The number of total initial claims rose in California for the week of May 29, while continuing to drop in the rest of the US.

In California, initial claims processed in the regular program climbed 5.0% compared to the prior week, while PUA claims rose somewhat higher at 7.1%. In the national totals, regular claims notched up 1.4%, while PUA claims fell 18.7%. Combined, total claims processed were up 5.4% in California while dipping 2.2% in the US numbers. In the unadjusted numbers, the US total was just shy of breaking the half million mark.

By industry, the pattern was little changed with the largest number of initial claims (all programs) again filed by workers in Accommodation & Food Service (16.2%), Retail Trade (11.5%), Health Care & Social Assistance (10.5%), Administrative & Support & Waste Management Services (9.0%), and Construction (7.7%).

The California numbers now have been essentially level for the past 8 weeks. The overall trend for total initial claims in the other states has been a decline over the past 13 weeks.

In the most recent results for April, California had the second-highest unemployment rate in the country, only 0.2 percentage point behind Hawaii which is even more dependent on tourism-related employment.

These numbers only cover the officially unemployed and not workers who have left the labor force during the pandemic period including workers who have given up on trying to find a job, workers who are fearful of contracting the disease if they get a job, and parents who had to quit their jobs to take care of their children while the California public schools have remained closed and while substantial uncertainty remains in many districts over when and how they will reopen.

The most recent tier allocations for the week of May 22 from the Department of Public Health show continuing improvement in the tier improvement. Counties in the second-lowest Tier 3 restrictions held 43.8% of April’s unemployed, only 1.9% still remain within the second-highest Tier 2, and the lowest Tier 4 rose to 54.3%. All counties remain under some level of restrictions which present barriers to the state’s economic recovery and continued reliance of many workers on unemployment benefits, although the governor recently announced his intention to remove the tiered system by June 15.

In the most recent data from the Centers for Disease Control, California was just above the US average in the share of vaccine doses being administered. As of midday June 2, a total of 38.5 million shots have been administered in the state covering 22.5 million people, or 57.0% of the population and 66.8% of the population age 12 and over. In all, 43.3% of the population (US 41.0%) and 50.9% of population 12 and over (US 48.6%) have been fully vaccinated.

Total EDD backlogs were little changed for the week of May 22, although the number of claims awaiting EDD action continued climbing. The most current EDD backlog data shows claims awaiting EDD action rose 1.7%, while the total backlog number was down only 0.1%. The backlog has remained above the one million mark for 11 weeks running. Backlogged claims are defined as those awaiting action for 21 days or longer.

The related call center data shows little change. Calls rose 2.3%, with the number answered up only 1.1%. On average—using total number of calls received and the number of calls answered by staff—the average caller put in 12.8 calls trying to reach EDD. Of the unique callers, up to 75% had their calls answered by staff (assuming one call answered per unique caller).

While the overall claims backlog remains largely due to applications awaiting claimant action, the extreme difficulty in reaching EDD for clarifications—as indicated by the call data—more accurately likely puts a substantial portion instead under the “pending EDD” category.

As an indicator of long-term unemployment in the state, payments for the extended benefit programs (PEUC and Fed Ed) dipped to 24.6% of the total for the week of May 29. While the share has eased from its high of 50.3% in March, the overall trend indicates a substantial share of those receiving unemployment benefits still face the risks of lifetime wage and income effects similar to those that afflicted the long-term unemployed coming out of the previous recession that began in 2008.

In the most recent data from the EDD, California paid out a total of $148.1 billion in benefits under all the UI programs since the week of March 7, 2020. The most current estimate is that up to $31 billion of unemployment benefits was paid out to fraudulent claims, consisting of $11 billion in known fraud and up to $20 billion in suspected fraud.

The most recent data from the US Department of Labor indicates California’s outstanding loans as of May 26 from the Federal Unemployment Account rose to $21.1 billion. The most recent projections from EDD contained in the May Revise expect the total to reach $24.3 billion by the end of the year. This amount is more than twice the peak of about $11 billion reached during the previous recession that began in 2008. That debt took 10 years to pay off through higher employment taxes imposed on businesses. Once the debt was retired, continuing benefit payments came close to revenues into the fund due primarily to the policy decisions discussed below. California consequently entered the current downturn with few reserves to cover the promised unemployment benefits. Just prior to the pandemic in their January 2020 rankings, US Department of Labor determined California’s trust fund solvency status came nearly dead last, ranking above only the Virgin Islands.

