A new report from the state auditor finds the California Employment Development Department failed to take part in a federal program that could have brought hundreds of millions of dollars to the state.
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Content
Employment
Development Department
It Failed to Participate in a Federal Program That
Would Have Allowed the State to Collect Hundreds of
Millions of Dollars
Investigative Report I-
March
COMMITMENT
INTEGRITY
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Doug Cordiner Chief Deputy
Elaine M. Howle State Auditor
621 Capi t ol Mal l , Sui t e 1200 Sacr ament o, CA 95814 916. 445. 0255 916. 327. 0019 f ax www. audi t or. ca. gov
March ¡¡, ao¡¡ Investigative Report Iao¡a-o6¸¡
Te Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California ,¸8¡¡
Dear Governor and Legislative Leaders:
Pursuant to the California Whistleblower Protection Act, the California State Auditor
presents this investigative report concerning inefficiency at the Employment Development
Department (EDD). EDD officials failed to take advantage of a federal program that would have
allowed the State to collect hundreds of millions of dollars.
Tis report concludes that EDD failed to participate in a key aspect of the federal Treasury Offset
Program (Offset Program) that would have allowed it to collect an estimated s¸¡6 million owed to
the State in unemployment benefit overpayments between February ao¡¡ and September ao¡¡.
In January ao¡¡ the U.S. Department of the Treasury adopted regulations that expanded the
Offset Program and allowed states to use it to collect unemployment benefit overpayments
by intercepting individuals’ federal tax refunds and other federal payments. Although other
states chose to participate in the expanded program from ao¡¡ through ao¡¡ with great success,
EDD, acting on behalf of California, chose not to participate because it concluded that it did
not have sufficient resources to make the information technology modifications necessary to
participate in the program. EDD officials reached this conclusion even though in ao¡a they
initially estimated that they could make the modifications at a cost of a little more than s¡aa,8oo,
compared to their own projection of recovering more than s¡oo million during the first year of
program participation.
After being contacted by our investigators regarding EDD’s lack of participation in the expanded
program, EDD officials developed a plan for participating in the Offset Program to collect
unemployment benefit overpayments by May ao¡¡. However, in February ao¡¡, EDD reported
that it would not complete the information technology modifications necessary to participate
in the expanded program until September ao¡¡.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
Blank page inserted for reproduction purposes only.
v California State Auditor Report I2012-0651
March 2014
Contents
Investigative Results
Results in Brief 1
Background 1
Facts and Analysis 5
When the Federal Government Advised EDD of the Approaching
Opportunity to Participate in the Offset Program to Collect
Unemployment Benefit Overpayments, EDD Officials Did Little to
Explore or Prepare for Participation in the Program 5
While Other States Began Participating in the Offset Program to
Collect Unemployment Benefit Overpayments, EDD Took No
Significant Steps Toward Participation 7
Even After EDD Officials Learned of Other States’ Successful Use of
the Offset Program to Collect Unemployment Benefit Overpayments,
EDD Still Took No Meaningful Actions Toward Participating 7
After Being Contacted by the State Auditor’s Office, EDD Committed
to Participating in the Offset Program to Collect Unemployment
Benefit Overpayments 9
Had EDD Chosen to Participate in the Offset Program to Collect
Unemployment Benefit Overpayments Earlier, the State Could Have
Collected an Estimated $516 Million 10
Recommendations 13
Summary of Agency Response and California State
Auditor’s Comments 15
Appendix
The Investigations Program 19
vi California State Auditor Report I2012-0651
March 2014
Blank page inserted for reproduction purposes only.
1 California State Auditor Report I2012-0651
March 2014
Investigative Highlights . . .
Our investigation at the Employment
Development Department (EDD)
substantiated the following:
» EDD officials failed to act efficiently to
participate in the federal Treasury Offset
Program (Offset Program) that would
have allowed the State to collect an
estimated $516 million in unemployment
benefit overpayments.
» EDD decided to forego participation
even though it estimated it would cost
$322,800 for modifications, compared to
the projected benefit of recovering more
than $100 million in the first year.
» After our investigation began,
EDD officials developed a plan for
participating in the Offset Program.
Investigative Results
Results in Brief
Te Employment Development Department (EDD) failed to take
advantage of a federal program tlat would lave allowed it to collect
an estimated s,¡6 million owed to tle State in unemployment
benefit overpayments made to claimants. In )anuary :o¡¡ tle
U.S. Department of tle Treasury (U.S. Treasury) adopted
regulations implementing federal legislation tlat expanded tle
federal Treasury Offset Program (Offset Program). Tis expansion
of tle Offset Program gave states tle ability to collect money
owed by unemployment insurance claimants wlo lave received
overpayments by intercepting federal payments tle claimants are
due to receive. Several states close to participate in tle Offset
Program to collect unemployment benefit overpayments from :o¡¡
tlrougl :o¡¸ witl great success. However, EDD, acting on belalf
of California, declined to participate in tlis aspect of tle Offset
Program, and instead persisted witl its existing collection efforts.
EDD officials concluded tlat in liglt of otler projects tley were
working on, EDD did not lave sufficient resources to make tle
information teclnology (IT) modifications necessary to participate
in tle program to collect unemployment benefit overpayments.
Tey reacled tlis conclusion even tlougl in :o¡: tley initially
estimated tlat tley could make tle modifications at a cost of
a little more tlan s¸::,8oo, compared to tle projected benefit
of recovering more tlan s¡oo million during tle first year of
program participation. By deciding to forego participation in tle
Offset Program to collect unemployment benefit overpayments,
EDD acted inefficiently and tlerefore lost an opportunity to
recoup an estimated s,¡6 million from February :o¡¡ tlrougl
September :o¡(, tle montl in wlicl EDD now projects it will
start collecting unemployment benefit overpayments tlrougl tle
Offset Program.
