NEW HIGH RISK AGENCY:
EDD IS HIGH-RISK BECAUSE OF INADEQUATE FRAUD PREVENTION AND CLAIMANT SERVICE, AS WELL AS A HIGH RATE OF OVERTURNED ELIGIBILITY DECISIONS IN ITS UNEMPLOYMENT INSURANCE PROGRAM
BackgroundThe Employment Development Department (EDD) provides billions of dollars in partial wage replacement benefits each year to Californians who need and seek such benefits (claimants). One of EDD’s primary responsibilities is its administration of the unemployment insurance (UI) program. Funded by taxes on employers, the UI program provides temporary financial assistance to unemployed workers who meet specific eligibility requirements, including those workers who were affected by the COVID-19 pandemic.
Beginning in March 2020, a surge in pandemic-related unemployment claims increased EDD’s UI workloads and resulted in changes to federal UI benefit programs, both of which created a greater risk of fraud. In Report 2020-628.2, January 2021, we explained that EDD’s fraud prevention approach during the pandemic was marked by significant missteps and inaction that led to billions of dollars in unemployment benefit payments that EDD later determined may have been fraudulent. Further, we also reported that EDD has been unable to accurately quantify its inappropriate UI payments, contributing to the delayed publication of California’s financial statements for the two most recently published fiscal years and to modified audit opinions on those statements. 2
Moreover, as we described in Report 2020‑128/628.1, January 2021, EDD did not prepare for an economic downturn despite multiple warnings, a key example of which is EDD’s slow efforts to improve its UI call center and overall claimant experience. Because the department did not address longstanding problems with the efficiency of its UI customer service, including its call center, EDD was unable to answer claimant questions and process claims in a timely and accurate manner during the pandemic.
AssessmentEDD is a high-risk agency because of its mismanagement of the UI program. Specifically, EDD is unable to reliably estimate improper payments under the UI program, thus adversly affecting the State’s financial statements as well as impairing efforts to independently evaluate the efficacy of EDD’s own fraud prevention activities. Further, EDD needs to improve customer service to unemployment insurance claimants, while also taking steps to ensure its eligibility decisions are not frequently overturned on appeal. EDD’s mismanagement of the UI program has resulted in a substantial risk of serious detriment to the State and its residents. A high-risk audit may result in recommendations that could substantially reduce the risks we have identified.
Substantial Fraud Risk Exists in EDD’s UI ProgramEDD’s administration of the UI program has resulted in the substantial risk of serious detriment 3 to the State and its residents. In addition to providing temporary wage replacement to unemployed workers, the UI program helps maintain the stability of the state economy during economic downturns. Despite the program’s critical importance, EDD’s management of the UI program has been characterized by significant internal control weaknesses. For example, the program did not block addresses used to file unusually high numbers of claims, and it removed a safeguard preventing payment to individuals who had unconfirmed identities. These inadequate internal controls did not prevent potential fraud during fiscal years 2019–20 and 2020–21 and allowed the payments of potentially fraudulent claims, estimated at tens of billions of dollars, most of which have yet to be recovered.
Contributing to this serious detriment, EDD’s inadequate identification of potentially fraudulent UI benefit payments was also a significant factor leading to modified audit opinions and the delayed publication of California’s Annual Comprehensive Financial Report (ACFR) for fiscal years 2019–20 and 2020–21, which the State Controller published in February 2022 and March 2023, respectively. Further, our contractor responsible for conducting the federal compliance component of the Single Audit found areas of material weakness and noncompliance in EDD’s administration of the UI program during the pandemic, which led the contractor to issue an adverse opinion in the State’s fiscal year 2020–21 Federal Compliance Audit, published in April 2023, indicating that the State did not comply in all material respects with specific program requirements that could have a direct and material effect on the program. The delayed publication of the ACFRs and related audit opinions substantially delayed the public’s ability to gain an understanding of California’s financial position. The impacts on the State’s financial reporting could also be a contributing factor toward any potential decision to lower the State’s credit rating. We discuss our additional concerns about late financial reporting that may adversely affect the State’s credit rating.
