…which was initially anticipated to be reached by the end of the year. In the following brief Five-minute read, we will dive into the EDD’s debt situation, the allocation of funds, and the impact on taxpayers.
The state of the unemployment insurance trust fund is rapidly deteriorating, leading to an alarming increase in the “temporary surcharge” federal taxes that every California business is currently shouldering. This surcharge is likely to persist for an extended period.
Despite the concern for the growth rate of the debt, the EDD has not provided an official response explaining why it is increasing at a faster pace than expected. Furthermore, they have not released their mandatory “October Fund Forecast” report. In May, the EDD was borrowing approximately $139 per second from federal resources to cover ongoing unemployment claims, a figure that has now risen to $211 per second.
The EDD incurred a substantial debt, ranging from $32 to $40 billion, due to preventable fraud during the pandemic. Notably, California did not utilize its remaining $7 billion federal COVID surplus funds to reduce this debt, which is currently accruing $867,392 in interest alone each day.
The state is expected to continue borrowing for several years, with the surcharge only beginning to make a dent in the debt in approximately three years when it increases to around $273 per employee per year. Initially, the Newsome administration projected a seven-year timeline for debt repayment, but it now appears that it will take at least 15 years, barring any severe economic downturn.
The state’s decision not to pay down the debt is now evident – the Newsome administration realized it could continue accumulating debt and rely on federal surcharges to address it. Essentially, the California EDD is increasing its federal borrowing while businesses in the state bear the brunt of additional taxes.
Ultimately, the people are footing the bill for the preventable fraud the EDD failed to address, without the need for the state to pass potentially unpopular or legally dubious taxes. The Department of Labor, operating independently of individual states, is legally authorized to collect up to 6% of the first $7,000 in wages as unemployment tax revenue. This revenue increased from around $3 billion to approximately $6 billion annually. However, since the pandemic, it has decreased to $5.3 billion.
The EDD’s financial situation remains precarious due to the generous nature of the benefits provided, and California’s economy, heavily reliant on both high-earning and low-earning jobs, is struggling to keep pace with the demands on the unemployment fund.
As per the EDD’s forecast, California employees may find themselves bearing an additional burden of approximately $1,500 per employee over the next decade. This yearly rate hike, starting at $21 and increasing by $21 annually (with additional increments in the coming years), is expected to reach $420 per employee per year. The debt will continue to grow in the coming years, and the funds designated for debt reduction will not effectively address it until the surcharge income surpasses the borrowing. Consequently, this debt may persist for as long as the EDD continues to borrow.
Jon Coupal, the leader of the Howard Jarvis Taxpayers Association, has characterized this strategy as “further evidence of California’s lack of fiscal responsibility.” While these additional UI chargers are labeled as a “surcharge” and are ostensibly temporary, from a business perspective, they represent an additional tax. Importantly, this tax did not undergo the standard legislative process, resulting in an imposed financial burden on business without the opportunity for public discussion, input or a vote.”
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