Business
California in a jam after borrowing billions to pay unemployment benefits
California’s massive budget deficit, coupled with the state’s relatively high level of joblessness, has become a major barrier to reducing the billions of dollars of debt it has incurred to pay unemployment benefits.
The surge in unemployment brought on by the COVID-19 pandemic pushed the state’s unemployment insurance trust into insolvency. And over the last year California’s joblessness has been on the upswing again, reaching 5.3% in February, the highest among all states. The March job numbers come out Friday.
To keep the safety-net program operating at a time when the taxes paid by employers and earmarked for jobless benefits are insufficient, Sacramento has been borrowing billions of dollars from the federal government. The debt now stands at about $21 billion and growing, an increasing burden for state deficit fighters and for the businesses that pay into the jobless insurance program.
Payroll taxes paid by employers are rising not only to cover payouts to unemployed workers but also a state surcharge and a gradually increasing federal surtax to help pay off the principal on the debt. But the tax increases are not enough to deal with the huge loan the state has incurred, or at least not in any timely manner.
California already has paid more than $650 million in interest on the loan — and about $550 million more is due Sept. 30.
“Businesses are going to continue to see the slow boil eating into their margins,” said Robert Moutrie, senior policy advocate for the California Chamber of Commerce.
Higher taxes will hit small and midsize companies in sectors such as restaurants and tourism especially hard, he said.
“It just adds to the burden and the costs of operating here and makes companies look at operating elsewhere,” Moutrie said.
Although the pandemic is largely to blame for California’s huge unemployment insurance debt — and there’s been a lot of attention on dollars lost to fraud — analysts and workers’ rights groups point to another problem: Even during more-normal economic times, the state often doesn’t collect enough unemployment insurance taxes to cover jobless claims.
“The root problem really is that for decades policymakers haven’t been requiring businesses to pay enough into the [unemployment insurance] fund to support the benefits workers really need,” said Amy Traub, senior researcher and policy analyst at the National Employment Law Project.
“So there’s a structural deficit that underlies this crisis moment with this huge debt to the federal government.”
Data also show that jobless workers in California stay on unemployment significantly longer than the national average, which adds to the total payout amount. And California workers claim unemployment benefits in disproportionately high numbers.
The state accounts for about 20% of the nation’s jobless claims, far in excess of its 11% share of the labor force population. That partly reflects the state’s higher unemployment and accompanying increases in layoffs and jobless claims in the tech industry and other sectors, but also its comparatively easier eligibility rules and low re-employment rate.
Last year California’s jobless workers received on average $385 a week, replacing only about 28% of the average wage. Both figures are lower than the national averages, according to Department of Labor statistics. (The wage replacement rate is about 50% for minimum-wage workers in California.)
From surplus to deficit
But California also stands out as an outlier in the way it has managed, or mismanaged, the program.
When COVID struck in March 2020, U.S. unemployment jumped to 14.8% a month later and brought unprecedented jobless claims, forcing California and many other states to borrow from the federal government to keep paying benefits. Almost all the other states have since repaid those loans, some with pandemic relief money they also got from Washington.
Today only New York and California, plus the Virgin Islands, still owe money for unemployment insurance loans.
Analysts said California could have used some of the $43.5 billion the state received from the American Rescue Plan Act to pay down the debt. Instead, state officials spent the relief money for other purposes, including additional stimulus checks to residents.
“California had options and it chose the spending option instead of the responsible option,” said Matt Weidinger, a senior fellow at the American Enterprise Institute who has written widely on the unemployment insurance program. He said higher employer payroll taxes will ultimately spill over to employees in the form of less wages.
“California distributed relief during a time when people and businesses were struggling, everything from covering rent and utility bills to small business grants — helping those hardest hit by the pandemic while stimulating the economy,” said Alex Stack, a spokesman for Gov. Gavin Newsom’s office. “That’s on top of paying down $250 million of unemployment fund debts.”
State legislative analysts were careful not to criticize policy choices made during the extraordinarily uncertain times.
Some suggested, however, that officials may have felt the state had plenty of financial cushion coming out of the pandemic in 2021-22. Then, Sacramento was flush with cash, thanks to huge tax windfalls. And the interest rate on the federal unemployment insurance loan two years ago was at a historical low of 1.6%.
But the interest rate on the loan has since risen to 2.6% — and may yet rise further. What’s more, once huge surpluses are now a projected record budget deficit of more than $70 billion in 2024-25, according to a February update by California’s Legislative Analyst Office.
