California’s Unemployment Insurance System Declared ‘Broken,’ According to Report
Analysts have indicated that the program is unable to accumulate reserves ahead of the next recession due to payroll tax shortfalls and a significant outstanding loan.
According to a recent report from the state Legislative Analyst’s Office, California’s unemployment insurance program is grappling with serious financial difficulties, impacted by multibillion-dollar shortfalls and a federal loan.
“Both our office and the administration predict these annual shortfalls to persist for the foreseeable future. Our forecasts indicate deficits averaging around $2 billion annually over the next five years,” the report emphasizes.
“This situation is unprecedented: while the state has historically struggled to build substantial reserves during economic expansions, it has never previously endured ongoing deficits during such times. The state’s unemployment insurance financing structure is fundamentally flawed.”
The expected annual shortfalls of $2 billion will exacerbate the situation regarding the $20 billion loan, complicating the financial landscape even further. The report indicates that interest on this loan is anticipated to reach $1 billion each year, warning that the system will be “unable to build reserves ahead of the next recession.”
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To address the issues within the system, the Legislative Analyst’s Office proposed several recommendations. Currently, payroll taxes are levied at 3.5 percent on the first $7,000 of an employee’s earnings. The report advocates increasing this wage threshold to $46,800.
Additionally, the analyst’s office suggests refinancing the outstanding loan, emphasizing that as long as the debt remains unpaid, “even with an improved tax structure, building reserves prior to the next recession may still be unfeasible,” it stated.
Unemployment Fraud and Benefits for Noncitizens
California’s UI system has faced significant fraudulent claims during the pandemic. California’s Employment Development Department (EDD) received the largest share of pandemic funds among state agencies.
The EDD estimates that approximately $20 billion was lost to international and domestic criminals through fraudulent claims filed using stolen identities. By August of last year, only $2 billion of the stolen funds had been recovered, the agency reported to The Epoch Times.
A major factor contributing to this extensive fraud was the failure of the EDD to block addresses that were used to submit multiple claims. Furthermore, a protective measure that prevented payments to individuals with unverified identities was rescinded as the agency faced pressure to rapidly distribute aid during the pandemic.
Simultaneously, a California bill aiming to provide unemployment insurance-equivalent benefits to noncitizens has attracted criticism from Republican lawmakers.
SB 227, described as the “Unemployment: Excluded Workers Program,” would require the EDD to devise a strategy for offering cash assistance to those “ineligible for unemployment insurance due to their immigration status.” The EDD must finalize this plan by March 31.
State Sen. Brian Jones, a Republican from San Diego, expressed his opposition to the measure in a September Instagram post.
“It’s outrageous that California Democrats would even think about extending unemployment benefits to illegal immigrants,” he stated.
“Under the Newsom administration, the unemployment insurance fund is already in deficit by $20 billion. We cannot afford to widen benefits to those in the state illegally.”
