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California’s Safety Net Explained

January 2025 | By Monica Saucedo and Nishi Nair

Father cooking while talking with his daughter in the kitchen at home

key takeaway

California’s vast wealth contrasts sharply with deep income inequality, leaving over a quarter of residents unable to meet basic needs without safety net support. Strengthening safety net programs is crucial to reducing poverty and ensuring all Californians can thrive.

California is home to vast wealth and has the 5th largest economy in the world. However, increasing poverty levels and deep income inequality make clear that not all Californians have access to this wealth. With the highest poverty rate in the nation, millions of Californians, many of whom are employed, rely on the state’s wide array of safety net programs to provide essentials like food, housing, and health care to meet their basic needs.

The COVID-19 pandemic exacerbated hardship for Californians with low incomes, but expansions in safety net programs showed promising progress in closing many long-standing gaps. As those expansions have concluded, the scars left by the pandemic are being highlighted. A recent study shows that persistently high inflation has disproportionately hit low-income Californians the hardest as prices for necessities, which make up the majority of their budget, have increased more than the average good.

While measures of poverty are concerning, they underestimate true need. According to MIT researchers, to make ends meet in 2024, a single adult in California would need an hourly wage of $27.32, or about $57,000 in annual income, and a family of two adults with two children would need wages between $33.26 and $49.10, or between $69,000 and $102,000 annually. These estimates suggest that families in California need incomes well over 200% of the federal poverty level (FPL), or $30,000 for a family of one and $62,000 for a family of four, to meet their basic needs. As of 2023, over a quarter of Californians lived below 200% of FPL.

Reducing poverty and ensuring all Californians have sufficient resources to thrive requires a strong social safety net. The charts below paint a picture of who participates and is most affected by the safety net, where funding comes from, and how income thresholds interact with assistance amounts. An overview of some of California’s most utilized safety net programs shows that scope and income restrictions limit the impact and reach of these vital supports.

1. Participation in Safety Net Programs Does Not Fully Capture Need in the State

Millions of Californians participate in safety net programs. However, many people in need face barriers in accessing these programs due to the narrow eligibility criteria, income limits, and other bureaucratic red tape. Medi-Cal is the only program where participation exceeds the number of Californians under the 200% FPL, which is likely due to its relatively high-income eligibility for children and recent eligibility expansions. In contrast, CalFresh, the largest food assistance program in California, and the Earned Income Tax Credits (CalEITC and Federal EITC) only reach about half of Californians in need. Programs like the California Work Opportunity and Responsibility to Kids (CalWORKs), Supplemental Security Income/State Supplementary Payment (SSI/SSP) programs, and the Young Child Tax Credit (YCTC) are even more narrowly focused, serving only about a tenth of the population in need.

While some participants can receive assistance from multiple programs, the narrow eligibility scopes do not guarantee this. In fact, many Californians are excluded entirely or can only access very limited aid in times of need.

2. Strong Public Supports Help Reduce Poverty Among Communities of Color

Discriminatory policies and systemic racism have historically blocked Californians of color from accessing economic opportunities in California. Safety net programs serve as a mechanism to level the playing fields for these communities and close the gap created by the barriers placed before them. An overwhelming majority of the programs displayed below serve mainly Black and brown Californians, communities that face disproportionately high poverty rates.

Programs like CalWORKs play a crucial role in ensuring that these families and children have the ability to afford basic needs. Proposed cuts to and limitations imposed on these programs are particularly harmful to Californians of color and reinforce the negative impact of historic racist policies. The end of pandemic-era policies – which temporarily expanded many of these programs – demonstrates the real harm to Black and Latinx Californians and the increased hardship they face when California reduces funding for the safety net.

3. California Safety Net Program Rely on Both State and Federal Funding

California has led the nation in many ways strengthening its safety net. Federal dollars play a large role in supporting many of these vital services. Consequently, this means that many safety net programs are subject to federal regulations and susceptible to restrictions and cuts. CalWORKs, CalFresh, SSI/SSP, and Medi-Cal all received funding from both the state and federal government, with Medi-Cal receiving almost two-thirds (64.4%) of all federal funding that flows through the state budget.

In recent years, safety net programs, like TANF and SNAP — the federal names for CalWORKs and CalFresh — have been used as bargaining chips for conservative federal budget deals and have been put at risk of cuts and restrictions. California has historically invested large sums of state dollars beyond what is required to allow for eligibility flexibilities, as demonstrated by the creation of the California Food Assistance Program (CFAP) that extends CalFresh to certain non-citizens. However, if federal safety net funding is reduced, the state would need to backfill billions of dollars to maintain services, potentially jeopardizing these programs and limiting their impact.

4. Complex Income Requirements May Limit Programs’ Impact

Safety net programs, such as tax credits and cash/in-kind assistance, have specific income requirements that determine eligibility and the amount of aid provided. In many cases, assistance is inversely proportional to income, with those with the lowest incomes receiving the most help. However, both state and federal tax credits phase in and out at different income levels, with most phasing out at relatively low incomes. In the case of the Child Tax Credit (CTC), families with zero earnings are entirely excluded while high earners can receive the full credit.

Programs such as CalFresh, CalWORKs, Medi-Cal, and SSI/SSP have varying income thresholds depending on household size, typically offering more support to those with lower incomes. CalFresh generally serves households with incomes up to 200% of the federal poverty level, but the eligibility limits for other non-tax credit programs are much lower. This creates a challenge for individuals who earn too much to qualify for safety net programs but still struggle to meet basic needs, illustrating a clear gap where increasing income can push people out of eligibility without significantly improving their financial situation.

5. Safety Net Programs Provide Limited Assistance to Californians in Need

The amounts of assistance provided, along with income eligibility restrictions, highlight the gaps in California’s safety net. While the chart below shows the maximum aid available to program participants, not all households qualify for the full amount. For instance, the SSI/SSP program offers a higher maximum monthly aid than the other programs, but only families with zero earnings would receive the full amount, putting their income level well below what is needed to meet their basic needs.

Other programs follow a similar structure where cash or in-kind benefits are not added on top of earnings but are instead limited based on earning levels. In many cases, the bureaucratic process to apply for aid is cumbersome and discourages income-eligible Californians from accessing these programs. This is especially true considering that the assistance amounts are often insufficient to compensate for the costs of missing work to attend appointments or completing other steps of the application process, further discouraging participation.

Safety net programs are vital in ensuring that the most vulnerable Californians are given the opportunity to overcome systemic barriers stemming from discriminatory policies. The new Trump administration and Republican control of Congress promised to cut these programs and have the ability to further disadvantage already marginalized communities. In addition, income limits and restrictions imposed on programs limit the reach and impact these programs have on the most vulnerable Californians. However, pandemic-era policies, historic Medi-Cal expansions, and other wins in the safety net have proven that California policymakers have the ability to curb harm and enact policies that can significantly improve the well-being of all Californians.

Alissa Anderson and Kayla Kitson contributed to this publication.

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key takeaway

California’s refundable income tax credits — CalEITC, YCTC, and FYTC — play a crucial role in combating poverty and promoting economic security for millions of low-income families and individuals. These programs prove how targeted policies can address the state’s high cost of living, advance racial equity, and provide vital financial support.

Every Californian deserves to be able to put food on the table, pay the rent, and support their families. Still, millions of people across California struggle to afford basic needs every day. California’s high cost of living has long been a challenge for state residents, but it has grown more acute in recent years, particularly for families and individuals with low incomes, due to persistently high inflation and housing costs. And while state leaders have made progress boosting workers’ earnings by raising the minimum wage and pay in specific industries, many jobs still fail to pay enough to cover essential expenses. In the face of these challenges, refundable income tax credits play a vital role in helping Californians with low incomes make ends meet.