An economic downturn in the state, marked by a falloff in technology investment and rising overall unemployment, has resulted in unprecedented shortfalls in tax revenues.
Under such budget constraints, California officials had little choice but to pull back on plans to spend $1 billion to reduce the principal on the unemployment insurance loan.
What’s the solution?
California’s Employment Development Department, which oversees the state’s unemployment insurance program, has said that it would rely on increased federal taxes on employers to pay down the debt.
Currently California employers pay a federal unemployment insurance tax of 1.2% on the first $7,000 of wages per employee, but that will rise incrementally every year so long as California is in debt, to more than 3.5% after 10 years. And analysts estimate that it may take at least that long to pay off the debt.
Businesses also pay a state unemployment insurance tax, also on the first $7,000 of wages, based on their layoff history, plus a surcharge when there’s a shortfall in the jobless benefits fund.
Combining both state and federal portions, a new California employer, for example, would be looking at paying about $500 in unemployment insurance taxes per employee this year — almost double than during normal times.
“California’s apparent plan to rely on [federal tax] revenue to pay off the loan avoids addressing solvency in the state unemployment insurance law and places the burden of increased unemployment benefits during the pandemic on employers,” said Doug Holmes, former director of Ohio’s unemployment insurance program and currently president of the consulting firm UWC.
In California, business groups say it’s unfair for employers to shoulder the increasing burden when they weren’t responsible for the pandemic or the temporary lockdowns that were imposed on them, resulting in layoffs and higher unemployment claims. They argue that it will only add to the state’s already higher business costs that have pushed some California companies to relocate to Texas, Nevada and other states.
Traub, of the National Employment Law Project, said employers have to pay more to make the math work and ensure the unemployment trust system is sustainable over the long haul.
Sacramento collects unemployment insurance taxes on the first $7,000 of wages per employee per year. Traub noted that most other states have a significantly higher taxable wage limit — New York at $12,500; New Mexico at $31,700; and Washington state, the highest, at $68,500.
“Raising the taxable wage base has got to be part of the solution,” Traub said.
California legislators are now considering an increase, which many agree is needed. “That’s very reasonable,” said Michael Bernick, an employment attorney at Duane Morris in San Francisco.
Bernick was the EDD director in the early 2000s when, under Gov. Gray Davis, the state raised the maximum weekly unemployment benefits to $450 a week — but without increasing the taxes to cover the larger payments.
Writing in a report with Holmes, Bernick recommended a number of steps the EDD could take to shore up the state’s unemployment benefits program, including tightening eligibility standards and modernizing the agency’s computer and communications systems. But by far the main policy change that’s needed is to help jobless workers move into new jobs more rapidly.
In 2022, California workers stayed on unemployment aid for an average of 18.1 weeks, compared with 14.5 weeks nationally, according to a study by the Department of Labor’s former lead actuary, Robert Pavosevich.
In California that year, 47% of recipients took the full maximum 26 weeks of jobless benefits. Nationally, only 27% exhausted all benefit weeks available.
“Those are striking numbers and highlight just how much the system needs to be reshaped,” Bernick said. “How do we get people back to work quickly? It’s both good for businesses and the workers, but also for the unemployment fund.”
Both peanut butter and salary increases are widely loved, but put them together and you may get some grumbles.
“Peanut butter raises” are across-the-board pay bumps to employees, spread out thinly like a creamy condiment on bread. The term popped up all over business media this year after a report from Payscale, a compensation data company, suggested that some employers would be giving such raises instead of larger merit-based increases to a select few.
This metaphorical use of peanut butter has been lurking around corporate America for years: In 2006, Brad Garlinghouse, then a senior vice president at Yahoo, wrote an infamous memo criticizing the company’s strategy of “spreading peanut butter across the myriad opportunities that continue to evolve in the online world” — in his view, failing to focus on priorities or reward top performers with higher pay. “I hate peanut butter. We all should,” he wrote in what he called the Peanut Butter Manifesto.
How it’s pronounced
/pē-nət bə-tər/
Are peanut butter raises fair? It depends on whom you ask, said Nick Bloom, an economist at Stanford. Are they a best practice? Not really, he argued.
“Good management involves setting tough targets, evaluating employees against this and rewarding those that make their targets,” Mr. Bloom wrote in an email. “This means some folks will get paid and others won’t.”
Firms turn to peanut butter raises in two situations: when they can’t really distinguish strong performers from weak and when managers just want to take “the course of least resistance,” Mr. Bloom said. Generally, he added, a well-managed firm will pay its top performers well and keep an eye on the market.
