The 2022-23 Budget: Assessing Proposals to Address UI Fraud
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The 2022-23 Budget:
Assessing Proposals to Address
Unemployment Insurance Fraud
FEBRUARY 2022 (Updated May 16, 2024)
Summary. The 2022-23 Governor’s Budget on top of all UI payments. Under the PUA program,
includes $29.8 million General Fund at the self-employed workers could receive payments
Employment Development Department (EDD) for retroactively—so-called “backdating”—to the
six third-party contracts to prevent future fraud in beginning of the pandemic, even if they applied
the state’s Unemployment Insurance (UI) program. for PUA benefits later. Although these temporary
(These contracts are in addition to 13 other programs were 100 percent federally funded, the
third-party contracts found in the department’s state was responsible for their implementation. These
“vendor services” budget change proposal.) With efforts added to the already high workload at EDD.
the six fraud contracts, the administration proposes Under Longstanding EDD Practices, Workers
to layer additional anti-fraud requirements and Must Pass Multiple Identity Tests. When an
processes on top of the major fraud improvements unemployed worker submits a claim for UI payments,
EDD took during the pandemic. In this brief, we EDD confirms the worker’s identifying information
outline the challenges EDD faced paying legitimate with the federal Social Security Administration and
UI claims and preventing fraud during the pandemic, the state Department of Motor Vehicles. EDD also
review steps EDD has taken to improve since then, crossmatches the amount the worker reports in prior
and assess whether additional anti-fraud efforts are wages against employer-provided salary data. EDD
warranted at this time. is able to quickly process many claims using these
automated steps. In many cases, however, a worker’s
BACKGROUND identity cannot be confirmed to EDD’s standards,
often due to incomplete information or minor
Unemployment Benefits discrepancies. These cases require workers and/or
During the Pandemic employers to provide EDD with additional information.
Pandemic Led to Sudden Spike in UI Claims... Collecting this information involves extensive EDD
The pandemic pushed unemployment in California staff time. As a result, these “manual claims” take
to record highs. Under normal conditions, about much longer to process than automated claims.
40,000 California workers file for UI each week. Time-Consuming Staff Process to Confirm
During the first two months of the pandemic, an Identity Led to Backlog During Pandemic.
average of 500,000 workers were filing each week. According to the administration, EDD redirects
This amount was five times greater than the peak about 40 percent of all UI applications to manual
seen during the Great Recession and 15 to 25 times staff processing. At the outset of the pandemic,
greater than typical workload at EDD. Figure 1 on EDD could manually process about 2,000 claims per
the next page shows a timeline of this and other key day. In May, June, and July 2020, EDD redirected an
events related to UI during the pandemic. average of 24,000 claims to manual processing each
…At the Same Time That New Federal day. This dramatic increase in manual processing led
Benefits Were Launched. In response to the to a backlog of claims waiting to be reviewed before
pandemic, the federal government expanded the UI payments could be made. Backlogged claims
UI program to include self-employed workers—under were delayed at least three weeks and in many cases
the Pandemic Unemployment Assistance (PUA) several months. At its peak in September 2020, the
program—and provided an additional $600 per week backlog reached 1.7 million claims.
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At the Same Time, New Federally
Figure 1
Funded UI Benefit Hit by Fraud. At the
same time that the backlog of delayed
Time Line of Key Events During the Pandemic
UI claims was increasing, fraudulent activity
in the new federal benefit program for
2020
self-employed workers spiked. Figure 2 March
shows the sudden and unexpected increase Governor declares state of emergency due to COVID-19 pandemic.
in claims for the PUA program during the Widespread business closures, layoffs, furloughs, and hours reductions.
early summer of 2020. (The figure also March through July
shows claims for regular state UI benefits, UI application workload 15 to 25 times higher than normal levels.
which did not show this same spike.)
April
This fraudulent activity affected UI systems Following USDOL guidance, state begins to fast-track UI claims by
throughout the country. In fact, many states issuing payment before confirming final eligibility.
were hit harder than California. For instance,
July
in Arizona, Georgia, Hawaii, Nevada, and
Governor forms strike team to address delays at EDD. Benefit delays
Rhode Island, more claims for UI were ranged from four weeks to several months.
submitted in 2020 than there were workers July and August
in those states. The new program was the EDD identifies high level of suspected fraud in federal PUA program.
target of fraud for several reasons. First, the
federal program presented a larger financial September
incentive to commit fraud. Specifically, EDD takes steps to limit fraud exposure, including not automatically
backdating claims or allowing multiple claims at same address.
federal law allowed self-employed workers
to backdate new PUA claims to when Strike team issues exhaustive, critical assessment of delays at EDD.
they lost work, meaning a first fraudulent
EDD begins implementing key strike team recommendations: two-week
check could total several thousand dollars. reset and setting up a new identity verification tool—ID.me.