Refundable income tax credits are proven tools for improving people’s economic security. For decades, the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) have provided hundreds or thousands of dollars in tax refunds to families and individuals with low incomes, helping them pay for food and other basic needs, and lifting millions of people out of poverty each year. These credits have also been linked to long-term benefits for children, including better health and school achievement, higher educational attainment, and increased employment and earnings when children become adults. Given these benefits, many states have state versions of these credits to enhance the positive effects of tax credits for state residents.

what is a refundable income tax credit?

A refundable income tax credit is a type of credit that benefits families and individuals with very low incomes. The credit provides the same value regardless of how much tax filers owe in personal income taxes. For example, a family who qualifies for a $500 refundable credit and owes $200 in taxes will get the full $500 credit, with $200 covering their taxes and $300 as a cash refund. If the family owes no tax, they will get the full $500 as a cash refund. 

California’s Refundable Income Tax Credits Provide Around $1.4 Billion Annually

California has three refundable income tax credits that help families and individuals with low incomes make ends meet. Collectively, these credits have provided around $1.4 billion annually to Californians in recent years. This is up significantly from just $200 million provided in 2015, when California established its first refundable credit. This substantial growth reflects a decade of progress in which state policymakers consistently expanded financial support to families and individuals with low incomes through refundable state income tax credits.

California’s three refundable income tax credits include:

  • The California Earned Income Tax Credit (CalEITC)
  • The Young Child Tax Credit (YCTC)
  • The Foster Youth Tax Credit (FYTC)

The California Earned Income Tax Credit (CalEITC)

Established in 2015, the CalEITC provides a credit to workers and their families who have annual earnings of about $32,000 or less. The amount of money the credit provides varies based on how much workers earn and how many children they support. The credit has benefited around 3.5 million tax filers annually in recent years, up significantly from fewer than 400,000 tax filers in tax year 2015.

*lina l., Riverside County

"I qualified for the young child tax credit. It came at the right time we needed to start shopping around for my 1 year olds car seat upgrade. He's getting so tall, so quick, and so this will be a perfect way to use some of the refund. As a first time parent and full time college student, it feels great to have resources like these, such as VITA tax services and information about tax credits such as CalEITC. It helped out my friends and peers so much too since I let them know about it."

In addition, more than 200,000 tax filers who file their taxes with Individual Taxpayer Identification Numbers (ITINs) have benefited from the CalEITC each year since tax year 2020, when California ended the exclusion of these filers.1ITINs are issued by the Internal Revenue Service (IRS) to individuals who do not have Social Security Numbers to use to file their personal income taxes. Nearly 6 million people benefit from the CalEITC when factoring in not just the tax filer who qualifies for the credit but also their spouse/partner, children, and other dependents.

The Young Child Tax Credit (YCTC)

Established in 2019, the YCTC provides a credit to families who have at least one child between the ages of 0 and 5 and have annual earnings of about $32,000 or less, including those with no earnings. Most eligible families receive the maximum credit – $1,154 per family in tax year 2024. The credit has benefited around 400,000 families each year since it was first established. More than 35,000 families who file taxes with ITINs have benefited from the credit each year since California ended the exclusion of ITIN filers from the credit in tax year 2020.

The Foster Youth Tax Credit (FYTC)

Established in 2021, the FYTC provides a credit to workers ages 18 to 25 who were in foster care on or after their thirteenth birthday and are eligible for the CalEITC. The credit is provided per eligible individual, and most individuals receive the maximum credit – $1,154 in tax year 2024. The credit benefited nearly 5,700 tax filers in tax year 2023, up from nearly 4,900 in its first year.2The Franchise Tax Board does not report the number of tax filers using ITINs who benefit from this credit.

California’s Refundable Tax Credits Help People in Poverty Meet Basic Needs

California’s refundable income tax credits provide a much-needed source of cash to families and individuals living in poverty that can help cover the cost of basic expenses. While these credits are available to tax filers who earn about $32,000 or less, many who benefit from these credits have much lower incomes. For example, about 60% of tax filers who receive the CalEITC and YCTC and three-quarters of those who receive the FYTC earn $20,000 or less. The FYTC particularly benefits eligible filers with extremely low incomes. About 40% of tax filers who receive this credit earn $10,000 or less.

The YCTC is California’s only refundable tax credit that is available to families without any earnings from work at all. However, only about 1% of all recipients who claimed the credit in tax year 2023 – around 3,500 families – had no earned income.

*Michael C., San bernardino county

"I am incredibly grateful for the CalEITC program, which has provided me with much-needed financial relief as a college student. The additional funds from the tax credit have allowed me to cover essential educational expenses, including textbooks, supplies, and even some tuition costs. This support has eased the financial burden of pursuing higher education and has empowered me to focus on my studies without constantly worrying about the financial constraints."

California’s Refundable Tax Credits Promote Racial Equity

California’s refundable income tax credits help to promote racial equity by boosting the incomes of low-paid workers who, because of systemic racism past and present, are disproportionately people of color. An estimated 79% of Californians who are likely eligible for the CalEITC and 84% of Californians who are likely eligible for the YCTC are people of color, compared to 64% of Californians as a whole.

Specifically, among individuals eligible for the CalEITC, 58% are Latinx, 11% are Asian/Pacific Islander, and 6% are Black.3Due to data limitations, further disaggregation by race and ethnicity is not available. In addition, estimates for Californians eligible for the FYTC are not available. Among Californians who are likely eligible for the YCTC, 64% are Latinx, 8% are Asian/Pacific Islander, and 7% are Black. This stands in stark contrast with other state and federal tax benefits that are largely available to people with high incomes and wealth and are disproportionately white.

California’s Refundable Tax Credits Lay a Solid Foundation for Young Adults’ Economic Security

Workers under age 25 are disproportionately likely to struggle to afford basic needs, and yet, the overwhelming majority of them are excluded from the federal EITC.4Workers ages 18 to 24 as well as those age 65 or older who are not supporting children in their homes have historically been excluded from the federal EITC (with one exception for certain young adult students in 2021). This makes California’s refundable income tax credits an especially important source of support for young adults just beginning their careers. About 1 in 4 workers who receive the CalEITC — roughly 827,000 tax filers in total — and the vast majority of workers who benefit from the FYTC (84%) are under age 25. Additionally, roughly half of workers who benefit from the CalEITC (about 1.8 million people) and nearly two-thirds of those who benefit from the YCTC (268,000) are under age 35.

*brenda E., LA county

"When I heard what my refund would be, I started crying. I'm going to be able to use that $4,783 to pay rent, utilities, and dentist bills. Best of all, I can buy my little girl new clothes and shoes for her first day of kindergarten. Bringing this much money home to my daughter makes me feel good. For at least a few months, I can relax and I feel a weight lifted off of me. VITA is a lifesaver."

More is Needed: Refundable Tax Credits Prove California Leaders Have Tools to Combat Poverty

Over the past decade, state leaders have made significant progress in expanding cash support for Californians with low incomes through refundable state income tax credits. Providing about $1.4 billion in cash refunds to families and individuals in poverty is a milestone worth celebrating. But state leaders must not stop here. They must continue building on the past decade of progress until every Californian can meet their basic needs. In the coming years, state policymakers should continue to strengthen and expand California’s refundable income tax credits, increase the amount of cash support they provide, extend them to additional families and individuals with low incomes, and take advantage of all opportunities to connect Californians to free tax filing services so they reap the full benefits of the credits they are owed.

*The following narratives were compiled by Golden State Opportunity as part of the CalEITC+ education and outreach program, with participant names modified to preserve confidentiality and protect their privacy.

Nishi Nair contributed to this publication.

Health & Safety Net
  • 1
    ITINs are issued by the Internal Revenue Service (IRS) to individuals who do not have Social Security Numbers to use to file their personal income taxes.
  • 2
    The Franchise Tax Board does not report the number of tax filers using ITINs who benefit from this credit.
  • 3
    Due to data limitations, further disaggregation by race and ethnicity is not available. In addition, estimates for Californians eligible for the FYTC are not available.
  • 4
    Workers ages 18 to 24 as well as those age 65 or older who are not supporting children in their homes have historically been excluded from the federal EITC (with one exception for certain young adult students in 2021)

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Affordable health care is essential for everyone to be healthy and thrive. Having health insurance coverage helps lower out-of-pocket expenses and ensures access to preventive care, which in turn supports workforce participation and education. While California has made great strides in lowering the uninsured rate and expanding health care access, policymakers can take further action to protect progress and achieve universal health care coverage.

