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Is Employment Department Ready for a Recession?

During the pandemic, the challenge for the department wasn’t just dealing with the surge of claims; it also had to implement new federal aid programs.

California’s Employment Development Department struggled to keep up with the demands of the pandemic. But a potential recession isn’t likely to be as intense, and the department has made several changes that could smooth the process of getting benefits.

A cascade of tech layoffs, the strain of inflation and news of potentially recession-inducing decisions from federal bankers could spell tough economic times ahead.

If more people are laid off, more Californians will turn to unemployment benefits to help them afford the basics while they look for a new job.

It’s a process that buckled under the pressures of the pandemic. Residents sometimes waited months for benefits from the state’s Employment Development Department, dialing the department hundreds of times. On top of that was a string of fraud scandals: Claims came from “unemployed” infants and children and, according to prosecutors, benefits were paid to tens of thousands of inmates in jail and prison, who are ineligible. The vast majority of the fraud was in temporary, federally funded pandemic aid programs.

The situation has since improved. But how will the system hold up if there’s a recession?

Thanks to “the level of testing that the pandemic put us through, we are in such a strong position to weather a typical economic contraction,” said Gareth Lacy, communications adviser for the department.

But not everyone is convinced. “There have been some major improvements,” said Daniela Urban, executive director of the Center for Workers’ Rights. “But I think we’re not at the point where if a major crisis hit the unemployment system again, the system would be able to function as it should.”

A recession would probably look different than the shocking early months of the pandemic, when claims for new benefits jumped tenfold from February to March 2020, according to department data. One point of comparison: There were 20 million claims for unemployment benefits during the pandemic and 3.8 million just during the Great Recession, according to Lacy. And during the pandemic, the challenge for the department wasn’t just dealing with the surge of claims; it also had to implement new federal aid programs.

The incredible wave of people applying in a matter of weeks was “extreme,” said Till von Wachter, an economics professor at UCLA. Normal recessions are more gradual, he said, so the number of claims the department has to process per week would likely be lower. “They just went through trial by fire,” von Wachter said. He’s optimistic that the department would be able to better deal with a recession.

But, if the agency struggles to keep up with the demands of a recession, it wouldn’t be the first time. In the wake of the recession that began in 2008, reports emerged that checks were delayed due to outdated computers, and exasperated workers were met with busy phone lines.

In 2021, state lawmakers required the department to come up with a recession plan; the result is a nearly 90-page report.

One change, the report explains, is that the department created a new team tasked with forecasting unemployment benefit-related workloads and figuring how many staff will be needed. The report also details how the department will adapt if the unemployment rate reaches specific levels. California’s unemployment rate is currently around 4 percent, but if, for example, it ticks up to 6 percent, the plan includes authorizing overtime, reducing vacation slots during peak periods, and limiting the approval of part-time requests. If it reaches 8 percent, the department will hire additional staff and “deploy retired annuitants.” If it reaches 12 percent, it’s time to call in the contractors.

The report says pulling all this off is challenging because federal funding for unemployment benefit administration is tied to an actual — not anticipated — workload.

The agency has made some other changes that could smooth the process of getting benefits.

There have been other customer service tweaks over the past couple of years, including adding a call-back feature on call center phone lines so that people don’t have to wait on hold, improving the mobile phone version of the website, and enabling claimants to upload documents, rather than physically mail them in, according to the department.

The department has also begun a multiyear modernization effort, dubbed EDDNext, aimed at improving customer service for unemployment benefits, paid family leave, and disability insurance, for which the department received $136 million this year. So far, the department has begun designing a new online login that will work for unemployment benefits as well as paid family leave and disability insurance, and designing forms that are easier to read and understand.

If there’s a recession, some workers can’t turn to unemployment benefits. That includes the self-employed, who generally aren’t covered by unemployment benefits, said Jenna Gerry, a senior staff attorney at the National Employment Law Project. The federal government created temporary benefits for self-employed workers and contractors during the pandemic, but that ended in 2021.

Another consequence of a recession could be growing California’s already massive unemployment debt.

The state’s unemployment insurance trust fund ran out of money during the pandemic, after so many laid-off Californians relied on the benefits. The federal government loaned California billions to keep benefits flowing, and the state still is on the hook to pay back about $18 billion.

California’s debt is uniquely large. While many states had to turn to the feds to pay out benefits during the pandemic, at this point just California, New York, Connecticut, Illinois and the Virgin Islands still have debt. California’s debt is roughly double the size of the other four combined.

This isn’t the first time the system has gone into debt. In the wake of the Great Recession, the debt grew to about $10 billion. California didn’t finish paying it off until the spring of 2018, according to H.D. Palmer, a spokesperson for the California Department of Finance, and the state spent about $1.4 billion on interest on the Great Recession era unemployment debt, according to Palmer.

Unemployment benefits are funded by employers, and in order to pay off the current debt, a federal tax on employers will automatically increase by $21 per employee in 2023 and ratchet up by an additional $21 per employee per year until the loan is repaid. This year state lawmakers also decided to kick in $250 million in state funds toward the loan principal and $342.4 million to cover the interest accrued so far.

But if the state goes into a recession, that debt could grow even larger.

“If there is a slowdown in the economy, we are totally and completely unprepared to be able to provide for California workers because of the deficit,” said Rob Lapsley, president of the California Business Roundtable, which represents major employers and has advocated for the state to contribute $10 billion to pay down the loan principal. “There may not be an interest in Congress to bail out California and New York,” Lapsley said.

But it would be unprecedented for the federal government to let a state’s unemployment system run out of money and stop providing benefits, said Gerry, with the National Employment Law Project. “That has never happened in the history of the unemployment insurance program since it was enacted in 1935.”
CalMatters is a nonpartisan, nonprofit journalism venture committed to explaining how California’s state Capitol works and why it matters.