California's $10B Debt to the Feds

As if California's budget crunch isn't bad enough, the state is on the hook to the federal government for $10 billion.

The debt stems from California borrowing the money from the feds to pay its share of unemployment benefits to those out of work. States and the federal government split the costs of unemployment insurance. The loan has been necessary because the Great Recession has totally depleted California's unemployment insurance fund.

California isn't alone.

In all, 31 states have been forced to lean on the federal government for help, totaling more than $42 billion in loans to cover their portions of unemployment insurance costs. But at $10 billion, California towers above the others in dependence upon the feds. This year, interest on the loan will amount to a staggering $250 million, adding yet another burden to the state's beleaguered treasury.

There may be a way out - of sorts. Recognizing the difficulties not only here but throughout the nation, the Obama administration has proposed a trade-off.

The proposal has two parts.

First, the federal government would waive any interest for two full years on the unemployment insurance loans. Second, in return for the waiver the states, including California, would increase the amount of workers' incomes subject to the employer-paid unemployment taxes to $15,000 from a the current maximum of $7,000.

The 6.2 percent tax minus credits amounts to about 1 percent, and has not been adjusted since 1976.

Some states have already raised the taxable levels, but most states, including California, have held back because of their already shaky economies.

All of this comes down to a potentially nasty fight between business and labor. Businesses would like to avoid any more taxes as they fight their way out of the recession. Labor would like to be assured of the continued availability of unemployment insurance funds to those who lose their jobs.

One way or another, state leaders have a tough choice to make. Either raise the dollar level for employer-paid unemployment taxes or pay a quarter billion to the feds in interest, leaving that much less in the state treasury. Ouch.

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