Kim Tanner didn’t expect to become a fraud detective when she filed for disability with the California Employment Development Department.

But in mid-July, $3,161 vanished from her online account with the state’s new debit card contractor, Money Network, according to Tanner’s complaints to government regulators. Someone had gotten access to her online debit card account, added a new bank account and transferred out her money, all without any notifications, she wrote in the complaints.

Tanner said Money Network told her it could take 90 days to investigate, and that she may or may not get a full refund, leaving her short on rent money. She turned to social media and saw similar horror stories on Reddit and Facebook. “My head exploded,” Tanner said. “This was happening to tons of people.”

So she started filing complaints. First with Money Network, its parent company Fiserv and the EDD. Then with a state senator and a half-dozen financial regulators.

“It just went on and on and on,” said Tanner, who got her money back via paper check about a month and a half later, after a federal agency intervened. “This needs to be investigated.”

A CalMatters investigation a year ago exposed how the EDD’s unemployment system crashed during the pandemic, the result of historic job losses, years of missed warning signs and poor contractor performance. As a result, the system at first failed to stop widespread fraud, then cut off access to millions of real people who used it as a crucial lifeline.

Now, even with a new payment contractor in place, concerns about fraud linger for people who rely on unemployment and disability programs run by the EDD. Multiple lawsuits and 74 federal consumer complaints about government debit cards have been filed by Californians against Money Network this year alone. The EDD and the company say the debit card fraud is smaller scale than the varied forms of fraud during the pandemic.

On top of the fraud complaints, a report released Monday by the Legislative Analyst’s Office warns that lawmakers are failing to address a bigger unemployment problem: a “broken” financial model, one that threatens the whole system.

California’s unemployment fund is still $20 billion in debt to the federal government after the state took out loans to cover pandemic benefits, costing taxpayers $1 billion in annual interest — more than the state spends on child welfare. Now, after years of ignoring calls to modernize the state’s 1980s-era unemployment tax code, the system is on track to lose $2 billion a year as it fails to bring in enough revenue to cover unemployment expenses, according to the report.

The Legislative Analyst’s Office, which provides fiscal and policy advice to state lawmakers, says the state needs to bring unemployment taxes in line with other states to cover the deficit.

“This is entirely avoidable,” said LAO policy analyst Chas Alamo.

Caption: First: Kim Tanner at her home in Carlsbad. Last: Kim Tanner scrolls through the “MoneyNetworkFraud” subreddit on her computer. The California Employment Development Department contracted Money Network to handle debit card payments after the agency faced scammers and hackers during the pandemic. Oct. 11, 2024. Photos by Adriana Heldiz, CalMatters

The recommendations could force a reckoning for lawmakers caught between business and labor advocates. Business groups have fought tax increases, favoring California’s current lowest-in-the-nation unemployment tax base. Labor groups argue that taxes must go up to stabilize the system. Then, they say, lawmakers should evaluate measures to expand which workers are eligible for unemployment or raise California’s $450-a-week maximum payment, which is also lower than many other states.

What happens next will be one test of how legislative leaders respond to voters’ rebuke of Democratic leadership nationwide, with the Legislature’s Democratic leadership pledging to do more to make California a less expensive place to live.

Meanwhile, the EDD has already secured funding for an unprecedented five-year, $1.2 billion effort called EDDNext to finally modernize the call centers, software and websites that power the state’s job safety net — a more ambitious version of past modernization efforts that crumbled during the pandemic.

Whether or not history will repeat itself is complicated by unanswered questions about what went wrong at the EDD during the pandemic and how the state scrambled to recover.

Former California labor chief Julie Su went on to become acting U.S. labor secretary and one of the longest-unconfirmed presidential nominees in history, thanks in part to criticism over unemployment fraud.

Gov. Gavin Newsom’s administration has denied CalMatters’ repeated requests for internal records from this period, citing an exemption that allows the governor to keep his communications secret if he chooses.

The fraud factor

During the pandemic, a wide range of fraud schemes hit the unemployment system at once. Global hackers used large-scale identity theft. Low-level social media scammers and prison inmates adopted fake names to file for benefits under emergency federal programs that waived normal identity checks. Debit card scammers cloned insecure EDD cards then run by Bank of America and drained the accounts.

Millions of real California workers got caught up in the mess, state audits found. Some saw their EDD accounts flagged as suspicious due to clerical errors, communication failures or faulty fraud software. Laid-off workers saw EDD debit cards overdrawn by thousands of dollars or cut off as the bank and the state scrambled to rein in fraud.