Second, whereas EDD typically verifies
Backlog of delayed UI claims peaks at 1.7 million delayed claims.
claims against employer payroll records, it
could not do so for self-employed workers. October
Third, former employers typically provide EDD begins implementing other recommendations from strike team,
including recommendation to revisit its approach to fraud prevention
a check on the validity of workers’ claims,
but this extra level of review did not apply to
December
self-employed workers. EDD hires Thompson-Reuters to assign “fraud score” to pre-ID.me
claims. Based on fraud scores, EDD suspends 1.1 million claims with
State Steps to Address no advanced notice. At least 600,000 of the 1.1 million claims were real.
Backlog and Fraud California State Auditor releases two EDD audits, pointing out that
EDD Took Early Step to Proactively EDD must redetermine eligibility for claims that were fast-tracked early
the pandemic.
Limit Fraud in Federal Programs.
After investigating the spike in claims shown 2021
in Figure 2, EDD stopped automatically
July
backdating PUA claims. This step closed Due to long delays for scheduling eligibility interviews, EDD begins
off the opportunity for fraudulent actors to paying benefits while awaiting eligibility interviews rather than delaying
benefits until after interview.
receive a large initial payment. EDD notified
the U.S. Department of Labor (USDOL) of September
their intent to stop backdating PUA claims Temporary federal benefits for self-employed workers and add-on
UI payments for all recipients end.
to eliminate this financial incentive. Shortly
thereafter, USDOL advised all states to take
a similar precautionary step. Following this UI = Unemployment Insurance; USDOL = United States Department of Labor; EDD = Employment
Development Department; and PUA = Pandemic Unemployment Assistance.
action, fraudulent PUA claims fell dramatically.
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Governor’s Strike Team Investigates Backlog surge in workload during the pandemic. In addition,
and Issues Recommendations. In July 2020, according to the strike team, the state’s manual
the Governor announced the formation of a “strike review process failed to meaningfully capture
team” to immediately investigate the claims backlog fraudulent claims—for each 500 claims EDD staff
and to make improvements at EDD. The strike flagged for more thorough review, one fraudulent
team was overseen by the state’s Government claim was uncovered.
Operations Agency. In September, the strike team Strike Team Recommends New, Rational
published an exhaustive, critical assessment Approach to Managing Fraud. Given these
of delays and fraud at EDD and issued key findings, the strike team recommended that
recommendations to address these elements. EDD reassess its approach to preventing fraud.
According to Strike Team, Focus on Fraud Specifically, the strike team recommended that
Provided Little Benefit and Led to Backlog. “[…] fraud prevention and detection practices
The state’s longstanding institutional focus on fraud must be supported by data and evidence and
led staff to manually scrutinize roughly 40 percent that justifications for new and existing anti-fraud
of all UI applicants’ identity information. In the practices include an analysis not only of their
words of the strike team report: “In interviews effectiveness, but also tradeoffs and unintended
and observations, stories and anecdotes about consequences of these practices, including adverse
fraud and/or suspected fraud were often used to impact on the experience of all claimants.”
explain why EDD could not act quickly to avoid the EDD Responded to Strike Team by Setting
growth of the backlog. […] There has developed up Automated Identity Verification Tool...
at EDD a culture of allowing fear of fraud to trump In response to the administration’s strike team
all other considerations…” The department’s assessment, EDD improved its identity verification
longstanding institutional design and anti-fraud process by instituting a third-party software—
emphasis prevented the department from ID.me. The ID.me service verifies that workers are
adequately adjusting its procedures to manage its who they say they are by asking them to take a
Figure 2
State Took Steps to Address Fraudulent UI Claims in Federal Programs
New Weekly Applications
450,000
EDD takes proactive steps to limit fraud.
400,000
Federal PUA Program EDD adds ID.me to UI application.
350,000 Regular State UI Program
300,000
250,000
200,000
150,000
100,000
50,000
5/2/2020 5/30/2020 6/27/2020 7/25/2020 8/22/2020 9/19/2020 10/17/2020 11/14/2020 12/12/2020
UI = Unemployment Insurance; PUA = Pandemic Unemployment Assistance; and EDD = Employment Development Department.
