Labor Sec. Julie Su Forgives $32.6 Billion in EDD Debt

As Acting Secretary of Labor, Julie Su has a very big eraser and she just used it wipe out her own $32.6 billion dollar mistake.

While she was California’s Secretary of Labor, Su oversaw the California Employment Development Department – the EDD – which lost more than $40 billion during the pandemic to homegrown and international fraudsters.

But Su recently forgave $32.6 billion of that debt. How? Because the state owed it to her federal department.

In other words, Su did not even have to borrow from Peter to pay Paul – she just made sure she went from being Peter to being Paul.

An important note – the massive increases businesses are now paying in federal unemployment taxes to pay off a different state pile of $20 billion dollars in debt will continue. Sorry.

Another important note – this relief will not change the current woeful condition of the state’s budget. The debt that was made to vanish had been kept “off book” by the state – the single direct benefit will be to the EDD itself which may now be able to get a “clean” auditor’s report next year.

A third important note – it is currently unknown where that debt will go, federal accounting-wise.  Exactly where that $32.6 billion dollar write off will end up – on what bookkeeping sheet, on the books, off the books, thrown into the national debt pile – is unclear.  What is clear is that California skated on the debt, literally by saying “we tried to collect it from the fraudsters but couldn’t and now the time has run out, so there.”

The entire issue is rather convoluted, but here is what happened.

During the pandemic, the EDD sent out a few different “types” of unemployment money.  The part that saw the most fraud, Su has said, was the the federal “pandemic unemployment assistance” bucket of money.

Technically, this may be true but it is a cunning dodge on Su’s part because the EDD was the single spigot through which all of the different funds flowed. For example, it was people declaring themselves “self-employed” who were no such thing that did much of the raiding of the system.  This occurred because, for the first eight months or so of the pandemic, the EDD did not require a person to prove they were self-employed (say, by sending in a copy of a city business permit or some such proof.)

All one had to do was go to the EDD website, type in some names and numbers (remember Sen. Feinstein’s name was used and all of the inmates who profited?) and that was that – a pre-loaded debit card was sent to the address listed, even if it was out of state or out of country or the EDD had already sent hundreds of cards to the same address.

In other words, the EDD sent both state and fed money in a single clump, making it – and Su – ethically responsible for where it went no matter where it came from.

Su was informed by security professionals very early on in the pandemic response that fraud – on a massive scale – was occurring, but took months to staunch the flow (she later said she didn’t want to hurt potentially legitimate recipients even though she did exactly that by – for between two and eight weeks -cutting all benefits to millions overnight on New Year’s Eve, 2020.

So that’s the money out – now on to the debt relief.

In December, 2023, Su’s labor department issued a rule regarding something called “finality.” In a very rough nutshell, the feds let states follow their own regulations regarding when to declare a claim over and done with. Once an account claim is final – i.e., there is nothing left to do with it – if it owes money it owes it directly to the feds.

Fox, meet henhouse.

The EDD did not reply to multiple requests for comment.  The state auditor’s office said it does not comment on issues beyond its published audits.

In February, the state asked the feds to let it off the hook for the $32.6 billion, citing state law:

“(W)hich provides that EDD cannot establish overpayments more than one year after the close of the benefit year in which the overpayment was made unless the overpayment is found to be a result of fraud, misrepresentation, or willful nondisclosure. Given that there is no fraud or fault on the part of the individuals identified in these populations, EDD is unable to establish overpayments.”

 In other words, even though the money was handed out by the EDD, the EDD is not on the hook for the debt;  that technically becomes the responsibility of the fraudulent claimant. While the state has clawed back about $6 billion, or about 15%, of the fraudulent payments and the EDD claims it will continue to look for money, that remaining $32.6 billion has been evaporated by the feds because the EDD says it cannot find it and can no longer collect it.

In other words, the money is gone for good.

