State Payments on Federal Unemployment Insurance Loan

Summary. the Governor’s Budget 2022-2023 proposes a general fund of $1 billion in 2022-23 and $2 billion in 2023-24 to make state payments on federal Unemployment Insurance (UI) loans the state has received during the pandemic. The government’s proposed payment would reduce the outstanding loan balance by approximately 15%. In this article, we update past projections for the Unemployment Insurance loan repayment and assess the Governor’s proposed payments. We estimate that the $3 billion payment would reduce General Fund interest expense over the repayment period by a total of $550 million to $1.1 billion. The payment could also reduce employers’ payroll taxes in about ten years. If the legislature wanted to provide immediate tax relief instead, one option to consider would be to provide employers with unemployment insurance tax credits to offset their future costs of repaying the federal loan.

See our May 2021 report for a detailed overview of the state unemployment insurance system.

Brief overview of the user interface

The unemployment insurance program helps the unemployed. Overseen by the Employment Development Department (EDD), the unemployment insurance program provides weekly payments to workers who have lost their jobs through no fault of their own. The average payment—excluding federal increases during the pandemic—is about $330 per week. Employers pay a payroll tax into the state unemployment insurance trust fund to cover payment costs. Unemployment insurance payroll taxes from employers average 3.6% and apply to the first $7,000 of each employee’s salary. State tax base: $7,000—east the minimum amount allowed under federal law.

States borrow from the federal government during economic downturns. Under existing tax and benefit rules, the Unemployment Insurance Trust Fund does not build large enough reserves in normal times to cover increased claims during a recession. During recessions, states can borrow from the federal government to continue paying benefits if state unemployment insurance funds are insufficient. These loans must be repaid, with interest (currently 1.6% per year), later. The principal of the loan is repaid through automatic increases in the federal unemployment insurance tax rate that employers pay. Interest on the loan was generally paid from general state funds.

Since the start of the pandemic, the state has received $20 Billions in federal unemployment insurance loans. Before the pandemic, in early 2020, the state unemployment insurance trust fund held $3.3 billion in reserves. Despite these reservations, the state unemployment insurance trust fund became insolvent in the summer of 2020, months after the onset of the pandemic and associated job losses. California, like many other states, has used federal loans to continue paying benefits during the pandemic. In total, the state had to borrow about $20 billion from the federal government, about double the amount the state borrowed for unemployment insurance benefits during the Great Recession.

Businesses are prepared to pay the additional federal tax on unemployment insurance starting in 2023. To repay federal loans, the federal unemployment insurance payroll tax rate for employers will increase by 0.3% for the 2022 tax year. However, employers will not pay this higher rate until 2023, when employers pay their 2022 Federal Unemployment Insurance payroll taxes. To put into context the magnitude of the increase in Federal Unemployment Insurance taxes that employers will pay to repay the loans, Figure 1 shows the combined state and federal unemployment insurance liability of a hypothetical employer for a single employee over the next few years.

The recent fraud has focused on federal unemployment insurance benefits that do not affect loan repayment. Figure 2 shows the administration’s estimate of possible unemployment insurance benefit fraud that occurred during the pandemic. Almost all of the pandemic-era fraud happened under the temporary federal programs that have now ended. The federal government, not the state unemployment insurance trust fund, paid for these benefits. As a result, the state did not use Federal Unemployment Insurance loans to pay these fraudulent benefits, which means that California employers are not required to repay the fraudulent Federal benefits.

Figure 2 - Temporary federal benefits, not state benefits, were the main target of the fraud

State UI fraud does not appear to be a major factor in the size of UI loans to be repaid. Although the figure shows the administration’s estimate of possible state fraud during the pandemic, a more reliable estimate of likely fraud in state unemployment insurance benefits comes from an audit claims in 2020. That review suggests about $100 million out of $35 billion in state benefits paid out during the pandemic were fraudulent. This estimate of likely fraud is well below the $1.3 billion that a separate EDD analysis flagged as possible fraud, but that $1.3 billion estimate is likely overstated. To arrive at the $1.3 billion estimate, EDD considers state unemployment insurance claims fraudulent if a worker has not responded to a request for additional identification documents after beginning to work. receive benefits. There are several reasons why workers with legitimate grievances may not have followed up with EDD. Many alleged claimants were already out of benefits and therefore had little reason to log in to confirm their identity. Other applicants may have given up in frustration after unsuccessfully attempting to send the requested documents to EDD. Because state unemployment insurance fraud was less prevalent than fraud in temporary federal programs, state unemployment insurance fraud does not appear to have significantly increased the amount of federal loans to the federal government. unemployment insurance that the State and employers must reimburse.