1. Medi-Cal Covers Over a Third of the State’s Population

Medi-Cal, California’s Medicaid program, provides free or low-cost health care to over one-third of the state’s population. The program covers a wide range of services to Californians with modest incomes, and many children, seniors, people with disabilities, and pregnant individuals rely on it. Medi-Cal plays a crucial role in promoting health equity, with about half of its beneficiaries being Latinx Californians, who often face low-wage employment and limited access to employer-sponsored health plans. For those who earn too much to qualify for Medi-Cal, Covered California — the state’s health insurance marketplace established through the Affordable Care Act — serves as a vital resource, helping individuals and families find affordable health coverage. Nearly 1.8 million Californians purchase their insurance through this state marketplace.

2. California’s Uninsured Rate Reached a Historic Low in 2023

California has made substantial progress in expanding access to health coverage over the past decade. Key drivers of this success include the federal Affordable Care Act and more recent state initiatives, such as expanding full-scope Medi-Cal to income-eligible Californians who are undocumented. As a result, the uninsured rate dropped to 6.4% in 2023, matching the record low of 6.4% in 2022. These gains reflect a major shift from a decade ago when over 17% of Californians lacked health coverage, underscoring the state's commitment to improving health care access for all.

3. American Indian or Alaska Native Californians Have the Highest Uninsured Rate

Despite California’s overall progress in expanding health coverage, significant racial disparities persist. American Indian or Alaska Native Californians face the highest uninsured rate among all racial and ethnic groups in the state. The racial disparities in health coverage highlight the profound and enduring impact of racism, which blocks Californians of color from equal access to health care. Addressing the racial disparities in health coverage requires targeted outreach and education efforts along with other antiracist policy actions to improve health and well-being for Californians of color.

4. Too Many Californians Lost Medi-Cal Coverage Due to Paperwork Challenges

When California resumed Medi-Cal renewals in 2023, after pausing them during the pandemic, many Californians were disenrolled from Medi-Cal. This process, known as the "unwinding period," marked the end of the federal policy that temporarily paused routine renewals.1A provision in the federal Families First Coronavirus Response Act passed in March 2020 required states to provide continuous coverage for Medicaid beneficiaries in exchange for enhanced federal funding during the federally declared Public Health Emergency (PHE). The Consolidated Appropriations Act of 2023, which federal policymakers passed in December 2022, delinked the continuous coverage provision from the PHE, thereby ending this provision on March 31, 2023. Over 1.8 million Californians lost Medi-Cal coverage from June 2023 to July 2024.2The California Department of Health Care Services publishes interactive dashboards detailing statewide and county-level demographic data on Medi-Cal application processing, enrollments, redeterminations, and renewal outcomes. The majority of disenrollments (85.2%) were due to challenges with the renewal paperwork. Completing the renewal process often involves complex paperwork and documentation requirements, which can be challenging to navigate. Additionally, many Californians have experienced extended call wait times when attempting to contact county Medi-Cal workers regarding their application. The high disenrollment rate underscores the need to further streamline the renewal process as well as permanently enact policies that build upon lessons learned during the pandemic.

5. Many Californians Could Lose Health Coverage if Premium Tax Credits Expire

Enhanced premium tax credits from recent federal policy actions have significantly improved health care affordability for many Covered California enrollees. However, these credits are set to expire at the end of 2025, which would lead to steep increases in monthly premiums. About 2.4 million Californians in the individual market would face higher health insurance premiums if Congress does not extend the expanded federal subsidies, according to the UC Berkeley Labor Center. The loss of these tax credits means that average premiums could rise by 63% for Covered California enrollees, and communities of color will be disproportionately impacted. Premiums will increase by 76% for Latinx enrollees, 67% for Black enrollees, and 71% for Asian enrollees, compared to a 57% increase for white enrollees. Overall, without these federal subsidies, an estimated 138,000 to 183,000 Covered California enrollees would disenroll.

Looking Ahead, Policymakers Can Take Action to Strengthen Health Coverage

While California has made substantial progress, challenges remain in ensuring health coverage for everyone. By addressing gaps in coverage, particularly for historically underserved communities, state leaders can continue leading the nation in advancing health equity and improving well-being for all Californians.

Key policy recommendations include:

Health & Safety Net
  • 1
    A provision in the federal Families First Coronavirus Response Act passed in March 2020 required states to provide continuous coverage for Medicaid beneficiaries in exchange for enhanced federal funding during the federally declared Public Health Emergency (PHE). The Consolidated Appropriations Act of 2023, which federal policymakers passed in December 2022, delinked the continuous coverage provision from the PHE, thereby ending this provision on March 31, 2023.
  • 2
    The California Department of Health Care Services publishes interactive dashboards detailing statewide and county-level demographic data on Medi-Cal application processing, enrollments, redeterminations, and renewal outcomes.

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key takeaway

California’s undocumented residents contribute nearly $8.5 billion in taxes, playing a crucial role in supporting public services while remaining excluded from essential programs.

All Californians should be able to live thriving lives and participate in their communities, regardless of their race, ethnicity, age, gender identity, sexual orientation, ability, or immigration status.

California is home to a sizable population of immigrants — with and without legal status — who are students, teachers, artists, chefs, business owners, religious leaders, colleagues, neighbors, family members, and more. Undocumented Californians pay billions of dollars in taxes and play a vital role in stimulating California’s economy. They help keep businesses running, put food on tables, care for children and loved ones, enrich communities through art and music, and much more.

Tax Contributions by Undocumented Californians

One contribution that is often overlooked or underestimated is the amount of taxes that individuals who are undocumented are paying into publicly-funded systems to support public services, even as they are excluded from benefiting from many of those same services.

Undocumented Californians paid nearly $8.5 billion in state and local taxes in 2022, according to estimates from the Institute on Taxation and Economic Policy (ITEP). This includes the sales and excise taxes paid on purchases, the property taxes paid on homes or indirectly through rents, individual and business income taxes, unemployment taxes, and other types of taxes.

These tax contributions support the public services and infrastructure that benefit all Californians, such as education, roads and transit, emergency response, and the social safety net. However, despite recent progress in making some public supports more inclusive of Californians regardless of their immigration status, many programs continue to unjustly exclude undocumented individuals and families who pay into these systems and seek support in times of need.

California has taken steps in recent years that recognize the importance of supporting everyone regardless of status, including:

  • Expanding full-scope Medi-Cal health coverage to all eligible Californians regardless of immigration status. We are already seeing signs of benefits from making Medi-Cal more inclusive: After full-scope Medi-Cal was expanded to undocumented children, the share of non-citizen children reporting excellent health status increased by 10 percentage points while no changes were seen for citizen children not impacted by the expansion.
  • Ending the exclusion of tax filers with Individual Taxpayer Identification Numbers (ITINs) from the benefits of the state’s refundable tax credits — the CalEITC and the Young Child Tax Credit.
  • Taking the first steps to provide access to nutrition benefits through the California Food Assistance Program (CFAP) for undocumented adults age 55 and older, who are excluded from receiving federally funded Supplemental Nutrition Assistance Program (CalFresh in California) benefits. However, the 2024-25 state budget delayed the implementation of this expansion until 2027.

