California Defaults on $18.5B Debt, Leaving CA Businesses Liable | Hacker News Reader

California Defaults on $18.5B Debt, Leaving CA Businesses Liable

hoover.org

46 pointswalterbell38 comments

Here is an article that does a better job of explaining how this will increase the amount of federal taxes paid by businesses in California:

https://www.ocregister.com/2023/03/27/california-had-a-97-5-...

It sounds like it will be in the ballpark of costing businesses a couple of hundred dollars per year for each employee.

Is it possible that it does t get fully relayed in one year and turns into 400 a year tax per employee next year?

Thanks. The Hoover Institution is... controversial [1], so I was hoping for another source. Although the link you have here is an opinion piece from a Republican congressperson, so I'm going to keep looking for something more neutral.

[1] e.g., https://stanforddaily.com/2020/11/17/frankly-speaking-stanfo...

Here's a neutral source[1] (I've also linked it elsewhere in the thread).

IMO, the Hoover Institution's writing is deeply misleading here: it implies a degree of hardship that $21 per employee does not seriously pose.

[1]: https://californiapayroll.com/blog/tax-alert-futa-credit-red...

Ok, here's something from the state itself. Down the page there's a chart showing how it will be paid back over time: https://lao.ca.gov/Publications/Report/4543

Either way this is going to get paid back by CA taxpayers. So it seems like the main question here is whether the tax burden should fall on employers specifically or on the general fund.

It looks like corporate taxes run around 10% of CA tax revenues normally: https://ebudget.ca.gov/2022-23/pdf/BudgetSummary/RevenueEsti...

Given that, I think I'm ok with unemployment insurance costs falling mainly on employers.

> So it seems like the main question here is whether the tax burden should fall on employers specifically or on the general fund.

I’m not even sure the state could pay it back directly, and if it could, it might require either cutting programs by large multiples of the amount needed or raising taxes by an amount significantly greater than the amount of the debt: Constitutional programmed baseline funding plus maintenance of effort requirements tied to federal funding plus Constitutionally programmed use of incremental revenue means that:

(1) the state (by this, I mean the executive and legislature working together; the people, of course, as the ultimate authority in the state can do what they want through initiative) can’t arbitrarily cut some large categories of spending,

(2) the cost of cutting other large categories of spending is greater than a $1 of federal funding dedicated to the same purpose for each dollar cut,

(3) even if the 2/3 majority necessary to raise taxes is marshalled, a substantial share of any new revenue from taxes would need to go to specified programs that get a share of incremental revenues, and

(4) total state spending (irrespective of revenue, and getting the required supermajority to raise taxes, etc.) is capped by the Gann Limit.

Letting the Fed tax employers directly avoids all of those constraints, even if it doesn’t optimally distribute the costs.

That's a whole lot of "no wonder everyone is leaving California" from an organization based in California.

The article levies some accusations of guilt / negligence at the state of California, but appears to have zero reflection about even possible causes.

WHY was so much fraud possible during the pandemic (and possibly other times) in the first place. Is it possible this is because the departments responsible are normally understaffed and when handling a pandemic surge had zero ability to scale up? Is this a budget or law codification issue?

The article did mention a recent surplus, but didn't talk about any reasons it might have not not been allocated to paying off this federal loan. My cynic side suppositions it might be one of the only ways the state can effectively raise taxes overall.

FYI, it's not an article, it's a Republican opinion piece. Which may explain the lack of reflection.

> WHY was so much fraud possible during the pandemic (and possibly other times) in the first place. Is it possible this is because the departments responsible are normally understaffed and when handling a pandemic surge had zero ability to scale up?

Ah yes, of course! The solution to our dysfunctional bureaucracy is to... add more people to it!

There's a weird bit of editorialization in this article: it implies that employers wouldn't know that they'd be on the hook for unemployment deficits, despite it being an explicit part of a pretty-well trodden piece of federal law.

The article also conspicuously omits the actual amount that employers will have to pony up per employee, because "a maximum of $21" isn't quite as eye-popping as $18.5 billion[1].

