California’s Multibillion-Dollar Pandemic Unemployment Fraud

California’s government-waste problem with unemployment fraud has just become a lot bigger. It’s not just celebrities and prison inmates who have been fraudulently cashing in on California’s pandemic unemployment assistance program.

If it were, the total amount of taxpayer money lost to fraudulent unemployment claims in the state would total less than $1 billion. That’s a big number, but it is a small percentage of the $110 billion in pandemic unemployment benefits the state has paid out, one that seems below the threshold that would drive serious reforms to fix the state’s unemployment benefits system.

But now, the known scale of the fraud has ballooned. Bank of America is the financial institution that issues the debit cards providing unemployment benefits to individuals approved to receive them by California’s Employment Development Division (EDD). It estimates that over $2 billion in fraudulent claims have been filed, using 640,000 of its debit card accounts. The Los Angeles Times‘ Patrick McGreevey describes the findings of BofA’s investigation:

Bank of America estimated Monday that fraud in California’s unemployment benefits system could total $2 billion, and said it has identified 640,000 accounts with suspicious activity that should be investigated to determine whether they are bogus and should be shut down.

The bank, which has contracted with the state Employment Development Department to issue debit cards containing unemployment benefits, issued the warning in a letter to state legislators. It represents the highest estimate of fraud yet in a system that has paid $110 billion since the COVID-19 pandemic triggered a wave of joblessness in California beginning in March.

A bank official said red flags have been issued on claims filed in the names of infants, children and centenarians, as well as people living in states not contiguous to California.

“It is outrageous,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn. “We understand that there was an effort to push as much money into the economy as possible but there has got to be some controls. Here it is like they have opened up a bag of cash in the middle of a tornado and hoped that it ends up someplace where it is supposed to be.”

The massive extent of the fraud points to a complete breakdown of reasonable controls to prevent such crimes at the EDD. Specifically, it points to the failure of the management at the agency’s Labor and Workforce Development Agency, which operates California’s Pandemic Unemployment Assistance (PUA) program.

The scale of the problem appears to have derailed the immediate future career prospects of Julie Su, the appointed secretary of California’s Labor and Workforce Development Agency. She had been under consideration to become the U.S. Secretary of Labor, but that possibility now appears dead. Writing at Morning Consult, Tom Manzo weighs in on the (PUA) fraud disaster:

California’s Julie Su could be up for a big promotion. As Joe Biden assembles his cabinet in advance of January, she’s reportedly on a list of candidates to be labor secretary. But a look at Su’s recent track record should call her qualifications into question.

Under Su’s leadership, the state’s Labor and Workforce Development Agency—which handles the pandemic unemployment system—has experienced “the most significant fraud on taxpayer funds in California history.” Following months of delayed or unpaid unemployment insurance benefits, it’s come to light that the agency paid out almost $1 billion in fraudulent benefits to California prison inmates.

Unfortunately, this disaster looks like it was a long time coming. Su acknowledged that there were issues with the state’s unemployment insurance system back in April. She even took ownership of the problems: “I need to own the things that we are not doing right. We need to fix those things, we need to make sure that we are accurate, that we are timely and that we are providing services.” But it seems not enough was done to right the ship.

That piece was written on December 7, days before the official estimates of California’s pandemic unemployment fraud doubled to become a multi-billion example of government waste.

Now the question is, how long will it be before heads roll at California’s EDD? The magnitude of the breakdown of effective oversight and management demands a clean break with how things have been done there for years. It will take a full top-to-bottom housecleaning to right the troubled agency’s years-in-the-making problems of fraud and waste.

Craig Eyermann is a Research Fellow at the Independent Institute.
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