If not for a persistent mail carrier, Lance Hastings might not have discovered all of the fake unemployment claims.
Last September, the head of the California Manufacturers & Technology Association got the first jobless claim from a worker he鈥檇 never employed. Mistakes happen, he thought, and reported the letter sent to the group鈥檚 boarded-up former Sacramento office as suspected fraud.
鈥淭hey even used our old CEO鈥檚 name and address,鈥� said Hastings, the association鈥檚 current CEO. 鈥淲hen we got that one, our spidey sense really got activated.鈥�
But in recent months, as the mail carrier delivered more than a dozen other bogus letters with unfamiliar names and Social Security numbers, Hastings鈥� skepticism has given way to frustration 鈥� especially now that taxpayers like his organization will likely have to help pick up the tab for California鈥檚 $21 billion and counting in unemployment debt.
Now, he worries that higher unemployment taxes could make it harder for businesses in California鈥檚 already expensive manufacturing sector to recover from the shock of the year-long pandemic. 鈥淚 think it鈥檚 unprincipled,鈥� Hastings said. 鈥淭hese are just nails in the coffin that concern me greatly.鈥�
on jammed customer service lines and have dominated the headlines about California鈥檚 unemployment system in the age of COVID-19. On Friday, officials at the state鈥檚 Employment Development Department unveiled to track unemployment data after the backlog of unpaid claims again mushroomed to in recent weeks, including 152,000 claims awaiting action by the state and more than 900,000 cases in need of certification by the person filing the claim.
Amid the chaos, another big problem has largely been overlooked: The state is , and nobody is doing much about it. California of going deep into the red to pay for jobless benefits during recessions, but the stakes are especially high this time as businesses hit hard by unprecedented pandemic shutdowns look to restart hiring. California鈥檚 unemployment rate to a pandemic-low 8.5% as employers added 141,000 jobs, but the rate is still twice as high as in February 2020.
The state鈥檚 unemployment trust fund financed by employer taxes last spring, which to an outdated tax system that has gone largely untouched for the last four decades. So far, California has borrowed from the federal government to keep benefits flowing to the jobless. Employment Development Department officials expect the deficit to balloon to by the end of the year.
In response to a question from CalMatters about how the state plans to address that debt, department officials said Friday that the next forecast for the unemployment fund is due around late May. 鈥淚nformation will be further forthcoming as developments occur,鈥� spokesperson Loree Levy said.
In the meantime, employers have been a 15% emergency surcharge on unemployment taxes due to the fund鈥檚 insolvency. Even before the coronavirus shut down much of the economy, California鈥檚 unemployment fund was the , well behind financially repressed Puerto Rico and the District of Columbia.
California鈥檚 unemployment rate fell in February to a pandemic-low 8.5% as employers added 141,000 jobs, but the rate is still twice as high as in February 2020.
The state鈥檚 descent during the pandemic to poster-child status for unemployment dysfunction could make this year a prime opportunity for reform. One option favored by economists at Stanford is to for employers in lower-wage sectors while raising taxes on higher-paying businesses to reduce the state鈥檚 debt.
But so far, lawmakers from both parties much more limited reforms: new oversight boards, a direct deposit payment option, better language access and stronger checks on inmates filing for benefits. Some measures call for the Employment Development Department to develop a new recession plan or to keep paying expanded benefits as the pandemic drags on, but they don鈥檛 address the underlying debt or tax system at the agency by the governor.
The cumulative effect, political analysts say, is that unemployment is poised to lose out to competing priorities such as vaccines, adding to a long history of neglecting safety-net programs in a year further complicated by messy recall politics.
鈥淚f the governor and the legislative leadership wanted to make this a top priority, the timing could be perfect,鈥� said Dan Schnur, a Republican campaign veteran and a professor at the University of Southern California and UC Berkeley. 鈥淭his could end up being the single worst financial scandal in the history of California government. But the irony is it鈥檚 so big and so sprawling, it鈥檚 difficult for voters to understand.鈥�
Who really pays for unemployment?
Unemployment is what Stanford economist Mark Duggan calls an 鈥渋nvisible tax.鈥� While Social Security is run by the federal government and deducted directly from workers鈥� paychecks, each state oversees its own unemployment system funded by employer taxes.
Despite California鈥檚 reputation for a progressive tax system, the state鈥檚 unemployment taxes hit businesses with lower-paid workers harder. That鈥檚 because businesses are taxed on only the first $7,000 a worker makes 鈥� the lowest amount allowed by federal law, and a figure that hasn鈥檛 been updated in 39 years, said Duggan, who studies unemployment at the Stanford Institute for Economic Policy Research.
鈥淚t鈥檚 the worst鈥� And it鈥檚 not some stupid little narrow program. As we just saw in the pandemic, this was the most important part of the social safety net.鈥�MARK DUGGAN, STANFORD INSTITUTE FOR ECONOMIC POLICY RESEARCH
Each business then pays ranging from 1.5% to 6.2%, depending on how many of its workers have filed for unemployment benefits in past years. That often penalizes hotels, restaurants and other high-turnover industries slammed by the pandemic. Unemployment taxes max out at $434 per employee, per year, or up to about $4,340 for a 10-person company paying the highest rate, before any emergency fees.
