The California State Auditor is required by Government Code section 8546.5, to report to the California Governor and State Legislature about statewide issues and state agencies that represent a high risk to the State or its residents. It’s latest report published on August 24, 2023 concludes that the Employment Development Department meets the criteria to me moved to the High Risk list, and two other agencies, the California Department of Technology, and the Department of Health Care Services, should remain on the High Risk list.
In the Auditor’s prior January 2021 Report it 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.
The new 2023 Auditor’s assessment said that “EDD 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.”
“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.”
“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.”
The Auditor “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.
“Apart 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.”
” 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.” The Auditor added that “as of March 2023, California had the third highest reversal rate in the nation.”