Auditor-controller discloses SDI under-withholding from paychecks; county to prospectively correct and review prior records

Auditor-Controller Rupa Shah told the Monterey County Board of Supervisors on July 1 that her office had identified an irregularity in how state disability insurance (SDI) tax was withheld from employee pay during a recent payroll-system transition.

The Auditor-Controller said a consultant's preliminary review flagged incorrect configuration logic that caused certain deductions (deferred compensation and CalPERS retirement cost) to be excluded from the SDI base. The county will implement a prospective correction to SDI withholding starting with the July 3, 2025 payroll; employees will see a small increase in SDI withholding going forward.

Scope and next steps: Shah said the change is prospective and does not itself recoup past under-withheld amounts; her office is performing a comprehensive review of the system configuration and pay records to determine the full scope of under-withholding at the individual-employee level. That broader review may take several weeks; Shah said staff would return with detailed findings and recommendations by September, after a full audit of historic pay events and deduction rules.

What officials told the board: Shah apologized to affected employees, said the office is creating additional configuration checks and accountability processes, and pledged to communicate directly with staff. Board members asked whether the correction would be retroactive (it will not be for the July 3 correction) and asked about potential dollar ranges; Shah said a very rough preliminary figure for three years could be in the low millions but that staff are still quantifying the precise liability. Shah said the county will seek to work with the state on penalties or interest if applicable.

Employee impact and policy questions: Board members asked that staff return quickly with options for how to treat prior under-withholdings (for example, recoupment from employees versus county absorption). The Auditor-Controller said the county would need to decide whether to try to recoup past amounts from paychecks and would consult with County Counsel on legal options.

Ending: Shah told employees directly that corrected withholdings would begin in the July 3 payroll and reiterated that the Auditor-Controller's office will report its findings and recommendations to the board this summer.