The 2025-26 Budget

EDDNext

Summary

EDDNext Portfolio Entering Critical Phase. The EDDNext information technology (IT) portfolio is expected to complete important milestones in 2025-26. Notably, the most complex and costly IT project in the portfolio—the Integrated Case Management System/Integrated Data Management (ICMS/IDM) IT project—will replace the Employment Development Department (EDD) legacy claims processing and data management systems for the disability insurance (DI), paid family leave (PFL), and unemployment insurance (UI) programs. These programs—and their associated claims—reflect the major benefits, totaling $20 billion in 2024, administered by EDD. However, the 2025-26 Governor’s budget proposes to use the same legislative oversight mechanisms as in previous fiscal years—that is, an expenditure plan to access one-quarter of project funding and quarterly progress reports. We find these mechanisms to be inadequate going into 2025-26.

Changes in EDDNext Funding Allocations and IT Projects in 2024-25 Raise Additional Legislative Oversight Considerations. In addition to the important milestones expected in 2025-26, underspending and shifting of funding allocations for current IT and non-IT projects in the EDDNext portfolio—as well as consolidation of other IT project scope into the proposed ICMS/IDM IT project—suggest a need to consider additional legislative oversight mechanisms. EDD reallocated more than half of 2023-24 funding and nearly 20 percent of 2024-25 funding from original appropriations to cover the costs of different projects within the EDDNext portfolio. Furthermore, the second phase of one IT project (the Shared Customer Portal) was cancelled and absorbed as a set of requirements into the procurement for the proposed ICMS/IDM IT project. While changes in project allocations and scope may be warranted, they also raise questions about how appropriations the Legislature is asked to approve are ultimately calculated, allocated, and spent.

Recommend Improved Legislative Oversight Tools in 2025-26. To avoid surprises and mitigate risks during 2025-26, we recommend the Legislature adopt additional oversight tools for EDDNext that are commonly used for other large IT projects. Specifically, we recommend: (1) remove the extended encumbrance and expenditure deadlines in proposed provisional budget bill language (BBL); (2) add a 30-day written notification period for the Joint Legislative Budget Committee (JLBC) to review the final project plan for the proposed ICMS/IDM IT project if planning extends into 2025-26; (3) require the California Department of Technology (CDT) to publish oversight reports reviewing the entire EDDNext portfolio every other month; and, (4) require EDD to provide quarterly meetings with CDT, Department of Finance (DOF), and legislative staff to review EDDNext activity and progress.

Background

EDD Administers State’s DI, PFL, and UI Programs. The EDD administers three large employment-related insurance programs. These include: (1) disability insurance, short-term wage replacement for workers who are injured outside of work (and therefore not covered by workers’ compensation insurance); (2) paid family leave, short-term wage replacement for workers to bond with new children or care for ailing family members; and (3) unemployment insurance, the state-federal wage replacement program for workers who lose their jobs through no fault of their own. Each year, about 1 million California workers receive a total of about $13 billion in DI and PFL insurance benefits. Similarly, about 1 million California workers access about $7 billion in UI benefits in a typical year. (Claims for UI tend to rise substantially during economic downturns, whereas claims for DI and PFL tend to remain relatively constant over time.) The IT systems the state uses to process incoming claims, ensure eligibility, and issue payments for these programs are aging. As a result, making technical changes to these systems to reflect legislative proposals or temporary federal policies related to UI during downturns has become increasingly complex and, in some cases, infeasible.

EDDNext Seeks to Modernize EDD. Beginning in March 2020, the state’s unemployment rate sharply increased due to actions taken in response to the pandemic. As a result, EDD experienced an historic increase in UI applications that strained the department’s existing IT systems and (together with other factors) led to delays in processing and payment of UI claims. In July 2020, the Governor formed a strike team to address the delays and in September 2020, the strike team released its assessment of the department’s challenges in administering the UI program and its recommendations to solve them. One recommendation (of many related to EDD’s outdated technology) was to restart the proposed Benefit Systems Modernization (BSM) IT project—the predecessor to EDDNext—using an incremental and iterative approach to address critical areas of need in the department’s technology portfolio. (An incremental and iterative approach is one that delivers system functionalities to a department as they are developed, so a department can use and improve them over time instead of at the end of system development.) The 2021-22 Budget Act provided EDD with funds to restart the proposed BSM IT project, and the 2022-23 Budget Act funded the first year of projects in the new EDDNext portfolio.

EDDNext Is a Combination of IT and Non-IT Projects. The current EDDNext portfolio includes three IT projects that seek to modernize and/or replace existing IT systems and several non-IT projects that seek to improve the department’s business processes, customer service, and information security. Figure 1 below provides a summary of these current IT and non-IT projects.

