Nearly $40 Billion Was Lost by the EDD

New federal Department of Labor figures regarding the massive looting of the nation’s unemployment insurance systems during the pandemic show that California’s improper payment figure has climbed again and is now estimated to be nearly $40 billion.

Labor Department Inspector General Larry Turner testified in front of Congress Wednesday that an estimated 21.5% of the $888 billion paid out in unemployment benefits across the country were improper.  That means $191 billion dollars were lost to fraud and other more typical bureaucratic incompetencies.

What that means for California is that nearly $40 billion – or about $1,000 per state resident – was lost in the wind.

The state Employment Development Department was contacted multiple times to elicit comment.  As has been typical in the past, the EDD did not avail themselves of the opportunity. 

In the past, the EDD has claimed that “95%” of the fraud losses were directly related to the federal PUA (pandemic unemployment assistance) program. The new figures show that could not possibly be true.

PUA – which offered assistance to those who would not normally qualify for benefits like independent contractors, freelancers, etc. –  was only one of the federal unemployment programs created at the start of the pandemic and accounted for about 15% of the overall national (state and federal) payment total of $888 billion. Regular state funds, the FPUC (the $600 then $300 weekly supplement that was available for about a year during the pandemic,) and other programs made up the rest.

Turner added the fraud estimate percentage for the PUA itself – unlike all of the other programs – has not yet been determined though he expects it to be higher than the 21.5 % averaged by all other payment types.

The PUA program has been considered the easiest target for fraudsters as some states, like California, required virtually no identity conformation to qualify for the benefits, hence claims made in Sen. Dianne Feinstein’s name sailed through the system (as did claims made by thousands of prisoners, out-of-state residents, and foreign nationals.)

Eventually the EDD did bring in an outside identity verification firm – ID.me – which reportedly did staunch the fraud flow, though also causing legitimate claimants to have their benefits halted for up to two months.

The EDD still claims only $20 billion total was lost, of which 95% was PUA related.  However, California’s share of PUA spending is most likely to be in the $25 billion range (akin to the national 15% percent of the total state spending) meaning that 76% of all PUA expenditures would have had to be fraudulent and/or improper.

And if the national estimate of 21.5% is correct (it may be slightly lower at 20%, though as the PUA percentage has yet to be determined it may be higher) the EDD lost between $37 and $40 billion.  If the EDD’s 95% claim is to be believed, that would mean that the PUA program would have had to somehow manage to lose about $36 billion of the estimated $25 billion it spent  – a mathematical impossibility.

As noted above, attempts to have the EDD clarify the figures – and to explain the impossible estimate they have been touting for more than a year –  were met with silence.

It should also be noted the EDD has ludicrously claimed that their non-PUA fraud rate actually went down during the pandemic

The new figures also show that, while having only 12% percent of the nation’s residents, California accounted for about 21% of all unemployment expenditures during the pandemic and about 22% of the fraud and other improper payments made nationwide.

This raises the specter of international gangs specifically targeting the state because they quickly became aware of how lax the system was, a system the EDD took more than seven months to put in even the most basic safeguards. Identity experts have said previously that the EDD, even with its antiquated tech systems, could have added a “bolt on” security program for a few million dollars in about a week’s time very early in the pandemic.

Exactly how much California received – and lost – as part of the PUA system should become clearer when the Department of Labor completes its PUA audit in the coming months.

At the end of January, new EDD chief Nancy Farias – formerly a labor union “government relations” human – told the Sacramento Bee that she blamed the problem on the Trump administration for neglecting “state efforts to combat domestic and foreign criminals collecting billions of dollars fraudulently from overwhelmed unemployment systems.”

Exactly how the Trump administration could have been at fault remains unclear – for example, when the EDD finally added some security “friction” to the system, Trump was still president and his administration clearly did not stop them from hiring ID.me and, therefore, undoubtedly would not have stopped them from doing so earlier on in the pandemic.

It should also be noted the Trump administration provided the EDD with an additional $788 million just to cover the department’s additional administrative costs caused by the pandemic.  With a typical annual administration/operations budget estimated to be in the one billion dollar range, that amounts to an annual budget bump of about 40% during the pandemic.

Click here to read the full article in the California Globe

In the past 10 years the state has managed to not borrow to cover unemployment claims only twice

Since 1990, California’s unemployment agency – the EDD – has paid the feds $1,793,665,930 in interest alone to help keep its doors open and claimants paid.

That approximately $1.8 billion dollar figure does not include what the state currently owes in interest – another $48.8 million for this year so far as the agency has begun borrowing again, as the Globe reported here – nor is that figure adjusted for inflation to reflect value in current dollars.  

