Massive unemployment insurance payments (and fraud) have caused California’s Unemployment Trust Fund debt to the federal government to skyrocket.  As of April 6, the state UI Trust Fund owed a $21.8 billion debt, incurred to federal trust funds to backfill state trust funds during periods in which claims exceed employer payroll tax collections.  The Employment Development Department projects the state UI trust fund will be $40 billion in debt by the end of 2021.  It’s important to note that the state’s UI trust fund debt after the 2009 recession only reached $10 billion, and California employers bore the burden of increased federal UI payroll taxes to repay that debt for nearly a decade.

California employers pay a 0.6% tax on the first $7000 of an employee’s wages – or $42 per employee when the state fund is solvent.  For each year when the fund is insolvent, the tax rate rises by 0.3%.  If the fund is insolvent for enough years (roughly 18 years) employers will face a per-employee tax of $4200 per employee.  This will continue until the trust fund regains solvency.

The next-largest state trust fund debt after California is New York: $10.2 billion.  Most state funds with current debts (20 states are currently in debt) have debts of less than $1 billion.

During the 2009 recession, there were some discussions at Capitol about addressing the then-seemingly massive debt, which again was only a quarter of the debt projected for the end of 2021. At that time there was conversation around increasing the taxable wage base to as much as $15,000 and increasing the state tax rate to increase collections.  None of these proposals moved forward, as representatives of organized labor insisted on significant liberalization of eligibility for UI and much more generous benefits.

In 2021, the Legislature is focusing on new paid sick leave, COVID-19 safety, and other employer mandates, and may not turn to the issue of the UI trust fund debt in 2021.  However, the massive debt and the very high taxes required to repay that debt may make state UI higher taxes and even liberalized benefits seem like a reasonable trade-off for massive federal UI trust fund repayment taxes for tax-beleaguered California employers.