An unfortunate incident unfolded in the state Employment Development Department as millions of Californians found themselves unemployed due to the COVID-19 shutdowns mandated by Gov. Gavin Newsom.
Last year, CalMatters reporter Lauren Hepler detailed a disastrous situation where the agency mishandled numerous legitimate claims for unemployment insurance benefits while also distributing billions of dollars to fraudsters.
A yearlong investigation by CalMatters has revealed that the EDD was on the brink of disaster due to a history of neglecting warning signs, delaying necessary reforms, and abruptly abandoning a pre-pandemic initiative to combat the surge in online fraud. These issues have consistently been prioritized during times of economic downturn, yet they have never been adequately addressed despite changes in leadership and regulations at the state and federal level, as highlighted by Hepler’s report. In the spring of 2020, California faced a devastating situation, experiencing significant losses due to fraud. The consequences were dire, with workers losing not only their financial stability but also their homes, and in some tragic cases, their lives.
An additional factor contributing to the EDD catastrophe continues to plague the state and may resurface if the state’s economy takes a downturn: a substantial debt owed to the federal government. The Unemployment Insurance Fund, also known as UIF, is funded by payroll taxes paid by employers. It provides financial assistance to workers who are unemployed under normal circumstances.
In even the most prosperous times, the fund is unable to fully cover claims for benefits. In 2001, a political stalemate initiated by former Gov. Gray Davis and the Legislature led to a significant increase in benefits, depleting the unemployment fund’s $6.5 billion reserve.
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During the Great Recession, the UIF faced a financial crisis as it quickly depleted its funds. To address this, the EDD had to borrow approximately $10 billion from the federal government to manage the surge in outflow. In a recent development, the state failed to repay the loans, resulting in a consequential action taken by the federal government. As a result, payroll taxes on employers were raised in order to retire the debt.
In 2018, the debt from the Great Recession was finally paid off. However, just two years later, the unemployment fund, which had already been nearly depleted, was hit hard by the layoffs caused by COVID-19. Once again, the state has taken out a loan of nearly $18 billion in order to ensure the continuation of benefits.
In 2022, federal officials have once again increased payroll taxes on employers in order to address the fund’s deficit and repay the debt. This amounts to approximately $21 per worker annually. According to a recent report from the EDD, the debt of the unemployment fund has surged to $20 billion as of the end of last year, with projections indicating it will climb to $21 billion by 2025.
Many people mistakenly believe that the debt is a result of the surge in unemployment insurance fraud. A significant portion of the fraud revolved around the misuse of federally funded extended benefits, specifically targeting individuals who did not meet the criteria for receiving state benefits. It is important to note that this fraudulent activity is not directly linked to the state’s debt.
In spite of the current low unemployment rate, the UIF continues to face challenges in disbursing benefits. According to the latest report from the EDD, annual benefit payments amount to approximately $6.7 billion, while state payroll taxes are only generating around $5 billion per year.
The fund’s strength continues to decline steadily, leaving it ill-equipped to handle even a minor economic downturn. This would result in the state having to borrow additional funds from the federal government. It is a significant source of embarrassment for a state whose governor takes pride in its global economic position. However, there are no signs of any progress in the long-standing deadlock.
Unions are advocating for an increase in taxes, either by expanding the taxable wage base of $7,000 a year or raising the tax rate, which currently stands at just over 3%, in order to improve the financial state of the UIF. Employers, on the other hand, are expressing their concerns about the increasing costs of retiring the debt and are calling for reforms in benefits.
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