Editor’s note: The first part of a series of articles investigating California’s unemployment crash. Subsequent parts will print in future editions of the Record-Bee.
By the first COVID summer, no one knew who was who. In Nigeria, an oil company IT engineer was allegedly filing for unemployment in California and 16 other states with a slew of fake Gmail accounts. At a desert state prison in Imperial County, an inmate used personal data bought on the dark web to funnel unemployment money to his wife for a $71,000 Audi and a down payment on a house. Along the Pacific coast in Carlsbad, Danny Ramos was one of millions of real California workers realizing that something was going very wrong, as weeks or months went by without the unemployment benefits they badly needed.
“It felt,” Ramos said, “like this was just a big old scam.”
As California unemployment claims spiked 2,300% in the early months of 2020, the state’s top labor officials ricocheted from crisis to crisis, internal communications obtained by CalMatters show. Emails and emergency meeting notes detail how the long-troubled California Employment Development Department became the focal point — and then the punching bag — for state efforts to stave off economic collapse while contending with a historic wave of fraud.
“This is bigger than anything we have ever experienced,” then-EDD Director Sharon Hilliard wrote in an email the day before California shut down in mid-March 2020. “Everybody is moving at the speed of light.”
But soon, Bank of America, the EDD’s unemployment debit card contractor, warned that it might not have enough plastic to print the millions of cards that the agency needed. An assistant in Gov. Gavin Newsom’s office emailed the state’s then-Labor Secretary Julie Su asking what to do about someone fraudulently using his Social Security Number to file for unemployment. A staffer for San Francisco Assemblymember Phil Ting pleaded for help for a constituent so distraught about “the runaround” from EDD that she was suicidal.
All across the country, states were dealing with their own versions of this race to prevent a modern-day Great Depression by getting money to laid-off workers, fast. Nowhere was the challenge more daunting — and the fallout more widespread — than in California.
A year-long CalMatters investigation found that the EDD was primed for disaster by years of failing to heed red flags, stalling reforms and abruptly abandoning a pre-pandemic effort to get ahead of exploding online fraud — issues that rose to the top of political agendas and budgets around recessions, but were never really fixed as governors, legislators and federal regulations changed. Once it all boiled over in the spring of 2020, California got the worst of both worlds: tens of billions of dollars lost to fraud, and workers who lost their financial stability, their homes or, in extreme cases, their lives.
“It’s almost like a pendulum, where EDD has opened up the door, and fraud’s happening,” former California Auditor Elaine Howle told CalMatters this summer. “And then, ‘Oops, oh my God, there’s fraud. Let’s freeze all these accounts.’”
Amid these twin failures of rampant fraud and financial harm to real workers, the EDD and top unemployment contractors Bank of America and Deloitte kept raking in millions of dollars from the state’s troubled system. The bank paid the EDD roughly one-third of the nearly half a billion dollars in unemployment debit card revenue generated from March 2020 through December 2022, according to state data requested and analyzed by CalMatters. The bank told state lawmakers that it still lost $178 million on the contract in 2020 due to card fraud and extra call center costs, but refused to provide CalMatters numbers for later years of the pandemic.
No one disputes that other states also struggled to keep up with the deluge, especially when it came to a first-of-its-kind emergency federal program for self-employed workers. States including neighboring Arizona and Nevada at times saw more unemployment claims than they had workers in the state. Despite being home to Silicon Valley, California was one of many states that struggled with decades-old technology, long processing delays and trouble training new workers while triaging a crisis.
Still, California’s system lagged states with much smaller unemployment budgets in several key ways. It is one of only three states that has failed to offer a direct deposit option for jobless benefits, setting the scene for chaos when EDD debit cards briefly became a scammer status symbol. It’s one of four states that has not changed its unemployment tax system since the 1980s, leaving California’s trust fund in the worst shape of any state’s when the pandemic hit — fueling a rapid descent into more than $19 billion of debt to the federal government.
When it comes to heading off fraud, California was in the minority of states that didn’t cross-check unemployment rolls with prisons, state audits found. The EDD was also slower than some other big states to implement new anti-fraud measures — and, once it did, took an approach so broad that state watchdogs say it trapped hundreds of thousands of real workers.
Those inside the EDD during the early days of the pandemic remember the shock as the whole picture came into focus. Job losses quickly blew past all projections for normal recessions, said Greg Williams, the agency’s former deputy director of Unemployment Insurance.
“The best way I can describe it,” Williams said, “is like going to a gunfight with a squirt gun.”
In the decades leading up to the pandemic, tragedy first propelled the EDD from an in-person, paper-based system to a network of call centers and online services that have repeatedly failed under pressure. The agency has lagged federal standards for timely payments and benefit decisions for many years since 2002. An effort to get ahead of online fraud in the 2010s was abandoned even as the risk of cyberattacks mounted across industries.
When the floodgates opened during the pandemic, California took months to tighten application processes, in some cases allowing scammers to more easily file claims than real workers. The EDD cut off benefits for more than 3 million people who didn’t send in requested documents while its offices were piled high with unopened mail. Still, the agency sent out 38 million letters with full Social Security Numbers years after it promised to stop the practice.