The inflation-adjusted number is significantly larger, approaching an estimated $3 billion.  

Not only does the loss of this literally wasted money contribute to the inability of the state unemployment trust fund to build a solid footing and has made reform of the agency more difficult, but it has also had to be paid for by state employers and workers, driving up business costs and being a general drag on the state’s economy. 

In the past 10 years – well before the pandemic – the state has managed to not borrow to cover unemployment claims only twice – in 2019 and 2020.  In that same time period, the EDD has paid $1.2 billion in interest, about $817 million from 2013 to 2018 and another $330 million this year.

Just since 2007, the state has borrowed $100 billion and since 2013 up to and including this year the EDD has paid about $1.2 billion in interest (the other $600 million interest paid occurred on borrowing between 1990 and 2007.)

It should be noted that much of the specifically-pandemic-related billions lent to the EDD were loaned interest free (as they were to every state.)

On top of this, the state – as of midnight Thursday night –  now owes another  $18,223,379,798.78 in principal and another $48,846,063.38 (as noted above) in interest.

EDD’s debt-reliant funding is somewhat analogous to a person who has a credit card, runs it up to the, say, $5,000 limit, pays the minimum due, say $200, and then the next day spends $200 using the same card. Or it’s like borrowing $100 from a loan shark on the condition of paying $125 back next week but only paying the $25 “vig” week in and week out in order to keep the use of your knees (luckily for all involved, it is doubtful that the Social Security Administration – which administers the loan program – would send its goons to the EDD’s Sacramento offices to “collect.”) 

It should be noted that the feds do not refuse to lend the money and tend to consider state (borrower)-initiated payment plans in order to make sure unemployment benefits claimants actually get the money they are entitled to. In other words, no matter the debt the money will flow through the EDD to the laid-off worker, as it does today.

It is true that the EDD has managed to occasionally pay the principal down to zero, but that state of being “off the schnide” is far from the typical condition of the financial affairs of the agency.

Like all states, California is allowed to borrow from a program called Title XII, a part of the Social Security system set up decades ago to “backstop” unemployment agencies experiencing what are supposed to be temporary difficulties. For example, a textile-heavy state that sees its mill jobs disappear and shipped overseas can access the funds to meet the concomitant spike in demand for benefits.

Unlike many other states, California must pay interest. Notably, which states pay interest varies from year to year, though California has not managed to qualify for interest-free money since 1990. The number of states that do qualify is usually between 20 and 28, or about half on the money it borrows, at a rate that has ranged over the years from about 1.7% to 2.5%.

The amount paid in interest – interest that brings no other gain along with it, like a mortgage leads to homeownership – could have funded a number of Governor Newsom’s pet green projects. For example, at $100 million a year (averaged and adjusted for inflation), the interest paid could have switched the funding of the state’s “methane satellites” program from just a one-off expense of $100 million this year to a dedicated annually funded project – not that that would be a good idea and, yes, methane satellites are exactly what they sound like – the state budgeted $100 million to help launch satellites dedicated to detecting methane emissions – basically, cows with the vapors; for more on this see here.

The state has one of the highest unemployment tax rates in the country, but, problematically, the lowest “base” rate possible.  Taxes are paid on only the first $7,000 of income per employee, meaning the part-time intern costs the same to insure as the CEO even though the amount in benefits they would receive if laid off are wildly different.  The state has not changed this base rate in about 50 years, while the benefits offered have risen dramatically since.

Additionally, the rates employers pay vary depending upon whether or not they have had significant layoffs and other similar issues that strain the unemployment system; “stable” employers can expect to pay only about one-third the rate of “problematic” ones, but the interest obligation to the feds is essentially paid equally by everyone.

“I think what policymakers may not realize is that the (interest) from Title XII loans also increases taxes on employers,” said Audrey Guo, Assistant Professor of Economics at Santa Clara University. “And these surcharges are less equitable because they penalize all California employers, even those that may not have previously laid off employees.”

Rationalizing the current tax and base rate numbers, said Guo, could “increase the tax cost for employers at the minimum and maximum, but other employers would actually experience tax rate decreases.”

As to why this problem has continued for more than 30 years, it is not clear, though it is possible that EDD employees know they can’t get fired for incompetence nor be rewarded for innovating changes.

“I’m not sure why California has lagged behind other states,” said Andrew Johnston, assistant professor of economics at UC-Merced.  “But California’s largesse in some areas has meant that it doesn’t do basic service on the core of its social safety net, including its dilapidated education system and its bankrupt unemployment insurance program,” 

Click here to read the full article in the California Globe