Despite this progress, Californians without documentation remain excluded from many critical supports, jeopardizing their health and economic security. While many of these exclusions stem from federal law, state leaders can further support these Californians by using state resources to end the exclusions. State policymakers should:

  • Ensure undocumented workers have access to unemployment support when they lose a job by funding cash assistance for workers excluded from traditional unemployment insurance benefits. The Legislature recently passed a bill to require the Employment Development Department to develop a plan to establish an Excluded Workers Program, but the governor vetoed the bill citing concerns about the cost and the deadline set in the bill.
  • Address food insecurity in undocumented communities by expanding CFAP nutrition benefits to undocumented Californians of all ages.
  • Build on the success of ending Medi-Cal exclusions by expanding access to health coverage through Covered California to undocumented families whose income make them ineligible for Medi-Cal.
  • Expand the Cash Assistance Program for Immigrants (CAPI) to undocumented older adults and people with disabilities whose immigration status disqualifies them from receiving Supplemental Security Income/State Supplementary Payment (SSI/SSP). 
  • Increase funding for free tax preparation services to enable more undocumented Californians to apply for and renew ITINs and file income returns — allowing them to pay the taxes they owe and receive the tax credits they are eligible for.

Exclusions from these vital services are one contributor to the higher rate of poverty among undocumented Californians. This results in unnecessary human suffering and additional strains on community services that people use as a last resort, such as emergency rooms.

Federal action is also needed, including ending unjust exclusions from federal safety net and financial assistance programs and providing an accessible path to citizenship for those who have been living, working, and contributing to their communities. Granting legal status to these individuals would provide them with greater economic security and stability, and allow them to make even more meaningful contributions to the state.

Furthermore, by allowing all workers to pursue legal employment, granting legal status could increase the state and local tax contributions of Californians currently lacking documentation from $8.5 billion to $10.3 billion, according to ITEP estimates. This would deepen their already significant contributions to California’s economy and public support programs.

Regardless of the prospects for federal action, California leaders have the tools to continue making the state’s services inclusive of all its residents and ensuring that no one is left out of critical safety net programs.

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key takeaway

California’s expansion of Medi-Cal to include all eligible residents, regardless of immigration status, has improved health outcomes for non-citizen children. However, gaps remain for undocumented adults who lack coverage, highlighting the need for continued efforts to promote health equity and economic stability for all Californians.

Immigrants are an integral part of California’s communities and the state’s social fabric. Over the years, California has set itself apart from other states by advancing inclusive policies that support immigrants while fostering economic growth. A key example is the state’s efforts to make coverage through Medi-Cal, California’s state Medicaid program, more accessible for immigrants. This year, California became the first state in the nation to expand comprehensive Medi-Cal coverage to all eligible Californians, regardless of immigration status. The timeline below shows the steps that state leaders have taken to end the unjust exclusions in Medi-Cal.

A look at reported health status shows promising signs that Medi-Cal expansion to undocumented Californians is positively impacting health.1Our analysis focuses on the Medi-Cal expansion to undocumented children. Data for the most recent Medi-Cal expansion are not yet available for analysis. Analysis for the 2020 expansion to young adults is excluded due to potential confounding effects stemming from the COVID-19 pandemic. Data show that the proportion of non-citizen children who reported being in excellent health after the expansion increased by 10 percentage points from 20% to 30%. In contrast, citizen children, who were not affected, did not experience any change in their reported health status. At a high level, this analysis suggests there is a link between access and improved health status.

While California has led the nation in closing health coverage gaps, access is still limited for undocumented Californians who do not qualify for Medi-Cal or lack employer-based health insurance. The percentage of uninsured Californians hit a record low in 2022 at 6.5%, but the gains are not distributed equally. Research suggests that over one in four undocumented immigrants under 64 will remain uninsured due to their exclusion from Covered California.

Ensuring that everyone has access to health care benefits all Californians, as health coverage is critical for preventing poverty and fostering economic stability. People without coverage are more likely to face high health care costs or medical debt and are less likely to receive preventive care or treatment for chronic health conditions.

Policymakers can continue to advance health equity by ending unjust exclusions in Covered California, our state’s health insurance marketplace. By building on the historic Medi-Cal expansions and investing in other equitable health policies, policymakers can ensure all Californians can be healthy and thrive.

Health & Safety Net
  • 1
    Our analysis focuses on the Medi-Cal expansion to undocumented children. Data for the most recent Medi-Cal expansion are not yet available for analysis. Analysis for the 2020 expansion to young adults is excluded due to potential confounding effects stemming from the COVID-19 pandemic.

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key takeaway

Prop. 1, passed in March 2024, aims to strengthen California’s behavioral health system by funding mental health treatment, substance use disorder services, and supportive housing for veterans and individuals facing homelessness. Ensuring equitable access to these essential services is critical as the state works to address both housing insecurity and behavioral health needs across diverse populations.

Millions of Californians, including many facing housing insecurity, rely on county-provided services to address mental health conditions and substance use disorders. Strengthening the state’s behavioral health system is essential to guaranteeing that every Californian — regardless of race, age, gender identity, sexual orientation, or where they live — can access the care they need.

In March 2024, California voters narrowly passed Proposition 1 on the promise to improve the state’s behavioral health system and provide the housing support needed to successfully maintain mental health and substance use disorder services for all Californians.

Prop. 1 was a two-part measure that 1) amended California’s Mental Health Services Act and 2) created a $6.38 billion general obligation bond. The bond will fund behavioral health treatment and residential facilities, and supportive housing for veterans and individuals at risk of or experiencing homelessness with behavioral health challenges.

As the transformation of California’s county-based behavioral health system brings both benefits and potential challenges for Californians, this Q&A highlights key developments of Prop. 1 since its passage and addresses important questions and considerations that remain.

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Key Acronyms

  • BHSA: Behavioral Health Services Act (formerly the Mental Health Services Act)
  • BHIBA: Behavioral Health Infrastructure Bond Act 
  • BHCIP: Behavioral Health Continuum Infrastructure Program
  • CalHHS: California Health and Human Services Agency
  • CalVet:  California Department of Veteran Affairs
  • DHCS: California Department of Health Care Services
  • HCD: California Department of Housing and Community Development

Key Terms

What does Prop. 1 do?

Prop. 1 significantly amended the Mental Health Services Act (MHSA), a law that California voters passed in 2004 that created a millionaire’s tax to provide increased funding for mental health services. Revenue from this tax is crucial to California’s behavioral health system as it accounts for nearly one-third of county behavioral health services funding. Prop. 1 renamed the law the Behavioral Health Services Act (BHSA) and made other changes, including:

  • Expanding its scope to encompass treatment for substance use disorders.
  • Modifying how revenue from the millionaire’s tax is allocated for behavioral health services.
  • Changing the requirements for counties’ three-year program and expenditure plan for behavioral health services and outcomes.
  • Revising accountability and transparency requirements for counties.

Prop. 1 additionally established a $6.38 billion behavioral health infrastructure bond. Roughly $4.4 billion is dedicated to the infrastructure development of treatment and residential care facilities. The remaining $2 billion is reserved for permanent supportive housing units specifically for veterans and other Californians with serious mental health conditions or substance use disorders. 

This initiative was designed to create targeted funding for mental health services and housing or treatment units for people with behavioral health conditions who are experiencing or at risk of homelessness. As such, these reforms will only serve a subset of Californians, as they do not cover everyone at risk of homelessness or all individuals with behavioral health conditions.

What do we know about the behavioral health infrastructure bond?

Major developments regarding Prop. 1 have primarily related to the Behavioral Health Infrastructure Bond Act (BHIBA). BHIBA created a $6.38 billion general obligation bond to fund the infrastructure development of treatment and residential sites as well as supportive housing. There are two programs funded by the bond which are overseen by different state departments:

HCD is aggregating two main funding sources for Homekey+ for a total of $2.25 billion for the upcoming November application cycle:

  • $1.98 billion from Prop. 1 bond funding, with $1.065 billion designated for veterans and $922 million for other people experiencing or at risk of homelessness. 
  • $323 million Homeless Housing, Assistance, and Prevention Program (HHAP) Homekey Supplemental funding appropriated in the 2023 and 2024 Budget Acts.

