California Is First State To Borrow From Federal Government To Make Unemployment Payments

Illinois, Connecticut receive approval for federal loans of up to $12.6 billion, $1.1 billion, respectively. California Is First State To Borrow From Federal Government To Make Unemployment Payments

California has become the first state to borrow money from the federal government so it can continue paying out rising claims for unemployment benefits during the coronavirus pandemic.

The Golden State borrowed $348 million in federal funds after receiving approval to tap up to $10 billion for this purpose through the end of July, a Treasury Department spokesman said Monday.

The U.S. government also has approved loans of up to $12.6 billion for Illinois and up to $1.1 billion for Connecticut through the end of July to replenish state unemployment-insurance funds, though the two states hadn’t yet started borrowing by the end of April. California was the only state to have accessed the program so far in the current downturn, the Treasury spokesman said.

States can use the money to pay regular unemployment benefits, while the extra $600 weekly payments recently added for workers laid off during the pandemic are funded separately through federal emergency legislation signed into law in late March.

More than 30 million people have filed unemployment claims, including about 3.7 million in California, since mid-March, when the virus led to widespread business shutdowns.

California had about $1.9 billion in its unemployment trust fund in mid-April, down from $3.1 billion at the end of February, the month before the coronavirus upended the U.S. economy. The state’s labor department didn’t immediately respond to a request for comment.

The unprecedented surge in claims, a proxy for layoffs, is forcing many states to quickly draw down their unemployment trust funds. Nearly half of U.S. states experienced double-digit percentage declines in their trust-fund balances from the end of February through mid-April, according to a Wall Street Journal analysis of Treasury Department data.

California serves as an early sign of the potential magnitude of the federal assistance that could be required if states are to continue paying out jobless benefits. It is one of more than 20 states and jurisdictions that entered the current economic crisis without enough money in their unemployment trust funds to pay benefits through a yearlong recession, according to Labor Department data. By that measure, California was prepared to make unemployment payments for just over two months in the event of a recession.

Economists expect other states to begin borrowing from the federal government in the coming weeks.

Congress doesn’t need to approve additional federal loans to replenish state trust funds when they run dry. Governors can submit a letter to the federal government asking for the funds to be placed in their state accounts.

Many states did so during and after the 2007-09 recession. To pay back the loans and rebuild their trust funds later, several raised employer taxes or cut the duration and amount of unemployment benefits. Some also tightened eligibility requirements.

Several states took years to pay back the loans after the last recession, leaving them less time to build up their trust funds ahead of the current downturn. For instance, California borrowed nearly $11 billion from the U.S. government to continue financing unemployment benefits after the 2007-09 recession but didn’t finish paying it back until 2018.

In a 2013 paper, policy analysts at the left-leaning National Employment Law Project argued California should raise its employer unemployment tax further to more quickly repay its federal debt.

Michael Bernick, an employment attorney with Duane Morris LLP, said that wouldn’t be an appropriate strategy for California to pursue now.

“At this particular time, when we’ve had massive job losses in our state, trying to put more taxes on employers is an approach we want to try to avoid,” said Mr. Bernick, who was also a director of the California Employment Development Department in the early 2000s.

During the current economic crisis, California is running up its unemployment debt at the same time state tax revenues are falling.

California’s personal-income-tax collections dropped sharply in April, with the state taking in $5.1 billion compared with nearly $19 billion collected in April of last year, according to the Tax Policy Center. While some of that decline was likely due to the extended income-tax filing deadline and likely will arrive in July, some of losses are likely permanent, a result of the job losses caused by the business shutdowns imposed to curb the spread of the virus, said senior research associate Lucy Dadayan.

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