Bungled. Blunder. Blasted. This is how some of the news media has described the management by California’s Employment and Development Department (EDD) of the enormous unemployment benefit fraud that began last year, and which was harshly criticized by the state auditor. And this was when the amount of fraud was reported to be in the $2 billion to $6 billion range.
The amount of fraud now appears to be as high as $31 billion since the beginning of pandemic, 19 months ago. Blunder? Bungled? How do you describe what happens when a single state government bureau manages to lose more than the annual GDP of Nepal, a country of nearly 29 million people? Not to mention when three individuals—a prison inmate, a nurse, and a car dealership employee—none of whom are close to being IT experts, can hack the system for $2 million.
The reason this happened is simple. California’s state government no longer abides by the basic principles of good governance: efficiency and respect for the taxpayer, incentives, and accountability.
Imagine that such a problem happened in the private sector, where businesses must compete to survive. To compete, a business must be efficient. To be efficient, a business must hire appropriate leadership and workforce, and implement the right incentives for them to deliver maximum value. And to implement the appropriate incentives, there must be accountability. If such a problem happened in the private sector, we would certainly see many changes in who makes these decisions and who carries them out, and the problem would have been fixed long ago.
But this didn’t happen in the private sector. And any similar event probably never will, because the EDD’s hacks were due to a computer system that dates to the 1980s, running software that is more than 50 years old.
But the fraud and the enormous backlog of legitimate claims is much worse than just a failure to update technology. It turns out that the EDD and the state snatched defeat from the jaws of victory by eliminating the only software they had that widely prevented fraud. In 2013, the EDD received a grant from the Obama administration that was used to purchase software from Pondera Systems, a business that has created extremely effective software that searches over many public databases and that uses proprietary AI algorithms to identify fraud and abuse.
The software, which cost about $2 million per year (think of this as an investment that has a very high rate of return), was in place from 2013 until 2016. EDD employees noted that the software identified a “remarkable amount of fraud.”
So far so good. But in the summer of 2016, someone in the EDD made the decision to discontinue use of the Pondera software. The 2013 federal grant had run its course, and the software was not renewed because of the $2 million price tag. Just like that. Who was accountable for this decision? Did anyone in the agency fight to retain the software, given its remarkable performance? Why didn’t someone anticipate what would happen without the software?
What would have happened if basic economic principles of incentives and accountability had been in place? First, there would have been negotiations with the vendor to obtain a lower price. But there almost certainly isn’t any incentive to do that within EDD.
Next, the budget would have been prioritized to include the software. The Workforce and Labor Development budget was $212 million in the previous year. The software that was protecting EDD’s otherwise wide-open doors (and at a cost of less than 1 percent of the budget) was eliminated. The EDD might as well have rolled out the red carpet and attached holiday lights to its ancient mainframe computer, with a sign saying “Here I am! Have at it!” An insanely expensive mistake could largely have been prevented had accountability and appropriate incentives been in place within the EDD.
Just how did the EDD respond to rising claims as well as fraud? In March 2020, they shut off their phones. And as legitimate unemployment claims began to pile up, the department told reporters that they couldn’t say how many claims had been received, nor how many had been processed, nor how many had been denied. All they could identify is the total amount they had paid out. Accountability?
By April 2020, as legitimate claims continued to wait, Governor Newsom announced hiring more than 1,300 new workers to process claims. But it takes months to train new hires to do this, so the new workers repeated answers to “frequently asked questions” on the phone lines. The backlog continued.
By July 2020, Governor Newsom appointed a “strike force” to evaluate the EDD. By September 2020, Beverly Hills police arrested individuals who were buying expensive clothing, jewelry, and cars using EDD debit cards, which electronically provide unemployment benefits. Those arrested showed the police how easy it was to obtain these cards.
Problems include the use of 1980s technology, employees who do not securely handle passwords, certain types of claims being dealt with manually, and the failure of having a systematic approach to even determine how much of a backlog they have. This report paints a clear picture of an organization that has been failing for years.
So what has happened in the last year? The EDD predicted the backlog would be cleared early in 2021. Not exactly. Presently, there are legitimate claimants who have a five-month wait to prove their identity. One man, a construction worker who filled out identity forms as required, was denied, and he sued. The judge found that he indeed provided identify proof, but he still hasn’t been paid after seven months.
He now has no car and is homeless. The EDD’s response? “We are very sorry.”
Well, as the old saw goes, “sorry” doesn’t pay the rent or the grocery bill. What has happened within EDD is unconscionable and inhumane and represents failure of governance on the grandest of scales. If the amount of fraud, which EDD presently has no way of precisely knowing, is $31 billion or more, then California will account for approximately 50 percent of unemployment fraud within the nation.
This is what happens when standard principles of governance—incentives, accountability, and efficiency—are not followed. And sadly, this will not happen until voters demand it. The EDD has been the subject of 10 audits and investigations over the last decade, averaging about one every year. And those didn’t exactly move the needle.
Legislative hearings about the EDD this year have been postponed three times, twice until after the governor recall election, and now a third time because the legislature is finding it difficult to identify a large enough room for the hearings.
Sadly, the state agency that is most responsible for taking care of the most vulnerable Californians during the pandemic is destroying lives. And letting billions of dollars disappear. The EDD needs to be rebuilt from the ground up, and the organization must be run using standard principles of governance, efficiency, and accountability. Otherwise, the catastrophe that has unfolded will happen again. And again.
