The management crisis within California’s Employment Development Department (EDD) was one of the most concerning incidents in the history of state government. As millions of Californians lost their jobs during the lockdowns initiated by Gov. Gavin Newsom in response to COVID-19, the EDD mishandled numerous lawful unemployment insurance claims. In addition, it lost billions of dollars to fraudulent activity. According to an investigation by CalMatters reporter Lauren Hepler, the EDD’s problems were years in the making due to neglect of warning signs, non-implementation of reforms, and an inability to tackle online fraud.

The EDD debacle has another facet, one that could lead to further trouble if the state’s economy falters in the future: a significant debt to the federal government. This issue originates from a political deadlock that started in 2001 when former Gov. Gray Davis and the Legislature considerably increased benefits, depleting most of the Unemployment Insurance Fund’s (UIF) $6.5 billion reserve.

When the Great Recession hit in the late 2000s, the UIF ran out of money, causing EDD to borrow approximately $10 billion from the federal government to cover the increased expenditure. This previous debt was paid off in 2018, but the situation repeated when COVID-19 layoffs drastically impacted the nearly exhausted unemployment fund in 2020. As a result, the state borrowed nearly $18 billion to keep benefits running.

Against this backdrop, a new EDD report forecasted that the debt of the UIF had grown to $20 billion in 2021, with predictions of this amount reaching $21 billion by 2025. Presently, the UIF is struggling to pay benefits even though unemployment is relatively low compared to historical levels.

This situation is problematic for a state whose governor regularly touts its global economic standing. Proposed solutions include increasing taxes or implementing benefit reforms. However, no indications suggest the longstanding impasse will be resolved soon.