Background
As part of its responsibility for carrying out various employment
and workforce functions witlin California, EDD administers
tle State’s unemployment benefits program. As Figure ¡ on tle
following page depicts, tle State maintains tle Unemployment
Fund, wlicl is financed by a payroll tax imposed on employers,
to provide benefits to eligible unemployed workers in tle form of
weekly payments. Tese payments are intended to provide partial
replacement of tle earnings workers lave lost due to losing tleir
jobs. EDD is responsible for collecting tle employer payroll tax
contributions and distributing tle benefits to eligible claimants.
2 California State Auditor Report I2012-0651
March 2014
Figure 1
The State’s Process for Paying Unemployment Benefits
Employers Unemployment Fund Claimants
Payroll Tax
Contributions
Unemployment
Benefits
Source: California State Auditor’s analysis of the California Unemployment Insurance Code.
Occasionally, in distributing benefits to claimants, EDD makes
overpayments from tle Unemployment Fund. Te vast majority of
tlese overpayments result from claimants committing fraud, including
misreporting tle dates on wlicl tley return to work. Otler
overpayments occur due to EDD errors or delayed determination of
ineligibility. Wlen overpayments occur, EDD is responsible for
collecting tle money from claimants. As tle text box
indicates, EDD uses a number of metlods to attempt
to collect tlese overpayments. EDD deposits tle
overpayments it is able to collect, along witl
penalties and interest assessed on overpayments due
to fraud, into two accounts. Penalties and interest go
into a special account called tle Benefit Audit Fund.
1
Te money leld in tlis account is particularly
significant because tle Legislature can appropriate it
to pay EDD’s administrative costs or transfer it to tle
State’s Ceneral Fund to address otler state needs.
EDD deposits tle remainder of wlat it collects into
tle Unemployment Fund. As of October :o¡¸ EDD
was owed overpayments of more tlan s¡.( billion.
Te ability of EDD to collect benefit overpayments always las been
important, but it took on leigltened significance after )anuary :oo,,
wlen tle Unemployment Fund became insolvent because
benefit payments exceeded tle fund’s available balance. Since
tlen, California las borrowed about s¡o billion from tle federal
government to cover tle deficit and paid lundreds of millions of
dollars in interest on tle money it las borrowed.
The Offset Program
California is not unique in needing to collect unemployment benefit
overpayments and otler debts owed by individuals. To enlance tle
ability of states and various entities witlin tle federal government
1
Because of a change in state law, when EDD collects penalties that it assessed on or after
October , , rather than depositing percent of those penalties into the Benefit Audit Fund,
it deposits percent into the Benefit Audit Fund and percent into the Unemployment Fund.
The State’s methods for collecting overpayments
of unemployment benefits:
• Repayment plans
• Wage garnishments
• Interceptions of state tax refunds
• Interceptions of lottery winnings
• Interceptions of future unemployment benefits
Source: Employment Development Department staff.
3 California State Auditor Report I2012-0651
March 2014
to collect debts owed by individuals, tle U.S. Treasury establisled
tle Offset Program in ¡,,6. Under tlis program, state and federal
agencies may collect delinquent debts by intercepting federal
payments, primarily federal tax refunds, directed to persons wlo
owe money to government entities. Since its inception, tle Offset
Program las been effective in collecting a variety of debts owed
by individuals to government entities, including delinquent clild
support payments and unpaid state taxes. For example, California’s
Franclise Tax Board used tle program to collect more tlan
s;¡ million in outstanding state taxes during fiscal year :o¡:–¡¸.
Starting in :oo( EDD began participating in tle Offset Program to
collect certain kinds of debts owed to tle State in connection witl
particular benefit programs it administers. EDD uses tle Offset
Program to collect outstanding personal income taxes and state
disability insurance contributions tlat employers witlleld from
tleir employees’ payclecks but failed to remit to EDD.
Until :o¡¡ tle Offset Program was not available as a meclanism for
collecting unemployment benefit overpayments. However, in :o¡o
and :o¡¡, clanges to federal law expanded tle Offset Program to
allow states to use it for tlat purpose. To participate in tle Offset
Program, states must be able to transmit electronically to tle
U.S. Treasury specified information about tle debt, including
tle amount owed and tle name and taxpayer identification
number of tle debtor. States must transmit tle information in a
particular computer format so tle U.S. Treasury can upload tle
information to its computer system to compare tle name and
taxpayer identification number of tle debtor witl tle names
and taxpayer identification numbers of persons about to receive
payments from tle federal government. If tlere is a matcl, tle
U.S. Treasury offsets tle payment tle debtor is about to receive by
deducting from tle payment wlatever amount tle debtor owes,
up to tle total amount of tle payment. Te U.S. Treasury tlen
transmits tle offset amount to tle state to wlicl tle debtor owes
money and directs to tle debtor wlatever remains of tle payment
after it las deducted tle offset amount. Figure : on tle following
page illustrates low California could use tle Offset Program to
collect unemployment benefit overpayments.
Because a state’s participation in tle Offset Program for tle
purposes of collecting unemployment benefit overpayments
depends on its ability to transmit to tle U.S. Treasury information
about debts in a particular format, a number of states lave
found tlat being able to transmit tle information in tle required
format is an obstacle to participating in tlis aspect of tle program.
Some states, including California, maintain tleir unemployment
benefit debt information in an older computer system tlat
provides tle required information in an incompatible format.
In and , changes to
federal law expanded the Offset
Program to allow states to use
it for collecting unemployment
benefit overpayments.
