The 2022-23 Budget: State Payments on the Federal Unemployment Insurance Loan

The 2022-23 Budget: State Payments on the Federal Unemployment Insurance Loan FEBRUARY 2022 Summary. The 2022-23 Governor’s Budget States Borrow From Federal Government proposes $1 billion General Fund in 2022-23 and During Economic Downturns. Under existing $2 billion in 2023-24 to make state payments state tax and benefit rules, the UI trust fund does on the federal Unemployment Insurance (UI) not build large enough reserves in normal times loans the state received during the pandemic. to cover the increase in claims during a recession. The proposed state payment would reduce the During recessions, states may borrow from the outstanding loan balance by about 15 percent. federal government to continue payment benefits In this post, we update earlier projections for the if state UI funds are insufficient. These loans must UI loan repayment and assess the Governor’s be repaid, with interest (currently 1.6 percent proposed payments. We estimate that the annually), at a later time. The loan principal is repaid $3 billion payment would reduce General Fund by automatic increases in the federal UI tax rate interest costs over the repayment period by a employers pay. The loan interest typically has been total of $550 million to $1.1 billion. The payment paid from states’ General Funds. also could reduce employer payroll tax costs in Since Pandemic Began, State Has Received roughly ten years. Should the Legislature instead $20 Billion in Federal UI Loans. Prior to the wish to provide immediate tax relief, one option to pandemic, at the start of 2020, the state’s UI trust consider would be to provide employers state UI tax fund held $3.3 billion in reserves. Despite these credits to offset their upcoming costs to repay the reserves, the state’s UI trust fund became insolvent federal loan. during the summer of 2020, a few months following See our May 2021 report for a detailed overview the start of the pandemic and associated job of the state’s UI system. losses. California, like many other states, used federal loans to continue paying benefits during Brief Overview of UI the pandemic. In total, the state needed to borrow UI Program Assists Unemployed Workers. about $20 billion from the federal government, Overseen by the Employment Development roughly twice the amount the state borrowed for Department (EDD), the UI program provides weekly UI benefits during the Great Recession. payments to workers who lost their jobs through Businesses Set to Pay Add-On Federal UI no fault of their own. The average payment— Tax Beginning in 2023. To repay the federal excluding federal augmentations during the loans, the federal UI payroll tax rate on employers pandemic—is about $330 per week. Employers pay will increase by 0.3 percent for tax year 2022. a payroll tax into the state’s UI trust fund to cover However, employers will not pay this higher rate payment costs. Employer UI payroll taxes average until 2023 when employers remit their 2022 federal 3.6 percent and are applied to the first $7,000 of UI payroll taxes. To give some context to the size of each employee’s wages. The state’s tax base— increased federal UI taxes that employers will pay to $7,000—is the minimum allowable amount under repay the loans, Figure 1 on the next page, shows federal law. a hypothetical employer’s combined state and federal UI tax liability for a single employee over the next several years. 2022-23 Budget Series 1 Recent Fraud Concentrated in Federal UI This estimate of likely fraud is much smaller than Benefits That Do Not Affect Loan Repayment. the $1.3 billion a separate EDD analysis flagged as Figure 2 shows the administration’s estimate of possible fraud, but this $1.3 billion estimate likely is possible UI benefit fraud that occurred during the overstated. To arrive at the estimate of $1.3 billion, pandemic. Almost all pandemic-era fraud occurred EDD counts state UI claims as fraudulent if a in the temporary federal programs that now have worker did not respond to a request for additional ended. The federal government, not the state identity documents after they had started receiving UI trust fund, paid these benefits. As a result, the benefits. There are several reasons why workers state did not use federal UI loans to pay these with legitimate claims may not have followed up fraudulent benefits, meaning California employers with EDD. Many of the suspected claimants had are not required to repay any of the fraudulent already run out of benefits and thus had little reason federal benefits. to log in to confirm their identity. Other claimants State UI Fraud Does Not Appear to Be Major may have given up in frustration after trying Factor in Size of UI Loans to Be Repaid. Although unsuccessfully to send requested documentation the figure shows the administration’s estimate of to EDD. Since state UI fraud was less widespread possible state fraud during the pandemic, a more than fraud in the temporary federal programs, state reliable estimate of likely fraud in state UI benefits UI fraud does not appear to have notably increased comes from an audit of claims in 2020. This review the amount of federal UI loans that the state and suggests about $100 million of $35 billion in state employers are to repay. benefits paid during the pandemic were fraudulent. Figure 1 Federal Tax Increases to Repay UI Loans in Context Example of Employers’ Annual UI Payroll Taxes Per Employee $500 400 $189 $168 $147 $126 $105 $84 $63 $42 300 $21 $42 200 Federal UI Payroll Tax Add-Ona $253 Base Federal UI Payroll Tax 100 State UI Payroll Taxb 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 a For states that have outstanding federal UI loans, federal law requires the federal UI tax rate paid by employers to increase by 0.3 percentage point increments until the loans are repaid. b State UI tax rates vary by employer and by year. For this figure, we display the average state UI tax rate of 3.62 percent. UI = Unemployment Insurance. 