California May Continue Paying Fraudulent Unemployment Claims

State Auditor Elaine Howle found Thursday the state agency that oversees unemployment benefits paid out at least $10.4 billion in fraudulent claims due to “significant missteps and inaction.”

At one point, just two people were assigned to look into reports of 1,000 fraudulent claims per day. The audit found the agency paid at least $810 million to prison inmates, more than double the amount previously thought.

The findings are the latest examination of the agency’s struggles as it rushed to pay claims to millions of Californians who lost their jobs amid coronavirus-related business closures. While some say Gov. Gavin Newsom is at fault, several Democratic lawmakers and a former gubernatorial chief of staff say it's unfair to blame Newsom for the Employment Development Department’s problems, and that the focus should be on fixing the department. But Republicans and at least one outside expert say fraud could have been halted sooner.

Newsom spokeswoman Erin Mellon said the new federal unemployment program created last year was the source of most of the fraud, with the Trump administration giving states little assistance to combat it. She pointed to actions Newsom has taken like creating a strike force in August to evaluate the agency and, more recently, a fraud task force. But she declined to directly answer questions about whether the governor was aware of identity theft issues, how often he met with the unemployment department’s leadership in 2020 and who in his office was responsible for communicating with the department about problems.

The audit found the federal government warned the state at least three times in the early months of the pandemic to beef up its fraud protections. In May, the U.S. Department of Labor’s Office of the Inspector General warned California its surge of 2.9 million claims in March and April were likely tainted by at least $1.2 billion in fraud.

Still, the auditor found the state “continues to pay claims despite having evidence that they are very likely fraudulent.”

In an interview with KQED Forum, Loree Levy, the deputy director of public affairs for California's Employee Development Department told KQED that efforts by the department prevented $60 billion worth of fraudulent claims. She noted the new identification system — ID.me was key to this. Levy also said that criminals were going state to state "to see where the vulnerabilities are." She also noted that it's an evolving situation in which "the plane continues to be rebuilt in midair."

While EDD implemented ID.me to fight fraud and eliminate tedious manual processing times, applicants have reported hours-long wait times to verify their identities with the platform. These are especially tedious when claimants are redirected to the service's video call center, which happens if ID.me can't immediately process their verification document uploads.

On Monday, ID.me CEO Blake Hall said more than 70,000 Californians were redirected to the video service in January alone. ID.me is also less accessible for people who don't have smartphones and is currently only available in English and Spanish.

The EDD is under new leadership after the director retired in December. No department leaders were fired over the fraud.

“If California was a bank they wouldn’t be able to be in business anymore. The regulators would shut them down because they’re just not following normal business practices,” said Haywood Talcove, CEO of LexisNexis’ Risk Solutions Government division, an identity verification and fraud detection service that works with banks and some state governments. He said the state could have put in place protections without revamping its entire system.

But Susan Kennedy, who served as chief of staff to former Republican Gov. Arnold Schwarzenegger and in the administration of Democratic Gov. Gray Davis, said the state’s outdated systems have plagued the unemployment agency for decades. Faced with millions of Californians suddenly out of work and in need of benefits, state officials had little choice but to get benefits out as quickly as possible, even if fraud slipped in, she said.

“There is no magic wand for a state this large with this much volume with an antiquated computer system,” Kennedy said. “The only thing you can do is cut through the bureaucracy.”

Republicans, who hold the minority in the state Legislature, said Newsom bears the responsibility for the agency’s failures. Assemblyman Jim Patterson, R-Fresno, said his Democratic colleagues might not hold Newsom accountable.

“You get very close to politically covering up the responsibility of the governor,” Patterson said.

Assemblyman Rudy Salas, D-Bakersfield, who chairs the Joint Legislative Audit Committee, said Newsom needs to “fully engage and immerse himself in fixing the problems at EDD.”

“I think it’s something that Californians are demanding and they’re demanding it now because they’re hurting,” Salas said. He said Newsom took a good first step by creating the strike team last summer.

Assemblyman David Chiu, a San Francisco Democrat who has been highly critical of the department, said it’s possible agency officials weren’t being truthful with the administration, though he hadn’t spoken directly to Newsom about the audit.

The audit found that the department had played a “significant role” in directing Bank of America, which handles unemployment debit cards, to freeze 344,000 accounts in September, many belonging to legitimate claimants. But the department had earlier told lawmakers that the bank had made the decision to freeze the accounts.

“Legislators have been given completely misleading, deceptive information,” Chiu said. “I suspect that that might also be true for the governor’s office.”

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Associated Press reporters Kathleen Ronayne and Adam Beam and KQED's Mary Franklin Harvin and Lakshmi Sarah contributed to this post.