Since the state partially insures wages up to a much higher limit, $46,800 a year, the result is that businesses pay very similar unemployment taxes for a worker who makes $8,000 a year and another who earns $40,000. But the higher-paid worker gets $400 a week in state jobless benefits if laid off, compared to $80 for the lower-paid worker.
While the costs of those benefits add up for the state, it鈥檚 often not enough for out-of-work Californians to pay for housing, food and other necessities. That鈥檚 made extra federally funded unemployment payments during the pandemic 鈥� $600 a week last spring, $300 under more recent stimulus measures 鈥� for many.
鈥淚t鈥檚 the worst. The most regressive. Appalling. I don鈥檛 know what adjective to use,鈥� Duggan said of the state鈥檚 current unemployment financing system. 鈥淎nd it鈥檚 not some stupid little narrow program. As we just saw in the pandemic, this was the most important part of the social safety net.鈥�
What happens when that safety net breaks down is all too clear for Lauren Taylor-Mayweather. The 41-year-old mother of four lost her job as a home health aide in the Inland Empire in January, and she鈥檚 still out $490 after reporting a string of fraudulent charges on her state-issued Bank of America in February.
All payments stopped for more than a month after her unemployment account was frozen, she said. Her husband was able to cover rent for the family, but they fell a month behind on their car payment, their auto insurance lapsed and groceries were sparse as she waited hours to plead her case to customer service workers.
鈥淚 was pretty much down to my last dollar,鈥� Taylor-Mayweather said, and yet, 鈥淚鈥檓 being made the criminal.鈥�
One silver lining of the past few months is that she鈥檚 been able to attend online classes for a bachelor鈥檚 degree in health care administration, giving her hope of moving up in her next job. But it鈥檚 fast-growing jobs including home health aides and other service industry positions that Duggan says would benefit most if California took on more ambitious unemployment reform.
He favors raising the $7,000-per-worker base on which employers are taxed to align with the $46,800 insurance limit. This would likely raise taxes on high-paying employers, but lower them for employers who hire more lower-wage workers. States including Utah, North Dakota and Washington have changed the rules and required employers to pay taxes on $36,000 in wages or more, and they鈥檝e so far avoided unemployment debt during the pandemic.
鈥淭hat would, overnight, lower the cost of hiring part-time and low-wage workers, and it would act as a powerful stimulus,鈥� Duggan said. 鈥淵eah, it would raise a little bit the cost of hiring engineers and accountants. But it would rationalize it, because right now the accountants and the engineers are getting free insurance.鈥�
Debt deja vu
This wouldn鈥檛 be the first time California policymakers have passed on overhauling unemployment during a crisis. After the Great Recession ended in 2009, it took until 2018 for the state borrowed from the federal government through business taxes and interest payments from the state general fund.
Duggan argues that such a drawn-out approach again risks creating a 鈥渁 drag鈥� on economic recovery after the COVID recession. Other policy researchers contend that the explosion of unemployment fraud in many states during the pandemic should also be a wake-up call to rethink who runs benefit programs, since most other countries administer similar programs at a national level.
鈥淎re we long past due for moving this to a federal system?鈥� asks Jody Heymann, a UCLA professor of health policy. 鈥淚 don鈥檛 actually think it鈥檚 realistic that all 50 states will be good at preventing fraud. And if they are, why would you set up that much redundancy?鈥�
Still, such prospects seem far removed from proposals favored by business groups including the Tax Foundation, which are to steer clear of tax hikes and 鈥渁void penalizing hiring.鈥�
鈥淭his could end up being the single worst financial scandal in the history of California government. But the irony is it鈥檚 so big and so sprawling, it鈥檚 difficult for voters to understand.鈥�DAN SCHNUR, REPUBLICAN CAMPAIGN VETERAN
Gov. Gavin Newsom has said he won鈥檛 raise taxes this year, but the alternatives are limited. EDD officials have stressed that upwards of 90% of fraud appears to have targeted federal emergency programs, so it鈥檚 unclear how much the state would get to keep of any money clawed back from fraudsters.
There鈥檚 also the possibility that the federal government could forgive some loans, though bailing out California and other insolvent states might not go over well in places that have kept their programs in order. California could also follow more conservative states and tighten eligibility or cut unemployment benefits for workers to save money.
The most likely scenario politically may be doing very little, given the hyper-polarized climate surrounding the recall. After assembling and disbanding an unemployment 鈥溾�� last year, Newsom and his surrogates have largely avoided the issue since installing at the Employment Development Department, often referring questions to labor and employment officials as he navigates the pandemic and other turmoil.
鈥淣ewsom has probably been hurt politically much more by one than by a multibillion-dollar employment benefit scandal,鈥� Schnur said. 鈥淭hat鈥檚 probably because he鈥檚 kept himself at such a distance from it. The problem is that may have created a disincentive for him to engage more forcefully on a solution.鈥�
For Taylor-Mayweather, it all seems like a matter of will, or lack thereof. She blames both the state and Bank of America for failing to make sure unemployment money was safe in the first place, such as secure chips in debit cards for recipients.
鈥淵ou knew we were vulnerable,鈥� Taylor-Mayweather said. 鈥淲e weren鈥檛 worth the extra step.鈥�
CalMatters is a nonprofit, nonpartisan media venture explaining California policies and politics.