Kevin J. Murphy, an expert on compensation at the University of Southern California’s business school, argued that peanut butter raises “send exactly the wrong signals,” telling top performers that their employers “just don’t care that much.”
Still, the idea that only stars should get pay bumps is not a law of physics. In previous generations, the notion that people across an organization — not just the top performers — should get consistent raises was common, said Peter Cappelli, a professor at the Wharton School.
But, he said, “that has changed over time,” starting in the winner-take-all, Jack Welch management era. Lately, executives who see themselves as top performers deserving high pay apply that framework to their employees.
Mr. Cappelli is skeptical that peanut butter raises will be a new norm in corporations — they actually strike him as a more generous approach than leaders are likely to take right now. In a tight job market, employers felt pressure to give everyone a little something, he said, but now, in a low-fire, low-hire job market, so few openings are available that bosses are not too worried that employees will quit to go elsewhere.
“Efforts to retain people have faded,” he said. Even peanut butter may be more than some should expect.
Framing raises around peanut butter “takes away some of the seriousness” of discussions about compensation, Mr. Murphy said. Peanut butter is cheap and ubiquitous. It is also associated with children, Mr. Cappelli noted, so it reads as a pejorative in a business setting. It’s not as though executives, he added, are referring to Grey Poupon or caviar raises.
Business
Sweeping California law on single-use plastic meets with outrage from all sides as it goes live
Within days of California’s long-anticipated single-use plastic law going into effect, environmentalists, anti-waste activists and the packaging industry reacted with anger and frustration.
Anti-plastic activists say Gov. Gavin Newsom’s administration and CalRecycle inserted exemptions favoring the plastic industry into the law’s regulations that weaken it and undermine legislative intent.
“These new rules create huge loopholes for plastic packaging that violate the law,” said Avinash Kar, senior director of the toxics program at the Natural Resources Defense Council.
On the other side, the packaging industry has sued over similar laws in other states. “Our members have real concerns about cost, compliance, and constitutionality,” said Matt Clarke, spokesman for the National Assn. of Wholesaler-Distributors, which sued Oregon earlier this year over a similar waste law.
CalRecycle, the state’s waste agency, did not respond in time for publication. The final regulations putting the law into effect were released May 1 and posted for review Tuesday.
The environmental organizations say the law’s new final regulations open the door to what is known as “chemical recycling,” which produces large amounts of hazardous waste. The law also contains problematic exemptions for certain categories of plastic foodware, they say.
The language of the law forbids any kind of recycling that would produce significant amounts of hazardous waste. The new regulations allow for these recycling methods if the facilities are properly permitted.
The new regulations also exempt certain products if they are already covered by federal law. For instance, a packaging company, retailer or distributor can claim that they have such a preemption, Kar said, and CalRecycle might not immediately review that claim. “And as long as they don’t review it, they’ll get the exemption for as long as CalRecycle doesn’t review it,” creating a potential “forever loophole.”
“Californians were promised a system where producers take real responsibility for the waste they create,” said Nick Lapis, advocacy director for Californians Against Waste. “When regulations introduce broad exemptions and redefine key terms, that promise starts to erode. The details matter here, and right now they don’t line up with the intent of the law.”
Senate Bill 54, the Plastic Pollution Prevention and Packaging Producer Responsibility Act, was signed by Newsom in 2022. It was considered landmark legislation because it addressed the scourge of single-use plastics, requiring plastic and packaging companies to use less of them and ensuring that by 2032, all food packaging is either recyclable or compostable.
Accumulating plastic waste is overwhelming waterways and oceans, sickening marine life and threatening human health.
The law’s intent was not only to reduce it, but also to put the onus and cost of dealing with it on packaging producers and manufacturers, not consumers and local governments. It was supposed to incentivize companies to consider the fate of their products and spur innovation in material redesign.
According to one state analysis, 2.9 million tons of single-use plastic and 171.4 billion single-use plastic components were sold, offered for sale, or distributed during 2023 in California.
Similar laws have been passed in Maine, Oregon, Colorado, Minnesota, Maryland and Washington. Oregon’s law, however, is on hold while a lawsuit by the National Assn. of Wholesaler-Distributors works its way through the courts.
“We see a lot of the same problems in California that we flagged in Oregon,” said Clarke, the trade group spokesman. “Given California’s scale, the cost implications are going to be even larger. Our legal counsel has noted that California’s proposed fees are already higher than what other states have put forward.”