2022-23 Budget Series 2 Looking Ahead Assessment Updated Forecasts Under Two Economic $3 Billion Repayment Would Lower Scenarios—Low Cost and High Cost. To illustrate State Interest Costs and Employer Costs... state and employer costs to repay the federal The Governor’s proposal would reduce the amount UI loans, this analysis updates our earlier of outstanding federal UI loans. As a result, low- and high-costs forecast scenarios for the the proposal would reduce state interest costs state’s UI system based on different underlying immediately. The state also would face lower economic scenarios. Under the low-cost scenario, interest payments each year the loan remains employment quickly returns to pre-pandemic levels outstanding. We estimate that the Governor’s and interest rates remain historically low for the proposed $3 billion payment likely would reduce entire period. Under the high-cost scenario, the General Fund interest costs over the repayment state’s full economic recovery is delayed several period by a total of $550 million to $1.1 billion. years, and interest rates paid on the UI loans …But Provide No Near-Term Economic increase gradually over the next several years. Relief to Employers or Workers. The proposed Loan Will Take Many Years to Repay Under state payment also would reduce employer costs Either Scenario. Under our low-cost scenario, in the future. In general, the $3 billion deposit the state and employers pay off the federal loan would reduce the amount employers must repay in 2030. Under our high-cost scenario, the payoff by $3 billion. However, employers would not occurs in 2032. Neither of these scenarios capture benefit from these lower costs for many years. the possibility of another recession sometime this This is because the federal tax increases remain decade. Should that occur, payoff of the federal in place until the loan is fully repaid, which would loan would extend well beyond 2032. still take several years even with the $3 billion Larger State Interest Payments Begin payment. Further, although the state payment This Year. Figure 3 on the next page, shows our could shorten the number of years that employers projections for upcoming state interest payments pay the increased federal tax rates, employers may under two interest rate scenarios. Under our low interest rate scenario, Figure 2 the federal interest rate charged on outstanding federal UI loans rises Temporary Federal Benefits, Not State Benefits, slightly from its current low and Were the Primary Target of Fraud remains near 2.5 percent. Under the high interest rate scenario, the federal interest rate increases from 2.2 percent to 4.5 percent over the next several years and remains at that level. SSuussppeecctteedd Proposal aass FFrraauudduulleenntt The 2022-23 Governor’s Budget proposes to make a $1 billion General Fund payment in 2022-23 and an additional $2 billion General Federal Benefits $146 billion Fund payment in 2023-24 toward repaying the outstanding balance on the state’s federal UI loans. The State Benefits $35 billion proposed supplemental payment Likely Fraud would reduce the state’s outstanding loan balance by about 15 percent. 2022-23 Budget Series 3 see no direct benefit if the payment is too small Figure 3 to reduce the repayment schedule by a full year. Looking Ahead at State Costs (In this case, employers would nevertheless pay the higher federal UI tax rates, but the carryover to Repay the Federal UI Loan revenue would instead be deposited into the state LAO Projections (In Millions) UI trust fund. These funds would be available to pay UI benefits in future years.) Estimated State Interest Payment Fiscal Year Low-Cost Scenario High-Cost Scenario To Provide Immediate Benefit, Legislature Could Instead Provide UI Tax Credits to 2021-22 $36 $36 Businesses. Should the Legislature instead wish to 2022-23 460 630 2023-24 520 890 provide immediate tax relief to employers while the 2024-25 480 1,030 economic effects of the pandemic linger, one option 2025-26 440 1,020 to consider would be to provide employers state 2026-27 380 970 UI tax credits to offset the upcoming federal UI tax 2027-28 300 880 increase. Tax credits could be designed in various 2028-29 210 750 ways to meet the Legislature’s policy objectives 2029-30 110 600 2030-31 20 430 and priorities. 2031-32 — 240 2032-33 — 50 Totals $3,000 $7,200 Note: low-cost scenario assumes 2.5 percent interest rate, whereas high-cost scenario assumes 4.5 percent interest rate. UI = Unemployment Insurance. LAO PUBLICATIONS This post was prepared by Chas Alamo, and reviewed by Brian Uhler and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2022-23 Budget Series 4