EDD has not taken adequate corrective action to prevent the substantial risk of serious detriment to the State and its residents. Corrective action is adequate when it prevents a risk—such as the risk of fraud—from presenting a substantial risk of serious detriment. Because the potentially fraudulent payments have already occurred, have not been fully identified, and have largely not been recovered, EDD’s corrective action is not adequate. Nevertheless, EDD deserves credit for taking some steps to strengthen its internal controls, such as partnering with vendors and data scientists to identify potentially fraudulent claims and to refer those cases to law enforcement agencies for further investigation and potential criminal prosecution, but significant work remains. For example, EDD cannot effectively measure its progress at addressing potentially fraudulent payments because it is unable to accurately determine how many improper payments it has made. We noted this issue in Report 2021-001.1, March 2023, the report that reviewed internal controls and compliance. In fact, we found that EDD’s estimate of potentially fraudulent payments omitted certain payments to claimants who made false statements to obtain benefits and also incorrectly included valid claims for benefits. EDD has established a process to pursue recovery of ineligible payments, but until it identifies all inappropriate transactions, it cannot effectively manage that process or allocate appropriate resources to pursuing recovery. Thus EDD’s current corrective action remains insufficient and is a contributing element to our designation of the agency as high‑risk.
EDD Has Not Provided California Residents With Sufficient Customer Service, Resulting in Significant Challenges to Obtaining UI BenefitsLike the fraud risk noted above, EDD’s handling of other components of the UI program also presents a substantial risk of significant detriment to Californians. EDD has faced longstanding efficiency problems in providing customer service to UI claimants. During the pandemic, millions of Californians were required to wait long periods to receive UI benefits or get answers to questions about their UI claims, and EDD continues to struggle to pay claimants in a timely manner. EDD’s customer service for the UI program has resulted in the impaired delivery of an important government service.
EDD has taken action to begin addressing customer service deficiencies in its UI program; however, those actions are not yet adequate. For example, as of April 2023, EDD had implemented many of our January 2021 recommendations and has since improved performance, but claimants still experience difficulties contacting EDD and being paid on time. Between January and May 2023 individuals called EDD on average between three and eight times a week trying to get help on their claims. In another example, according to statistics published by the U.S. Department of Labor (DOL), although EDD’s timeliness of first payment on a UI claim has improved since the worst of the COVID-19 pandemic, it does not yet meet DOL’s acceptable level of performance. Specifically, in the first six months of 2023, EDD paid between a high of 86 percent of claims and a low of 81 percent of claims within the time frame established by DOL, and it has not yet met DOL’s 87 percent acceptable level of performance. Consequently, these improvements are not sufficient to prevent the impaired efficiency and effectiveness of EDD’s UI program from presenting a substantial risk to California residents.
Many of EDD’s UI Eligibility Decisions Are Not Upheld on AppealApart from the potentially fraudulent UI payments that EDD made during the pandemic, which it has estimated to be in the tens of billions of dollars and which continue to affect the State’s financial reporting, EDD’s eligibility decisions are frequently overturned during appeal and have resulted in the substantial risk of serious detriment to California residents. Specifically, EDD’s improper decisions regarding UI benefits have required some UI claimants to face even longer delays than are typical. From 2017 through 2022, about half of the issues in UI claims that claimants appealed were ultimately overturned in favor of the claimant. This rate of overturned decisions is consistent with the high rate of overturned decisions we noted in Report 2014-101, August 2014. Although EDD wants to reduce the percentage of overturned appeals, it asserts that one of the reasons for the high rate of overturned decisions is that claimants can provide new information during their appeal that was not furnished to EDD during the claim filing process, leading many appeals to be decided in the claimants’ favor. Nevertheless, as of March 2023, California had the third highest reversal rate in the nation. These improper eligibility decisions can serve as unnecessary obstacles to claimants’ right to benefits and can result in a significant reduction in the overall effectiveness of the UI program. Thus they present a substantial risk of serious detriment to the State and its residents.
EDD has not taken adequate steps to prevent improper denials of UI benefits. Although EDD says that it is evaluating the UI appeals process in hopes of reducing the high rate of issues overturned on appeal, it has not taken sufficient action to address this problem, as evidenced by the fact that approximately half of the issues that claimants appealed between 2017 and 2022 were overturned, as was the case when we previously reported on this issue in August 2014. Thus, these actions are not sufficient to prevent the impaired efficiency and effectiveness of EDD’s UI program from presenting a substantial risk to California residents.
An Audit May Lead to Policy Changes That Significantly Reduce These RisksAdditional audit work by the State Auditor may assist EDD in mitigating the risk presented by its handling of the UI program. In particular, a high-risk audit would provide independently developed and verified information regarding EDD’s management of the UI program and its challenges. A high-risk audit would also include analyses that serve as the basis for recommendations to assist EDD in resolving the risks presented by its management of the UI program. For example, an audit could evaluate EDD’s efforts to identify potentially fraudulent or improper UI claims, which would lead to recommendations on how to effectively address the associated payments and properly account for them in a timelier manner. A deeper examination of EDD’s UI claimant service and its high rate of denied UI claims overturned on appeal could result in recommendations on how to improve the UI claims process and how to reduce the high rate of denied UI claims overturned on appeal.
EDD's response, and State Auditor’s comments