4 California State Auditor Report I2012-0651
March 2014
Figure 2
The Process by Which the Employment Development Department Could Use the Treasury Offset Program to
Collect the State’s Unemployment Benefit Overpayments
Tax refunds and
other federal payments
to claimants
Unemployment benefit
overpayment data
Funds intercepted
from claimants’
federal payments
Remaining federal
payments after
interception
Claimants
Treasury
Offset Program
U.S. Department
of the Treasury
Employment
Development Department
Source: California State Auditor’s analysis of information on the U.S. Department of the Treasury’s Web site.
Terefore, to transmit tle information in tle required format,
tle state must translate tle information prior to sending it to tle
U.S. Treasury. Due to tle complexity of computer programming,
especially wlen dealing witl older computer systems, translating
tle information can be a labor-intensive and costly undertaking.
However, because of tle financial benefits tley may derive from
participating in tle Offset Program to collect unemployment
benefit overpayments, many states lave undertaken tlat task.
As a result of a wlistleblower complaint, tle California State
Auditor’s Office (state auditor’s office) learned tlat EDD lad put
off participation in tle Offset Program to collect unemployment
benefit overpayments in spite of tle program’s potential
for collecting millions of dollars of unemployment benefit
overpayments owed to tle State. We were told tlat EDD made
tlis decision because it did not want to devote tle relatively small
amount of resources needed to make tle required modifications
to its IT system. Altlougl state agencies lave broad discretion
in deciding low to use tleir resources to fulfill tleir respective
missions, Covernment Code section 8,(;.: provides tlat any
action by a state agency tlat is economically wasteful or involves
inefficiency is an improper governmental activity. We tlerefore
launcled an investigation into EDD’s cloice not to participate in
tle Offset Program to collect unemployment benefit overpayments.
5 California State Auditor Report I2012-0651
March 2014
Facts and Analysis
Our investigation revealed tlat over nearly tlree years, EDD
received a stream of information about tle Offset Program’s
potential to improve California’s ability to collect unemployment
benefit overpayments and even lad advocates for entering
tle program among its staff. However, despite tle projected
effectiveness of tle Offset Program and its proven success in otler
states, EDD senior officials failed to act efficiently to take advantage
of tlis program and tlerefore missed an opportunity to collect an
estimated s,¡6 million in benefit overpayments from February :o¡¡
tlrougl September :o¡(.
When the Federal Government Advised EDD of the Approaching
Opportunity to Participate in the Offset Program to Collect
Unemployment Benefit Overpayments, EDD Officials Did Little to
Explore or Prepare for Participation in the Program
In )une :o¡o EDD officials received a detailed letter from tle
U.S. Department of Labor (Labor Department), directed to state
employment offices tlrouglout tle country, advising tlem tlat
tle Offset Program was expanding to allow states to collect
unemployment benefit overpayments tlrougl tlis program. Acting
in partnerslip witl tle U.S. Treasury to promote participation in
tle Offset Program by state employment offices, tle Labor
Department informed EDD and employment offices in otler
states tlat altlougl tle U.S. Treasury still needed to adopt certain
implementing regulations before states could participate in tle
Offset Program to collect unemployment benefit overpayments,
it anticipated tlese regulations would be adopted soon. Te
Labor Department tlerefore provided instructions on wlat states
slould do immediately—particularly regarding tle formatting
of required data—so tlat tley could collect unemployment
benefit overpayments using tle Offset Program as soon as tle
implementing regulations were enacted.
During :o¡o some states, including New York, began preparing in
earnest to participate in tle Offset Program to collect unemployment
benefit overpayments and made significant progress toward laving
tleir data properly formatted so tley could enter tle program as
soon as it became available. In contrast, EDD took no significant
actions to prepare for participation in tlis aspect of tle Offset
Program, even tlougl California’s Unemployment Fund lad been
insolvent for more tlan a year. Te only action tlat EDD took in
response to tle letter it received about tle expansion of tle Offset
Program was to send tlree employees to an informational webinar
about tle program in )uly :o¡o. After tlis webinar, tle employees
were entlusiastic about tle prospect of laving EDD participate in
EDD took no significant actions to
prepare for participation in this
aspect of the Offset Program, even
though California’s Unemployment
Fund had been insolvent for more
than a year.
California State Auditor Report I2012-0651
March 2014
6
tle Offset Program as a means of drastically improving EDD’s ability
to collect outstanding unemployment benefit overpayments. Despite
tlis entlusiasm, otler tlan some lower-level management employees
discussing tle idea of participating in tle Offset Program to collect
unemployment benefit overpayments, EDD took no furtler action to
prepare for entering tle expanded Offset Program.
We interviewed Official A, an EDD official witl responsibilities
related to EDD’s collection efforts, about EDD’s actions during
tlis period wlen tle Offset Program was about to expand.
Official A, wlo now is retired, recalled tlat le tlouglt collecting
unemployment benefit overpayments tlrougl tle Offset Program
would be a good way for EDD to collect more revenue for tle
State. Accordingly, le believed EDD slould take advantage of
tle opportunity to participate in tle expanded program. He furtler
recalled tlat modifying EDD’s IT system to participate in tle
program appeared to require only minimal work and resources. He
surmised tlat implementation of anotler major IT project could
lave lowered tle priority of preparing for participation in tle Offset
Program to collect unemployment benefit overpayments, but le
could not explain wly le lad not explored participation in tle
program furtler.
A ligl-ranking EDD official (Official B), also now retired,
recalled wlat was occurring at tlis time somewlat differently.
Sle recalled tlat tle Offset Program was not “on tle radar” wlen
tle U.S. Treasury was about to expand tle program for use in
collecting unemployment benefit overpayments. Sle explained tlat
tle Offset Program did not receive any attention because EDD’s
resources already were strained due to numerous otler IT projects
being undertaken.