Homekey+ projects are required to demonstrate a funding match of at least 3 years for operating costs. For long-term sustainability, HCD is encouraging counties to pair the restructured BHSA housing intervention dollars and other funding sources for behavioral health treatment to provide long-term service and operating costs for Homekey+ projects. However, Homekey+ projects will be awarded before counties are required to have their new three-year BHSA expenditure plans approved, which may create budgeting challenges.

How are counties allocating Behavioral Health Services Act (BHSA) funds under Prop. 1?

Prop. 1 significantly reforms the allocation of MHSA (now BHSA) dollars to prioritize Californians who are most affected by severe behavioral health conditions (mental illness and substance use disorders) and homelessness.1SB 326 created the legislative language for the BHSA.

Under Prop. 1, counties continue to receive the bulk of BHSA funds (90%). However, the allocation across different spending categories would change. Counties would allocate their BHSA funds as follows:

Prop. 1 shifts a small percentage of dollars from counties to the state (from about 5% of total MHSA funding to about 10%). This would result in about $140 million annually redirected to the state budget. However, this amount could be higher or lower depending on the total amount of revenue collected from the tax.

Prop. 1 also revised the allocation of state-level funds:

  • At least 3% to the Department of Health Care Access and Information to implement a statewide behavioral health workforce initiative.
  • At least 4% to the California Department of Public Health for population-based mental health and substance use disorder prevention programs. A minimum of 51% of these funds must be used for programs serving Californians who are age 25 years or younger.

What are the new county reporting requirements under Prop. 1?

Prop. 1 changes the way counties plan and report behavioral health funding. 

Starting in 2025, counties will need to develop integrated county plans for the 2026-29 fiscal years. The steps for developing plans are similar to how counties developed plans under the MHSA — counties will still gather community input and receive approval from County Boards of Supervisors. However, a key change is that counties will now report on all behavioral health funding, not just BHSA dollars. This includes local, state, and federal funding sources such as opioid settlement funds, SAMHSA and PATH grants, realignment funding, and federal financial participation.

Counties will also be required to report on unspent funds, service utilization data, outcomes with a focus on health equity, workforce metrics, and other information. The Department of Health Care Services (DHCS) has the authority to impose corrective action plans on counties that fail to meet these requirements. Additionally, the State Auditor will release a report on the implementation of the BHSA by December 31, 2029, with follow-up reports every three years thereafter.

What do we know about implementation timelines?

Since the passage of Prop. 1 in March, various developments regarding both the behavioral health infrastructure bond and county guidance for BHSA reforms have surfaced.

Behavioral Health Infrastructure Bond

Treatment and Residential Sites — BHCIP

In July, the Department of Health Care Services (DHCS) released an expedited timeline to roll out $3.3 billion for the construction, renovation, or expansion of treatment and residential care facilities through the existing Behavioral Health Continuum Infrastructure Program (BHCIP). Round 1 applications for “launch ready” projects are currently being accepted through mid-December 2024. DHCS is prioritizing applicants working in regional models or collaborative partnerships focused on expanding residential treatment facilities. Awards for Round 1 are anticipated to be announced in May 2025 and Round 2 “unmet needs” project applications will be opened in the same timeframe for the remaining $1.1 billion bond funds.

Permanent Supportive Housing — Homekey+

The Department of Housing and Community Development (HCD), in conjunction with the Department of Veteran Affairs (CalVet), engaged with stakeholders on the roll out of the Homekey Plus (Homekey+) program. Homekey+ is expanding on the Homekey Program which funded the acquisition and conversion of property for permanent supportive housing during and after the COVID-19 pandemic. It is receiving roughly $2 billion in bond funds to develop supportive housing for people with behavioral health conditions, with $1.065 billion designated for veterans and $922 million for other people experiencing or at risk of homelessness. HCD was collecting stakeholder input through the end of September. Applications will open November 2024 with continuous award announcements beginning in May 2025.

Behavioral Health Services Act Reform

Since the passage of Prop. 1 in March 2024, the California Health and Human Services Agency (CalHHS) and the State Department of Health Care Services (DHCS) have held public listening sessions to share Prop. 1 implementation updates and collect feedback from counties and other interested groups.

DHCS, in coordination with other agencies and departments, is currently in the midst of stakeholder engagement to inform new county expenditure plans and reporting requirements under the BHSA.2Other departments and agencies include: CalHHS, the California Behavioral Health Planning Council, and the Behavioral Health Services Oversight and Accountability Commission. CalHHS plans to share full guidance to counties in early 2025.

In addition, Prop. 1 created a Behavioral Health Services Act Revenue and Stability Workgroup, which has held two meetings. This group is charged with developing and recommending solutions to reduce BHSA revenue volatility and to propose appropriate prudent reserve levels to support the sustainability of county programs and services.

To support Prop. 1 implementation, the Department of Health Care Access and Information (HCAI) is taking steps to improve the behavioral health workforce. HCAI recently presented its strategy on how to grow and diversify the behavioral health workforce to the California Health Workforce Education and Training Council, and will provide additional updates in November 2024. The behavioral health workforce shortage in California is a major obstacle to addressing the growing need for mental health and substance use disorder services.

What don’t we know about Prop. 1 implementation?

There are several critical questions and considerations surrounding the BHSA reforms and behavioral health bond funds that are yet to be addressed. As key Prop. 1 players continue to engage with stakeholders, roll out program details, and prepare to release additional county guidance in early 2025, the following fundamental questions are essential to understanding how these reforms will impact Californians and current behavioral health and housing systems. Key questions include:

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit chcf.org to learn more.

Health & Safety Net
  • 1
    SB 326 created the legislative language for the BHSA.
  • 2
    Other departments and agencies include: CalHHS, the California Behavioral Health Planning Council, and the Behavioral Health Services Oversight and Accountability Commission.

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New Report Highlights Urgent Need for Reform in California’s Underfunded Unemployment Insurance System

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SACRAMENTO, CA — Today, the California Budget & Policy Center (Budget Center) released a new report, in partnership with the National Employment Law Project (NELP), highlighting the urgent need to address the inadequacies in California’s unemployment insurance (UI) system, a critical support tool for California workers and the economy. The report reveals that while UI … Continued

This report was co-authored by Amy M. Traub, Senior Researcher and Policy Analyst at the National Employment Law Project.

key takeaway

California’s Unemployment Insurance (UI) system is severely underfunded and outdated, leaving workers with inadequate benefits and excluding millions. To revitalize UI and ensure it supports both workers and the economy, the state must raise the taxable wage base and reform its financing structure to eliminate the $19.8 billion debt and stabilize the system for future economic downturns.

When Californians are out of work, unemployment insurance (UI) should help them make the rent, put food on the table, and cover other basic needs until they can find a new job. During the worst days of the pandemic, millions of jobless workers across the state relied on UI benefits to make ends meet, supporting both their families and California’s economy until it could thrive again. UI is also critical for jobless workers during periods of economic growth: In May 2024, 379,955 California workers — laid off from industries including manufacturing and information — counted on UI as they sought new employment.1Employment Development Department, California Employers Gained 43,700 Nonfarm Payroll Jobs in May 2024, accessed June 21, 2024, https://edd.ca.gov/en/about_edd/news_releases_and_announcements/unemployment-may-2024/.

Yet without the federal supplements that were available during the pandemic downturn, California workers received an average UI benefit of just $368.53 a week in 2023, less than the income needed to afford fair market rent in any county in the state.2Average benefit amount based on US Department of Labor Employment and Training Administration, Unemployment Insurance Data, https://oui.doleta.gov/unemploy/data_summary/DataSum.asp; housing affordability based on National Low Income Housing Coalition, Out of Reach: The High Cost of Housing, 2023, https://nlihc.org/sites/default/files/oor/California_2023_OOR.pdf using an affordability standard of 30% of income for rent. At the same time, millions of California workers, including more than a million immigrant workers, are excluded from accessing unemployment insurance entirely.3Legislative Analyst’s Office, Extending Unemployment Insurance to Cover Excluded Workers, (March 28, 2023), https://lao.ca.gov/handouts/state_admin/2023/Unemployment-Insurance-032823.pdf.

