CA recovered $6 billion in COVID-era fraud. It’s getting harder to recoup more
COVID-19 — and the swell of jobless Californians that the virus’ spread produced — created two, separate billion-dollar problems for California’s Employment Development Department. Those issues have continued to plague the agency since the pandemic.
The first problem was the massive amount of fraud that took place when California rushed to distribute federal, and some state, funds to an unprecedented number of people who were suddenly out of a job. The total amount of fraud is estimated to be at least $20 billion.
EDD has worked to recover some of the stolen funds by partnering with federal and state law enforcement agencies. The department reported that thousands of investigations have resulted in 670 convictions — $5.9 billion has been recovered.
But given the statute of limitations for these types of crimes is sunsetting, it’s becoming more difficult to recover that money.
The second problem was the surge of people seeking jobless benefits required California to borrow money from the federal government to pay those claims. Because there hasn’t been enough money coming from Golden State employers since 2020 to cover the benefits going to jobless Californians, the state’s unemployment insurance funds developed a deficit. That grew to $22 billion at the end of last year. ‘
To overcome that deficit the state needs to increase the amount of revenue it brings into the unemployment fund through employers, decrease the amount that is sent out to jobless Californians or, ideally, both.
“California will continue to owe interest until the loan is paid off completely,” EDD wrote in its latest fund forecast. Last year, California’s interest payment cost over half a billion dollars.
EDD’s fraud recovery efforts
“EDD fraud has been around as long as EDD has been around,” said McGregor Scott, a former U.S. attorney. Scott recalled prosecuting fraud cases while he served as Shasta County’s district attorney from 1997 to 2003.
But the amount of unemployment fraud that occurred during the pandemic was unprecedented, in part because the federal government was trying to get so much money out so quickly, and it didn’t require proof of employment.
As a result of that flaw, the federal government’s Pandemic Unemployment Assistance program was the target of the majority of the fraud that occurred in California.
In 2021, around the time that billions in unemployment-related fraud was being reported, Gov. Gavin Newsom named Scott as the “fraud special counsel.” Scott’s role was to serve as a liaison between state agencies, such as EDD and the California Governor’s Office of Emergency Services, and federal and state charging authorities who could actually recover some of the stolen funds.
“We really want people to look at EDD as a crime victim and then get prosecutors and courts to order restitution for the money that was stolen back to EDD,” he said in an interview.
Over several years, Scott and others successfully recovered billions, the lion’s share of which was in the form of Bank of America debit cards that unemployment benefits were preloaded onto and shipped to recipients, he said.
Some of those “were fraudulent cards that got mailed out and were either never used or somebody identified that they were likely fraudulent and froze them,” he said. One of the flaws in that process was that individuals were able to call Bank of America after applying for a card and get the bank to send it to a different address than was listed on their initial application, Scott said. Going forward, he said, that shortcoming has been fixed.
Catrina Ranum, a supervising deputy district attorney with the Sacramento County District Attorney’s office, said that investigations have led to major prison sentences and substantial restitution orders, including an eight-year sentence for a defendant who committed a $3.2 million fraud scheme.
“Additional cases remain pending due to defendants petitioning for Mental Health Diversion,” Ranum said in a statement. “Our office remains committed to protecting taxpayer funds and the integrity of essential public programs.”
There’s a simple reason it’s been hard to recover this money. The money loaded onto cards was easily converted to cash and much of it went overseas, he said.
For many of the fraud cases that occurred during the pandemic, the statute of limitations has already passed or is nearly passed. Those statutes differ for federal and state prosecutors, Scott said, but law enforcement authorities don’t have much more time to charge fraudsters and seek restitution.
The more time that goes by, the harder it is going to be to get more money back, he said.
Nature of EDD fraud has changed
During a legislative hearing last week, EDD officials discussed technological and process improvements that have been made within the department, which have better prepared California to handle future economic downturns.
The department also has additional layers of fraud prevention in place.
“Today, EDD and our customers benefit from our enhanced identity verification methods and extensive prevention efforts -thwarting the kind of criminal enterprises we saw during the pandemic,” Loree Levy, a department spokesperson, said in a statement.
Post pandemic, EDD fraud mostly consists of individuals providing false information to the state about their wages earned and their eligibility. She said that one of the most common instances of fraud now is when Californians choose not to tell EDD that they went back to work but continued to receive unemployment checks.
While individuals might need that money to bridge the gap between receiving unemployment benefits and their first paycheck, it’s still considered fraud under California law, Levy said.
A broken unemployment insurance system
The second issue that arose from the pandemic is the deficit in California’s unemployment insurance trust fund, which is not a result of the fraud that took place during the pandemic, Levy noted.
During the 2008 financial crisis, California’s unemployment insurance fund also became insolvent, said Michael Bernick, a former EDD director who now works as counsel with Duane Morris LLP. It took the state nearly a decade to recover, he said.
When COVID-19 hit, the imbalance of money going out to unemployed workers and coming in from employers created a deficit in EDD’s trust fund, and California had to start borrowing money from the federal government to pay unemployment claims.
Since 2024, the federal loan balance has fluctuated between $21 billion and $22 billion. But the amount of interest paid by California has continued to increase. California’s second interest payment in 2022 was $336 million. Last year, the Golden State paid $628 million. The nonpartisan Legislative Analyst’s Office warned this taxpayer cost could increase to $1 billion each year.
“The fund is challenged by an antiquated funding formula established in 1984 that makes it difficult to collect enough in contributions from employers to cover the cost of regular unemployment benefits,” Levy said.
Both Bernick and the LAO agree, the state’s unemployment insurance system is broken. The former EDD director said the state needs to make structural changes to address the situation.
One thing Bernick recommended was for EDD to take fraud more seriously, though he noted that the department had made progress on this front in recent years.
Additionally, California could increase its taxable wage base, which limits how much of workers’ salaries employers have to pay taxes on. That wage base currently stands at $7,000 per year, but the LAO recommended increasing it to $46,800 to help reduce the state’s deficit.
Increasing the taxable wage base will not likely be popular with businesses, given employers already pay into the state’s unemployment insurance fund.
Brooke Armour, executive vice president at California Business Roundtable, said businesses are frustrated that the governor and the Legislature have not yet resolved the deficit.
Armour said that businesses paid off the deficit when it last became insolvent after the 2008 recession. Now employers are paying even more in taxes to address the latest imbalance.
“This is increasingly becoming, at all levels of business, one of the most important and concerning costs that they’re incurring,” she said.
Another way to address the deficit would be to get Californians off of unemployment benefits — and back to work —faster. Armour noted that there is an outsized number of unemployment claims in California compared to how many jobs are in the state. Creating stricter requirements for who can receive unemployment would also help reduce the state’s deficit, she noted.
“As we saw during COVID, it is a very critical safety net,” Armour said. “And (the fund) being functionally insolvent in perpetuity is very concerning, because it just adds additional pressure anytime there’s another economic slowdown.”