Jan Dell of Last Beach Cleanup, an anti-plastic waste group based in Laguna Beach, doesn’t believe the law will work — irrespective of the final regulations — and said the “exorbitant” cost of its implementation will either spur producers to sue, or they’ll end up passing the higher costs on to consumers.
She referred to a report from the Circular Action Alliance, the state-sanctioned group established to represent and oversee the implementation of the law on behalf of the plastic and packaging industry. It finds the law will increase the cost of disposal between six and 14 times for common products, such as Windex bottles, made of polyethylene terephthalate.
“If the producers don’t successfully sue to stop the fees, this will certainly add to product inflation for CA consumers,” she said in an email. “Californians already have to pay exorbitantly high curbside collection fees for trash, recycling, and organics … so, starting in 2027, our groceries will cost a LOT more but we won’t see a reduction in our waste bills.”
Christopher “Smitty” Smith, a partner at law firm Saul Ewing in Los Angeles, who councils companies and interest groups on SB 54 and other Extended Producer Liability laws, said that although he could see areas of the law that “could be sharper and avoid the legal challenges … you can’t stop people from suing.” Environmentalists and anti-waste activists say they are preparing a lawsuit.
Smith said the law already has sparked changes in how companies think and respond to concerns about waste.
One of his national fast-food chain clients has realized that if its brand name is on plastic packaging, it’s that company’s responsibility, he said, so “they’ve spent the past year mapping out their franchise agreements, their supply chain agreements, their producer agreements, to figure out” what it needs to do to comply.
He said in the past, companies have paid little attention to these details and just let their franchisees figure this kind of thing out. Now, they’re spending a lot of time and money “to wrap their arms around what their supply chain looks like and like, what post consumer use of their plastic products looks like and what their regulatory obligations are.”
It’s bringing a new dialogue within companies. And that, Smith said, is what could make this law so powerful.
Times staff writer Meg Tanaka contributed to this report.
At Gap’s headquarters in San Francisco, an archive dedicated to the apparel company’s 57-year history features nearly 6,000 boxes of memorabilia documenting the retailer’s brands, which also include Old Navy, Banana Republic and Athleta.
There are prints from photographers like Annie Leibovitz and material related to many celebrity ad campaigns, like Missy Elliott and Madonna for Gap and Cindy Crawford for Old Navy. Those dated back to the retailer’s heyday, when malls were full, celebrities wore the brand on red carpets and Gap stores were plot points in sitcoms like “Seinfeld.”
When Richard Dickson started as Gap’s chief executive nearly three years ago, he was awed by those archives and set out to change the conversation about the company.
Gap had spent years closing hundreds of stores across the United States, as sales flagged and profits were patchy. Its stock, which peaked in 2000, was languishing. The company took more than a year to fill the C.E.O. position.
Mr. Dickson, who spent nearly 20 years at Mattel, brought with him a playbook that had helped revitalize the toymaker’s brands like Hot Wheels and Barbie. He got Barbie to the big screen, with star power and a marketing machine that produced blockbuster financial results.
The native New Yorker speaks excitedly about the ways that fashion, entertainment and music are intertwined. He went to Coachella last month and has been to the Oscars in recent years. He often mentions how Gap’s first store, which opened in 1969 in San Francisco, sold records, tapes and jeans.
Mr. Dickson’s culture-focused strategy is taking root. For his creative director, he hired Zac Posen, who dressed Kendall Jenner in a Gap gown for the recent Met Gala. Gap has made toe-tapping ads featuring Katseye and Parker Posey. Mr. Dickson even hired another C.E.O. — a chief entertainment officer — to oversee the company’s push into content, licensing and Hollywood.
Gap’s comparable sales have risen for eight straight quarters, and its market value has increased to $8.5 billion, from $3.6 billion when Mr. Dickson started. Last year, Gap, Old Navy and Banana Republic posted sales increases, with only Athleta recording a decline. Gap’s namesake brand showed the strongest growth.
Mr. Dickson, 58, credits the turnaround to “being aware of pop culture, content, art, theater, music, entertainment.” If a brand makes sure that those themes come through, “you become more relevant,” he said.
This interview was edited and condensed.
As you try to bring Gap back into the cultural conversation, how are you managing your time? Are you spending more time in Hollywood?
As our business evolves, my allocated time also changes.
When I first got to the company, we were in “fix mode.” It’s no secret. My time was 100 percent spent on the operations, the financial rigor, setting up strategic priorities and editing a lot of the noise in the system that can be very distracting for a turnaround.