In any event, neitler Official A nor Official B took action to prepare
EDD to participate in tle Offset Program to collect unemployment
benefit overpayments once it became available for states to use
for tlat purpose. Altlougl it may lave been working on otler
important IT projects at tlis time, EDD did not perform even
a basic analysis to determine tle resources required to prepare
for participation in tle Offset Program to collect unemployment
benefit overpayments. EDD officials merely made assumptions
about tle resources needed and ultimately did not take any
significant steps toward participation because tley decided EDD
could not spare tle resources to do so at tlat time.
EDD did not perform even a
basic analysis to determine
the resources required for
participation in the Offset
Program to collect unemployment
benefit overpayments.
7 California State Auditor Report I2012-0651
March 2014
While Other States Began Participating in the Offset Program
to Collect Unemployment Benefit Overpayments, EDD Took No
Significant Steps Toward Participation
Te U.S. Treasury adopted regulations in )anuary :o¡¡ to implement
expansion of tle Offset Program to allow states to use tle program
to collect unemployment benefit overpayments. Tree states
immediately joined tle program and started collecting delinquent
overpayments, and witlin tle year, otler states stepped up tleir
preparations for participating in tle program. Meanwlile, officials
at EDD failed to take any action to move EDD toward participation
in tle program to collect unemployment benefit overpayments.
In April :o¡¡ Official A left lis position to work in a different brancl
of EDD, and Official C transitioned into lis position.
2
According
to botl Official A and Official C, Official A did not discuss tle
Offset Program witl Official C to any extent during tle transition.
Official C stated tlat as a result, sle was unfamiliar witl tle clanges
to tle Offset Program until sle lad been in ler new position for
nearly a year. Consequently, between April :o¡¡ and Marcl :o¡:,
Official C did not direct any action be taken to move EDD toward
participation in tle Offset Program to collect unemployment benefit
overpayments, even as otler states began participating.
In tle midst of tlis one-year period, lowever, EDD’s staff initiated
a study to evaluate tle feasibility of replacing tle computer system
tlat EDD was using to operate its benefit overpayment collection
program. As part of tle feasibility study, one of tle tlings staff
performing tle study began to examine was low a new computer
system miglt facilitate EDD’s participation in tle Offset Program to
collect unemployment benefit overpayments. To advance tlat part
of tle feasibility study, four employees attended a webinar about tle
Offset Program in August :o¡¡. Subsequently, tle feasibility study
continued witlout making mucl progress toward identifying a
suitable replacement for tle collection program’s computer system
or advancing EDD’s ability to participate in tle Offset Program to
collect unemployment benefit overpayments.
Even After EDD Officials Learned of Other States’ Successful Use of the
Offset Program to Collect Unemployment Benefit Overpayments, EDD
Still Took No Meaningful Actions Toward Participating
In Marcl :o¡:, about a year after some states began participating in
tle Offset Program to collect unemployment benefit overpayments,
EDD started receiving newsletters from tle U.S. Treasury describing
2
Official C was acting in this position from May through December . EDD officially
appointed her to the position in January .
Between April and March ,
Official C did not direct any action
be taken to move EDD toward
participation in the Offset Program
to collect unemployment benefit
overpayments, even as other states
began participating.
California State Auditor Report I2012-0651
March 2014
8
otler states’ success in collecting sucl overpayments tlrougl tle
Offset Program. Specifically, states participating in tle program in
:o¡¡ collected an average of ¡: percent of tle total overpayment debts
tley submitted to tle Offset Program. New York, one of tle first
states to join tle expanded Offset Program, and a state witl a large
population like California, collected ¡, percent of tle total amount
of tle overpayment debts it submitted in :o¡¡. Furtler, even before
submitting tle debts to tle Offset Program, some states were successful
in collecting a substantial amount in overpayments simply by sending
debtors letters informing tlem tlat unless tley paid tle overpayment
debts tley owed, tleir federal tax refunds would be intercepted to
secure payment. According to a New York official, debtors in New York
voluntarily repaid s( million after receiving sucl letters.
In tle same montl tlat EDD began receiving newsletters touting tle
success of otler states in collecting unemployment benefit overpayments
tlrougl participation in tle Offset Program, Official C became aware
of tlese otler states’ success and directed EDD’s collections and IT
staff to look into tle program furtler. Specifically, sle asked tlem for
an estimate of tle revenue EDD would derive from participating in tle
expanded program and an estimate of tle cost EDD would incur to
participate. In May :o¡: EDD’s collections staff estimated conservatively
tlat tle State could collect more tlan s¡oo million from benefit
overpayment debtors during just its first year of participation in tle
Offset Program. In )une :o¡: EDD’s IT staff estimated tlat EDD would
need to spend about s¸::,8oo to complete tle computer programming
necessary to translate information about claimants’ benefit overpayment
debts into tle format required by tle U.S. Treasury for states to
participate in tle Offset Program to collect overpayments.
Armed witl tle revenue and cost estimates prepared by staff, in )uly :o¡:
Official C met witl otler ligl-level EDD officials, including Official B,
to advocate tlat EDD dedicate tle resources needed to participate in
tle Offset Program to collect unemployment benefit overpayments. Sle
argued tlat committing tle needed resources constituted a good deal for
tle State because it could reap an estimated s¡oo million in additional
revenue during just its first year of participation in tle program at a cost
of significantly less tlan ¡ percent of tlat amount.
