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LAO calls California's unemployment insurance financing "broken," recommends reforms and refinancing
Summary
The Legislative Analyst's Office told the Senate subcommittee that California's unemployment insurance financing is structurally unstable, with an outstanding federal loan near $21.6 billion and recurring annual shortfalls; the LAO proposed raising the taxable wage base, simplifying tax rates, changing experience rating, and a combined state/employer refinancing plan.
Chaz Alamo of the Legislative Analyst's Office told the subcommittee that California's unemployment insurance (UI) financing system is structurally unsound and that the state faces a large outstanding federal loan and recurring shortfalls.
Alamo presented LAO analysis showing California's outstanding federal UI loan is approximately $21.6 billion and that the state has made no net progress repaying principal since the pandemic. He said the LAO estimates the state is likely to collect roughly $2 billion less in employer contributions each year than it pays in UI benefits under current structures, a shortfall that will increase the outstanding loan and push higher interest and eventual employer surcharges.
The LAO offered four major recommendations to restore fiscal stability: substantially increase the UI taxable wage base (the LAO recommended raising it to $47,000), adopt a simpler two-part employer tax approach (a base "standard rate" plus a reserve-building surcharge when needed), redesign experience rating to reduce incentives for employers to contest claims for financial reasons, and immediately undertake refinancing of the outstanding federal loan in a shared fashion (the LAO proposed the state use about $10 billion of its own pooled-money investment account while arranging employer-financed repayment through revenue bonds spread over 10-15 years).
Caleb Horrell of EDD noted the governor's budget includes a proposed $634 million general fund payment for 2025-26 interest on the federal loan, and officials said the May revision will update the precise interest amount. Senators acknowledged the political difficulty of options the LAO proposed but also expressed concern about continuing large interest payments and the potential for future employer surcharges and tax increases.
Committee members and LAO representatives agreed further policy conversations were necessary to weigh tradeoffs between employer tax increases, state repayment, and the long-term solvency of UI. The administration said it was willing to discuss options with the legislature.
