California’s Unemployment Insurance System Is ‘Broken,' Report Finds

People line up to attend TechFair LA, a technology job fair, in Los Angeles on Jan. 26, 2017. Lucy Nicholson/Reuters

California’s unemployment insurance program is facing financial challenges, burdened by shortfalls and a multibillion-dollar federal loan, according to a recent report by the state Legislative Analyst’s Office.

The program provides eligible workers with partial wages if they lose their jobs through no fault of their own, the Dec. 2 report from the office said. The system works by building a trust fund with payroll taxes from employers, with the taxes collected expected to cover the benefits paid. However, the collections now “routinely fall short,” the report said.

“Both our office and the administration expect these annual shortfalls to continue for the foreseeable future. Under our projections, deficits would average around $2 billion per year for the next five years,” the report states.

“This outlook is unprecedented: although the state has, in the past, failed to build robust reserves during periods of economic growth, it has never before run persistent deficits during one of these periods. The state’s unemployment insurance financing system is broken.”

While the program faced fiscal issues for several decades, the COVID-19 pandemic presented an “unprecedented challenge.” During the pandemic, California took a loan of roughly $20 billion from the federal government to pay for unemployment benefits. The state never paid back this amount.

The anticipated $2 billion per year shortfalls will add to the $20 billion outstanding loan and complicate the financial situation, the report noted. The interest on the loan is expected to total $1 billion annually. The report warned that the system will be “unable to build reserves ahead of the next recession.”

To “fix the system,” the Legislative Analyst’s Office suggested several measures. At present, payroll taxes are charged at 3.5 percent of an employee’s first $7,000 in wages. The report recommended raising the wage threshold to $46,800.

The analyst’s office also suggested refinancing the outstanding loan, because as long as it remains unpaid, “even an improved tax system would probably not be able to build reserves ahead of the next recession,” it said.

On average, employers contribute $5 billion to $6 billion annually to the state’s unemployment insurance (UI) fund. When an eligible person becomes jobless, the state pays 50 percent of his or her wages, up to $450 per week, for up to 26 weeks.

Unemployment Fraud, Benefits to Illegals

California’s UI system was also plagued by fraudulent claims during the pandemic. Out of the several state agencies that received pandemic funds, California’s Employment Development Department (EDD) was granted the highest amount.

However, the EDD estimates that roughly $20 billion was siphoned off by international and domestic criminals via fraudulent unemployment claims filed under stolen identities. By August last year, the EDD had recovered only $2 billion of the stolen funds, the agency told The Epoch Times.

A key reason for such large-scale fraud was that the EDD failed to block addresses that were used to file numerous claims. In addition, a measure that prevented payments from going to people with unconfirmed identities was removed by the agency amid pressure to get the aid out quickly during the pandemic.

Meanwhile, a California bill seeking to provide benefits equivalent to unemployment insurance to noncitizens has drawn criticism from Republicans.

SB 227, titled “Unemployment: Excluded Workers Program,” requires the EDD to develop a plan to provide cash assistance to people who are “ineligible for unemployment insurance due to their immigration status.” The EDD has to develop the plan by March 31.

State Sen. Brian Jones, a San Diego Republican, warned against the measure in a September Instagram post.

“It’s insulting that California Democrats are even considering expanding unemployment benefits to illegal immigrants,” he wrote.

“Under the Newsom administration, the unemployment insurance fund is already broke with a $20 billion deficit. We cannot afford to expand benefits to those here illegally.”