May 08,2024

Crapo, Cassidy Demand Transparency on DOL’s New Policy Forgiving Julie Su for Losing $32 Billion to Unemployment Insurance Fraud

Washington, D.C.--U.S. Senate Finance Committee Ranking Member Mike Crapo (R-Idaho) and U.S. Senate Health, Education, Labor, and Pensions (HELP) Committee Ranking Member Bill Cassidy, M.D. (R-Louisiana) raised concerns that the U.S. Department of Labor’s (DOL) December 2023 guidance could put U.S. taxpayers on the hook for the approximately $32.6 billion the State of California lost to fraud during DOL Acting Secretary Julie Su’s tenure as California’s Labor Secretary.  The guidance transfers the authority to decide when the federal government forgives lost federal unemployment insurance (UI) funds to California and other states.

In a May 1 U.S. House Education and the Workforce Committee hearing, Julie Su stated that the guidance only allows states “to waive non-fraudulent [UI] overpayments.”  However, the guidance allows states to apply their own finality laws to determine which lost funds they are required to pay back with nothing specifically prohibiting states from waiving funds lost to fraud. 

Specifically, California’s losses in federal UI funds due to fraud have been estimated to be as high as $32.6 billion, as much as one third of the nation’s total UI fraud.  Concerningly, the California State Controller found that the state “had inadequate control over its financial reporting for federally funded unemployment insurance benefits … [the State] is unable to provide complete and accurate information” for federally funded UI accounts.  This inability to definitively account for how much was lost to fraud means that it is questionable how fraud can be a limiting factor in the Employment Development Department (EDD) determination of how much of the lost funds should be forgiven. 

As California’s Labor Secretary at the time of the widespread fraud, Julie Su was directly in charge of EDD, the agency tasked with distributing UI payments to state residents. At the direction of Su, EDD waived basic fact-checking fraud prevention requirements for UI payments. This was in contradiction to DOL guidance, which clarified these protection requirements “must be adhered to” and were “critical to the operations of the UI-related CARES Act programs.” As a result of lax oversight, California lost an estimated $32.6 billion in fraudulent UI payments. In 2022, the California State Auditor found that, “[d]espite repeated warnings, EDD did not bolster its fraud detection efforts until months into the pandemic, and it suspended a critical safeguard.” 

The senators requested information from DOL on if and how it ensured California took all proper steps to recover these fraudulently paid funds.  

“Under your leadership as Acting Secretary, DOL issued Unemployment Insurance Program Letter No. 05-24 stating that, to allow states to ‘be forward looking,’ the agency will ‘defer to states to apply their finality laws to the CARES Act UC programs,’” wrote the senators. “DOL’s guidance therefore appears to allow California to shift the consequences of a still unknown amount of federal funds that was lost under your leadership as Secretary of LWDA to the American taxpayer.” 

Read the full letter here or below.  

Dear Acting Secretary Su:

We write to express our concern that the U.S. Department of Labor (DOL) may be preventing the recovery of federal unemployment insurance funds lost to fraud by California’s Employment Development Department (EDD).

While serving as Secretary for the California Labor & Workforce Development Agency (LWDA),  you waived basic fact-checking and fraud prevention requirements for federal pandemic-related unemployment insurance (UI) payments.[1] DOL guidance later clarified that such requirements “must be adhered to” and are “critical to the operations of the UI-related CARES Act programs.”[2] Even California’s own state auditor found that “[d]espite repeated warnings, EDD did not bolster its fraud detection efforts until months into the pandemic, and it suspended a critical safeguard.”[3] As a result of EDD’s failures, including to verify claimants’ identities, it is estimated to have mistakenly paid approximately $32.6 billion in fraudulent UI payments during the pandemic.[4] This is more than double the annual budget of DOL.

Under your leadership as Acting Secretary, DOL issued Unemployment Insurance Program Letter No. 05-24 stating that, to allow states to “be forward looking,” the agency will “defer to states to apply their finality laws to the CARES Act UC programs.”[5] As the guidance notes, the terms of the agreements that states entered to administer federal pandemic UI programs require them to take “such actions as reasonably may be necessary to recover for the account of the United States all benefit amounts erroneously paid.”[6] EDD, which paid out approximately $32.6 billion in fraudulent claims, determined that it has taken all such actions to collect monies lost to fraud that are “reasonably necessary,” and therefore California’s finality laws should be applied and the lost amounts should be forgiven. However, the California State Controller noted that because EDD “had inadequate control over its financial reporting for federally funded unemployment insurance benefits … [the State] is unable to provide complete and accurate information” for federally funded UI accounts.[7]

DOL’s guidance therefore appears to allow California to shift the consequences of a still unknown amount of federal funds that was lost under your leadership as Secretary of LWDA to the American taxpayer. California’s 2022 Annual Comprehensive Financial Report maintains that “[o]nce federal approval is received, approximately $29.0 billion in federal liabilities will be removed from future financial statements in addition to a portion of the remaining $26.0 billion in federal liabilities, which would also be subject to state finality laws.”[8] This action by California is especially concerning, given the State’s own unemployment insurance law indicates that its finality laws “shall not apply in any case of fraud, misrepresentation or willful nondisclosure.”[9]

We ask that you answer the following questions, on a question-by-question basis, and provide all responsive documents requested by May 22, 2024:

  1. California’s 2022 Annual Comprehensive Financial Report notes “EDD is waiting on final federal approval of EDD’s request as indicated in the February 2024 letter before the event [applying finality laws to CARES Act claims] can be recognized in financial statements as a forgiveness of debt.”[10]
    1. What is the current status of DOL’s review of California’s request to apply finality laws to outstanding liabilities incurred to the federal government?
    1. What steps is the DOL taking to ensure that California’s application of finality law is not being applied to suspected or confirmed benefit claims involving fraud, misrepresentation, or willful nondisclosure?
  1. Detail all actions of which DOL is aware that California’s EDD has taken to recover all fraudulently paid UI funds provided by the federal government through the CARES Act.
    1. Does DOL believe such steps constitute all reasonably necessary actions to recover those funds?
    1. If not, what additional steps does DOL believe EDD must undertake to recover the lost funds?
  1. Describe all retroactive actions DOL required the State of California to implement pursuant to DOL’s authority under the CARES Act.
    1. Prior to issuing Unemployment Insurance Program Letter No. 05-24, did the State of California successfully implement all such retroactive requirements?
    1. If not, which requirements did the State of California fail to implement? 
  1. Describe any (1) modernization and (2) anti-fraud efforts or recommendations DOL has advised the State of California to implement using funds from the American Rescue Plan Act of 2021.
    1. Prior to issuing Unemployment Insurance Program Letter No. 05-24, did the State of California successfully implement all such modernization efforts?
    1. If not, which efforts did the State of California fail to implement? 
  1. Since 2020, how much funding did the State of California receive from the DOL to recover UI fraud under the American Rescue Plan Act and the CARES Act?
  1. Have you discussed the funds lost to UI fraud administered by EDD with any California state government officials since becoming Deputy Secretary of Labor on July 13, 2021?
    1. If so, please detail with whom you discussed UI fraud losses, when you had that discussion(s), and a general summary of what was discussed.
    1. Provide all written correspondence or evidence of any scheduled conversations regarding funds lost to UI fraud in California since 2020.
  1. Please provide all correspondence between the DOL and California state government officials regarding Unemployment Insurance Program Letter No. 05-24.

Thank you for your prompt attention to this important matter.