California Defaults on $18.6 Billion Debt, Now Businesses Have to Pay
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California borrowed approximately $20 billion from the federal government to cover unemployment benefits during the pandemic, and with Gov. Gavin Newsom’s recent decision to not pay it back, employers are now saddled with the expense, according to experts.
“The state should have taken care of the loans with the COVID money it received from the government in 2021,” Marc Joffe, policy analyst at the Cato Institute—a public policy think tank headquartered in Washington, D.C.
In the proposed 2023–2024 budget, $750 million was allocated to start paying down the loans, but Newsom made changes to the plan in January and withdrew the funding.
The Epoch Times’ request for comment from Newsom’s office was not returned on deadline.
The decision leaves businesses in the state responsible for the loans—as mandated by federal regulations—so the federal unemployment tax rate of .6 percent is set to increase by .3 percent annually, starting in 2023, until the loan is extinguished.
“California is just not really an employer-friendly state,” Joffe said. “This one thing will not be a difference between a business remaining open or closing, but it’s just another burden on top of the many burdens the state puts on employers.”
Twenty-two states borrowed money for unemployment insurance from the federal government during the pandemic, with all but four—California, Colorado, Connecticut, and New York—paying back their debts.
California owes the most, by far, with approximately $18.6 billion outstanding as of May 2, followed by New York’s $8 billion, Connecticut’s $187 million, and Colorado’s $77 million, according to U.S. Treasury Department data.
The discrepancy in amounts borrowed and owed by states lies in the different approaches to managing the pandemic, with California’s stricter lockdown causing unemployment to remain higher and longer, according to experts.
Initially, the state borrowed from its reserves to pay the benefits, but after exhausting its coffers borrowed to cover expenses, analysts said.
Exacerbating the situation were unprecedented levels of fraud occurring across the state, due to limited oversight and antiquated computer systems, according to Lee Ohanian, professor of economics at the University of California–Los Angeles.
Analytics firm LexisNexis estimated the total cost of the fraud at $32.6 billion.
Investigations have since uncovered that illegitimate unemployment benefits payments were paid to convicted felons, with one address receiving 60 separate fraudulent payments.
Fraud is a persistent issue historically 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 told The Epoch Times.
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 said. “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?”
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