The Employment Development Department (EDD) in the state of California underwent a significant managerial failure during COVID-19 shutdowns, as millions lost their jobs. The agency mishandled myriad legitimate claims for unemployment insurance benefits while simultaneously disbursing billions to fraudsters. The EDD issue, which has been reported in detail by CalMatters, had been looming due to the agency’s disregard for warning signs, delay of vital reforms and insufficient preemptive action against potential online fraud.

By Spring 2020, the problem culminated in significant financial loss to fraud and left workers in dire financial straits. Along with these severe issues, the state is haunted by a substantial debt to the federal government. The source of payments to unemployed workers under normal circumstances, the Unemployment Insurance Fund (UIF), is unable to fully process claims for benefits even in prosperous times.

The problem started in 2001 when the state significantly increased benefits, depleting the $6.5 billion reserve of the UIF. The Great Recession later emptied the UIF, forcing the EDD to borrow approximately $10 billion from the federal government to cover the increased outflow. The state did not repay the loans, resulting in increased payroll taxes on employers.

The debt from the Great Recession cleared by 2018, but post 2020 COVID-19 layoffs drained the UIF once more, leading to additional borrowing. Federal officials increased payroll taxes again in 2022 to offset the UIF’s deficit. Despite historical low levels of unemployment, the UIF continues to struggle with benefit payments, with state payroll taxes not meeting the demands, further weakening the fund.

The UIF will not be able to handle even a mild economic downturn without further borrowing from the federal government. This crisis has led to calls for increased taxes to bolster the UIF, but employers are resistant, seeking benefit reforms instead.