Business

California in a jam after borrowing billions to pay unemployment benefits

Published

1 week ago

April 23, 2024

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.”

Business

Sony and Apollo make formal $26-billion joint bid for Paramount

Published

1 hour ago

May 3, 2024

Press Room

Sony and Apollo make formal $26-billion joint bid for Paramount

Sony Pictures Entertainment and Apollo Global Management have officially put in a bid for Paramount Global, as competition for the storied film and TV company continues to heat up.

Sony and Apollo submitted their $26-billion all-cash offer this week, according to a person familiar with the matter who was not authorized to comment.

Under the terms of the proposed deal, Sony would take a majority shareholder role in the company, with Apollo as a minority shareholder. The joint bid is a nonbinding expression of interest.

The companies do not see regulatory approval as a hurdle to the deal, the person said, even though it would lead to the combination of two of Hollywood’s major movie studios.

Apollo already owns a minority stake in “Dune” producer Legendary Entertainment. The deal could run up against Federal Communications Commission rules that restrict foreign ownership of broadcast TV stations, so Paramount’s CBS station group likely would have to be sold or licensed to Apollo, which already controls Atlanta-based Cox Media Group.

Culver City-based Sony Pictures is owned by Tokyo-based Sony Corp., the electronics giant behind the PlayStation video game system.

The bid comes as Paramount nears the end of a 30-day exclusive negotiating period on Friday with tech scion David Ellison’s Skydance Media, which recently sweetened its takeover offer after outcry from shareholders, who saw the original bid as dilutive to their shares.

Ellison has teamed up with investment firms RedBird Capital Partners and KKR to make a bid to acquire Paramount controlling shareholder Shari Redstone’s National Amusements holding company.

The complicated two-step proposition would involve Paramount acquiring Skydance Media and Ellison taking control of Paramount, including the storied Melrose Avenue Paramount studio lot, broadcast network CBS and various cable channels such as MTV and Comedy Central.

Skydance’s revised offer includes a cash infusion for Paramount and money earmarked for nonvoting shareholders, who have raised concerns that the prior bid would benefit the Redstone family at their expense.

On Monday, Paramount ousted chief executive Bob Bakish, who was known to have opposed the Skydance proposal. His opposition irked Redstone, who also had questioned some of Bakish’s business decisions, including not selling cable network Showtime, according to people familiar with the situation.

The company said three of its top entertainment executives would jointly run the firm: Paramount Pictures CEO Brian Robbins; CBS CEO George Cheeks; and Showtime/MTV Entertainment Studios chief Chris McCarthy.

Analyst Jamie Lumley at financial research firm Third Bridge described the bid as Sony and Apollo’s best attempt to make Paramount an offer it couldn’t refuse, though it could be futile at this point.

“Ultimately, this offer could be coming in after the 11th hour if the sweetener Skydance added in last weekend is enough to get a deal over the line,” Lumley wrote in a statement. “With the exit of Bob Bakish as CEO, Paramount is likely looking to finalize a deal as soon as possible as it plots a path forward for its beleaguered business.”

Shares of Paramount were up 12.5% to $13.80 around 12:30 p.m. PDT on Thursday.

Adding to the complications, Paramount also is in negotiations with Charter Communications to work out a new deal for carriage of the company’s TV channels. Paramount is heavily reliant on the fees it reaps from its TV stations, despite flagging ad revenue and increasing cord cutting. The outcome of these negotiations could factor into Paramount’s valuation in the event of a sale.

Business

Elon Musk, Argentina's president headline 27th Milken conference

Published

8 hours ago

May 3, 2024

Press Room

Elon Musk, Argentina's president headline 27th Milken conference

Free-market enthusiasts and mutual admirers Elon Musk and Javier Milei, Argentina’s new president, will headline next week’s Milken Institute Global Conference, the annual Beverly Hills confab that tackles the world’s most pressing problems with a dash of celebrity and Hollywood.

The Beverly Hilton event draws several thousand people from around the world and will kick off with remarks Monday by International Monetary Fund Managing Director Kristalina Georgieva.

Also packed into a busy program will be Milei, a libertarian populist elected in November amid soaring inflation in his country, who will speak at lunch. Musk will close out the day talking with Michael Milken, founder of the conference and its sponsor, Santa Monica’s Milken Institute think tank.

The theme of this 27th annual gathering is “Shaping a Shared Future,” a reference to finding common ground amid the complex issues that have arisen in the post-pandemic world, including war, the emergence of artificial intelligence and the need to create a sustainable economy amid climate change — employing the tools of capitalism. All public panels can be watched on the institute’s website.