According to Official C, some officials at tle meeting saw tle value of
participating in tle Offset Program to collect unemployment benefit
overpayments but were opposed to dedicating tle resources needed to
participate because of tle strain tley believed it would place on staff
resources. In tle end, Official B, wlo lad autlority to approve tle
proposal, agreed witl tlose opposed to dedicating resources to join
tle Offset Program to collect unemployment benefit overpayments.
Official B stated tlat altlougl participating in tlis aspect of tle Offset
Program seemed like a “no-brainer,” sle believed tlat due to otler
ongoing projects, EDD simply did not lave enougl staff resources to
EDD’s staff estimated that the State
could collect more than $ million
from benefit overpayment debtors
during its first year in the Offset
Program at a cost of significantly
less than percent of that amount.
9 California State Auditor Report I2012-0651
March 2014
undertake tle IT work necessary to participate in tle program to
collect unemployment benefit overpayments. Official B claimed
tlat because EDD’s computer system used for collections was so
antiquated, and tle programming language it used was so outdated,
only a few EDD employees and contractors possessed tle teclnical
knowledge necessary to create a program for converting EDD’s
collection information into a different format, and all of tlose people
were occupied witl otler EDD projects.
However, certain IT personnel at EDD told us tlat altlougl tle
number of IT professionals possessing tle teclnical expertise
needed to work witl EDD’s old computer system may lave been
somewlat scarce, EDD always las been able to locate and lire
qualified contractors to perform work on tle old computer system.
EDD did not even attempt to lire any contractors to perform tle
work, so Official B’s conclusion tlat EDD could not lire anyone witl
appropriate skills to perform tle work was pure speculation at best.
As a result of Official B’s refusal to devote resources to bringing EDD
into tle expanded Offset Program in :o¡:, tle only effort EDD made
to position itself for participation in tle program was to continue
witl tle feasibility study for replacing its collection program’s
computer system. However, because tle Offset Program was not
tle main focus of tle feasibility study, wlile EDD may lave made
some progress in late :o¡: toward identifying a replacement for
its collections computer system, it made no progress toward
participation in tle Offset Program to collect unemployment benefit
overpayments. As a result, wlile otler states collected millions
of dollars in benefit overpayments tlrougl tle expanded Offset
Program in :o¡: and later in :o¡¸, EDD gave up tlis opportunity.
After Being Contacted by the State Auditor’s Office, EDD Committed
to Participating in the Offset Program to Collect Unemployment
Benefit Overpayments
By early :o¡¸ a total of ¸¡ states were participating in tle Offset
Program to collect unemployment benefit overpayments, but EDD
still lad not joined tlem and did not lave a plan for doing so.
3
Official C, wlo was promoted in )anuary :o¡¸ to a ligler position,
instructed staff to continue working on tle feasibility study regarding
tle replacement of tle computer system tlat EDD was using for its
collection program and, as part of tlat effort, to explore low tlis
3
In California began participating in the Offset Program to collect a different kind of
unemployment debt, the debt owed by employers. The employers’ combined debt was much
smaller than the amount of debt owed by overpaid claimants. EDD maintains the employer debt
information in a different computer system that allows it to submit the debt information to the
U.S. Treasury far more easily than it can transmit claimant debt information.
Although a total of states were
participating in the Offset Program
by early , EDD still did not have
a plan to participate.
California State Auditor Report I2012-0651
March 2014
10
system could facilitate participation in tle Offset Program to collect
unemployment benefit overpayments. However, no one at EDD was
working on translating EDD’s benefit overpayment debt information
into a format tlat could be transmitted to tle U.S. Treasury, and EDD
lad no plans to join tle Offset Program to collect unemployment
benefit overpayments.
Tis situation substantially clanged just a few montls later wlen
in May :o¡¸ we began interviewing EDD officials about EDD’s lack
of participation in tle Offset Program to collect unemployment
benefit overpayments. Soon afterward, Official C advised us tlat
EDD lad establisled a scledule to participate in tlis aspect of tle
Offset Program. Official C told us tlat sle and otler EDD officials
lad determined tle feasibility study was not progressing in a timely
manner and realized tlat EDD needed to perform tle IT work
required to participate in tle Offset Program to collect unemployment
benefit overpayments independent of tle outcome of tle feasibility
study. Official C tlerefore recommended to Official B tlat EDD
commit to devoting tle resources necessary to participate in tlis
aspect of tle Offset Program as soon as possible. Official B agreed to
Official C’s recommendation and in August :o¡¸ EDD implemented a
plan to begin its participation by tle end of May :o¡( at an estimated
cost of about s6,;,ooo. However, in February :o¡(, EDD revised its
estimate and now projects tlat it will not begin participating in tle
Offset Program to collect unemployment benefit overpayments until
September :o¡( at a projected cost of a little more tlan s¡ million.
Had EDD Chosen to Participate in the Offset Program to Collect
Unemployment Benefit Overpayments Earlier, the State Could Have
Collected an Estimated $516 Million
Figure ¸ details tle events tlat occurred between :o¡o, wlen EDD first
learned of tle opportunity to participate in tle Offset Program to collect
unemployment benefit overpayments, and :o¡(, wlen EDD finally
committed to participating in tle program.
Wlile we applaud EDD’s decision to participate in tle Offset Program
and tlereby greatly enlance tle State’s ability to collect millions
of dollars in unemployment benefit overpayments, EDD’s delay in
arriving at tlis decision las been costly to tle State. Between :o¡¡
and :o¡¸, tlis delay deprived tle State of fleeting opportunities to
collect overpayments from tle stream of federal payments directed to
overpayment debtors. In addition, by furtler delaying its start date
to participate in tlis aspect of tle Offset Program until September
of tlis year, EDD will miss most of its opportunity in :o¡( to collect
overpayment debts tlrougl tle Offset Program. Tis lost opportunity
will occur because tle Internal Revenue Service (IRS) distributes
approximately ,o percent of federal tax refunds during tle montls
Soon after we had started our
investigation concerning EDD’s
lack of participation in the Offset
Program to collect unemployment
benefit overpayments, EDD
established a schedule to begin
its participation.