Over the course of three years, we’ve emerged a better company. Now we move into the next phase, which is to build momentum. My focus, while not taking my eye off the operational discipline, moves more into how to accelerate our growth.
I have a multitude of meetings and time spent with the entertainment community, which I’m very familiar with from previous roles.
When you were hired from Mattel, the chatter was that you would try to recreate the Barbie magic. Is that true, or is there a different strategy for Gap?
It’s actually the same playbook. It is not so much that the playbook is unique; it’s the methodology and the execution that’s unique.
The playbook is, first, identifying what’s our reason for being.
You could put me on any brand in the world. Why do you exist? What is our purpose? What’s our point of difference? Those simple questions have very complicated answers when you’re in a turnaround. If you can’t answer it in a sentence or two, or one or two words, you’ve got a problem.
Old Navy is different from Gap. Gap is different from Banana. Banana is different from Athleta.
So let’s focus on Gap. What makes it distinctive?
When I look at the history of every one of our brands — it wasn’t dissimilar to the Barbie conversation — what was it that broke through? What was that single thing that made it so incredibly relevant?
In our case, it was a store that was all-inclusive before inclusivity became a word, because we sold jeans for all races, all sizes, all sexes. We bridged the generation gap in the experience through music. Music was the connective tissue in the context of the store experience.
Let’s get back into that music narrative with great product storytelling and amplify it in a way that is relevant for today’s consumer. We started with Jungle with our linen campaign. We moved to Troye Sivan with a great music video around the baggy and loose trend. Then, of course, the blowout with Katseye.
These aren’t ads. Yes, you see the fleece because it looks incredible. But nobody’s saying, “Oh, my God, it’s a great deal with a great price.” They’re saying: “Did you see this? Did you feel this?” That is when you get emotional connection to a brand.
We had become more about price than product. More about stuff, not storytelling.
If you’re focusing on entertainment, how do you measure success?
We have dashboards everywhere. I think we just turned one off when you walked in because our business flashes on an hourly basis on my screens.
We have dashboards that measure brand love, people searching more for our brand and brand attributes that we test and roll out to see how consumers are feeling.
Does the focus on entertainment hedge against all of the uncertainty in the world?
To some extent, in the world that we live in, we should be that great distraction in some cases, that pleasant place that you love to go to. That ultimately makes a brand stronger, to essentially navigate more complex times. There’s always something that we have to worry about.
How worried are you about consumer spending? We’re in California right now. I passed a gas station where it was about $6 per gallon.
That was a good deal.
Most retailers say that consumers remain resilient, but are you prepared for spending levels to drop?
We have a fantastic portfolio that addresses all income cohorts.
We have quality products that should last, in some cases, for generations. You’re buying it for the long haul. But we do recognize that we need frequency: We need to stay fresh. We need to stay new.
There are a lot of businesses that will start to pull back on quality, right? We’re not.
You’re from New York City, right? Tell me about your upbringing.
My parents were both in retail, real estate and fashion. My mom was more on the creative side, and my dad was more on the financial and operations side.
My grandparents were also in fashion and retail. They were Holocaust survivors. My grandmother sewed and had her own line in department stores. My grandfather ran the factory, so they had a small business that did very well. I remember growing up and running around the factory floor.
What’s a piece of advice that you received that you still reflect on today?
Retail is detail. There’s not a single day where everything goes right, but at the end of that day you could still say that it was a great day.
Ultimately you’re firefighting on a minute-to-minute basis. You’re constantly in motion. That sense of detail orientation is probably an attribute that’s carried with me from my earliest days in the industry.
It’s time for the lightning round. What’s on heavy rotation on your music playlist right now?
Who I really like right now is Sombr. I saw him at Coachella.
What’s the last thing you asked A.I.?
To decipher an object that somebody sent me from a museum and I wanted to know which museum it was from.
How often do you check Gap’s stock price?
I probably check it twice a day. I do a morning check and at the end of the day.
When you need to feel most confident, what are you wearing?
I love our hoodies, and not only our fleece hoodies at Gap but Banana Republic’s cashmere hoodie. Depending on the vibe, I would go with a fleece or cashmere hoodie. Then I usually throw on a Banana Republic trucker jacket.
I wear all of our brands. I have worn a few sweatshirts from Athleta.
If you had to explain each of your brands in exactly one word, what would it be? Let’s start with Old Navy.
Family.
Gap?
Individuality.
Banana Republic?
Adventure.
Athleta?
I’m going to go with empowerment.
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