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photo or video of themselves that is then digitally with Akamai to detect and prevent organized,
compared to the documents in their application. automated cyber-attacks—known as “bot
The continued decline in new PUA claims after attacks”—that could disrupt or disable EDD’s
the state instituted ID.me—as shown in Figure 2 benefit application website.
above—suggests that ID.me may have further • Business Intelligence Competency
reduced the viability of fraudulent claims. Center Consulting. Consulting contract
…But Took Other Actions Inconsistent with Executive Information Systems to
With Strike Team Call to Reassess Stance improve reporting of potentially fraudulent
on Fraud. While ID.me seemed to move EDD in activity and crossmatching that data with
the right direction, the department continued to Department of State Hospitals patient data
take actions inconsistent with the strike team’s or California Department of Corrections and
recommendation to assess the effectiveness and Rehabilitation records.
potential unintended consequences of anti-fraud • Fraud Services. Rehiring Accenture to
steps. In December 2020, EDD hired Pondera, continue advising EDD on how to identify and
an investigation consulting firm owned by the prevent future fraud.
Thompson Reuters news service, to review nearly
10 million claims issued during the pandemic, but
before ID.me came online, for potentially fraudulent
ASSESSMENT
characteristics. EDD and the contractor identified Striking a Balance Between Fraud Prevention
1.1 million claims as potentially fraudulent. EDD and Program Access. State employment
stopped payments for these claims. Workers insurance programs must balance the need to
were not notified ahead of time. To reopen their prevent fraud with the priority to delivery payments
accounts, workers had to verify their identity in a timely and straightforward manner. State
using ID.me or their accounts would be closed agencies also have a responsibility to protect the
permanently. Ultimately, more than half of the privacy of the constituents they serve. Eliminating all
claims (600,000) flagged as fraudulent were fraud is infeasible. Moreover, attempting to eliminate
confirmed as legitimate. all fraud necessitates onerous eligibility standards
and a lengthy, time-consuming application process.
On the other hand, although a program without
PROPOSAL
fraud controls would be quick and simple, such
The 2022-23 Governor’s Budget includes
a system would expose the state and employers
$29.8 million General Fund at EDD for six
to substantial financial risk. Given the importance
third-party contracts to prevent future fraud within
of UI payments to workers, the economy, and the
the state’s UI program. (These contracts are in
state during economic downturns, EDD’s policies
addition to 13 other third-party contracts found in
and practices should be regularly reviewed by
the department’s “vendor services” budget change
the Legislature and administration to be sure the
proposal.) The six fraud-related contracts are:
state is striking a workable balance that manages
• Automated Batch Review. Thompson fraud while providing prompt and straightforward
Reuters software tool used to flag potentially payments to eligible workers.
fraudulent claims. Same tool used in January State Already Set up ID.me, Providing
2021 to suspend 1.1 million claims. Substantial Protection Against Fraud… EDD’s
• Identity Risk Analytics. Thompson Reuters implementation of ID.me during the pandemic has
software contract to allow EDD to review new had two major benefits: (1) with ID.me in place,
UI claims daily instead of weekly. Aim of more the department now can automate more claims
frequent review is to stop fraud. so fewer are redirected to the time-consuming
• Identity Verification. Extension of state’s manual review process; and (2) fraudulent actors
existing contract with ID.me. using stolen identity information are no longer able
• Website Managed Security Services. to successfully claim benefits. With ID.me now in
Expanding an existing statewide partnership place, EDD has taken steps to substantially limit
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opportunities for fraud while also addressing the majority of fraud occurred in the temporary
manual review bottleneck that caused the backlog federal programs that now have ended.
during pandemic. According to the administration, $18.7 billion
…But ID.me Has Come Under Scrutiny in (94 percent) of UI benefit fraud may have
Recent Days. The state hired ID.me to confirm occurred in the federally funded PUA program,
workers’ identities using so-called “one-to-one” while EDD suspects $1.3 billion (6 percent) in
face matching; that is, when a computer algorithm state UI benefits fraud.
matches the photo or video submitted by the • Administration’s Estimates of Fraud in
worker to the worker’s identification card. Earlier State UI Benefits Likely Significantly
this month, the company CEO admitted to Overstated. The $1.3 billion estimate of
misleading ID.me clients: although ID.me uses fraud in the state UI benefits program likely
one-to-one matching to confirm identity, the is overstated. EDD counts state UI claims as
company also made so-called “one-to-many” fraudulent if a worker did not confirm their
matches without their client’s knowledge. identity when EDD requested additional
One-to-many matches scan one person’s face documentation or verification. Yet there are
against large databases and therefore could several reasons why workers with legitimate
help identify fraudulent actors who claim multiple claims may not have followed up with EDD.
