Pandemic Unemployment Fraud to Cost American Taxpayers More

It’s a mistake to think the unemployment insurance fraud permitted during 2020’s pandemic has stopped imposing costs on its victims: American taxpayers. A new majority report by the US House of Representatives Committee on Oversight and Accountability highlights the official estimates of the magnitude of the fraud:

While unemployment insurance (UI) compensation programs in the United States have a long history of improper payments, new temporary pandemic UI programs created by Congress and administered by states and territories in response to the COVID-19 pandemic led to an unprecedented amount of fraud and improper payments. Although the full extent of this fraud and the money lost may never be fully known, the U.S. Government Accountability Office (GAO) estimates that about 11 to 15 percent of total benefits paid during the pandemic were fraudulent, totaling between $100 to $135 billion. The Department of Labor (DOL) Office of Inspector General (OIG) estimated that at least $191 billion in pandemic UI payments could have been improperly paid, with a significant portion attributable to fraud. As of March 2023, states reported recoveries of improper payments in an amount of only $6.8 billion.

Over $32 billion of the total taken through fraud was enabled by a single bad decision made as head of the California Labor & Workforce Development Agency, which is part of the state’s Employment Development Division (EDD). This state government agency oversees the state’s unemployment insurance system and was headed by Julie Su, who has since moved on to run the US Department of Labor for the Biden-Harris administration. Here’s how the report summarizes that bad decision:

EDD, under the leadership of LWDA Secretary Julie Su, made the decision early in the pandemic to ‘pay and chase’ after Su was informed that keeping integrity checks in place would lead to backlog in processing claims largely due to EDD’s outdated IT.

Whatever checks EDD had in place to detect and prevent fraud were disabled by this bureaucratic choice, thus enabling the fraud that ensued. This bad decision also goes a long way in explaining why Su is only the acting secretary of labor and not the confirmed secretary. The US Senate will not confirm her in that role because of her role in the mismanagement of California’s pandemic unemployment benefits. And yet, she still has power over the Department of Labor’s policies, which is where American taxpayers face new costs incurred because of the fraud she enabled.

Old Fraud, New Costs

Those new costs arise because of how state employment agencies like the EDD were funded to pay out pandemic unemployment insurance benefits. The report describes how Su’s negative influence imposes new costs on American taxpayers:

Acting Department of Labor Secretary Julie Su is able to exert significant influence over UI policies and repercussions. For example, the Social Security Act allows states to borrow funds from the Federal Unemployment Account (FUA) within the Unemployment Trust Fund (UTF), a single trust fund in the U.S. Treasury for transactions related to UI and EB. States generally borrow from the FUA during a recession when state unemployment tax revenue is insufficient to fund the UC benefits for eligible claimants. Federal law requires states to repay the loans and if they do not, the state faces interest on the loan and the state’s employers will pay increased Federal Unemployment Tax Act (FUTA) rates until the loans and interest are fully repaid. FFCRA, CAA, and ARPA, temporarily waived interest payments and accrual of interest on loans from FUA through September 6, 2021.

Most states who borrowed during the pandemic repaid the loans in due course. However, as of December 22, 2022, California, Connecticut, Illinois, New York, and the U.S. Virgin Islands still owed outstanding loan balances and accrued interest totaling nearly $28 billion dollars, leading to employers in those jurisdictions having to pay higher FUTA rates. As of August 29, 2024, the states of California and New York still owe outstanding loan balances and accrued interest totaling more than $26 billion, and seem to have no urgency to repay the loans they owe or to provide relief to employers (and small businesses) in their states. In fact, the longer that the loans are outstanding, the more the FUTA rates will increase. By avoiding repaying the loans, California and New York are ensuring that employers, with the increased FUTA tax rates, will repay most of the outstanding loan principal and accrued interest the states owe, even though the employers were not responsible for taking out the loans in the first place.

It gets worse. California is seeking a bailout, in which the state will never pay US taxpayers back the amount it borrowed from them to fund the fraudulently claimed benefits it issued without any effective oversight under Su’s leadership. The majority report indicates both Su and the Department of Labor failed to provide Congress with any information about this proposed deal after being requested,

… members of the U.S. House of Representatives and the U.S. Senate have written to Acting Secretary Su requesting clarification about EDD’s request and for correspondence between the Department of Labor and California EDD officials, including a copy of the February 2024 letter, and to date have received no formal response from Acting Secretary Su or the Department of Labor.

Failures and a lack of accountability under Su at the California Labor & Workforce Development Agency and the US Department of Labor now define her legacy as a government bureaucrat. American taxpayers deserve better.