[1]: https://californiapayroll.com/blog/tax-alert-futa-credit-red...

> it implies that employers wouldn't know that they'd be on the hook for unemployment deficits, despite it being an explicit part of a pretty-well trodden piece of federal law.

This is misleading- employers know they would need to pay for any deficits. But employers did not expect there to be deficits- no one expected that CA would default on the loan. And the reason why CA defaulted is frustrating:

"When states across the country received loan-free federal aid as a result of the federal government’s unprecedented emergency spending packages, most chose to use at least a portion of those funds to pay back the federal loans they’d been forced to take to support their unemployment programs. California received $15.3 billion in federal Coronavirus Relief Funds, *but allocated none of it to repaying its outstanding loans.*" [1]

The same article also points out that CA could have paid off the loan easily with their surplus ($97.5 billion)- but they simply decided not to...

> because "a maximum of $21" isn't quite as eye-popping as $18.5 billion

The issue is in the end, the $18.5 billion will all be paid off. It's still an extra $18.5 billion being paid that would not have been paid otherwise, if CA had been more responsible.

[1] https://www.ocregister.com/2023/03/27/california-had-a-97-5-...

> The same article also points out that CA could have paid off the loan easily with their surplus ($97.5 billion)

The amount of is greater than the amount by which the state was below the Constitutional spending limit, so, no, it could not easily have done so; it maybe could have called it emergency spending to avoid the limit — which takes a supermajority vote and some other things (since the state had the choice of not spending it and allowing the Feds to collect it directly, it probably could not have used the federally-mandated spending exception.)

> The issue is in the end, the $18.5 billion will all be paid off. It's still an extra $18.5 billion being paid that would not have been paid otherwise, if CA had been more responsible.

Sure, if the state had had the foresight to prepare its systems for a once-in-ever event in advance, the costs that ended up needing paid back might not have been incurred.

I will respect this criticism somewhat if you can point me to the people making it advocating the necessary changes in advance of the need, otherwise...

> had the foresight to prepare its systems for a once-in-ever event in advance

As I already said, which you ignored:

"California received $15.3 billion in federal Coronavirus Relief Funds, but allocated none of it to repaying its outstanding loans."

> I will respect this criticism somewhat if you can point me to the people making it advocating the necessary changes in advance of the need

Here is a WSJ article criticizing CA's choice to not use reliefs funds to pay the loans:

https://www.wsj.com/articles/democratic-led-states-let-their...

But it really does not matter, since your mind is already made up and you are being disingenuous.

Incorrect FUD from the Hoover Institution, as usual.

California borrowed money from the federal government on behalf of CA businesses to make unemployment payments out of the state unemployment fund due to the massive layoffs in the early days of the COVID lockdowns. CA did not increase the state UI payments to cover these massively increased costs (as this would have been a permanent increase in rates) and instead chose to have it repaid by businesses in the form of a reduction of FUTA credits until the borrowed debt is paid off.

The total comes out to about $21/employee for affected businesses. Despite the Hoover Institution's fearmongering, and the Republican opinion piece in the OC Register linked to elsewhere in these comments, not all CA businesses are affected.

> With an unpaid federal unemployment insurance loan, the federal government raises the unemployment insurance tax immediately by 0.3 percent on each business within the state, and an additional 0.3 percent each year after that until the loan is fully repaid.

Yikes.

0.3% of the first $7,000 only. It's a maximum $21 tax raise; the Hoover Institution's reporting conveniently omits this fact[1].

[1]: https://californiapayroll.com/blog/tax-alert-futa-credit-red...

Did you miss the part in the original article about "an additional 0.3 percent each year after that until the loan is fully repaid"? Do you have a source that rebuts that, or are you just conveniently omitting that because you want to minimize the problem? Stop repeating this misleading factoid to try to make it seem like this is just some Republican think tank inventing a problem to make the Democratic government in California look bad.

