Why Won't It Sink?!?

California's Unemployment Insurance Agency is Awful

First, you will note that there are TWO whole stories below - neat and no extra charge! They are on two aspects of the terribleness of the EDD - the oh-so-ironically named Employment Development Department. First we have the agency which already owes the feds $18 billion in pandemic-borrowing borrowing even more money to stay afloat. Second, we have a piece on identity verification and California’s - and 23 other states’ and the IRS’ - service provider.

And a few treats at the end!

Thanks again to the California Globe for running these pieces. You can visit the website at: https://californiaglobe.com/

Story the First:

Even Before the Pandemic, the EDD was Awful:

Only New York – and that’s a maybe - has a less financially stable unemployment program than California

Though much of the Sacramento bureaucratic blob was exposed as the simultaneously incompetent and corrupt menace it is during the pandemic, one agency stood apart by proving itself the most inept and cruel organization in the capitol – the Employment Development Department.

Countless true tales of its heartlessness, rank stupidity, inability to tell real from fake, and sheer nastiness circulated throughout the duration – and after – the wrath of COVID (in case a reminder is needed, see here: https://californiaglobe.com/articles/ca-labor-secretary-julie-su-is-failing-up-after-massive-edd-fraud-and-failures/ and here https://californiaglobe.com/articles/california-edd-misinformation-poor-communication-miserable-claimant-services-fraud-issues/ and here https://californiaglobe.com/articles/monetizing-data-the-edd-id-me-and-the-unemployed-of-california/ and, well, many many more.

It now appears that the pandemic bungle-fest was not what could be classified as a “one-off” COVID-related event, but the culmination of decades of mismanagement, shoddy oversight, and continuously farcical internal processes.

From seeing itself primarily not as a claimant benefit agency but tax collection outfit -

EDD’s Communications Fog Compounds Agency’s Problems, Infuriates Claimants

- to having a customer service policy of not having a customer service policy - https://www.yourcentralvalley.com/news/top-stories/cbs47-investigates-employees-who-answer-edd-phone-lines-say-their-job-is-unproductive/ - to technology older than the word technology - https://abc7.com/edd-suspension-unemployment-covid-19-fac-payment-id-me/10101104/ , the EDD has had problems for years and now a federal Department of Labor review of the agency’s unemployment insurance (UI) benefit trust fund (the account employers pay into) raises further questions about the stability and capability of the system as the fund’s solvency level is zero.

California is one of only eight states (and the Virgin Islands) to enjoy that dubious honor – others include: Colorado, Connecticut, Illinois, Minnesota, New Jersey, New York, and Pennsylvania. 

It cannot but help to be noted that these “in the red” states are all politically “deep blue,” as reflected by the map on the cover the report (see above.)

According to the latest “State Unemployment Insurance Trust Fund Solvency Report,” the state still owes the feds more than $18 billion against a trust fund on-hand balance of about $600 million.  The report also shows California has an “advance (from the feds) per covered employee” amount of more than $1,400.  The national average is $353 and most states have a figure of $0.

In 2019, the entire national UI trust fund debt whittled down to nothing from a high of $38 billion in 2011.  The pandemic pushed the overall national debt up to $46 billion, of which, at its comparable height, California owed more than half, or about $24 billion.  While the specific numbers have lowered, the state still owes about the same as the rest of the nation combined (you can see the entire report at the bottom of this article.)

It should be noted that, even using the EDD’s own lowball number of $20 billion lost by the agency to easily preventable fraud, let alone the more accurate estimate of $30 billion, the state would have no debt to the feds if it had acted earlier to at least slow the massive pandemic benefits rip-off.  In turn that would mean California businesses would not be facing a per-employee unemployment annual tax surcharge of at least .3% to be paid over the next seven years.

While pandemic-related funds were loaned interest free, that is the first time the state has been able to borrow Title XII (the federal unemployment backstop fund that existed long before the pandemic) funds interest free since 1990 due to its longstanding unemployment insurance financial issues.  Only a few other states, such as Illinois, have had that problem going back more than 30 years (the number of states - 20 this year - who can borrow interest free varies from year-to-year, depending upon their financial status and history.)

That means that the state’s post-pandemic borrowing does incur interest and while in May California made a nearly $2 billion principal payment to the feds it still had to pay another $335 million in interest in late September, before the close of the federal fiscal year.

Since making the May payment, the state has continued to borrow federal dollars.  According to this Department of the Treasury website - https://fiscaldata.treasury.gov/datasets/ssa-title-xii-advance-activities/advances-to-state-unemployment-funds-social-security-act-title-xii - the EDD just this month has borrowed another $284 million – a clip of about $13 million PER DAY – to meet its obligations.  So far this fiscal year, the state has racked up $41 million in interest alone and paid exactly zero of that back.