Majority of Funding Approved for EDDNext Available for IT Projects in 2024-25… As of January 2025, the estimated total cost of the EDDNext portfolio is $1.258 billion, approximately half of which is General Fund. Through 2024-25, $661 million ($330 million General Fund) has been approved by the Legislature specifically for EDDNext. As of January 2025, $415 million is available in 2024-25 to fund current EDDNext projects, as well as pay for services and tools that are used by all projects such as the Transformation Office. (The Transformation Office provides centralized services that support, for example, change management, project management, vendor procurement, and other functions.) Figure 2 below provides a breakdown of available funding in 2024-25 by current IT project, non-IT project, and supporting function.

…and IT Projects Likely Source of Remaining EDDNext Costs in Outyears. Most of the remaining $597 million in costs to complete the EDDNext portfolio (of the estimated $1.258 billion as of January 2025) will come from its three IT projects—and namely the proposed ICMS/IDM IT project. It is also possible that the ICMS/IDM IT project will exceed cost estimates, and thereby increase the total cost of EDDNext. This is because the ICMS/IDM project must still complete its procurement(s) and awards a vendor contract(s) through the state’s IT project approval process—the Project Approval Lifecycle (PAL). (A nearby text box provides some background information on the state’s PAL process.) Figure 3 below provides the most recent total cost for each of the three current EDDNext IT projects, as well as their start and end dates.

Provisional BBL Used for Legislative Oversight of EDDNext. In both the 2023-24 Budget Act and 2024-25 Budget Act, the Legislature adopted provisional BBL that (1) provides two fiscal years to encumber and/or expend project funding; (2) submit an expenditure plan for DOF approval and JLBC review before one-quarter of project funding is released to EDD; and, (3) submit a quarterly progress report to DOF and the Legislative Analyst’s Office.

2025-26 Governor’s Budget

$124 Million ($62 Million General Fund) Proposed for Fourth Year of EDDNext. The 2025-26 Governor’s budget proposes $124 million ($62 million General Fund) for the fourth year of EDDNext IT projects, non-IT projects, and supporting functions. Figure 4 below provides a breakdown of the requested 2025-26 funding for EDDNext.

Same Provisional BBL Also Proposed for a Third Fiscal Year. The 2025-26 Governor’s budget also proposes the same provisional BBL as the previous two fiscal years—that is, an extended encumbrance and expenditure period, an expenditure plan to access one-quarter of project funding, and quarterly progress reports.

Assessment

EDD Continues to Make Progress on EDDNext… The department continues to advance both the IT and non-IT projects in its EDDNext portfolio. For example, phase one of the Shared Customer Portal (SCP) IT project created a new online portal for workers to log into and access their DI, PFL, and UI benefits in six new languages (in addition to English and Spanish). Also, EDD is nearing completion of forms redesign and research/analysis, fraud and data analytics, and integrated contact center non-IT projects at the end of 2025-26, and nearing its approval of the proposed ICMS/IDM IT project through CDT’s PAL process in the summer of 2025. The department’s forward momentum towards completion of EDDNext is encouraging.

…But A Number of Changes in 2024-25 Raise Questions About Strength of Legislative Oversight. Despite its encouraging progress, in 2024-25, the department made a number of changes to the three current IT projects within the EDDNext portfolio that suggests a need to consider whether the current legislative oversight through provisional BBL is sufficient:

• Consolidation of Second Phase of SCP Into Proposed ICMS/IDM IT Project. On August 29, 2024, EDD entered into a vendor contract for the second phase of the SCP IT project. However, more than two weeks earlier on August 12, 2024, the department had already released a request for proposals for the proposed ICMS/IDM IT project that included the requirements from the second phase of SCP. EDD did not cancel the vendor contact until a month and a half later on October 11, 2024, noting the benefits of SCP’s second phase would be limited given the overlap with the ICMS/IDM IT project schedule. EDD then requested redistribution of the 2024-25 funding allocated for SCP to instead cover integrated call center licensing and SCP maintenance and operation costs. This redistribution was possible because EDD knew the second phase requirements would be included in the cost, schedule, and scope of ICMS/IDM (though additional information will be available about the impact of this decision when ICMS/IDM completes the PAL process).