benefits. However, privacy experts warn that these Many of the suspected fraudulent claimants
matching systems are prone to error, suffer from already had run out of benefits, meaning
systematic racial bias, and have the potential to legitimate claimants would have had little
be misused. In light of this scrutiny, the Internal reason to log in to confirm their identity. Other
Revenue Service recently called off its planned claimants may have given up in frustration
adoption of ID.me for tax filing. (After the publication after trying unsuccessfully to send requested
of this report, the IRS reinstated its use of ID.me, documentation to EDD. While widespread
but with added safeguards.) frustration and an inability to contact EDD
New Anti-Fraud Proposals
No Longer Needed and
Figure 3
Run Counter to Strike Team
Recommendations. Moving Temporary Federal Benefits, Not State Benefits,
forward at this time with additional Were the Primary Target of Fraud
layers of fraud protection is not
necessary because (1) recent fraud
was concentrated in temporary
federal benefit programs that
have now ended, (2) recent fraud
in the state’s regular UI program
appears to have been minimal, Suspected
and (3) adopting additional fraud as Fraudulent
protection now runs counter to the
strike team recommendations.
• Recent Fraud Concentrated
in Temporary Federal Federal Benefits $146 billion
Benefits That Have
Ended. Figure 3 shows the
administration’s estimate of State Benefits $35 billion
suspicious or confirmed UI Likely Fraud
benefit fraud that occurred
during the pandemic. The vast
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are problematic for other reasons, the reduced fraud in the temporary federal programs.
claims from this group of workers did not In hindsight, the strike team’s recommendation to
represent fraudulent activity so including them set up ID.me was warranted during the pandemic,
contributes to the overstatement. Another when the magnitude of the claims backlog called
estimate of likely fraud in the state’s program for prompt and decisive action. Now that this
(based on findings in the administration’s critical period has passed, we recommend the
strike team report) suggests that state UI fraud Legislature pause and carefully consider the
during the pandemic could be much smaller— implications of requiring third-party biometric
just $100 million in fraud out of $35 billion in scanning—in this case, facial recognition performed
benefits paid. (The small red area represents by artificial intelligence.
this smaller likely fraud estimate.) Given that …And Direct Administration to Gather
relatively little fraud seems to have targeted More Information, Assess Alternatives. As the
the state’s regular UI program, new, additional Legislature considers the ongoing use of facial
layers of fraud prevention are not needed. recognition software for the state’s UI system,
• Runs Counter to Key Strike Team we recommend that it direct the administration to
Recommendation. Moving forward at this follow through on the strike team recommendation
time with new, additional layers of fraud to assess the trade-offs and potential unintended
protection also would move the department consequences of anti-fraud measures, in this case
further out of balance by again prioritizing for ID.me. The Legislature also may wish to task
fraud elimination at the expense of prompt the administration with presenting alternatives
and straightforward payments. To ensure to biometric scanning that achieve the same (or
that an anti-fraud emphasis does not come similar) level of automated security but that pose
at the expense of prompt and straightforward fewer potential privacy risks and equity concerns.
payments, the strike team recommended that Reject Proposals to Make Pandemic Era
new anti-fraud proposals must be supported Anti-Fraud Tools Permanent. We recommend
by data and take into consideration how the Legislature reject the pandemic era anti-fraud
the new protocols might impact legitimate contracts with Thompson Reuters for automated
claimants. The department’s use of the batch review and identity risk analytics because the
Thompson Reuters software to suspend state’s use of these programs adversely impacted
1.1 million claims, of which at least 600,000 the experience of several hundred thousand
were legitimate, raises concerns that EDD has unemployed workers with legitimate claims and
not internalized the strike team’s fraud-related are not likely to be useful now that automated
recommendations. Moving forward with this identity verification is in place. The Legislature
contract and others therefore runs counter may wish to ask the administration whether these
to the administration’s own assessment software tools could be useful in more targeted,
and recommendations and would move the special circumstances.
department further out of balance. Reject Anti-Fraud Consulting Contracts,
Require EDD to Outline Benefits and Consider
RECOMMENDATIONS Trade-Offs First. We also recommend that
Approve Contract to Prevent Website the Legislature reject the Business Intelligence
Disruptions. We suggest the Legislature approve Competency Center Consulting and Fraud Services
the administration’s contract with Akamai to prevent contracts until the administration reports on the
coordinated bot attacks that could disrupt or shut “the effectiveness, but also the trade-offs and
down EDD’s website at critical times. unintended consequences of these practices” as
recommended by the strike team.
Withhold Action on ID.me… Setting up
automated identity verification substantially sped up
EDD processes so benefits could be paid promptly
during the pandemic. The software likely also
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LAO PUBLICATIONS
This post was prepared by Chas Alamo, and reviewed by Brian Uhler and Carolyn Chu. The Legislative Analyst’s
Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature.
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