Look forward

Forecast updated under two Scenarios—Low Cost and high cost. To illustrate the state and employer costs of repaying federal unemployment insurance loans, this analysis updates our previous low and high cost forecast scenarios for the state unemployment insurance system. based on different underlying economic scenarios. In the low-cost scenario, employment quickly returns to pre-pandemic levels and interest rates remain historically low throughout the period. Under the high-cost scenario, the state’s full economic recovery is delayed for several years and the interest rates paid on unemployment insurance loans gradually increase over the next few years.

The loan will take several years to repay in either scenario. In our low-cost scenario, the state and employers repay the federal loan in 2030. In our high-cost scenario, the repayment occurs in 2032. Neither of these scenarios takes into account the possibility of another recession in during this decade. If that happened, the repayment of the federal loan would extend well beyond 2032.

Larger state interest payments begin this year. picture 3 shows our projections for future government interest payments under two interest rate scenarios. In our low interest rate scenario, the federal interest rate charged on outstanding federal unemployment insurance loans rises slightly from its current low and remains near 2.5%. In the high interest rate scenario, the federal interest rate rises from 2.2% to 4.5% over the next few years and remains at that level.

picture 3

Thinking ahead about state costs
to repay federal unemployment insurance loan

LAO projections (millions)

Fiscal year

Estimated state interest payment

Low cost scenario

High cost scenario

2021‑22

$36

$36

2022‑23

460

630

2023‑24

520

890

2024‑25

480

1,030

2025‑26

440

1,020

2026‑27

380

970

2027‑28

300

880

2028‑29

210

750

2029‑30

110

600

2030‑31

20

430

2031‑32

240

2032‑33

50

Totals

$3,000

$7,200

Proposal

the Governor’s Budget 2022-2023 proposes to make a payment of $1 billion to the General Fund in 2022-2023 and an additional payment of $2 billion to the General Fund in 2023-2024 to repay the outstanding balance of federal state insurance loans -unemployment. The proposed additional payment would reduce the state’s outstanding loan balance by approximately 15%.

Evaluation

$3 Reimbursement of a billion would reduce the interest costs of the State and the costs of the employer… The governor’s proposal would reduce the amount of unpaid federal unemployment insurance loans. Accordingly, the proposal would immediately reduce the government’s interest charges. The state would also face lower interest payments each year the loan remains unpaid. We estimate that the $3 billion payment proposed by the Governor would likely reduce General Fund interest expense over the repayment period by a total of $550 million to $1.1 billion.

… But brings no short-term economic relief to employers or workers. The payment proposed by the state would also reduce costs for the employer in the future. In general, the $3 billion deposit would reduce the amount employers must repay by $3 billion. However, employers would not benefit from these reduced costs for many years. In effect, the federal tax increases remain in place until the loan is fully repaid, which would take several more years, even with the $3 billion payment. Additionally, while the state payment may shorten the number of years that employers pay the increased federal tax rates, employers may see no direct benefit if the payment is too small to reduce the tax schedule. reimbursement for a full year. (In this case, employers would still pay the higher federal Unemployment Insurance tax rates, but the deferred income would instead be deposited into the state Unemployment Insurance Trust Fund. These funds would be available to pay unemployment insurance benefits in future years.)

To provide an immediate benefit, the legislature could instead grant unemployment insurance tax credits to businesses. If the legislature instead wished to provide immediate tax relief to employers while the economic effects of the pandemic linger, one option to consider would be to provide employers with unemployment insurance tax credits to offset the upcoming increase in unemployment. federal unemployment insurance tax. Tax credits could be designed in a variety of ways to achieve the Legislative Assembly’s policy objectives and priorities.

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