California unemployment debt rises, businesses ask for help

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California borrowing to pay unemployment benefits will soar to $ 26.7 billion by the end of next year as state funds prove insufficient to cover costs of unprecedented unemployment caused by the COVID-19 pandemic, a new report warns.

Even as the economy rebounds, unemployment remains high and debt is expected to exceed the estimated $ 24.3 billion by the end of this year, state officials said.

Business leaders said on Friday that as borrowings from the Federal Unemployment Trust Fund are repaid from higher payroll taxes, state officials must further exploit the planned budget surplus for ease the financial blow to employers who are already struggling to recover from last year’s economic shutdown. .

“If they don’t do anything more, businesses are going to have to pay this tax at a critical time in our economic recovery,” said Rob Lapsley, president of the California Business Roundtable. “If a few [businesses] teeter on the edge of a fiscal cliff, it could lead them to the brink and they go bankrupt. “

California has processed a record 22.5 million jobless claims since the start of the COVID-19 pandemic in March 2020, and the state has paid out $ 150 billion in benefits.

The report, released this week by the state’s Employment Development Department, poses a new challenge to Governor Gavin Newsom and lawmakers after months of unresolved issues with the unemployment system.

Employers pay federal and state taxes into unemployment insurance funds on behalf of each employee on their payroll. When the fund runs out, states can seek help from the federal government to ensure that regular benefits can continue to flow.

But the money borrowed from the federal government is repaid through an increase in the payroll tax that gradually rises each year, reaching over 3% after 10 years, until the debt is paid off.

The ESD Debt Forecast Report noted that employer contributions are expected to increase from $ 4.8 billion this year to $ 6 billion next year. The independent office of the legislative analyst estimates that the total debt may not be repaid until 2031.

The increase in debt has sparked a dispute between heads of state over how much of the surplus should be spent on reducing the burden on business.

Newsom recently announced that the state is expected to have a fiscal windfall of $ 76 billion, in addition to the $ 27 billion the state will receive from the US federal bailout.

The governor proposed to use $ 1.1 billion of federal funds for unemployment costs.

“This shows the commitment we need to make for this payment,” Newsom said last month, when he unveiled his budget proposal. “Every state in the country will struggle for many years to pay off this debt, as we did in the last recession, the Great Recession, when it took several years. “

During the recession of ten years ago, California borrowed $ 10.7 billion from the federal trust fund to pay unemployment benefits; it took the state from 2011 to 2018 to pay off the debt.

This time, California is one of 19 states that have had to borrow a total of $ 53 billion from the federal trust fund to cover unemployment benefits during the pandemic. Other states that have taken out loans include Massachusetts, Illinois, New York and Texas, but California has borrowed by far the most – over 40% of the total.

The $ 1.1 billion proposed by the governor is “a step in the right direction”, according to Jennifer Barrera, executive vice president of the California Chamber of Commerce.

“However, in order to protect small businesses and other employers devastated by the pandemic from the risk of higher taxes and more economic uncertainty, the state must be much more aggressive in paying off all debt as soon as possible. “said Barrera.

As an alternative to Newsom’s plan, the legislature offered $ 2 billion in payroll tax credits to small employers, spread over 10 years. The two sides are still negotiating on the proposals and Lapsley proposed that a working group be formed to resolve the issue. He said even the legislative proposal of $ 200 million a year was not enough to prevent heavy tax increases for businesses and would hit the service and hospitality sectors particularly hard.

The state’s response to the unemployment system’s debt has been called inadequate by some lawmakers.

“If not addressed in a meaningful and substantial way, it will lead to an increase in taxes paid to and by our already struggling small businesses,” said MP Vince Fong (R-Bakersfield), vice chairman of the Assembly budget committee.

Some lawmakers have noted that EDD officials said the agency had identified at least $ 11 billion in benefits paid out of fraudulent claims. While the vast majority of frauds have occurred on claims in a federal program, some of the fraud payments are state liabilities.

“This debt was incurred because of the mismanagement of our state government, not our local small businesses,” Fong told colleagues during Monday’s budget debate. “Lack of action will only increase the tax burden hardworking Californians face in the future.”

In October, the EDD thought California’s loan balance could reach $ 48 billion this year, but the estimate was revised down after some officials cited factors that include many employers pushing for a large number of employees working remotely.

However, the new projection of the debt worries business leaders.

“The bottom line is that taxing California businesses what is estimated to be a tax increase of $ 26.7 billion or more over the next 10 years will divert resources from their ability to recoup the losses incurred.” during pandemic shutdowns and will hamper California’s overall economy. recovery, ”Barrera said.


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