11 California State Auditor Report I2012-0651
March 2014
of )anuary tlrougl May of eacl year. Terefore, by tle time its
participation in tle program is scleduled to begin in September,
EDD already will lave missed tle opportunity to collect more tlan
,o percent of tle unemployment benefit overpayments it could lave
collected tlrougl tle Offset Program in :o¡(.
Figure 3
Time Line of Events Leading to the Employment Development Department’s Planned Participation in the Treasury
Offset Program to Collect Unemployment Benefit Overpayments
July 2010
EDD employees attended
a webinar regarding the
Offset Program.
July–August 2011
EDD staff began a feasibility study to
replace the computer system that EDD
uses for its collection program. As a part
of the study, EDD employees attended a
second Offset Program webinar.
May–June 2012
EDD staff estimated that California stood to receive more
than $100 million from its first year of participation in
the Offset Program. EDD staff initially estimated it would
cost $322,833 to join the program.
July 2012
EDD officials decided
not to allocate the
resources necessary to
participate in the
Offset Program to
collect unemployment
benefit overpayments
at that time.
May 2013
EDD decided it should pursue
participating in the Offset Program to
collect unemployment benefit
overpayments without waiting for the
results of the feasibility study.
May 2013
EDD decided it should pursue
participating in the Offset Program to
collect unemployment benefit
overpayments without waiting for the
results of the feasibility study.
August 2013
EDD initiated a
plan for joining
the Offset
Program.
September 2014
EDD plans to join
the Offset Program.
June 2010
The U.S. Department of Labor (Labor
Department) distributed a letter to
all states regarding the Treasury
Offset Program (Offset Program) and
its requirements.
January–April 2011
The federal government issued
program regulations. Some
states began participating in
the Offset Program.
March 2012
The Labor Department began
sending newsletters to states
detailing the successes that states
were experiencing through the
Offset Program.
May 2013
Employment Development
Department (EDD) officials
learned of the California
State Auditor's investigation.
2010 2011 2012 2013 2014
External Events
Actions by EDD
Sources: U.S. Department of the Treasury records, Labor Department records, and EDD records and staff.
As slown in Table ¡ on tle following page, we estimate tlat if EDD
lad participated in tle expanded Offset Program wlen it first became
available to tle states, California could lave collected s,¡6 million
in overpayment debts from February :o¡¡ tlrougl September :o¡(.
To arrive at tlat estimate, we calculated tle collection rates states
aclieved in eacl of tleir first, second, and tlird years of participation
in tle Offset Program to collect unemployment benefit overpayments
by dividing tle amount of money successfully offset and redirected
to tle states by tle total amount of debt tlat all participating states
submitted to tle U.S. Treasury. We tlen applied eacl first-, second-,
and tlird-year collection rate to tle total amount of collectable
benefit overpayment debt owed to California in :o¡¡, :o¡:, and :o¡¸,
respectively, tlat EDD could lave submitted to tle Offset Program.
For :o¡( we assumed tlat tle collection rate would be tle same as
tle tlird-year rate, but we discounted tle rate by ¡o percent because
12 California State Auditor Report I2012-0651
March 2014
California is not expected to participate in tle Offset Program to collect
unemployment benefit overpayments until after tle IRS las issued
,o percent of federal tax refunds for tle year. We applied tlis rate to
tle amount owed to EDD as of October ¸¡, :o¡¸. We also reduced tle
amounts owed to EDD for years :o¡: tlrougl :o¡( by tle amount of
unemployment benefit overpayments we estimated EDD would lave
collected tlrougl tle Offset Program during tle previous year(s).
Table 1
Estimated Amounts the Employment Development Department Could Have Collected by Participating in the
Treasury Offset Program to Collect Unemployment Benefit Overpayments
2011 2012 2013 2014 TOTAL
Overpayments the Employment Development
Department (EDD) could have submitted
$894,171,474 $929,987,886 $920,488,448 $892,991,625
Estimated collection rate 15.11% 18.54% 12.09% 10.88%
Estimated amount EDD could have collected $135,109,310 $172,419,754 $111,287,053 $97,157,489 $515,973,606
Sources: California State Auditor’s analysis of data from EDD and the U.S. Department of the Treasury.
Furtlermore, if it lad collected tle estimated s,¡6 million, EDD
likely would lave been able to use a substantial amount to pay for
its administrative costs. As discussed in tle Background section
of tlis report, EDD deposits tle portion of funds tlat it collects
attributable to penalties and interest assessed on fraudulent claims
into tle Benefit Audit Fund. To determine tlis amount, we looked
at tle annual amount of unemployment benefit overpayments tlat
EDD was able to collect tlrougl its otler collection efforts during
:o¡¡, :o¡:, and :o¡¸, and calculated tle percentage of eacl of tlese
amounts attributable to penalties and interest. We tlen multiplied tlose
percentages by tle amounts of unemployment benefit overpayments
we estimated tlat EDD could lave collected tlrougl tle Offset
Program during tlose years. For :o¡( we used tle percentage of EDD’s
actual collections attributable to penalties and interest during tle
previous tlree years combined. As Table : describes, EDD could lave
deposited an estimated ¡, percent of tle s,¡6 million, or s,, million,
into tle Benefit Audit Fund. Tose funds are particularly significant
because tle Legislature could lave appropriated tlem to pay EDD’s
administrative costs or transferred tlem to tle Ceneral Fund to
address otler state needs. Te remaining s(¡; million would lave been
deposited in tle Unemployment Fund, wlicl could lave lelped reduce
tle s¡o billion debt tlat California owes to tle federal government.
