California jobless agency did little to stop unemployment fraud despite warnings, audit finds

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Closed shopfronts in what would be a normally busy fashion district in Los Angeles, California on May 4, 2020. – California governor Gavin Newsom earlier today announced the gradual reopening of the state later this week as dismal US employment figures are expected with the release of figures Friday May 8 for April’s US jobs report, as 30 million Americans filed for unemployment in the last six weeks. (Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)

SACRAMENTO, Calif. (AP) — Despite warnings, California’s unemployment agency did nothing for four months to stop paying bogus jobless claims, according to an audit released Tuesday that blamed Gov. Gavin Newsom’s administration for “significant missteps and inaction” costing taxpayers $10.4 billion and counting.

The report from California State Auditor Elaine Howle found the agency was flagging as many as 1,000 suspicious claims per day in the first four months of the coronavirus pandemic, yet it only had two people responsible for reviewing those reports and stopping the payments.

It wasn’t until July that the agency automated this process. But even then, it did not act to stop fraudulent payments.

One sign of a sham is multiple claims filed from the same address. In one assessment, the agency found 555,000 claims associated with 26,000 addresses, an average of 21 per address. Yet the agency did nothing, simply referring to the report as “informational.”

Auditors dug into that report and found one address that was the source of more than 80 claims. The agency’s fraud detection tool missed 12 of those claims, which were still active in mid-December and had received more than $300,000 in benefits.

“Our review illustrates that EDD continues to pay claims despite having evidence that they are very likely fraudulent,” Howle wrote in her report.

The agency couldn’t even stop payments to state prison inmates, paying at least $810 million in the names of roughly 45,000 inmates — more than double the amount previously reported by the state.

Agency officials told investigators they believed their fraud tools were effective. But Howle found the state “paid almost as much to suspicious claims as it prevented,” estimating the state stopped $12.8 billion in likely fraudulent payments while paying least $10.4 billion — a number that will rise in the coming months. The agency said this week it is investigating another $20 billion in suspicious payments.

Newsom and agency officials have consistently blamed the fraud problems on the federal government, which expanded unemployment benefits during the pandemic by loosening eligibility rules so much it made the program and easy target for criminals.

Newsom spokeswoman Erin Mellon called the amount of fraud “unacceptable,” and said the agency “was unprepared to mitigate the criminal attacks we saw against the new federal unemployment insurance programs.” She noted Newsom has set up a fraud task force at Office of Emergency Services that is working with local and federal law enforcement.

And she also blamed the Trump administration, saying it “failed to provide leadership to prevent and investigate national and international criminal attacks on unemployment systems.”

But Howle reported 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.

Despite this, agency officials stopped using a mechanism that would halt payments on suspicious claims. Howle said agency leaders who made this decision “did not adequately understand” how the system worked. That decision, Howle said, caused the state to pay $1 billion in likely fraudulent payments.

“It is almost certain that because of its lax approach, EDD missed stopping payment on fraudulent claims during the pandemic,” Howle wrote, adding the agency “does not acknowledge earlier warnings about potential fraud and its own failure to respond quickly to those warnings.”

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California lost more than 2.6 million jobs in March and April after Newsom issued the country’s first statewide stay-at-home order, the beginning of 10 months of economic turmoil tied to the ups and downs of an unpredictable virus.

California’s unemployment benefits agency was unprepared to handle the accompanying surge of claims, with previous audits showing the agency was plagued by outdated technology and a bureaucracy that contributed to a backlog of claims that at one time totaled more than 1.6 million people.

So far, the state has processed more than 19 million unemployment claims and paid out more than $114 billion in benefits. Thursday’s audit shows just how overwhelmed the agency was while trying to handle this surge.

By September, more than 1,000 people per day were telling the agency their identity had been stolen to claim fraudulent unemployment benefits. But the agency had just one employee responsible for reviewing those reports, and in July that position was vacant. From April to October, the agency responded to less than 2% of these fraud reports.

Because of that, it is likely thousands of people will owe taxes this spring on benefits they never received. And that’s not including people who don’t know their identity has been stolen, and likely won’t find out until they get a tax notice in the mail. Howle warned these people will flood EDD with requests for help in the coming weeks, adding even more work to an already struggling agency.

“Without a concentrated focus, EDD risks unnecessarily delaying assistance to victims of identity theft, who will remain in precarious tax situations until EDD completes its work,” Howle said.

Republican Assemblyman Jim Patterson said the audit “rightfully demonstrated what a disaster EDD has been with respect to fraud.” And said he worried the state Legislature, which is dominated by Democrats, won’t do enough to hold the Democratic governor accountable.

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

Democratic Assemblyman Phil Ting said that “it’s not really important who gets blamed for what,” adding: “People don’t care about blame, people care about getting their money.”

“I think we’ve been extraordinarily critical of the department,” he said. “EDD has to do a significantly better job on their fraud prevention, period,” Ting said.

You can read the full audit below:

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