To strengthen and expand UI to adequately support workers and the economy, California must address the severe and chronic underfunding of the UI trust fund, which has created a structural deficit and $19.8 billion in debt for the state’s UI system. The underlying problem is California’s deficient UI financing: For decades policymakers have not required businesses to cover the true cost of the unemployment benefits their workers need. Instead, the state taxes employers on only the first $7,000 of each employee’s pay, a dramatically lower wage base than most other states.

This report details how workers, employers, and the economy as a whole are paying a steep price for California’s inadequate UI financing system. It explores how both raising the taxable wage base and changing the state’s experience rating system will be necessary to strengthen and stabilize UI to better serve workers, employers, and the economy.

Unemployment Insurance is a Lifeline for California, But Low Benefits and Exclusions Undermine Its Effectiveness

The joint federal-state UI system was established in the wake of the Great Depression to protect workers and their families against the loss of employment income, to bolster the economy during economic downturns by supporting consumer demand, and to ensure jobseekers are not forced into substandard jobs that could broadly depress wages and degrade working conditions.

Today, economists recognize that UI also plays an important role in improving job matches, enhancing the overall functioning of the labor market, and helping employers match with workers who have the right skills, improving their efficiency.4Ammar Farooq, Adriana D. Kugler, and Umberto Muratori, “Do Unemployment Insurance Benefits Improve Match Quality? Evidence From Recent US Recessions,” National Bureau of Economic Research (2020), https://www.nber.org/system/files/working_papers/w27574/revisions/w27574.rev0.pdf. By giving workers time to match with more suitable jobs, UI also contributes to higher wages and greater job satisfaction when they find new work.5Nick Gwyn, State Cuts Continue to Unravel Basic Support for Unemployed Workers (Center on Budget and Policy Priorities, June 27, 2022), https://www.cbpp.org/research/state-budget-and-tax/state-cuts-continue-to-unravel-basic-support-for-unemployed-workers; Adriana D. Kugler, Umberto Muratori, and Ammar Farooq, The Impacts of Unemployment Benefits on Job Match Quality and Labour Market Functioning (Centre for Economic Policy Research, February 7, 2021), https://cepr.org/voxeu/columns/impacts-unemployment-benefits-job-match-quality-and-labour-market-functioning. Yet UI’s ability to fulfill any of these functions is weakened by California policymakers’ failure to raise the state’s low benefit levels or to include the significant numbers of workers who are locked out of the system entirely.

Unemployment benefits remain critical to workers who receive them. In 2022, UI prevented more than 400,000 people nationwide, including 116,000 children, from experiencing poverty.6Amy Traub, Unemployment Insurance Had Less Capacity to Cut Poverty in 2022 (National Employment Law Project, 2023), https://www.nelp.org/insights-research/unemployment-insurance-had-less-capacity-to-cut-poverty-in-2022/. Even for workers not facing poverty, receiving unemployment benefits reduces hardship and broadly improves the well-being of households, including recipients’ financial stability and mental health.7Patrick Carey, et al., “Applying for and Receiving Unemployment Insurance Benefits During the Coronavirus Pandemic,” Monthly Labor Review, US Bureau of Labor Statistics, September 2021, https://doi.org/10.21916/mlr.2021.19.

Yet benefits in California have not been raised in nearly two decades. With an average benefit of just $368.53 a week in 20238US Department of Labor, Employment and Training Administration, Unemployment Insurance Data, https://oui.doleta.gov/unemploy/data_summary/DataSum.asp., UI benefits no longer provide enough money for Californians — particularly those with low incomes — to meet the rising cost of living while seeking employment. As the California Budget & Policy Center pointed out earlier this year, a worker who loses a full-time minimum wage job (at $16.90-per-hour in Los Angeles County) receives just $1,465 in monthly unemployment benefits, which falls $69 short of covering rent for a studio in Los Angeles priced at Fair Market Rent.9Alissa Anderson and Hannah Orbach-Mandel, California Should Increase Unemployment Benefits to Help Workers Meet Basic Needs (California Budget & Policy Center, January 2024), https://calbudgetcenter.org/resources/california-should-increase-unemployment-benefits-to-help-workers-meet-basic-needs/ California’s UI benefits are significantly lower than other Western states, including Washington ($703.79 per week on average), Oregon ($543.81 per week), Nevada ($450.70 per week), and Hawaii ($613.30 per week), as shown in the figure below. California’s low benefits are even more striking considering the state’s higher cost of living.

At just $40 per week, California’s minimum UI benefit — the payment provided to workers who earned the lowest wages before becoming unemployed — is also among the nation’s lowest, falling below the minimum benefits provided by 29 other states. For example, Washington’s minimum benefit is seven times greater than California’s ($295 per week), while Arizona’s minimum benefit is $200 per week, and Oregon’s is $171. In addition, 12 states offer dependent allowances, providing a weekly supplement to UI benefits so that workers with children and other dependents have an additional resource to make ends meet. Despite its low average and minimum benefits, California offers no additional support to unemployed parents and other workers supporting dependents.

Low Unemployment Insurance Benefits Exacerbate Racial and Gender Inequities 

Low UI benefits can be especially harmful for workers of color, including American Indian, Black, Latinx, and Pacific Islander Californians — particularly women — who are overrepresented in low-paying jobs due to structural racism and sexism.10Jasmine Tucker and Julie Vogtman, When Hard Work Is Not Enough: Women in Low-Paid Jobs (National Women’s Law Center, April 2020), https://nwlc.org/wp-content/uploads/2020/04/Women-in-Low-Paid-Jobs-report_pp04-FINAL-4.2.pdf. Since benefit levels are based on prior wages, low-paid workers tend to receive lower UI benefits. Yet workers who lived paycheck-to-paycheck when they were employed face even greater hardship in trying to cover their expenses on benefits that are a small fraction of their paycheck. At the same time, workers of color typically have fewer financial resources other than UI benefits to draw on during unemployment compared to white workers, as a result of systematic exclusion from wealth-building opportunities over generations.11Angela Hanks, Danyelle Solomon, and Christian E. Weller, Systemic Inequality (Center for American Progress, February 21, 2018), https://www.americanprogress.org/article/systematic-inequality/.

California’s low benefit levels also undercut UI’s ability to fight recessions. This is particularly troubling because a strong UI system is among the most effective tools available to promote economic recovery: According to the International Monetary Fund, each dollar paid in UI benefits during the pandemic generated $1.92 of economic growth as workers and their families were able to continue spending on basic necessities.12Klaus-Peter Hellwig, Supply and Demand Effects of Unemployment Insurance Benefit Extensions: Evidence from US Counties (International Monetary Fund, 2021), https://www.imf.org/en/Publications/WP/Issues/2021/03/12/Supply-and-Demand-Effects-of-Unemployment-Insurance-Benefit-Extensions-Evidence-from-U-S-50112. This powerful impact was achieved because the federal government expanded UI benefits during the pandemic: A $600 a week supplement to regular state UI benefits early in the pandemic (later $300 a week) ensured that unemployed workers could keep spending money, supporting local businesses across the state. The expanded federal benefits also ensured that California jobseekers and their families were able to meet expenses far better than they could by relying solely on the state’s regular UI benefits.

Federal pandemic programs also expanded eligibility for UI benefits to self-employed workers, caregivers, misclassified independent contractors, part-time workers, and many underpaid workers who are typically shut out of California’s regular UI system. By expanding the share of unemployed workers who received support, federal pandemic programs further improved the ability of UI to stabilize the economy.