4
4
State law requires EDD to return collected overpayments to the source that originally funded them.
In past years, many Californians received extended or augmented unemployment benefits funded
by federal sources. Therefore, EDD would have been required to return collections on federally
funded overpayments to the federal source from which they originated.
13 California State Auditor Report I2012-0651
March 2014
Table 2
Estimated Amounts the Employment Development Department Could Have Deposited Into the Benefit Audit Fund
to Pay Its Administrative Expenses
2011 2012 2013 2014 TOTALS
Estimated amount the Employment Development
Department (EDD) could have collected through the
Treasury Offset Program
$135,109,310 $172,419,754 $111,287,053 $97,157,489 $515,973,606
Estimated percentage of collected funds that EDD could
have deposited in the Benefit Audit Fund
18.06% 19.94% 19.55% 19.23%
Estimated amount not deposited in the Benefit Audit Fund $24,400,741 $34,380,499 $21,756,619 $18,683,385 $99,221,244
Sources: California State Auditor’s analysis of data from EDD and the U.S. Department of the Treasury.
Once EDD begins participating in tle Offset Program to collect
unemployment benefit overpayments, it will be able to use tle
program to intercept future federal payments to claimants wlo
owe tle State for tlese overpayments, allowing EDD to collect
sucl overpayments more effectively and efficiently. However, by
delaying its decision to participate in tlis aspect of tle Offset
Program, EDD failed to maximize tle benefits of tle program and
missed opportunities to collect millions of dollars in unemployment
benefit overpayments. Some of tlese funds could lave paid for
EDD’s administrative costs, and tle remainder could lave reduced
California’s debt to tle federal government for unemployment
benefit costs. However, its inefficient actions forced EDD to cover
tlese administrative costs by using funds from otler sources and
prevented California from reducing its debt.
Recommendations
To remedy tle effects of tle improper governmental activity
described in tlis report and to prevent it from recurring, we make
tle following recommendations:
• To ensure tlat EDD collects unemployment benefit
overpayments as efficiently as possible, we recommend EDD
adlere to its commitment to begin participating in tle Offset
Program to collect unemployment benefit overpayments by no
later tlan September :o¡(.
• To ensure tlat EDD efficiently acts to take advantage of future
collection opportunities, we recommend EDD institute a
routine process for staff to identify and tlorouglly evaluate
ideas for improving EDD’s ability to collect overpayments. Tis
process slould require staff to bring promising ideas to tle
California State Auditor Report I2012-0651
March 2014
14
attention of EDD’s senior management so it can give prompt,
informed consideration to tlese ideas and document in detail tle
substance of tlat consideration.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
Date: Marcl ¡¸, :o¡(
Steven Benito Russo, )D, Clief of Investigations
Legal Counsel: )ulie )acob, )D
Investigative Staff: Russ Hayden, CCFM, Manager of Investigations
Lane Hendricks, CFE
For questions regarding tle contents of tlis report, please contact
Margarita Fernández, Clief of Public Affairs, at ,¡6.((,.o:,,.
15 California State Auditor Report I2012-0651
March 2014
Summary of Agency Response and
California State Auditor’s Comments
After reviewing our draft report, tle Employment Development
Department (EDD) provided comments and additional
information regarding its efforts to join tle federal Treasury
Offset Program (Offset Program) to collect unemployment
benefit overpayments. Regarding our estimate tlat EDD could
lave collected s¡¸,.¡ million in :o¡¡ tlrougl tle Offset Program,
EDD commented tlat it believes tlis amount was overstated. EDD
argued tlat because tle U.S. Department of tle Treasury did not
release tle federal regulations governing tle expanded Offset
Program until )anuary :8, :o¡¡, it did not lave adequate time to
begin participating in tle expanded program before tle federal
government began processing tax refunds in early :o¡¡. However,
as noted in our report, in )une :o¡o tle U.S. Department of Labor
provided EDD witl tle information it needed to begin preparations
immediately for participating in tle Offset Program once tle
regulations were issued. In response to tlis notification, otler
states undertook tle necessary preparations and were able to begin
participating in tle Offset Program as early as February :o¡¡. Tus,
we believe tlat EDD could lave participated in tle Offset Program
in :o¡¡ because, as demonstrated by tle success of tlese otler
states, EDD was given sufficient warning and information about
tle expansion of tle Offset Program to permit its participation in
early :o¡¡. Furtler, we arrived at an estimate of s¡¸,.¡ million using
an estimated collection rate based on tle successes of tle otler
states tlat participated in tle Offset Program in :o¡¡. Terefore, we
do not believe tlat tlis estimate is overstated.
EDD also commented tlat our draft report did not provide
sufficient information about tle different ways tlat it las
participated in tle Offset Program since :oo( to collect otler
types of debts owed to tle State. To address EDD’s comment, we
included additional information in tle Background section of
our report about tle otler ways in wlicl EDD participates in tle
Offset Program, including using tle program to collect outstanding
personal income taxes and disability insurance contributions tlat
employers witlleld from employees’ payclecks but failed to remit
to EDD. However, considering EDD’s extensive familiarity witl tle
effectiveness of tle Offset Program as a collection meclanism over
tle past decade, we find its delay in using tle program to collect
unemployment benefit overpayments to be even more appalling.
EDD also expressed concern tlat our draft report did not
adequately acknowledge its efforts during :o¡: and :o¡¸ to pursue
a feasibility study to replace tle computer system EDD uses for
its collection program. Altlougl one of tle goals of installing a
California State Auditor Report I2012-0651
March 2014
16
new computer system was to facilitate EDD’s participation in tle
Offset Program, it was not tle primary objective of tle project, and
tying participation in tle expanded Offset Program to installing a
new computer system only served to linder joining tle program.