The May Revise proposes using only $1.1 billion ARPA funds to offset the current debt. The recently released legislative framework for the budget increases this amount to $2 billion, but applies it over 10 years—thereby leaving it open to legislative reductions under future budgets—and limits the tax relief to an as-yet undetermined subset of small businesses. Both ensure a major tax increase making it more costly for employers to rebuild the jobs lost in the current crisis.

Recent LAO analysis indicates this debt requires payments over the next 8-9 years, but only under their unemployment, inflation, and economic cycle (i.e., no downturn in this period) assumptions and at a cost of $17 to $20 billion in higher taxes that will be imposed on California employers.

Under the LAO analysis, this $17 to $20 billion tax increase embodied in the May Revise will be in place until around 2030. The proposed $1.1 billion debt payment consequently comes into play at the end of the period by potentially shortening the tax increase period by only a small amount. The LAO numbers, however, are based on a $20 billion debt and not the EDD projections of $24.3 billion. The May Revise reliance on a substantial tax increase to pay down the debt also means the UI Fund will continue running a negative balance throughout this period—just as it did in the decade following the 2008 recession—and thereby retain a reliance on federal funding for this critical safety net program.

The condition of the state unemployment insurance fund even prior to the pandemic derives largely from key policy decisions that were made with minimal involvement of the employers responsible for funding this program:

• SB 40 (2001, Alarcon) more than doubled unemployment benefits over the objections of employers, both private and public. As was the case with the public employment pension increases also adopted at this time with little consideration for long-term fiscal effects, benefits were assumed to be covered by a continuation of the then-high reserves in the unemployment insurance fund. Subsequent legislative actions have continued to increase the level of benefits. Three economic downturns since then have undermined the reserves.
   
• SB 3 (2016, Leno) enacted the current process for ongoing annual increases in the minimum wage. Because unemployment benefits are tied to wage levels, this factor means available balances in the fund will be drawn down much more quickly in each succeeding economic downturn as minimum wage rises and as these levels affect the next tranches through wage compaction adjustments as well. This process was already at play prior to the current crisis, with the fund never regaining solvency even after a period of higher rates over 12 years.
   
• In the current crisis, the state’s response relied on a more extensive shut-down of business activities than used in many other states. Many higher-wage industries and even many service industries were able to adjust to these restrictions through new work arrangements and new sales channel options, but these adjustments were often not available to a large number of generally lower-wage service businesses including restaurants, tourism, personal service, smaller retail, and related businesses most heavily affected by this approach.

California already has by far the highest unemployment insurance rate, at 4.14% of taxable wages in 2020 compared to the US average of 1.78%. Measured instead against total wages, California ranks somewhat better at the 18th highest rate (0.56% vs. US average of 0.45%), but the first measure is more relevant given the greater employment effect of this tax on lower wage jobs and distributional effect on total wages coming from the tech and other higher wage industries in the state.

Many employers in the state will be struggling to achieve recovery over the coming years—both small businesses as well as many larger employers in the tourism and population-serving industries that saw their sales essentially vanish under the state’s policies in the pandemic period and costs rise under emergency measures that are now being proposed for expansion. This major tax increase embodied in the May Revise will further increase the cost of bringing workers back to their jobs.

The economic projections underlying the revenue and expenditure projections for the May Revise already expect a pronounced split in the state’s recovery, intensifying the two-tier economy already in development even prior to the current downturn. In fact, three industries are not expected to return to pre-COVID job levels until the end of the projection period in 2024, and three are expected to still have fewer jobs at that point.

The unemployment insurance rates are already structured to have their greatest employment impact on distressed businesses, and the parts of the state’s economy that were most heavily affected by the state’s strategies are expected to remain in distressed circumstances for some time to come. The health of the unemployment fund and more critically the long-term wage and income prospects for the workers now relying on these benefits depends on rebuilding jobs as quickly as possible. The tax increase now looming over this goal makes it more difficult and costly to achieve.

Accounting for 40% of the total amount owed by 18 states and 1 territory, the size of this debt is an issue focused on California and at best a few other large states. At least eight states as of last summer had already used a portion of their federal relief funds to shore up their UI funds, others such Tennessee subsequently did so to prevent the issue from reaching crisis proportions as it has in California, and others such as Ohio are now proposing relatively broader use of the ARPA funds for this purpose.