Michael Petersen, spokesman for the federal Department of Labor confirmed that despite the agency’s financial woes, the EDD is and will remain able to meet its obligations to those currently receiving unemployment benefits and/or about to apply for them.

However the decades-long issue does call into question exactly why the agency has been run so badly for so long.

Long considered a career graveyard by Sacramento insiders, the EDD has – for decades – failed to modernize, failed to consider customer service, failed to keep up internal morale, all the while being a source of political tension, impotent as that may be as the legislature and successive governors have done little if anything to address the problem.

One of the root causes of the instability of the EDD is its funding method, said unemployment insurance expert Mark Duggan, the Trione Director of  The Stanford Institute for Economic Policy Research (SIEPR) and The Wayne and Jodi Cooperman Professor of Economics at Stanford University.

When it comes to unemployment insurance tax rates, California has some of the highest in the nation.  But it also has one of the lowest “taxable income” amount, an amount that has not changed since the 1980s.  Depending upon whether the company has had significant layoff and/or other issues, California business pay between 1.5 and 6.2 percent of taxable income per employee (typically it’s about 3.4 percent.) 

But that state only considers the first $7,000 earned annually to be taxable for unemployment insurance purposes.  That means a typical employer will pay about $230 per year for the seasonal part time worker making $500 a month and the same amount for the CEO making $500,000 per year.

While the CEO could receive $450 per seek for 26 weeks if laid off, the lower wage employee – on whose behalf the same amount was paid into the system – would receive a tiny fraction of that amount if laid off.

“Higher wage workers are getting (thousands of dollars worth of) free insurance,” Duggan said.  “The tax is the same but there is a massive benefit difference.”

The fact that the taxable base rate has not gone up in decades combined with the fact that the benefits offered have increased markedly leaves the system extremely vulnerable to economic uncertainty.

Duggan said it would be far more stable – and fair – if the $7,000 base were raised to something more in keeping with current economic realities while concurrently lowering the actual tax rate paid.  This would not increase actual employer costs but would be a stabler source of income and justify the large benefit payout differences.

Why this has not been done he has no idea, Duggan said, especially considering the potential bipartisan political popularity of being able to say publicly that you are lowering taxes (one side of the aisle) while not costing the state any revenue (the other, currently much more powerful side of the aisle.)

Multiple experts and officials have called the EDD essentially a “tear down” that needs to be replaced from scratch.  During the unsuccessful recall campaign against him Governor Newsom briefly made loud noises about serious reform, as did the Democrat-held legislature.  Nothing substantive has been done and even a bill creating a citizen’s oversight board was turned back.

And Newsom has said very little and done even less since and the EDD keeps borrowing money to stay afloat.

Why the agency is political kryptonite – especially when wholesale reform would be so popular with the public – is a mystery, though it would be remiss to fail to note that the current situation does benefit some:  the agency employees who can stay blithely enmushroomified in their cubicles and the well-connected lawyers and consultants and tech experts etc. who are paid a great deal of money to keep applying Band-Aids, plugging leaks, bailing water, tidying up messes, and putting out fires.

It is as if the EDD was a ship that keeps hitting the same iceberg purposefully and repeatedly – but somehow won’t sink.

It just doesn’t make sense.

As per usual, the EDD did not offer any comment despite having said it would do so and being given additional time to respond.  Here are the questions they declined to address, including a pretty basic one: 

Can people expect to get their benefits if they file a proper claim?

Additional questions included:

How did this happen and what is being done to address it?

Is it still expected that the UI employer tax surcharge will go forward to pay for the shortfall?

California accounts for about 13 percent of the nation's population, but accounts for more than 40 percent of the UI funds owed the feds - why?

Has any EDD employee been terminated for the pandemic problems?

Has the EDD upgraded its technology yet?

The EDD has not met solvency standards (able to borrow without interest) since 1990 and is one of only 9 states to have a trust fund solvency rating of Zero - explain

The report is extremely unflattering to the EDD - do you differ with any of its claims?

Story the Second:

EDD Identity Firm Slapped by Congress

The EDD’s identity verification contractor, ID.me, came under withering Congressional fire late last week for providing allegedly misleading client wait time data and touting allegedly inflated national pandemic fraud-loss figures in order to boost its business.

ID.me was brought in by the EDD in the fall of 2020 to address its rampant fraud problem.  Though the problem was instantly evident to every observer, the EDD waited months to install ANY identity verification system (the job could have been done in the first weeks of the pandemic for a cost of one-thirtieth of one percent of the approximately $30 billion lost to fraud.)

