Stephanie Ferguson Melhorn
Executive Director, Workforce & International Labor Policy, U.S. Chamber of Commerce
Published
November 17, 2025
The Unemployment Insurance (UI) system is a vital safety net for workers during periods of job loss, helping families stay afloat and communities remain stable. For this system to function effectively, states must manage their UI trust funds responsibly, so employers aren’t left paying for interest instead of benefits. California offers a cautionary tale.
The $21 Billion Problem
As of November 6, 2025, California’s UI trust fund owed nearly $21 billion to the federal government, with no clear repayment plan. Under federal law, states that fail to repay these loans lose Federal Unemployment Tax Act (FUTA) credits, which drives up employer taxes.
In 2026, California businesses will pay $126 per employee in FUTA taxes—a rate three times higher than any other state except the Virgin Islands. If insolvency persists, that rate could continue to climb, creating a crushing burden for employers.
Missed Opportunity
California had an opportunity to ease this strain. Many states heeded the Chamber’s advice and used American Rescue Plan Act (ARPA) funds to pay down their UI trust fund loans. California did not. That decision left billions on the table that could have restored solvency and strengthened the trust fund.
Now, California employers are facing a tax hike that could ripple through the state’s economy. The money businesses are handing over to the state to repay federal loans could instead fuel job creation, raise wages, and be invested into workforce development.
Instead of driving growth, they’re covering past debts.
A Smart Veto
Governor Gavin Newsom deserves credit for recognizing the fragility of California’s UI system. He vetoed 2023 legislation that would have extended UI benefits to striking workers. Adding new obligations to an already insolvent system would have worsened the strain and jeopardized its core purpose: protecting workers during involuntary job loss.
The Path Forward
The Chamber urges California—and all states—to manage their UI systems responsibly by:
- Preventing fraud and improper payments to protect solvency
- Building reserves during growth to avoid future borrowing
- Rejecting costly expansions that undermine solvency and qualified UI eligibility requirements
- Exploring debt reduction strategies using federal relief or structured repayment
Bottom Line: Employers shouldn’t pay for fiscal mismanagement. UI funds must stay solvent, uphold integrity, and avoid misguided eligibility expansions, ensuring they protect workers without stifling job growth or economic competitiveness.
About the author
Stephanie Ferguson Melhorn
Stephanie Ferguson Melhorn is the Executive Director, Workforce and International Labor Policy. Her work on the labor shortage has been cited in the Wall Street Journal, Washington Post, and Associated Press.
