California Defaults on $18.6 Billion Debt, Now Businesses Have to Pay
California's decision not to repay the approximately $20 billion it borrowed from the federal government to cover unemployment benefits during the pandemic has left employers with the expense. The state should have used the COVID money it received from the government in 2021 to repay the loans, said Marc Joffe, a policy analyst at the Cato Institute, a public policy think tank.
The proposed 2023-2024 budget had allocated $750 million to start paying down the loans, but Governor Gavin Newsom withdrew the funding in January. The decision leaves businesses in the state responsible for the loans, causing the federal unemployment tax rate to increase annually by 0.3% until the loan is extinguished, which is a burden on top of the many other burdens the state puts on employers.
While 22 states borrowed money for unemployment insurance from the federal government during the pandemic, all but four states, including California, have paid back their debts.
According to U.S. Treasury Department data, California owes the most, with approximately $18.6 billion outstanding as of May 2. New York owes $8 billion, Connecticut owes $187 million, and Colorado owes $77 million. Experts attribute the discrepancy in amounts borrowed and owed by states to different approaches to managing the pandemic, with California's stricter lockdown causing unemployment to remain higher and longer.
Initially, the state borrowed from its reserves to pay the benefits, but after exhausting its coffers, it borrowed to cover expenses, said analysts. The unprecedented levels of fraud across the state due to limited oversight and antiquated computer systems exacerbated the situation, according to Lee Ohanian, a professor of economics at the University of California-Los Angeles.
The total cost of fraud was estimated at $32.6 billion by analytics firm LexisNexis. Investigations found that illegitimate unemployment benefits payments were paid to convicted felons, with one address receiving 60 separate fraudulent payments. Fraud is a persistent issue with the program, and a $2 million federal grant in 2013 sought to address the issue with new computer software systems.
The upgrade successfully stopped instances of fraud, but further improvements stopped with the end of the grant in 2016, reportedly due to the agency's reluctance to take on the annual expense for the third-party service. "They were penny wise and pound foolish," Ohanian said. At a cost of $2 million annual investment, the program would have cost $14 million to operate since it was terminated. "Sadly, this is just a trifecta of bad decisions," Ohanian added. "The Employment Development Department made a bad decision to not renew its lease for the fraud detection software, the state government took out a loan and chose to welch on the debt—which is outrageous—and now businesses are repaying more in taxes for the incredibly unwise decisions and mistakes of the state government."
Reports that the state is seeking forgiveness from the federal government were met with resistance by policy experts, including Ohanian. "We've made a lot of bad decisions, and we expect the rest of the country to pay for it," he said. "It also raises questions about the future: If the state is going to default on the $20 billion federal loans, how safe are municipal bonds from California?"
