California employers pay the price for state negligence

As a Certified Public Accountant and Certified Financial Planner, one consistent piece of advice I would give to my clients was never to cosign on a loan. When doing so, you agree to be responsible for the debt should the original borrower miss a payment or stop paying altogether. It’s awkward. And I’ve seen sincere people who wanted to help a friend or a relative find themselves in a financial bind because they were kind to someone who has now fallen into hard times, or turned out to be a deadbeat.  

Paying for someone else’s debt and having nothing to show for it is an aggravating imposition and an honest cause for bitterness.

But Californians have had the state’s debts thrust upon them, directly and indirectly, because Gov. Gavin Newsom failed to pay off short-term borrowings when he had the chance to do so with a recent $100 billion surplus.  His poor fiscal stewardship is reflected in not having attacked the state’s liabilities during the first five good years of his time at the helm.  The Golden State’s balance sheet tells the tale.  As of June 30, 2022, it had the largest unrestricted net deficit in the nation.   

States may borrow funds from the federal government to pay out unemployment benefits.  With the COVID-19 lockdown imposed by Newsom on California’s residents, too many found themselves without employment and became reliant on these benefits provided through the Employment Development Department (EDD).  And don’t get me started on the ineptness of this state department overseen by the governor and his then Secretary of Labor, Julie Su.

Fast forward four years and only two states, California and New York, and one territory, the Virgin Islands, have not repaid the federal government.  

When a state fails to pay back unemployment benefit loans, the federal government raises the rate of the Federal Unemployment Tax Act (FUTA) tax on that state’s employers.  This tax is normally 0.6 percent on the first $7,000 of wages, or $42 per employee per year.  Due to the Governor’s dereliction the rate for California’s employers doubled to 1.2 percent, or $84.  But where is the outrage?  

My former legislative colleague, now Congressman Jay Obernolte (23rd Congressional District), brought up this concern more than a year ago (see “Why are employers being forced to pay off California’s defaulted loans?”, March 27, 2023).

Back in September, the supposed balance due was some $18 billion. It’s higher now.  And the state’s June 30, 2022, Annual Comprehensive Financial Report, its most recent, tells a sad tale about the mismanagement of the EDD and the Newsom administration. 

With Newsom’s fiscal mismanagement, it’s doubtful this obligation will be paid off quickly.  The recent budget shortfall and the gimmicks used to close the gap are not comforting for what will occur with next year’s balancing efforts.  And the economy will not be there to save Sacramento in twelve months (see “California’s lagging economy hinders efforts to close state budget deficit”, May 17, 2024). 

In the County of Orange, Kaiser-Permanente has nearly 10,000 employees.  This means this involuntary cosigner must pay an additional $420,000 for them here in Orange County alone!  Not to mention the other counties where they are located.  No wonder healthcare costs continue to rise.  

Thank Sacramento for compounding this problem.

Let’s bring it even closer to home.  When your employer tells you that it doesn’t have the funds to provide you with a salary increase, thanks to paying unexpectedly higher employment payroll taxes, don’t get angry with your boss, focus your anger on Newsom.  Such is the joy of this dastardly tax imposition.

While serving as a State Senator, I had an angry constituent call me.  She owned a local restaurant.  She had just been informed by her out-of-state payroll service that her FUTA tax was much higher than anticipated because California failed to pay off its loan.  It was December and she was rightfully upset.  She claimed the unexpected expense was more than $4,000 and that she had this amount available, but it was intended for employee Christmas bonuses.  She was in tears.  I told her not to blame me, one of the few Republicans in the State Legislature.  Blame the supermajority in Sacramento, who would rather pay for their pet projects and leave taxpayers holding the bag.

This conversation started my efforts to submit a bill to make paying off these loans a higher budget priority.  I was dismayed when the leadership of the California Chamber of Commerce informed me that they would be opposed to such an effort.  If this were implemented, they said, Sacramento would find another way to extract funds from employers and taxpayers.  And they did not want to play “whac-a-mole.”  As my former colleague, Senator Brian Jones of San Diego is famous for saying, “Are you kidding me?”

The callousness of the California Chamber, or its impotence as a force for California business owners in Sacramento, finds this poor fiscal stewardship of skipping payments on a federal loan a normal reoccurrence.  And why not?  Employers will pay the freight.  Besides, you don’t hear them complaining.  

When was the last time you read a newspaper article informing you of this unilateral transfer of debt?  At least the Southern California News Group’s editorial board  took a stab at it two months ago (see “Unemployment debt still plagues California budget”).

When an employer gets the bill, do you think the Internal Revenue Service is going to grant easy payment terms?  No.  So, where is the outrage?

Why is Gov. Newsom so concerned about watching President Biden’s back and not the backs of the employers that prop up his state’s economy?  Is it because they are “delusional California bashers?”

During my last budget cycle in the State Senate in 2020, I told my colleagues that I didn’t understand why the Legislature was pushing costly burdens on businesses when they are already hemorrhaging, thanks to the coronavirus lockdown.  But the band played on.  Even with ever increasing tax revenues with each passing year.  But all good things come to an end.

The supermajority has been on a spending joy ride, ignoring debts and forcing taxpayers to open their pocketbooks in what seems like a death by a thousand pinpricks for California’s taxpayers.  All the while as Newsom is telling other states how great California is and how they should emulate the Golden State.  Let’s get real.  He and his cohorts have driven the 31st state into a deep fiscal ditch.  

At least these deadbeats are behind the wheel of a fancy car, thanks to Californians having involuntarily cosigned the loan.  For some reason, the conclusion of the movie, “Thelma and Louise,” comes to mind.

John Moorlach served in the California State Senate and on the Orange County Board of Supervisors.