Furtler, even after recognizing early on tlat tle study and
subsequent work would not be completed in time to participate
in tle Offset Program in )anuary :o¡¸, EDD still did not pursue
participating in tle Offset Program otler tlan to continue treating
it as a potential byproduct of someday installing a new computer
system. Ultimately, EDD’s efforts to pursue tle feasibility study
did not result in advancing its participation in tle Offset Program
and left it to make tle necessary clanges to its existing computer
system later anyway—a decision tlat EDD could lave made mucl
earlier and tlereby yielded substantial returns.
In addition, EDD provided furtler details regarding tle factors tlat
it claimed led to its decision to delay participation in tle Offset
Program to collect unemployment benefit overpayments. It stated
tlat between :o¡¡ and :o¡¸, its information teclnology (IT) project
portfolio included a total of eiglt projects costing more tlan
s,;: million. Some of tlese projects lad legislatively set deadlines
and required securing vendors tlrougl tle competitive bidding
process and dedicating EDD’s IT and program staff resources.
EDD also stated tlat in :o¡o it notified tle Legislature tlat it
would lave to suspend work on several IT projects because it lad
overcommitted its staff resources. However, tlis notification did not
liglliglt tlat EDD was forgoing an opportunity to collect lundreds
of millions of dollars owed to tle State by not participating in tle
Offset Program to collect unemployment benefit overpayments.
Furtler, EDD did not request additional resources from tle
Legislature to avoid suspending work on tlese projects or to
enable it to participate in tle expanded Offset Program. Altlougl
we do not dispute tlat EDD lad allocated its resources toward
otler IT projects, we still find it difficult to understand wly it did
not attempt to find a way to dedicate a relatively small amount of
resources to a project tlat was projected to bring sucl large returns.
To address our first recommendation, EDD reported tlat it is
working actively to perform tle IT work necessary to participate in
tle Offset Program to collect unemployment benefit overpayments.
EDD lad planned to begin participating in tle Offset Program
by May :o¡(, and in our draft report to EDD, we made a
recommendation urging tle department to begin participating in
tle program by tlat planned date. However, EDD explained tlat tle
work lad proved to be more complex tlan originally anticipated,
delaying its participation scledule and increasing its costs. As
noted in tle report, EDD now plans to participate in tle Offset
Program beginning in September :o¡(, at an increased cost totaling
rouglly s¡ million. We lope EDD succeeds in complying witl tlis
17 California State Auditor Report I2012-0651
March 2014
revised date for beginning to participate in tle Offset Program to
avoid missing additional opportunities to collect unemployment
benefit overpayments.
To address our second recommendation, EDD stated tlat
since :ooo, its collections division las a structured process
in place to solicit ideas from staff for greater efficiencies and
revenue opportunities. Its business results planning process
includes a montlly meeting between staff and managers wlere
tle participants slare information and communicate operational
clanges. In tle meetings, managers encourage staff to provide
input and make suggestions for improvement. Te managers tlen
slare tlese ideas witl senior-level management for consideration
and implementation. EDD reported tlat tlrougl tlis process, it las
implemented many ideas tlat lave improved tle effectiveness of
its operations. However, because tlis process was in place between
:o¡o and :o¡:, a time wlen some EDD employees openly favored
participating in tle expanded Offset Program yet tle program still
received little or no attention from EDD, we are left to conclude tlat
tle process was ineffective at raising tle expanded Offset Program
to tle awareness of EDD’s senior officials. Terefore, EDD needs to
improve its process to implement our recommendation fully.
18 California State Auditor Report I2012-0651
March 2014
Blank page inserted for reproduction purposes only.
19 California State Auditor Report I2012-0651
March 2014
Appendix
THE INVESTIGATIONS PROGRAM
Te California Wlistleblower Protection Act (Wlistleblower
Act) contained in tle California Covernment Code, beginning
witl Section 8,(;, autlorizes tle California State Auditor (state
auditor) to investigate allegations of improper governmental
activities by agencies and employees of tle State. Under tle
Wlistleblower Act, an improper governmental activity, as defined
by Covernment Code section 8,(;.:, subdivision (c), includes any
action by a state agency, or by a state employee in connection witl
lis or ler employment, tlat violates a state or federal law, violates
an executive order of tle governor, a California Rule of Court,
or a policy or procedure mandated by tle State Administrative
Manual or State Contracting Manual, is economically wasteful,
or involves gross misconduct, incompetence, or inefficiency. To
enable state employees and tle public to report suspected improper
governmental activities, tle state auditor maintains a toll-free
Wlistleblower Hotline: (8oo) ,,:-,66,. Te state auditor also
accepts reports of improper governmental activities by mail and
over tle Internet at www.auditor.ca.gov.
Altlougl tle California State Auditor’s Office conducts
investigations, it does not lave enforcement powers. Wlen it
substantiates an improper governmental activity, tle state auditor
reports confidentially tle details to tle lead of tle state agency
or to tle appointing autlority responsible for taking corrective
action. Te Wlistleblower Act requires tle agency or appointing
autlority to notify tle state auditor of any corrective action taken,
including disciplinary action, no later tlan 6o days after transmittal
of tle confidential investigative report and montlly tlereafter
until tle corrective action concludes. Te Wlistleblower Act
autlorizes tle state auditor to report publicly on substantiated
allegations of improper governmental activities as necessary
to serve tle State’s interests. Te state auditor may also report
improper governmental activities to otler autlorities, sucl as law
enforcement agencies, wlen appropriate.