When asked about the status debt, a spokesman for the federal Department of Labor emailed the following:  

The California Employment Development Department (CA EDD) submitted their request, under the guidance of Unemployment Insurance Program Letter (UIPL) 05-24, to the Department of Labor (DOL), Employment and Training Administration (ETA), to apply certain sections of the California Unemployment Insurance Code (CUIC) to specific monitoring findings issued by DOL ETA. The effect of the guidance in UIPL 05-24 permits state finality provisions to be applied where corrective actions were otherwise required. After receiving and reviewing the CA EDD submission, the DOL ETA accepted CA EDD’s assertion that the CUIC was applicable to the specific CARES Act findings.  CA EDD does not owe a debt to DOL ETA for pandemic program benefit payments. (emphasis the Globe)

It is that last sentence that is most important – the debt is gone, thanks to Julie Su (note – the department did not supply the final number of the debt – just that it was gone.)

Earlier this year, the state auditor released a scathing report on the EDD and its woeful fraud controls and systems operations in general.

According to both the state’s Annual Comprehensive Financial Report and the state auditor’s report on the EDD, there was roughly $53 billion in unemployment related debt.  That debt is divisible into two groups – the $20 billion owed by the state that was borrowed to fund California’s own unemployment system and the $32.6 in directly federal money the state lost to fraud.

Those, again, are estimates, due to the EDD’s own poor accounting. From the report:

“EDD provided an additional estimate of $29 billion to account for these paid benefits, increasing its overall estimate to $55 billion,” reads the audit.  “However, EDD was unable to provide sufficient information substantiating this additional estimate. Because of these issues, there are possible material misstatements in the beginning balances, liabilities, revenues, and expenditures in the financial reports of the Federal Fund and Governmental Activities.”

So that’s the fed debt taken care of…but not really.  

To pay regular state unemployment benefits, the EDD has a trust fund paid for by state unemployment insurance taxes.  The fund – do in part to the way it is constituted and to the massive benefit increases with no increase in income – has been floundering for years and, in the past decade or so, only managed to go two years without borrowing money from the feds.

Needless to say, the trust fund was unprepared for the pandemic and  – seperate from the $32.6 billion in improper federal money it paid – paid out billions more than it had. It had to borrow from the feds and that debt – today – stands at just a little less than $20 billion dollars (P.S. – at least $500 million a year in interest alone.)

Most other states had large unemployment debts caused by the pandemic as well, but only California and New York (and the Virgin Islands) did not pay them off with “left over” pandemic assistance money.

Facing a recall in 2021 and wallowing in a massive budget surplus, Gov. Gavin Newsom instead went on a vote-buying spree, promising to send out more than $30 billion to voters – sorry, residents – just before the election.

This decision has forced California businesses to make up for the shortfall.

Typically, a business pays about $21 per employee per year in the federal tax. Mobius strip-ironically, that tax funds the same emergency fund California keeps borrowing from at a clip of about $10 to $20 million a day.

The EDD says 2025 will see a total fed tax of $63 per employee, triple the normal amount.

After the third year of the payback process, there is an automatic “add-on” tax.  The add-on would push the annual per employee rate to $273 for 2026, 13 times the rate it would have been if the EDD did its job properly.  And when the added tax will stop is anybody’s guess at this point.  

For anyone in Sacramento to claim that this was not the intent of not paying off the debt in the first place is laughable – Newsom, et.al knew they could side-door a tax on businesses and use th surplus money to literally hand out money to voters and supporters.

While Su has magic-wanded her $32.6 billion error into oblivion, the rest of the debt remains and much of that can be attributed to fraud as well.

During the pandemic, a claimant under the “barn door wide open self-employed category” noted above got $600 in federal money and at least $168 in state money each week. The $600 in fed money was cut in half towards the end of 2020, but that state amount stayed the same.

Remember – the EDD was in charge of handing out both “types” of money and a person could not just get one type – the fed and state money went together: qualify for state, get fed.

Therefore, if the feds say they lost $32.6 billion to fraud, then the state must have lost on its own about $10 billion to the same fraudsters.

In other words, the final state unemployment fraud total is at least $42 billion and the $20 billion the state still owes the feds – that businesses are paying off directly – should be half that figure. 

But at least Julie got a promotion.  

Good for her.