State Audit Exposes California’s Failures: Massive Fraud, ‘Ghost’ Phones, and Crumbling Infrastructure

California is facing a mounting financial and operational crisis, according to a scathing new report from the State Auditor. The 2025-601 State High-Risk Audit Program highlights a series of systemic failures across major state agencies that could cost taxpayers billions, threaten public safety, and force local businesses to pick up the tab for government mismanagement.

A Wake-Up Call for the Golden State

The California State Auditor’s office has released its updated “High-Risk” list, a designation reserved for agencies plagued by waste, fraud, abuse, or mismanagement.

The report serves as a formal warning that without immediate intervention, these problems will result in “serious detriment” to the state. This year’s assessment adds new departments to the list while noting that many long-standing issues remain dangerously unresolved.

The $2.5 Billion CalFresh Liability

The most significant new addition to the high-risk list is the California Department of Social Services (CDSS). The Auditor highlighted chronic errors in calculating CalFresh benefits, noting that the state’s “payment error rate”; a measure of how accurately eligibility and benefits are determined is dangerously high.

Under the federal “One Big Beautiful Bill Act,” California is facing a looming “fiscal cliff.” If the state cannot slash these error rates, it will be required to pay a portion of the benefits out of the General Fund, costing taxpayers up to $2.5 billion annually by 2028.

EDD’s Recurring Nightmare: Half a Billion Lost to Fraud

The Employment Development Department (EDD) remains a fixture on the high-risk list. The Auditor identified a staggering amount of fraud within the Unemployment Insurance (UI) program.

In 2024 alone, an estimated $513 million was lost to fraud, making up nearly 8% of all payments. This follows nearly $489 million lost to fraud the previous year. The report notes that the EDD is still unable to reliably estimate these losses, which cripples its ability to stop future scammers.

 

The ‘Ghost’ Phone Scandal: Millions Wasted on Unused Tech

While the billions are alarming, smaller-scale waste reveals a culture of mismanagement. A secondary investigation found that the EDD wasted $4.6 million simply by paying monthly service fees for over 6,200 mobile devices; including cell phones and tablets that went unused for months or even years. This “set it and forget it” approach to state resources highlights a lack of basic oversight that is costing taxpayers millions in “ghost” technology costs.

The  California Air Resources Board did not accurately track an employee’s leave hours, continuing to pay the employee for many months after he had fully depleted his leave hours and was no longer working.

The Yountville Veterans Home operated by the California Department of Veterans Affairs did not report more than $400,000 in taxable housing benefits for employees.

Several cases of waste, improper payments and misuse of state resources are documented by the California State Auditor in Investigative Report I2025-1.

Why California Businesses Are Footing the Bill

The fraud and waste within the EDD isn’t just a government problem; it’s a direct tax on employers. Because California borrowed billions from the federal government to keep the UI fund afloat during the pandemic, and that fund is still depleted by improper payments, businesses are being taxed to pay it back.

Employers are currently facing FUTA credit reductions, which effectively raises the federal tax rate on every business in the state until the debt is cleared.

California Flying Blind on Homelessness Spending

California has allocated a staggering $24 billion over the last five years to combat homelessness, yet the State Auditor warns that the state is effectively “flying blind” regarding the results.

The 2025 report identifies a pervasive “data desert,” revealing that the California Interagency Council on Homelessness (Cal ICH) has failed to track spending or program outcomes since 2021. Despite this massive infusion of taxpayer cash, the state lacks the basic information needed to determine which programs are successfully reducing the number of people on the streets and which are failing to deliver.

The “Unknown Destination” Problem on Homelessness Spending

The audit’s findings on program exits are particularly troubling for those seeking evidence of progress. In several major counties, nearly one-third of individuals leaving state-funded interim housing did so for “unknown destinations.” This means the state cannot confirm if these individuals moved into permanent housing or simply cycled back onto the streets, rendering it impossible to measure the true return on investment for these multi-billion dollar initiatives. Without this tracking, the Auditor warns that policymakers are making critical funding decisions without any concrete evidence of what actually works.

Furthermore, the Auditor noted that of the five major state-funded homelessness programs, only two could provide enough data to determine their cost-effectiveness. The remaining programs; representing billions in funding provided no data to justify their continued expense.

This lack of statutory compliance by Cal ICH has left the state in a position where it continues to dump money into a system that refuses to measure its own success, even as the homelessness crisis remains one of the most visible failures in the Golden State.

Medi-Cal’s $1.9 Billion Eligibility Gap

The Department of Health Care Services (DHCS) is under fire for its management of Medi-Cal. The audit reveals significant discrepancies between county and state eligibility systems, leading to an estimated $1.9 billion in “questionable payments.” These are funds going to individuals who may not actually be eligible for the program.

The Auditor warns that the state has still not done enough to ensure that only those truly in need are receiving benefits.

California’s Crumbling Dams: A 73% Increase in Danger

Infrastructure is a major focal point of the 2025 report. The Auditor notes a terrifying trend in the state’s water safety: the number of dams with “Poor” or “Unsatisfactory” condition ratings has skyrocketed by 73% since 2023. These ratings suggest that many dams are at risk of failure during extreme weather events, posing a direct threat to the lives and property of thousands of Californians living downstream.

Water Supply at Risk: A 23% Future Drop

Beyond the safety of dams, the report sounds the alarm on the reliability of the state’s water supply. If infrastructure issues are not addressed, water project delivery capabilities could decrease by as much as 23% by 2043. As climate change brings more frequent droughts, the state’s inability to maintain its water delivery systems could lead to severe shortages for both residential and agricultural users.

The Paper Trail: 85 Recommendations Ignored

California was awarded a staggering $285 billion in federal funds, but the management of that money remains a high-risk issue. The Auditor performed 11 separate audits and issued 85 recommendations to fix mismanagement, many of which have yet to be fully addressed. Millions in available grants remain unspent or untracked, raising concerns about the state’s ability to manage massive federal infusions of cash.

IT Oversight Failures and Cybersecurity Threats

The California Department of Technology (CDT) is criticized for its failure to provide adequate oversight of state IT projects. Many critical technology upgrades are behind schedule and over budget, leaving state agencies to rely on aging, vulnerable systems. The Auditor warns that the state’s information security remains a high-risk issue, leaving sensitive resident data potentially exposed to hackers.

Vanishing Accountability: Why Financial Reporting Matters

For the state to be accountable, its financial reporting must be timely. However, the report indicates that California continues to struggle with late and inaccurate financial reporting. This lack of transparency makes it difficult for the public and policymakers to understand the state’s true fiscal health.

Late reporting can also negatively impact the state’s credit rating, making it more expensive for California to borrow money for vital infrastructure projects.

The State Auditor emphasizes that “lip service” is not enough. With billions of dollars, public safety, and the tax burden of local businesses on the line, the report is a clear signal that the state is failing to meet its “duty of care” to its citizens.

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