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.

The state’s decision to default is inexcusable. California recorded a nearly $100 billion state budget surplus last year, thanks to the state’s top earners, that could have been used to repay the debt. The state received $27 billion in federal COVID aid it could have used to repay the debt. The state’s record $300 billion–plus 2022–23 budget could have retired the debt. Even after defaulting, the state could have resumed its payments this year and offset the tax burden on businesses, as it planned to do in its 2023–24 budget. But as the state’s finances continue to decline, the state has walked back making payments or offsetting higher business federal unemployment insurance taxes.

Twenty-two states received federal unemployment loans during the pandemic, and California is just one of four states that have not yet repaid the debt. As of the end of last year, California owed nearly two-thirds of the outstanding $27.5 billion federal unemployment insurance debt among these four states. The other states with remaining unpaid debt are New York, Illinois, and Connecticut, all of which are high-tax and high-spending states that are all losing population to other states.