it into perspective, the second most indebted state is New York at negative $9 billion. And third is Illinois with nearly $4 billion in debt. And some states have surplus balances, such as Arizona at $1.2 billion and Iowa at $1.3 billion.  

Under the current system, it’s going to take years of higher taxes on employers, who fund the benefits, to pay it back. Gov. Gavin Newsom proposed using $3 billion of the state’s projected $21 billion surplus to take a bite out of that debt, in addition to hundreds of millions to cover the loan’s interest payment, when he unveiled his budget proposal in January.

While that proposal is intended primarily to help businesses, there’s no guarantee businesses will reap a benefit directly, especially in the short term. If these debts are not repaid “states may face interest charges and the states’ employers may face increased net FUTA rates until the loans are repaid.”

This isn’t the first time California’s unemployment trust fund has had to turn to the federal government for loans.

In the wake of the Great Recession, the fund went into about $10 billion of debt, and it took California employers roughly a decade to dig the fund out. Taxpayers wound up footing a roughly $1.4 billion dollar bill for interest payments on that loan. In fact, in 2016, when California employers were still paying down the Great Recession debt, analysts at the nonpartisan Legislative Analyst’s Office warned that the fund could go into debt again during the next recession.