California’s Unemployment Loan Default Debt to the Federal Government Exceeds $21 Billion
Businesses are anticipated to face increased payroll taxes that will rise annually until the debt is fully settled.
“This is certainly a concern, and I have been mindful of it for years,” he mentioned during a press conference on Dec. 16. “It’s an obligation we must fulfill. We will pay it off.”
The governor emphasized the importance of utilizing the budget process, when feasible, to repay part of the loan, rather than depending on the current system where businesses are taxed at higher federal rates to address the debt.
While businesses in states without outstanding debts pay approximately 0.6 percent for unemployment tax, California businesses will face a rate of 1.5 percent starting in 2025, with an annual increase of 0.3 percent—roughly $21 per employee—until the loan is repaid.
“We want to ensure that employers are not shouldering the burden of the payroll tax,” Newsom expressed. “I’m optimistic that as our economic conditions continue to improve, which they are significantly, we can make substantial progress in reducing that debt.”
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The governor mentioned that the state has successfully navigated similar obstacles in the past, resolving billions in debt in the aftermath of the Great Recession, and intends to follow a similar strategy to address the current debt.
He stated that arriving at a resolution will necessitate a collaborative effort among all branches of state government.
Newsom indicated that his office had made attempts to include funds in the budget to partially repay the loan, but these proposals were rejected by other elected officials.
“A few years back, I proposed billions for this purpose, but the Legislature removed it from the budget, and it happened again, so this has been an enduring challenge for us,” he said. “We will persist in advocating to the Legislature for the necessity and urgency of addressing this debt.”
In the fiscal 2024 budget proposal, $750 million was initially allocated to reduce the debt, but that funding was later withdrawn.
Nationwide, 22 states borrowed funds during the pandemic to support unemployment insurance payments that surged when local and state regulations forced many businesses to close.
States that encountered unemployment claims exceeding their payment capabilities, including California, initially accessed their reserves and subsequently borrowed from the federal government to fill the gaps.
All states, except for three, have since repaid their loans.
California has the largest debt by a significant margin, having increased from $18.6 billion in May 2023.
New York’s debt stands at about $6.5 billion, down from $8 billion in May 2023.
Connecticut’s outstanding debt was $187 million last year and now it has paid off nearly all, owing only about $1.6 million.
The variations in borrowed amounts and repayment statuses stem from differing approaches taken by state and local governments during the pandemic and their respective abilities or willingness to repay the loans.
States with stricter regulations that constrained business operations—such as California and New York—experienced greater borrowing needs due to elevated unemployment claims compared to states like Texas and Florida, where fewer regulations were in place, according to available data.
Fraudulent Claims
As federal funds flowed liberally due to the $2.2 trillion CARES Act, instances of fraud against the government surged.
California reportedly dispensed approximately $32.6 billion in fraudulent claims, as estimated by data analytics firm Lexis Nexis.