More than 1 million undocumented workers, who represent over 6% of California's workforce, were, notably, not included in the UI benefit expansions.13University of California Merced Community and Labor Center, Worker Relief: Expanding the Safety Net to Excluded Workers, April 2023, https://clc.ucmerced.edu/sites/clc.ucmerced.edu/files/page/documents/worker_relief_2022_2.pdf. California instituted a Disaster Relief Assistance for Immigrants (DRAI) program to provide limited, one-time financial assistance to unemployed immigrants who were not otherwise eligible for UI benefits. However, the amount of support was grossly inadequate to meet immigrant workers’ needs and fell far short of what other Californians received, with researchers finding that unemployed citizen workers in California were eligible for up to 20 times more aid than the state’s undocumented workers in the first year of the pandemic.14University of California Merced Community and Labor Center, Essential Fairness: The Case for Unemployment Benefits for California’s Undocumented Immigrant Workers, March 2022, https://clc.ucmerced.edu/sites/clc.ucmerced.edu/files/page/documents/essential_fairness.pdf.

Workers who are on strike are also excluded from UI benefits, even though they miss paychecks and risk hardship for exercising their right to collective action. California should consider expanding UI benefits to striking workers, as New York and New Jersey already do.

Now both federal and state emergency programs have expired, and Californians are left with a UI system that does not adequately support jobseekers and still excludes many of them. California’s UI system is not prepared for the next unexpected economic shock or crisis. At a moment when policymakers are increasingly worried that the use of artificial intelligence could push large numbers of workers out of a job, a strong UI system is needed more than ever to support Californians who could be displaced.

A Strong and Effective UI System Requires Adequate Financing: California Needs Major Reforms

Unemployment insurance is funded by state and federal payroll taxes. In general terms, the Federal Unemployment Tax Act (FUTA) funds UI administrative costs and certain special programs, while the State Unemployment Tax Act (SUTA) tax, imposed by states, pays for UI benefits and is used to repay any federal loans made to the state’s UI trust fund (more on this below). SUTA tax revenues are deposited into a trust fund held for each state by the US Treasury.

State unemployment insurance benefits are paid out of each state’s trust fund. If states don’t have sufficient money in the trust fund to pay UI benefits, they can take out a federal loan. That’s what California and 21 other states did as they struggled to pay out benefits to tens of millions of laid off workers in the early days of the COVID-19 pandemic.15US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2021, March 2021,https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2021.pdf. Although the federal government fully paid for expanded UI benefits during the pandemic economic crisis, California still faced a record $35 billion in costs for regular UI benefits. The state is still paying back those costs today, and currently faces a trust fund debt of $19.8 billion.16US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2024, March 2024, https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2024.pdf.

Yet the extraordinary costs of the pandemic are only the latest and most dramatic manifestation of an ongoing structural deficit in California’s UI financing system. In January 2020, before the pandemic triggered record job loss, California already had the most underfunded UI system of any state.17US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2020, March 2020, https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2020.pdf. Even today, with a relatively low unemployment rate hovering around 5%, California does not raise enough revenue to pay for current UI benefits, much less pay down its trust fund debt.

In addition to regular SUTA taxes, California employers are paying a 15% tax surcharge to pay back the trust fund loan, but this additional revenue is still not sufficient to reduce the principal. The state Employment Development Department projects that at the current rate of repayment, the outstanding federal UI loan balance will grow to nearly $22 billion in 2025.18Employment Development Department, May 2024 Unemployment Insurance (UI) Fund Forecast, May 2024, https://edd.ca.gov/siteassets/files/unemployment/pdf/edduiforecastmay24.pdf.

California must overhaul its UI revenue system to adequately support unemployed workers and the economy, pay down its debt, and build a reserve for future economic downturns.

Failing to Modernize UI Financing Costs All Californians

California’s underfunded UI system imposes steep costs across the state. As described above, job seekers face hardship as they struggle to get by on low UI benefits, even as many jobless workers are excluded. At the same time, meager benefits may not be enough to power the state’s economic recovery in the next downturn. Yet the costs are even more widespread: Because the interest on the trust fund debt has traditionally been paid out of the state’s general fund, all California residents will ultimately pay a price.

Due to rising interest rates, California owed $484 million in interest on UI debt in 2024 at a time when the state was facing a significant, multi-year budget shortfall. Although California was able to use internal borrowing to cover the interest payment due in 2023, there were fewer such options available in 2024 and the state’s final budget agreement covered most of the interest payment ($384 million) with General Fund dollars, taking significant resources away from other priorities. Looking ahead to future years, California will continue to owe interest every year that it maintains trust fund debt, and these payments will significantly reduce funding available to invest in other critical priorities, including health care, child care, affordable housing, and environmental protection.

And while employers may express concern about increased UI taxes in a modernized system, they also face a direct tax penalty if no action is taken: In addition to the surcharge to pay back the loan, California employers will also face a reduction in the Federal Unemployment Tax Act (FUTA) tax credit, effectively hiking their taxes as long as the trust fund debt continues to go unpaid.

Raising and Indexing the Taxable Wage Base Is Critical to Improving UI Financing

Failure to raise revenue is at the heart of California’s UI financing crisis. State policymakers have been reluctant to mandate that employers contribute the funds needed to finance a strong and effective UI system. As a result, California taxes employers on only the first $7,000 of each employee’s pay.

What Is the Taxable Wage Base and Why Is It Important for Understanding How Unemployment Insurance Benefits Are Funded?

State unemployment benefits are financed through state payroll taxes paid by employers. There are two basic factors that determine how much employers pay in those taxes: the tax rate and the taxable wage base. The tax rate is determined for each employer based on tax rate schedules outlined in state law. The rate for a particular employer is then applied to a taxable wage base equal to each of their employee’s first $7,000 in annual earnings to determine how much tax the employer owes. 

For example, new employers are assigned a state payroll tax rate of 3.4%. If a new employer has three employees all earning $40,000 annually, the employer would calculate the payroll tax they owe by multiplying 3.4% by $7,000 for each employee ($238), for a total annual tax of $714 for all three employees. If the taxable wage base were higher, say $21,000, the same amount of revenue could be raised with a much lower tax rate (1.1%) because a greater proportion of each worker’s wages would be subject to taxation. Alternatively, by maintaining a 3.4% tax rate, the higher taxable wage base would raise three times as much revenue ($2,142 for all three employees).

When comparing state payroll taxes across states, it’s important to consider both the tax rate and the taxable wage base to which that rate is applied. A state with relatively high tax rates does not necessarily result in employers in that state paying more in taxes than states with lower tax rates. For example, a 5.7% rate would generate a tax of $400 if applied to a base of $7,000. But a much lower rate of 3.8% would generate twice as much tax ($800) if applied to a base of $21,000.

This low fixed amount, known as the taxable wage base, not only raises inadequate revenue but raises it inequitably. The low taxable wage base means that California  taxes a higher proportion of the wages of low-paid workers and imposes the highest effective tax rates on small businesses while failing to keep up with wage growth and taxing a far smaller share of wages than most other states. Raising the taxable wage base and indexing it to the state’s average wages is essential to strengthen the UI system.

Wages have increased significantly over the last 40 years, yet California’s taxable wage base has remained fixed, lagging further and further behind. While the state’s taxable wage base of $7,000 was equivalent to full-time wages at the federal minimum wage in 1982, it was less than three months of full-time work at the minimum wage in 2022 in California. By 2022, California’s effective UI tax rate was less than half of what it had been in 1980, as the figure below illustrates.

