California unemployment fund 'insolvent' due to $55B fraud, businesses to pay

California’s unemployment insurance fund is “structurally insolvent” due to $55 billion in fraud and overpayment during COVID-19 crisis, leading to a growing $21 billion unemployment benefits loan from the federal government the state is unable to pay down.

While the state seeks loan forgiveness from the Acting United States Secretary of Labor, who was California’s Secretary of Labor during the COVID-19 era and oversaw the state’s fraudulent payments — including nearly $1 billion to felons in prison filling out fraudulent paperwork — California Democrats have proposed quintupling unemployment insurance taxes and nearly doubling unemployment benefits.

In 2020 California borrowed $17.8 billion to continue payments from its unemployment insurance fund, a number that is projected to reach $20.8 billion by the end of 2024 due to insufficient payments. With unemployment projected to grow from 804,000 Californians in 2022 to 930,000 Californians by 2025, benefits payments are projected to grow — barring any legislative changes from $5 billion in 2022 to $6.8 billion by 2025. While California’s unemployment insurance fund already faced poor solvency before the COVID-19 crisis, $55 billion in fraud and overpayments have led the state’s non-partisan Legislative Analyst’s Office to declare the program “structurally insolvent.”

“The administration’s UI Trust Fund forecast shows that UI benefit payments exceeded state payroll tax contributions by $1.3 billion in 2023,” wrote the LAO in January. “The administration anticipates this imbalance will increase to about $1.6 billion annually in 2024 and 2025. Historically, benefit payments have only exceeded contributions during major economic downturns – most recently, during the pandemic and Great Recession.”

If a state’s unemployment insurance fund owes money to the federal government for two consecutive years, federal law automatically imposes an escalating tax increase on employers to pay back the loan. This tax increase amounts to $21 per worker per year, meaning that in the fifth year of tax increases, the tax will have increased $105 over the baseline level.

This $21 increase per worker per year amounts to an additional $400 million per year in increased revenue. However, these growing payments still are not enough to reduce the principal owed to the federal government due to the fund’s inability to fund existing claims, let alone pay back debt. This leaves the state with two options: debt forgiveness from the federal government, and/or increasing unemployment taxes in excess of the automatic federal increases.

Acting U.S. Secretary of Labor Julie Su’s office announced at the end of 2023 the potential waiving of state repayment to the federal government for ineligible benefits, with the California state auditor noting the state submitted a letter in February 2024 requesting federal approval from Su — who administered California’s $55 billion paid in ineligible benefits — for debt forgiveness.

Should federal forgiveness not go through, the state is considering quintupling unemployment taxes from 0.1% to 0.5%, and nearly doubling weekly maximum benefits from $450 to $700, which would require a ⅔ vote in each chamber of the legislature to pass. However, the author of SB 1434, State Sen. Maria Durazo, D-Los Angeles, just canceled the bill’s first hearing, perhaps due to the pending decision letter from the U.S. Department of Labor.

Durazo’s office did not respond to media inquiries by the time of publication.