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You can’t go through life without surprises. All you can do is hope most of them turn out to be, at worst, neutral impact. The ones you love to receive are pleasant and, preferably, maybe even beneficial in the long run.

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Perks you up looking towards the future.

There’s nothing worse than a nasty surprise after a rough patch in life or a particularly tough year in a business.

I saw this Xweet yesterday from a fellow I really love to follow, Chef Andrew Gruel. As if the restaurant business anywhere wasn’t exciting enough on its own – especially in California – it looks as if he’d had one of those blind-sided surprises.

… They explained (in summary) that California has a budget shortfall, and the federal government wants money back that it lent California for UI that it “lost.” They are making up for it by having business owners pay it. Keep in mind that it was around 10% of our total payroll. When people say, “Why isn’t California business-friendly?” remember this.

Hang on a minute – the CA legislature arbitrarily stuck business owners with the tab for their budget overruns?

For once, it seems, you couldn’t blame that collection of spendthrift loons. And none of this happened by a magic wand from the floor of the state house.

The genesis of what is shaping up as a potential CA business catastrophe is CA’s profligate unemployment fund (run by the state’s  Employment and Development Department or EDD). The fund is perpetually in the hole thanks to its oversized benefit distribution scheme, which those same CA business owners subsidize handsomely but nowhere near enough to keep solvent. It has been borrowing federal dollars forever to stay afloat, even before the pandemic.

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…To pay regular state unemployment benefits, the EDD has a trust fund paid for by state unempeven before the pandemicloyment insurance taxes.  The fund – do in part to the way it is constituted and to the massive benefit increases with no increase in income – has been floundering for years and, in the past decade or so, only managed to go two years without borrowing money from the feds.

Needless to say, the trust fund was unprepared for the pandemic and  – seperate from the $32.6 billion in improper federal money it paid – paid out billions more than it had. It had to borrow from the feds and that debt – today – stands at just a little less than $20 billion dollars (P.S. – at least $500 million a year in interest alone.)

Most other states had large unemployment debts caused by the pandemic as well, but only California and New York (and the Virgin Islands) did not pay them off with “left over” pandemic assistance money.

What happened to all the pandemic money that CA was sitting on?

For one thing, ‘fraud.’ Unrestricted, rampant fraud on a scale that boggles the mind.

…What makes this default even more egregious is that the stone-age-era IT system of the state’s Employment and Development Department (EDD) opened the floodgates to bad actors, permitting more than $30 billion in fraudulent unemployment claims during the pandemic. Those receiving fraudulent payments include incarcerated felons, a person impersonating a one-year-old, and a person impersonating Senator Dianne Feinstein. A single residential address received checks for around 60 separate individuals filing from that address.

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For another, expediency ate up a healthy chunk of that emergency cash. Oleaginous CA Gov Gavin ‘Randall Flagg-lite’ Newsom was in the fight of his political life, and he had the federal largesse at hand to help grease the skids.

…Facing a recall in 2021 and wallowing in a massive budget surplus, Gov. Gavin Newsom instead went on a vote-buying spree, promising to send out more than $30 billion to voters – sorry, residents – just before the election.

He also had a willing cohort in the CA Secretary of Labor, Julie Su.

…Su was informed by security professionals very early on in the pandemic response that fraud – on a massive scale – was occurring, but took months to staunch the flow (she later said she didn’t want to hurt potentially legitimate recipients even though she did exactly that by – for between two and eight weeks -cutting all benefits to millions overnight on New Year’s Eve, 2020.

With money flying out and few earnest efforts being made to recoup the fraudulent claims, CA was soon on the precipice of a financial default on the loan.

In the meantime, Julie Su became Joe Biden’s acting secretary of labor, which meant she was now writing the federal rules in the aftermath of the pandemic.

…In December, 2023, Su’s labor department issued a rule regarding something called “finality.” In a very rough nutshell, the feds let states follow their own regulations regarding when to declare a claim over and done with. Once an account claim is final – i.e., there is nothing left to do with it – if it owes money it owes it directly to the feds.

Fox, meet henhouse.

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Long story short, CA’s $32.6B debt, lost to fraud and ‘unrecoverable’, was “forgiven,” but the $20B they’d borrowed for the EDD fund was still an outstanding loan.

…According to both the state’s Annual Comprehensive Financial Report and the state auditor’s report on the EDD, there was roughly $53 billion in unemployment related debt.  That debt is divisible into two groups – the $20 billion owed by the state that was borrowed to fund California’s own unemployment system and the $32.6 in directly federal money the state lost to fraud.

The state decided in the spring of 2023 to default on the $20B, and it was as cynical a ploy as I’ve ever seen. 

Yes, it meant the state wouldn’t have to pay the feds the $20B back, so they could keep those dollars in their coffers for more illegals or whatever Newsom’s next pet project was. But what hadn’t been made clear to anyone was the fact that business owners in the state were co-signees for the federal loan, and they were now responsible for picking up the tab the state had dumped.

Little did California businesses know that they were cosigners on the state’s nearly $20 billion loan from the federal government that was used to cover California’s unemployment fund shortfall during the COVID pandemic. This ugly truth became apparent when the state recently decided to stop making payments on this loan. When a state defaults on its federal unemployment insurance loan, federal law requires that the state’s businesses repay the loan.

Most of them, like Chef Gruel, are only finding out NOW, as the tax bills come due for 2024 and the penalty rates for the default kick in.

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…Typically, a business pays about $21 per employee per year in the federal tax. Mobius strip-ironically, that tax funds the same emergency fund California keeps borrowing from at a clip of about $10 to $20 million a day.

The EDD says 2025 will see a total fed tax of $63 per employee, triple the normal amount.

After the third year of the payback process, there is an automatic “add-on” tax.  The add-on would push the annual per employee rate to $273 for 2026, 13 times the rate it would have been if the EDD did its job properly.  And when the added tax will stop is anybody’s guess at this point.  

For anyone in Sacramento to claim that this was not the intent of not paying off the debt in the first place is laughable – Newsom, et.al knew they could side-door a tax on businesses and use th surplus money to literally hand out money to voters and supporters.

The increases are going to be astronomical and came out of the blue to whammy employers.

Californians just handed their greasy slickster chief executive his very first minimum wage defeat at the ballot box. Some of the main reasons were the job/hour reductions and price increases at restaurant counters as a result of the previous hikes.

  • After the implementation of the $20 minimum wage law, an EPI survey found that a majority of restaurants say they had raised menu prices (98%), reduced employee hours (89%), limited employee shift pick-up or overtime opportunities (73%) and reduced staff or consolidated positions (70%) as a result of the minimum wage law;
  • Additionally, a majority of restaurants surveyed said in the next year they will have to raise menu prices (93%), reduce employee hours (87%), reduce staff or consolidate positions (74%), and limit employee shift pick-up or overtime opportunities (71%);
  • The law has also led to a considerable drop in California’s fast food industry jobs shows the state is now down a net 4,400 jobs since January, when companies began sounding alarms about the new AB 1228 $20 minimum wage;
  • The state has also seen the worst fast food job growth rate since the Great Recession;..

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After this nasty surprise, courtesy of Newsom and his enablers, I hate to tell them they haven’t seen anything yet.

And God knows what they can do about this one. 

I mean, there’s no voting down the feds when they come looking for money you owe them.