• Modest Delay in Procurement of Proposed ICMS/IDM IT Project. In the 2024-25 Budget Act, the Legislature approved a total of $141 million for the proposed ICMS/IDM IT project expecting the project would begin development and implementation in 2024-25. While the department still expects the proposed IT project will complete the PAL process at the end of 2024-25, EDD also acknowledges that the project start date could extend into 2025-26 and identifies the loss of approved 2023-24 funding as a project risk. As of January 2025, the project is in active negotiations with potential vendors, and it remains unclear whether there will be a delay in the project start date. As shown in Figures 2 and 4, nearly all of the funding approved in 2024-25 remains available with no additional funding requested for the proposed IT project in 2025-26. With the project start date in question and a possible extension of planning into 2025-26, the Legislature may not have a complete project plan available to review during the 2025-26 budget process for the most complex, costly IT project in the EDDNext portfolio.

• Other Underspending and Shifting of Funds Between EDDNext IT and Non-IT Projects. In 2023-24, $105 million of the $198 million approved for IT and non-IT projects in the EDDNext portfolio was reallocated, largely due to consolidation of IT project scope into the proposed ICMS/IDM IT project and underspending on support functions provided by the Transformation Office. In 2024-25, $60 million of the $327 million approved was reallocated, again primarily due to consolidation of IT project scope. While the reallocation of funding between IT and non-IT projects is not a problem unto itself, it does raise questions about how appropriations the Legislature is asked to approve are ultimately calculated, allocated, and spent. Figure 5 below provides a summary of the reallocated funding in 2023-24 and 2024-25.

Current Provisional BBL Only Provides Visibility Into Past EDDNext Decisions. The current provisional BBL not only provides extended encumbrance and expenditure deadlines that allow for significant reallocations of appropriated funding, but also provides a relatively limited view into how these and other EDDNext decisions were made. Expenditure plans are submitted more than halfway through a fiscal year with reallocations between IT and non-IT projects already approved, by DOF, and quarterly progress reports provide no substantive information about progress towards completion of EDDNext aside from high-level summaries and IT project approval letters.

Recommendations

Approve Requested Funding in 2025-26. We recommend the Legislature approve the requested funding for current EDDNext IT and non-IT projects in the 2025-26 Governor’s Budget.

Adopt Additional Oversight Tools in 2025-26. With the potential uncertainty of the budget condition in 2025-26, the most complex and costly IT project in the EDDNext portfolio on the horizon, and a number of other EDDNext projects reaching critical milestones in 2025-26, the Legislature’s adoption of more oversight tools that are commonly used for large IT projects is warranted. We recommend the Legislature amend the provisional BBL for EDDNext proposed in the 2025-26 Governor’s budget in four ways:

• Remove Extended Encumbrance and Expenditure Deadlines. Consistent with best practice for other IT projects, we recommend the Legislature require annual budget requests without extended encumbrance and expenditure deadlines in 2025-26 and future fiscal years. Review of annual budget change proposals without significant reallocations between IT and non-IT projects will allow the Legislature to better oversee progress towards completion of EDDNext.

• Build In Legislative Review of Final Project Plan for Proposed ICMS/IDM IT Project. Given the modest procurement delay of the proposed ICMS/IDM IT project and its potential to push CDT approval through the PAL process into early 2025-26, we recommend the Legislature require 30-day written notification of the JLBC once Stage 4 Project Approval and Readiness documentation for this project is approved by CDT. This notification requirement is consistent with a number of other IT project budget proposals that expected to finish planning in the fiscal year for which they are requesting or receiving development and implementation funding. (An example is the California State Payroll System [CSPS] IT project which, in provisional BBL the Legislature approved in 2024-25, provided for 45-day written notification of the JLBC after Stage 4 Project Approval and Readiness approval.) Given the anticipated complexity and cost of the proposed ICMS/IDM IT project and its importance to the EDDNext portfolio, this additional level of legislative review is needed.

• Require CDT to Provide Bimonthly Independent Project Oversight Reporting on EDDNext Portfolio. We recommend the Legislature require that CDT, as the control agency charged with independent oversight of IT projects, publish oversight reports reviewing the entire EDDNext portfolio every other month. The absence of portfolio-level reports limits understanding of how decisions made by department and project leadership—such as the consolidation of IT project scope—impact each EDDNext project. Bimonthly portfolio-level reporting is already provided by CDT for other comparable IT project portfolios, such as the Department of Health Care Services’ Medi-Cal Enterprise Systems Modernization effort, and would be similarly useful for legislative oversight of EDDNext.

• Require Quarterly Legislative Staff Meetings. We recommend the Legislature require EDD to provide quarterly meetings with CDT, DOF, and legislative staff to review current EDDNext project progress. In particular, quarterly meetings would allow the Legislature to monitor whether the proposed ICMS/IDM IT project is on time, on track, and within budget. Quarterly legislative staff meetings are common practice for complex and costly IT projects such as the Child Welfare Services – California Automated Response and Engagement System and CSPS.