In summary
The California Employment Development Department got a well-deserved black eye for mismanaging unemployment insurance benefits during the pandemic. There is an unresolved aspect to the collapse, and it could cost the state billions.
The administrative meltdown at the state Employment Development Department was one of the saddest events in the annals of state government when millions of Californians lost their jobs due to shutdowns ordered by Gov. Gavin Newsom to fight COVID-19.
At the same time, the agency has botched countless legitimate claims for unemployment insurance benefits while distributing billions of dollars to fraudsters, a debacle that CalMatters reporter Lauren Hepler explained last year:
“A yearlong CalMatters investigation found that EDD was ripe for disaster due to years of failing to respond to red flags, stalling reforms, and abruptly abandoning pre-pandemic efforts to advance online fraud — issues that had risen to the top of political issues.” . “Agendas and budgets revolve around recessions, but they are never static as governors, legislators, and federal regulations change,” Hibler wrote. “Once things got worse in the spring of 2020, California got the worst of both worlds: tens of billions of dollars lost to fraud, and workers who lost their financial stability, their homes, or in extreme cases their lives.”
However, there is a third element to the EDD disaster that continues to haunt the state and is likely to worsen again if the state’s economy deteriorates: the massive debt owed to the federal government.
The Unemployment Insurance Fund, or UIF, supported by employers’ payroll taxes, is the source of payments to unemployed workers under normal circumstances.
However, the Fund cannot fully absorb compensation claims even in times of relative prosperity. The problem stems from a two-decade political stalemate that began in 2001 when former Gov. Gray Davis and the Legislature decided to sharply increase benefits, absorbing most of the $6.5 billion unemployment fund reserve.
When the Great Recession hit half a decade later, the IMF quickly ran out of money, and the EDD borrowed about $10 billion from the federal government to cover the growing outflow. The state didn’t repay the loans, so the feds raised payroll taxes on employers to pay off the debt.
The Great Recession debt was paid off in 2018, but two years later, coronavirus layoffs decimated a nearly depleted unemployment fund. Once again, the state borrowed money – nearly $18 billion – to keep the interest flowing.
In 2022, federal officials again raised payroll taxes on employers to make up the fund’s deficit and pay down debt — about $21 per worker per year. A new report by the Ministry of Economic Development says that unemployment fund debt rose to $20 billion by the end of last year, and is expected to reach $21 billion by 2025.
There is a widespread misconception that the debt stems from the explosion of unemployment insurance fraud. The fraud almost entirely involved expanded federally funded benefits for workers who did not qualify for state benefits, and had no direct relationship to the state’s debt.
Today, the UIF is still struggling to pay benefits even though unemployment is relatively low in historical terms. EDD says it pays about $6.7 billion in benefits each year, but state payroll taxes generate only $5 billion annually.
Thus, the fund would steadily weaken and would be completely unable to handle even a moderate economic downturn, forcing the state to borrow more money from the federal government.
This should constitute a major embarrassment for a country whose ruler prides himself on its global economic standing. But there are no signs that the decades-long stalemate is beginning to ease.
Unions want to raise taxes, either by expanding the $7,000-a-year taxable wage base or raising the tax rate, currently just over 3%, to make the UIF healthier. Meanwhile, employers say they are already paying more to pay off debt and want benefits reforms.