The saga set off a political firestorm, adding fuel to the unsuccessful COVID-era campaign to recall Gov. Gavin Newsom. It is still reverberating in a bitter business-versus-labor fight over President Joe Biden’s attempt to make former California labor chief Su his U.S. Secretary of Labor — a move that has drawn fierce partisan opposition. In July, Su, who continues to be the acting Labor Secretary, became the longest unconfirmed nominee whose own party controls the White House and the U.S. Senate.
CalMatters repeatedly attempted to contact Su and Newsom about the state’s pandemic unemployment breakdown, along with former EDD directors Hilliard and Patrick Henning Jr. None of them agreed to an on-the-record interview.
Today, EDD Director Nancy Farias maintains that “we’re no different than any other state.” Shifting federal guidelines for emergency unemployment programs complicated the agency’s response, she said. Once California did start using “fraud filters” to scan for suspicious claims in the fall of 2020, Farias told CalMatters that the EDD took other states’ advice and was aggressive, setting its filters “on the high end” of what the technology could do.
Ultimately, state reports have found that 5 million Californians saw unemployment payments delayed during the pandemic, and at least 1 million saw benefits improperly denied. A backlog of unprocessed claims peaked at around 1.6 million. Hundreds of thousands more workers were cut off by debit card freezes that Bank of America and the EDD blamed on each other.
“People did get caught up, and you know, to be fair, it took us a while,” Farias said of the state’s pandemic unemployment backlog. “But we did go through those claims.”
About 130,000 California workers are still fighting long unemployment appeals cases, and several class-action lawsuits are ongoing against the EDD and Bank of America. To this day, no one knows how much money the state lost to pandemic unemployment fraud; government and industry estimates range from around $20 billion to $32 billion. Some officials say it’s unlikely states will ever know how much was lost to fraud or “improper payments” — a broader government term for intentional fraud and other payment errors — let alone be able to claw back more than a fraction of missing funds.
In the absence of clear answers, the agency now planning a historic $1.2 billion overhaul of California’s job safety net has been left to grapple with big questions. How could the EDD have been so good at giving money to scammers, but so bad at getting funds to real workers? Why didn’t the state and contractors who were making money off of the flawed system do more to fix the problems, faster? And now, who will pay for the fallout?
“My whole life just went upside-down,” said Ramos, the San Diego construction worker, who told a state appeals judge he was forced to separate from family and leave the state for a cheaper rental in Tecate, Mexico, while waiting for unemployment benefits that never came. “They say money doesn’t buy happiness, but poverty sure as hell causes grief.”
The COVID unemployment backlog begins
On March 18, 2020, the day before Newsom first ordered Californians to stay home to slow the spread of the coronavirus, his then-Labor Secretary Su wrote an email to EDD Director Hilliard and her own deputies at the state’s higher-ranking Labor and Workforce Development Agency.
She wanted to know if the state’s unemployment system was ready for whatever came next.
“Do we need to do anything to shore it up at this time to prevent problems (delays or worse — system crash)?” Su asked. “I need you to work together to make sure we are ok.”
At first, the EDD was optimistic: “System is performing fantastic,” the agency’s IT director wrote the next day.
Less than 24 hours later, the scale started to sink in. Su and Hilliard exchanged messages on March 20 about the pros and cons of expediting unemployment approvals by waiving some eligibility requirements. Su wanted to know what keeping the checks in place would mean for processing times.
“How long would it take to get payments out,” Su asked, “and what would the backlog situation likely be?”
Hilliard answered: “It would be months if not well into next year…. Makes my (sic) shiver just thinking about it.”
A bigger challenge was still to come.
In May 2020, California rolled out the unprecedented federal Pandemic Unemployment Assistance program for self-employed workers, which the EDD later blamed for 95% of the state’s COVID-era fraud.
“No,” state websites instructed applicants for the new federal program. “You do not need to submit any documents to the EDD.”
This is where federal officials tasked with tracking what happened to trillions of dollars in nationwide COVID relief spending now say things went awry, both in California and elsewhere. There should have been middle ground — at least doing faster and more obvious checks with prison rolls, or sharing claim information between states — said Michael Horowitz, inspector general of the U.S. Department of Justice and chair of a federal Pandemic Response Accountability Committee.
“They set up a false choice between, ‘Get the money out the door as soon as you can send it out,’ versus, ‘Let’s spend a week matching data,’” Horowitz told CalMatters. “Not months, but a week matching data. And that’s the crux of the problem.”
The EDD maintains that the feds did not provide enough guidance at the time, “leaving states to fend for themselves,” Farias later wrote to a U.S. House committee.
What happened instead as jobless claims flooded in, state reports would later find, was a fateful split in how they were handled by the EDD. About 60% of claims — including many later suspected to be fraud — sailed through an automated application process, a state EDD task force appointed by Newsom found. The application for the emergency federal program for self-employed workers was particularly fast and easy to game, state audits and district attorneys found (sample successful applicant: “Poopy Britches”).