In the end, ID.me issued nearly 6 million verified identity “credentials” to EDD claimants.  Around the nation, the company issued nearly 40 million credentials to people seeking government benefits, multiple unemployment and other state agencies and the IRS making up the lion’s share. 

During the course of the pandemic, ID.me went from having issued about 10 million credentials – i.e. having 10 million registered users - to about 70 million, increasing its corporate valuation significantly.  As a cybersecurity firm, the more identities you have in your data base the more money you can make -  and ID.me’s value increased by at least a factor of six to about $1.5 billion (it is likely much higher as one its similar sector competitors is valued at $4.5 billion.)

For a deeper dive on how ID.me makes money, see here: https://californiaglobe.com/articles/monetizing-data-the-edd-id-me-and-the-unemployed-of-california/

What that means is that at least 10 percent of the growth of the company – worth between $150 and $400 million to ID.me – was directly related to the gathering of the personal data of California’s unemployed (the company was also paid directly by the EDD about $24 million to provide the verification service, a number ID.me executives have in the past said did not cover their costs.)

As to verification wait times, Californian’s had to wait an average 4 hours – often quite a lot more -  to complete the process (ID.me had two ways to create a credential – either using a smart phone to gather your biometric data like selfie, picture of your license, etc. or it could be down via video chat by holding up your license, etc.;  it was the “in person” side that saw the longest wait times.

Late last week, the Select Subcommittee on the Coronavirus Crisis, chaired by Rep. James E. Clyburn, and the Committee on Oversight and Reform, chaired by Rep. Carolyn B. Maloney, claimed that ID.me did not provide accurate wait time estimates based on its other government clients – like EDD – actual experiences when it was in talks with the IRS for a new contract.  The committee also said that ID.me CEO Blake Hall used inflated estimates of the national fraud problem in order to drum up business.

The Committee claimed “the company informed the IRS that its wait times for video chats were only about 2 hours as of today.  But new data obtained from ID.me shows that this inaccurately downplayed the long wait times Americans were facing in states that were using ID.me.  Average wait times for video chats in April 2021 were more than four hours for 14 of 21 state (including California) unemployment programs it served.”

ID.me admitted that “those that required a live agent faced long wait times, because of this massive volume, the impact of COVID, and the lack of modern technology in state governments,” and specifically noted a “short notice spike in early 2021.”  This was almost certainly caused by the EDD shutting out - and then requiring ID.me-verified identities from - 1.4 million claimants overnight on that New Year’s Eve.  It is unclear if/when the EDD informed ID.me it was about to get 1.4 million customers overnight, which clearly added to the wait time problem.  It should be noted the agency did not directly inform other government agencies and state legislators and officials until well after the fact.

Additionally, the Committee stated ID.me, in “an apparent attempt to increase demand for ID.me’s services,” that Hall erroneously claimed that about $400 billion had been looted across the nation.

ID.me vigorously denied any attempt to gin up government business by making the problem appear larger than it was.  Experts have noted that as almost every previous fraud loss estimate made by government agencies have been comically low and that attacking the ID.me figure could merely be a way to deflect/diminish governmental failure (The “See, we only lost $300 billion not $400 billion like he says so we’re not that bad,” line of reasoning). 

Additionally, Hall took personal umbrage at the accusation:  “As a combat platoon leader and soldier in Iraq who risked my life serving the United States of America, I would never use a claim about a national crisis to advance the interests of my company,” Hall said.  “My loyalty to my country supersedes my loyalty to my company.”

Be that as it may, said cybercriminal turned noted cybersecurity expert Brett Johnson, that does not mean the pandemic was not very good to Hall and ID.me, despite the personal information privacy concerns and that desperate unemployment benefit claimants were forced by the EDD to hand over that extremely valuable data to a private third-party company.

“They are an extremely powerful security company.  More identities, more information, more data, means more value,” Johnson said.  “They could be a very good security company, but they check all the boxes for everything that is wrong about cybersecurity.  The problem is that they’re unethical as shit.”

Oh, and the EDD did not respond to requests for comment.

Here are the ID.me related questions the EDD declined to answer:

What has ID.me told the EDD regarding wait times?

Has ID.me acted ethically, in the EDD's experience?

Is it ethical that ID.me was paid at least 24 million dollars while hoovering up an incredibly valuable haul of 6 million identities?

ID.me issued about 6 million "credentials" to UI recipients - how many did it decline (deem fake in other words)?

Extra Credit – In case you were wondering how all this identity stuff worked in the past, here’s a fun video on how you proved who you were in the Roman Empire: