Failed Governance Caused California’s $8 Billion Unemployment Fraud

Tuesday, January 5, 2021
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California’s employment department uses computers more than 30 years old with 60-year-old software. This is one reason why taxpayers may be on the hook for $8 billion in fraudulent unemployment benefits.

Those who fraudulently received benefits include a person claiming to be US Senator Dianne Feinstein, and those who filed benefits using the names of incarcerated felons serving murder sentences. Fraudulent benefits were also paid to a 120-year-old man, to an eight-year-old girl, and to a hard-working one-year-old infant, who received $648 in monthly benefits. Benefits were paid to 80 individuals at the same address, and a rapper bragged on YouTube about swindling the system for $1.2 million. Over $1 billion was paid out to people living outside of California.

If you are thinking that even the most ludicrous applications would be approved, you are probably right. Given how fast technology advances, the employment department’s IT system is roughly the equivalent of a horse and buggy with several broken spokes trying to navigate the Indianapolis Speedway.

The fundamental reason why $8 billion was looted from California’s unemployment fund also explains why California’s 50 year-old Oroville dam failed, requiring the evacuation of 188,000 people and $1.1 billion in repairs in 2017; why one in 18 of California’s bridges are structurally deficient; and why toxic substances, including asbestos and lead, continue to plague some of California’s schools.

California doesn’t adequately invest. In anything. California’s failure to invest is a consequence of a failure of governance. It is not that there isn’t money in the budget for investment. There is. Adjusted for inflation, state spending per person has increased by about a factor of five since the early 1960s, when California legislators allocated as much as 25 percent of the state budget to investment.

Today, investment is about four percent of the state budget, not enough to cover depreciation. No wonder that everything seems broken, ranging from dams to roads and water pipes, many of which are more than 60 years old and routinely burst, wasting millions of gallons of water in a state that suffers from chronic water shortages.  

State policy makers have chosen not to invest, and the cost of this failure grossly exceeds the cost of the needed investments that would have prevented these problems from occurring in the first place. But the employment department’s failure to prevent $8 billion in fraud goes beyond antiquated hardware and software. The department makes blatantly obvious mistakes that compound over time, which in turn makes matters even worse. In the last eight months, the department sent out 38 million letters regarding unemployment benefits—in a state with a peak of about 3 million people unemployed—that included the recipient’s social security number. One Californian reported receiving 65 letters addressed to 15 different people who claim to live at her address.

California’s state auditor warned, even before the pandemic, that this practice should be reformed, noting that these letters make identity theft easy. And yet the employment department has doubled down on this hacker’s delight by sending out these letters at a far greater rate than ever before. The department predicted to have this problem solved by August 2021, but given the pandemic, it is likely that this resolution will be delayed.

It is not just the state’s auditor who identified and warned about obvious security problems. State legislators and prosecutors warned that the department needed software upgrades that could have identified many problematic applications recommending that the department cross-check applications to identify obviously fraudulent applications. Cross-checking claims to identify fraud is standard practice in 35 other states.

One department employee personally found five different addresses that were each reporting dozens of applicants. Some of these claims could have initially been flagged just because they did not report a phone number, but despite this omission the claims were processed.

This is not the first rodeo for the department, which chronically has problems with processing fraudulent claims during periods of rapid increases in unemployment claims, including after wildfires and floods. One department employee remarked that “anybody, anywhere, should have seen this coming. It is a mess that shouldn’t have happened. We have one job, which is to help people out who are unemployed. And we’re failing at that mission.” 

As with any failing organization, problems ultimately result from ineffective management. The department director, who had worked at the department for 37 years, since she was 19, was forced out late last year. But she probably should never have been promoted from her job as deputy director, which she had held for six years before this. Any organization needs new ideas that typically come from outsiders to succeed, and the employment department’s chronic failures show just how costly it can be when insiders are routinely promoted into positions that they may not be qualified to hold.

The underlying failure of the state’s employment department, and those of many other state government bureaus, is a complete lack of accountability. Organizational success is only possible when failures are held accountable and when excellence is rewarded. But this fundamental principle of implementing the appropriate incentives within an organization is missing from the state government’s HR playbook. As long as it is, California taxpayers will continue to pay for easily prevented colossal problems.