$18.5 billion is $18.5 billion regardless of how thinly you slice it. California does not have the ~billion employees it would take to pay of the loan in one year. Then there's interest, presumably. Defaulting on a huge loan, while allowing tens of billions more in fraud, is irresponsible government.

I'm confused as to how California is both running a surplus and apparently short on money. I would have thought those were opposite financial conditions.

Money isn't free, apparently. Who knew!?

I'm confused - I thought California had a record $100B budget surplus just last year?

https://www.nytimes.com/2022/05/13/us/california-budget-surp...

> California recorded a nearly $100 billion state budget surplus last year, thanks to the state’s top earners, that could have been used to repay the debt. The state received $27 billion in federal COVID aid it could have used to repay the debt. The state’s record $300 billion–plus 2022–23 budget could have retired the debt. Even after defaulting, the state could have resumed its payments this year and offset the tax burden on businesses, as it planned to do in its 2023–24 budget. But as the state’s finances continue to decline, the state has walked back making payments or offsetting higher business federal unemployment insurance taxes.

Idk what California's argument is for why they aren't paying

> I’m confused - I thought California had a record $100B budget surplus just last year?

It had a $100B projected surplus, which it couldn’t Constitutionally retain (or even spend, because of things like the Gann Limit on state appropriations), so it returned a whole lot of money to taxpayers through various credits and rebates.

Paying off debt is not retaining or spending.

You sure? ..I think we need the source law that prevents California from spending all it's surplus to be sure.

If it does count as spending, then increasing the rate of employer taxes so that other programs don't suffer because companies asked Cali to take out loans on their behalf than it'd be fucking stupid, gross, and backwards AF not to raise employer taxes.

> so that other programs don't suffer

Other programs wouldn't suffer. CA had a large surplus. No cuts would be made...

I cannot find any other reputable news organizations covering this story

That's because it's a non-story: the tax adjustment is an adjustment on a credit, and it's 0.3% of the first $7,000 in income. So $21 per employee at the absolute most.

Hoover is a conservative think tank, which traditionally hasn’t written this type of crap. Welcome to 2023.

It’s very typical for states to face these kinds of situations after a significant unemployment event. That makes sense - maximize public benefit and assess the fees necessary when the economy improves.

Organizationally, times are always good for Labor departments when times are bad. States that don’t come out of major events like recessions or COVID with unemployment program debt engineer it that way - they choose to pay meager benefits or make it difficult to get benefits to push spending to Federal programs.

Usually the US government arranges a debt facility to spread the pain over a longer period. My guess is this is part of a campaign to block such efforts in the budget.

There’s been a lot of reporting on fraud in unemployment during COVID. Most of it was associated with the special COVID appropriations intended to rush out relief. That stuff was outside of the normal unemployment trust funds if memory serves.

https://www.mercurynews.com/2023/02/24/opinion-california-sh...

And an older WSJ article, before CA's default, that was critical of CA's decision making:

https://www.wsj.com/articles/democratic-led-states-let-their...

Well, it's been said before, and I'll add myself to the list. I'm glad I left. Money mismanagement in CA is insane. Super high taxes with nothing in return. Taxes are there to establish a baseline for everybody. But my health insurance was not cheaper.

Lots of homeless even with an insane budget in LA.

High gas tax, but you'd think the roads where smooth? Youd think the cops actually gave a rats ass to get people off the road who didn't have insurance or didn't tie down their loads. Nothing like that.

If at least I'd get MediCal like the people I pay taxes for. But I had to pay high taxes and get my own.

And to make matters worse, much of that loan from the federal government was paid to fraudulent claims - it was ripped off by scammers.

Small potatoes compared to what they will potentially have to come up with soon https://www.pbs.org/newshour/nation/reparations-could-cost-c...

What does this mean for those holding CA municipal bonds and bond funds?

Nothing at all.

At this point, F!@# California’s dystopian mismanagement on just about everything, and I wish we could investigate them all for criminal irresponsibility. It’s at the point where it is indistinguishable from actual malice.

Richest and poorest state in the country.

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