January 16, 2024
In the Governor's Budget forecast of the state's Unemployment Insurance (UI) Trust Fund, the administration reports that the program now pays out more in UI benefits than it receives in UI payroll taxes.
State Forecasts UI Trust Fund Condition Twice Each Year. The Employment Development Department (EDD) oversees the state’s UI program. The EDD pays UI benefits for unemployed workers out of the state’s UI Trust Fund. Employers pay regular UI payroll taxes into the fund. These payroll taxes are used to pay out benefits. In January and May each year, EDD publishes a two-year forecast of UI benefits, UI payroll tax receipts, and other key fiscal information related to the state’s UI Trust Fund.
Structural Deficit Began in 2023, Expected to Worsen in 2024 and 2025. As shown below, the administration’s UI Trust Fund forecast shows that UI benefit payments exceeded state payroll tax contributions by $1.3 billion in 2023. The administration anticipates this imbalance will increase to about $1.6 billion annually in 2024 and 2025. Historically, benefit payments have only exceeded contributions during major economic downturns – most recently, during the pandemic and Great Recession.
Key Drivers of the Imbalance. The structural imbalance anticipated by the administration reflects the continuation of a long-term trend within the UI system: on average, annual UI payroll taxes have grown more slowly than benefit payments. For this period, specifically, UI payroll taxes remain flat from 2022 through 2025 at about $5.2 billion annually. This reflects the offsetting effects of increased employment, which pushes contributions upward, combined with lower average UI payroll taxes due to recent declines in the use of UI. UI benefit payments, on the other hand, are anticipated to grow from $5 billion in 2022 to $6.7 billion in 2024 due mainly to recent wage growth (which pushes up the average weekly UI benefit amount) and the recent uptick in unemployment.
Temporary Increase in Federal UI Taxes Not Sufficient to Offset Imbalance… As we detailed here, the state took on about $20 billion in federal UI loans to continue paying UI benefits during the pandemic after running through all of the state trust fund reserves. Under longstanding federal law, when the state has outstanding federal loans employers pay a payroll tax surcharge that increases each year until the loans are repaid. The surcharge revenue goes into the state UI trust fund where it is first used to pay benefit payments. Any remainder repays the principal on the federal loan. Surcharge revenue are expected to be about $400 million in 2023, $850 million in 2024, and $1.3 billion in 2025. These amounts are not large enough to cover the structural deficit in the UI trust fund.
…Meaning State’s Outstanding Federal UI Loan Set to Increase. As the administration expects the underlying gap to worsen faster than the federal surcharge revenues increase, the annual fund imbalance is expected to continue despite federal payroll tax surcharges. Consequently, the administration expects the outstanding federal UI loan balance to increase by more than $1 billion over the two-year period, from $20 billion in 2023 to $21 billion in 2025. The state pays the interest on these loans, customarily from the General Fund. This interest payment is expected to be about $300 million in 2024-25.
Structural Deficit Consistent with LAO Forecast. The administration’s expectation that the state’s UI trust fund is now structurally insolvent is in-line with our office’s preliminary projections.