The state Employment Development Department experienced a significant managerial failure when millions of Californians lost their jobs due to COVID-19 shutdowns ordered by Gov. Gavin Newsom. The agency botched many legitimate unemployment insurance benefit claims while awarding billions of dollars to fraudulent claimants. This calamity not only led to severe financial losses in the state but also a broader disaster that left many unemployed workers without financial stability, and in extreme cases, without homes.

Further compounding the issue is the vast debt incurred by the Unemployment Insurance Fund (UIF), underpinned by employer payroll taxes. Unable to fully cover benefit claims even in prosperous times, the UIF quickly depleted following substantial benefits increases in 2001 and the onset of the Great Recession. The state had to borrow around $10 billion from the federal government to cover the shortfall, a debt that was retired by raising payroll taxes on employers. The COVID-19 job losses further drained the UIF, leading to an almost $18 billion loan from the federal government.

Despite unemployment being relatively low by historical standards, the UIF continues to encounter difficulties paying out benefits. The agency pays out about $6.7 billion in benefits each year, but state payroll taxes only generate roughly $5 billion a year. As such, the fund is weakening, raising concerns about its ability to cope with any future economic downturn and the inevitable need to borrow additional funds from the federal government. Despite the situation, there seems to be no resolution in sight, with standoffs between unions demanding tax increases and employers calling for benefits reforms.