California's Unemployment Insurance Crisis: A $22 Billion Hole for the Next Governor

California's unemployment insurance system is facing a deepening financial crisis that will become a major challenge for the state's next governor, who will be inaugurated in January 2027. With 61 candidates on the primary ballot, the winner will inherit a system that has been dysfunctional for a quarter-century, plagued by a massive debt and a structural imbalance between tax revenue and benefit payouts.

The system, designed to provide temporary financial assistance to laid-off workers, is funded by employer payroll taxes on the first $7,000 of each worker's annual wages. Benefits can reach up to $450 per week for up to 26 weeks.

However, the fund has been in trouble since 2001, when the Legislature and then-Governor Gray Davis sharply increased benefits, drawing down a $6.5 billion surplus. The Great Recession of 2008 forced the state to borrow about $10 billion from the federal government, and rather than repay the loan, California allowed a federal payroll tax hike to slowly reduce the debt.

The fund never fully recovered. When the COVID-19 pandemic hit in 2020, 3 million Californians lost their jobs, and the state borrowed heavily again—initially $8 billion, later growing to more than $20 billion.

The Employment Development Department (EDD) processed a flood of applications with minimal scrutiny, including fraudulent claims from state prison inmates. However, contrary to popular belief, fraud is not the primary cause of the fund's deficit; the two issues are separate.

While other states have repaid their pandemic-related federal loans, California has not. Governor Gavin Newsom and the Legislature have allowed a federal payroll tax increase of $1.6 billion this year to slowly retire the debt and interest.

The EDD now estimates that by the end of 2026, the fund will be more than $22 billion in the red. The system's finances continue to deteriorate because payroll taxes are insufficient to cover benefit outflows, even though the state is no longer in recession.

Currently, more than a million Californians are jobless, and the state's unemployment rate of 5.3% is tied with Delaware and Nevada for the highest in the nation.

The EDD report projects that the fund will receive $4.9 billion in payroll taxes this year while paying out $7.1 billion in benefits—a mismatch expected to persist. Closing the gap would require either reducing benefits or raising payroll taxes by increasing the tax rate or expanding the tax base beyond the current $7,000 limit.

However, political stalemate between employers and unions has blocked any reform since 2001.

Some policymakers are discussing expanding unemployment insurance to cover workers displaced by artificial intelligence. But before pursuing that, experts say the state must first resolve the impasse, pay off the massive debt, and make the system financially sustainable.

Doing nothing, as has been the response so far, will only deepen the crisis.

This story was originally published by CalMatters, a nonpartisan, nonprofit journalism venture based in Sacramento.