California to borrow federal money to cover soaring jobless claims

SACRAMENTO —  California has been approved to borrow what is expected to be billions of dollars from the federal government to pay unemployment benefits to those left jobless by the coronavirus pandemic, raising concerns about the cost of repaying the debt.

The state made the request as its reserves for paying unemployment benefits are being quickly depleted, requiring California to begin borrowing in just a few weeks, officials said Wednesday.

“We have protocols in place for difficult moments such as this to ensure critical safety nets remain in place,” California Labor Secretary Julie Su said.

With more than 2.7 million Californians filing new claims for unemployment benefits in the last month, experts say the state will probably have to borrow more than the $10.7 billion in loans it received from a federal trust fund during the Great Recession.

“Without the help of the federal government, we wouldn’t be able to pay benefits unless we could come up with billions of dollars or dramatically cut benefits, neither of which is a positive scenario,” said Maurice Emsellem, director of the Fair Chance Program at the National Employment Law Project in Berkeley. “It’s very likely that it is going to be more than we borrowed last time.”

On Wednesday, Gov. Gavin Newsom highlighted the unprecedented number of unemployment insurance, or UI, claims being paid to Californians who lost jobs in the month since he ordered them to stay home to prevent the spread of the coronavirus.

“Just this last week, $2 billion of UI claims were dispersed, just in one week, in the state of California to help support the financial needs of those individuals that have been directly impacted by COVID-19,” Newsom said.

Under a decades-old program, states apply to the U.S. Department of Labor for access to an unemployment trust fund holding revenue from business taxes. The federal account can be tapped by states for loans whenever unemployment insurance claims exceed their reserves.

“California has submitted a request and has been authorized to borrow,” said Loree Levy, a spokeswoman for the state Employment Development Department, which processes unemployment insurance claims. The states don’t ask for a specific amount when they file applications, just for authority to borrow as needed to continue paying benefits, she added.

The state expects to start drawing on the borrowing authority “in the next couple of weeks, meaning the revenue coming into the fund from employer contributions will be outweighed by the benefit payments being made out of the fund,” Levy said.

California keeps a small reserve, but it is dwindling. Last year, before the coronavirus pandemic, the state government collected $5.9 billion in unemployment insurance taxes from employers and issued about $5.5 billion in total benefits.

California was one of 36 states that had to borrow from the federal fund during the last recession. The state then ended up borrowing $10.7 billion, which it only finished paying back in 2018. The principal borrowed was paid back with higher taxes on employers, on behalf of each worker on payroll.

More than $1.4 billion in interest was paid back from state general funds from 2011 through 2018.

The higher taxes levied to pay the debt are a concern for businesses that will already face a huge financial burden of lost revenue during the shutdown.

Robert Moutrie, a policy advocate for the California Chamber of Commerce, said the business group recognizes the importance of unemployment insurance to help residents meet living expenses.

Business advocates are hoping Congress will act to reduce the negative impact of the repayment, with options including a reduction or waiver of extra taxes.

“Without federal or state legislation, California’s employers will end up paying for this shutdown for a decade or longer, and are likely to pay substantially more than the $10 billion that we paid after the 2008 recession,” Moutrie said. “Those UI costs are going to make it that much harder for businesses that are already struggling to rebuild when this shelter-in-place [order] is over.”