The other 40% of unemployment claims were flagged for manual review for a wide range of reasons, the task force found: typos, nicknames, language barriers, mismatched dates, hyphenated last names, middle initials instead of full middle names, addresses “too long to fit in the database” used by the EDD and so on.
The catch: It was sometimes easier for scammers to get through the automated process than it was for real people. That’s because real people are prone to human error, especially when typing on mobile phones or using outdated online systems.
More proficient scammers, by comparison, use software to copy precise stolen data and auto-file applications, often passing verification even when applications were checked against other government databases.
“Fraudulent applications using these sources will not get flagged,” EDD task force co-leader Jennifer Pahlka wrote in her recent book “Recoding America”. “The data entered on the application will exactly match the sources the EDD checks against, because it is usually a copy of precisely that data.”
Cashing in on EDD contracts
The fraud panic was just beginning, but the chaos that followed would prove to be a money-maker for EDD contractors. That is, until some of them got targeted by scammers, too.
Deloitte — which the state previously paid more than $152 million for projects including an EDD computer modernization effort that state reports found faltered during the pandemic — won another $118 million in no-bid emergency EDD call center and tech contracts after March 2020.
Deloitte spokesperson Karen Walsh said in a statement that the consulting firm has “successfully modernized dozens of state labor and workforce systems,” and that shifting regulations in the years before COVID “required changes” to its work with EDD that increased the scope, time and financial amount of its contracts. During the pandemic, Walsh said, Deloitte helped “deliver critical federal pandemic benefits to millions of California families.”
Things between the EDD and payment contractor Bank of America, meanwhile, were tense. The state and the bank sparred in the early days of the pandemic over how many benefit debit cards it was physically possible to print and provide customer service for.
“They are telling us their limit to issue new cards is 22,500 per night,” EDD Director Hilliard wrote on March 26, 2020. “Starting this Sunday we expect about 465,000 new claimants that will need a card.”
Su was adamant that the bank do more, replying, “We want NO DELAYS in payment of benefits.”
Weeks of emergency phone calls followed. At one point, a plan was hatched, then scrapped, for Bank of America to mail paper checks. State labor officials asked why the EDD didn’t have direct deposit, or online payments similar to Apple Pay’s digital cards. By May, a bank executive wrote that capacity had increased to up to 300,000 cards per day, and that more than 3.8 million cards were active. The two sides bickered about legal and financial agreements.
“This is painful,” one EDD administrator wrote in a June 2020 thread about contract terms.
Still, the mess was minting money for both parties.
Bank of America collected more than $492 million in EDD debit card fees from March 2020 to December 2022, state financial records provided to CalMatters show. Per the state’s debit card contract, the bank kicked back to the EDD nearly $187 million during that same time, which the EDD said was used to help “offset the cost” of administering the state’s multi-billion-dollar unemployment and disability programs.
Under fire for fraud and delays that would plague the system, Bank of America later told the state Senate Banking Committee that, despite the nine-figure revenue, the program was a money-loser, costing $927 million in expenses compared to $687 million in revenue from January 2011 through December 2020. The EDD, the bank argued, was at fault for the system’s security weaknesses.
“The vast majority of fraud occurs when criminals who are ineligible for benefits improperly enroll in the program by creating accounts using false identification or stolen identities,” Brian Putler, a Bank of America government relations executive, wrote to the committee. “The enrollment and cardholder verification processes are controlled by EDD, not by the Bank.”
In mid-2021, the bank went a step further, telling state lawmakers in public statements that it wanted out of its expiring EDD contract; California extended it anyway, in continuity. The following year, the bank was fined $225 million by federal financial regulators for what they called “botched disbursement” of state unemployment funds in California and elsewhere.
The finger-pointing was just starting. In the months that followed, a long-brewing battle would come to a head over whether the state was way too concerned, or not nearly concerned enough, about unemployment fraud.
“The irony is, we went into this pandemic having created a culture in places like EDD of extreme sensitivity to fraud, when in fact it wasn’t that big of a problem,” Pahlka told CalMatters. “And then created the conditions under which we made fraud a really, really big problem.”
A fraud tech boom — then bust
Five years before anyone had heard of COVID, Steve Sheehan discovered a time bomb lurking in the state’s unemployment system.
It was late 2014 when his team of fraud investigators at the EDD started rolling out fraud detection software from a local tech startup called Pondera Solutions.
At his desk at EDD headquarters lofted above the Capitol Mall, Sheehan recalls wading through up to 300 alerts per day for potential unemployment fraud. They flagged possible claims by ineligible prison inmates, on the state’s new unemployment debit cards and applications coming from overseas IP addresses in places like Israel, Uruguay and Pakistan.
“Were we aware that the fraud was out there? Yeah,” said Sheehan, a 30-year EDD veteran who retired in late 2018. “We didn’t put safeguards in place and made California an easier target, so people would come here to do their fraud.”
For a brief period in 2014 and 2015, the EDD used the experimental deal with Pondera as a centerpiece of its effort to finally modernize California’s antiquated unemployment system.