California’s UI financing system disproportionately taxes the employers of low-paid and part-time workers because the state’s taxable wage base is so low. Take, for example, employers subject to a state UI tax rate of 3.1%, which is the average rate paid by employers in 2023. Since most workers earn more than the state’s taxable wage base of $7,000, employers effectively pay $217 in state UI taxes per worker. But this represents a much larger share of employers’ labor costs for low-paid and part-time workers. For instance, $7,000 amounts to 1.3% of the earnings paid to half-time minimum wage workers, compared to 0.7% of the earnings paid to full-time minimum wage workers and just 0.2% of the earnings of workers paid three times the minimum wage, as the figure below shows. Researchers find that this creates disincentives to hire part-time workers in the first place, leading to fewer employment opportunities, which would impact workers who benefit from the flexibility of part-time work or who rely on additional earnings to make ends meet.19Mark Duggan, Audrey Guo, and Andrew C. Johnston, Would Broadening the UI Tax Base Help Low-Income Workers? (IZA Institute for Labor Economics, January 2022), https://docs.iza.org/dp15020.pdf; Po-Chun Huang, “Employment Effects of the Unemployment Insurance Tax Base,” The Journal of Human Resources, 59, no.4 (March 2022) https://doi.org/10.3368/jhr.0719-10316R2. Raising the taxable wage base would help to address these inequalities.

Small businesses also bear a disproportionate tax burden as a result of California’s low taxable wage base for UI.

Raising California’s taxable wage base is not a pie-in-the-sky idea. In fact, 94% of US states already have a higher taxable wage base than California, including Washington State with a taxable wage base of $68,500 in 2024, Oregon ($52,800), Nevada ($40,600) and Hawaii ($59,100).20US Department of Labor, Employment and Training Administration, Significant Provisions of State Unemployment Insurance Laws Effective January 2024, https://oui.doleta.gov/unemploy/content/sigpros/2020-2029/January2024.pdf. These states not only tax a much higher share of payrolls than California, but their wage base is indexed to the state’s average weekly wage so that it adjusts automatically each year as wages rise, providing far more reliable financing than California’s low fixed rate. As the figure below shows, businesses in California actually pay taxes on a smaller share of wages than any other state, with just 8% of average annual earnings taxed. California’s low, fixed taxable wage base leads it to raise far less UI revenue than the state needs.

California Must Shift to Forward Financing of UI Benefits and Reform Experience Rating

Raising and indexing California’s taxable wage base is essential to ensuring adequate UI financing, but that alone will not be sufficient to sustainably fund the system because of the structurally flawed mechanism that determines UI tax rates in California.

California has seven employer contribution rate schedules that operate to increase state UI tax rates when the balance of the state’s UI trust fund is low and to reduce rates when the trust fund has more funding.21Employment Development Department, California System of Experience Rating, DE 231Z Rev. 17, (6-22), https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de231z.pdf. This “pay-as-you-go” mechanism is meant to increase revenues at the moment they are needed, but it produces two perverse outcomes. First, by hiking tax rates during economic downturns (when more workers are claiming UI benefits and the trust fund balance falls), the system compels businesses to pay higher taxes during the most difficult economic times, when their own resources are most depleted. Raising business costs during recessions undermines the ability of UI to promote economic recovery. Second, by lowering tax rates as the trust fund balance begins to recover, this system makes raising additional revenue difficult. If California were to increase its taxable wage base without fixing the “pay-as-you-go” mechanism, employer tax rates would automatically fall as soon as the trust fund balance began to improve, making it more difficult to reach and maintain solvency.

The weakness of pay-as-you-go financing is evident with a look at California’s history: As the figure below indicates, the state failed to raise sufficient revenue to fund UI benefits in every recession since 1980.

The alternative to California’s pay-as-you-go financing mechanism is a forward-funded system designed to take in more revenue than it pays out during periods of low unemployment. Forward funding enables state UI systems to build up sufficient reserves during periods of economic growth to pay benefits during economic downturns, when large numbers of workers are laid off and seeking unemployment benefits. The US Department of Labor’s UI Trust Fund solvency standards are designed to encourage this type of forward funding.22US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2024, March 2024, https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2024.pdf. Numerous other states, including Oregon, use a forward-funding mechanism to put their UI systems on more stable financial footing.23State of Oregon Employment Department Oregon Employment Department Announces 2024 Rates for Paid Leave Oregon and Unemployment Insurance, November 2023, https://www.oregon.gov/employ/NewsAndMedia/Documents/2023-11-Tax-Contribution-Rate-Notice.pdf.

The mechanism for determining each individual employer’s UI tax rate is also flawed and needs to be reformed. In general, private employers are assigned a tax rate based on their experience with unemployment — that is, their history of laying off workers who then claim unemployment benefits.24New employers are initially assigned a rate of 3.4%, which is then adjusted after 2-3 years based on their experience rating. Additionally, public and nonprofit employers may choose to finance UI benefits on a dollar-for-dollar reimbursement basis instead of being subject to experience rating. Employment Development Department, California System of Experience Rating, DE 231Z Rev. 17 (6-22), https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de231z.pdf; Employment Development Department, 2024 California Employer’s Guide, DE 44 Rev. 50 (1-24), 9, https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de44.pdf. This system, known as “experience rating,” is required by the federal government, but states have considerable flexibility in selecting specific experience rating methods. In California, an employer’s experience rating is determined by a formula that takes into account their contributions into the trust fund and the UI benefits paid to their former workers.

There are two unintended consequences of this approach to experience rating. First, because employers’ contribution rate increases when their former employees claim UI benefits, employers have an incentive to discourage workers from applying for benefits, provide misinformation about eligibility, and dispute UI benefit claims. Second, this approach to experience rating makes raising the taxable wage base, on its own, a less effective strategy for improving UI financing. This is because increasing the taxable wage base would improve employers’ experience rating and automatically decrease their contribution rates (all else being equal), effectively limiting the amount of revenue that could be raised.

One potential alternative to this system is an experience rating system based on quarterly changes in the hours employees work for a given employer, regardless of whether these workers claim UI benefits.25Josh Bivens et al., Reforming Unemployment Insurance (Center for American Progress, Center for Popular Democracy, Economic Policy Institute, Groundwork Collaborative, National Employment Law Project, National Women’s Law Center, and Washington Center for Equitable Growth, June 2021), 36, https://files.epi.org/uploads/Reforming-Unemployment-Insurance.pdf. This would remove the incentive for employers to discourage or dispute benefit claims and would make increasing the taxable wage base more effective at shoring up the trust fund while supporting stronger benefits and broader eligibility.

Additionally, California could explore adopting this alternative experience rating system in combination with a method of assigning employer tax rates based on desired revenue targets, which researchers find is a highly effective strategy for improving UI financing.26A comprehensive analysis of state UI financing systems prepared by the Urban Institute for the US Department of Labor concluded that this approach, called “array allocation,” in combination with indexing the taxable wage base to wage growth were two key factors supporting UI trust fund adequacy. The analysis also suggested that states using array allocation have more stability in tax rates from year to year, leading to more predictability for both employers and the UI trust fund. Wayne Vroman et al., A Comparative Analysis of Unemployment Insurance Financing Methods (Urban Institute, December 2017), xv, 20, 42-43, 46, https://www.dol.gov/sites/dolgov/files/OASP/legacy/files/A-Comparative-Analysis-of-Unemployment-Insurance-Financing-Methods-Final-Report.pdf. Finally, California should consider how app corporations like Uber, Lyft, and DoorDash, which use technology to set and control working conditions, short-change California’s UI system by misclassifying employees as independent contractors, circumventing traditional labor laws and taxes. A study from the UC Berkeley Labor Center finds that If Uber and Lyft had treated workers as employees, these two corporations alone would have paid $413 million into the state’s UI trust fund between 2014 and 2019.27Ken Jacobs and Michael Reich, What Would Uber and Lyft Owe to the State Unemployment Insurance Fund? (Institute of Research on Labor and Employment, University of California, Berkeley, May 2020), https://laborcenter.berkeley.edu/pdf/2020/What-would-Uber-and-Lyft-owe-to-the-State-Unemployment-Insurance-Fund.pdf.

Conclusion

California’s UI system is a critical piece of social infrastructure and could become an engine of economic dynamism for the state, enabling workers, employers, and the economy to thrive. To achieve this vision, policymakers must stabilize the state’s UI finances by raising the taxable wage base and shifting to a forward-financing mechanism, providing the revenue needed to support California jobseekers with adequate benefits and expand assistance to workers who are currently shut out of the system.

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