“The world is in transition again,” said economist Kevin Klowden, the institute’s executive director of MI Finance. “And what you’re seeing in the U.S. right now is a huge amount of dissatisfaction. There’s this very real sense that people would like to go back to the way it was prior to the pandemic, but it’s not.”

The conference headliners — who have been described as having a bromance, with Musk hosting Milei at Tesla headquarters in April — highlight some of the challenges and possibilities of finding common ground.

Musk has warned artificial intelligence could lead to the destruction of civilization without proper safeguards, and this year sued industry leader OpenAi, which he had co-founded when it was a nonprofit before leaving in 2018. He accused it of violating its original charter in search of profits.

OpenAi Chief Operating Officer Brad Lightcap will be a featured interview Monday on one of several conference panels about artificial intelligence.

The whiskered Milei is a self-described anarcho-capitalist who has vowed to shut down Argentina’s central bank. He will take the stage just hours after Georgieva of the IMF, a global institution that is often the target of populists yet is working with his administration to help dig Argentina out of its economic hole.

Among the leading themes is sustainability. John Podesta, President Biden’s senior advisor on international climate policy, will discuss the issue with Exxon Mobile chairman and chief executive Darren Woods.

That will be followed up by a talk among Sen. Joe Manchin, a Democrat from coal state West Virginia; Chevron chairman and chief executive Michael Wirth and a top Department of Energy official.

“Up to this point, a lot of climate change has been hypothetical, but look at what you are seeing now in terms of the insurance market, wildly varying temperatures, the [flooding] pictures from Dubai. This is the new reality,” Klowden said. “There is a real understanding from the business community, the finance community, that this is something that needs to be incorporated into the future.”

As is typical, Wall Street bigwigs will opine on financial markets, asset management and other topics. The notables include hedge fund managers Bill Ackman and Ken Griffin, private equity titan David Rubenstein, hospitality magnate Barry Sternlicht, billionaire investor Ron Burkle and Wells Fargo chief executive Charles Scharf.

Hollywood panelists include Warner Bros. Discovery chief executive David Zaslav, producer Brian Grazer and Jeffrey Katzenberg. Soccer superstar and businessman David Beckham will speak on branding.

Los Angeles Mayor Karen Bass will welcome the guests while former L.A. mayor and current U.S. Ambassador to India Eric Garcetti will talk about that country’s future. Public officials on stage will include the presidents of the New York and Minneapolis federal reserve banks and Mandy Cohen, director of the Centers for Disease Control and Prevention, one of multiple panelists on medicine and health, another focus of the Milken Institute.

The conference will not ignore the war in Ukraine, as well as Israel’s campaign in Gaza — which has sparked protests at UCLA, USC and college campuses nationwide — with some panels touching on the Middle East conflict by invite only and behind closed doors.

Klowden said it was important for the conference to address the Gaza conflict, especially since the institute has wide contacts in the Middle East and holds an annual summit there. However, given the sensitivity of the matter, “the fact is that nobody wants to come out and publicly say something at the global conference or anywhere else that’s going to upset everything,” he said.

The conference ends Wednesday with a concert by John Fogerty, who led Creedence Clearwater Revival and wrote the counterculture classic “Fortunate Son”— playing at one of the country’s leading celebrations of capitalism.

Business

Byron Allen's Allen Media Group facing layoffs across all divisions of the company

Published

15 hours ago

May 3, 2024

Press Room

Byron Allen's Allen Media Group facing layoffs across all divisions of the company

Allen Media Group, the company owned by TV mogul Byron Allen, is set to undergo a significant round of layoffs that will affect all divisions of the business.

“Allen Media Group is making strategic changes to better position the company for growth that will result in expense and workforce reductions across all divisions of the company,” a spokesperson said Thursday in a statement to The Times.

“Allen Media Group’s brands continue to perform well and in many areas our revenue growth has greatly outpaced the market. We are aligning these changes to drive future business opportunities and support our growth strategies in our rapidly evolving industry.”

The company did not say how many jobs would be cut.

Allen Media Group is the parent company of the Weather Channel and a number of local TV stations.

The stand-up comedian and TV producer has been making lots of headlines lately amid reports that he was among the entertainment executives looking to acquire Paramount Global.

Earlier this year, Allen made a $14.3-billion bid to purchase all of the outstanding shares of the New York City-based entertainment company — home of Paramount Pictures, CBS and other legacy brands and franchises.

But analysts and investors were skeptical of Allen’s bid for Paramount, questioning whether he’d be able to raise the funding necessary to pull off a deal.

This is a developing story.