California and other states were partially let off the hook when the federal government agreed to absorb the bulk of the billions lost to fraud in emergency programs. After Bank of America pulled out of the unemployment business last year, the EDD tried to turn the page on debit card fraud by hiring Georgia finance tech company Money Network to take over.

The scope and details of the current fraud that workers allege isn’t clear. State auditors and financial regulators haven’t analyzed it; lawsuits and regulatory complaints only show that money disappeared from workers’ accounts, not how it was taken.

The Consumer Financial Protection Bureau, which previously fined Bank of America $100 million over what it called “botched” pandemic unemployment payments, declined to answer questions about new complaints. The bureau’s public records show that Californians have filed 149 complaints against Money Network since 2022, when the company first started running a different state debit card program, with 101 complaints mentioning government cards.

Money Network said in a statement that “only a small percentage of EDD recipients have reported suspected fraud,” and that anyone concerned should “call the number listed on the back of their card.”

The EDD and Money Network also now allow direct deposit, giving people the option of skipping debit cards altogether. Since direct deposit launched in June, about 15% of new applicants have opted for debit cards, the EDD said in a statement. The agency could not immediately say how many of its hundreds of thousands of existing customers still use debit cards.

“Anyone who suspects they are a victim of fraud should take steps to protect themselves and file a fraud report,” the EDD said in a statement.

A flyer for identity theft resources and information sits on top on other various documentation related to Kim Tanner’s financial fraud case on her desk at her home in Carlsbad on Oct. 11, 2024. Photo by Adriana Heldiz, CalMatters

Lea Bitton was still reeling from a high-risk pregnancy when it happened to her.

One evening in June, the Orange County resident logged into her Money Network disability account and realized that $4,000 was missing. She relied on the EDD money to cover her family’s costs during parental leave.

Someone Bitton didn’t know had hacked into her account, according to a lawsuit she filed against Money Network. Similar to Tanner’s case in Carlsbad, a new electronic transfer was set up for someone with a different name and bank account, and Bitton was never asked to authorize the change before the money disappeared.

Matthew Loker, Bitton’s attorney, said the fraud appears similar to some EDD debit card fraud cases that he handled during the pandemic.

“It’s deja vu a little bit,” Loker said. “It’s a difficult problem, but it shouldn’t be the consumers who are left holding the bag.”

If fraud occurs once unemployment or disability money has already been transferred from the EDD to Money Network, the state’s contract says that Money Network is responsible for investigating and reimbursing clients if necessary. But some people with EDD Money Network debit cards say that it isn’t always easy to figure out how to start that process.

In Los Angeles, Greg Zekowski filed for unemployment while in between film projects. He hadn’t even used his EDD Money Network debit card yet, he said, when he logged into the online account and saw several unfamiliar charges to Uber and other retailers.

He called Money Network. “Their response was, ‘The problem is EDD,’” Zekowski said.

So he called the EDD: “Their response was, ‘It’s all them.’”

The EDD and its contractors aren’t alone. The state’s food assistance and college financial aid programs are also among the many financial systems facing mounting fraud risks.

One broader challenge is how few financial institutions bid on government benefit projects. The lack of options puts more pressure on agencies working to secure debit cards and other payments, according to a 2023 report by the Consumer Financial Protection Bureau.

“Providers may face minimal competitive pressure from program innovation, new entrants, or customer choice,” the report authors wrote, “which may exacerbate or cause the issues with fees and customer service that benefits recipients face.”

A financial cliff

While the EDD and the people who rely on it play whack-a-mole with fraud, California has big decisions to make about the future of the state’s job safety net.

If the state continues to do nothing, the LAO projected this week, it will have no unemployment reserves and become even more reliant on loans from the federal government to weather future recessions, likely costing taxpayers billions more in interest.

Or the state can bite the bullet, as many others have, and change the way it pays for unemployment.

The offices of the Employment Development Department in Sacramento on Jan. 10, 2022. Photo by Miguel Gutierrez Jr., CalMatters

First, the LAO recommends that businesses pay a flat 1.9% unemployment tax while digging out of debt. California companies also currently only pay unemployment taxes on the first $7,000 a worker earns each year. Instead, the LAO recommends taxing employers on workers’ first $46,800 in earnings — higher than some neighbors like Nevada, but lower than Washington, Idaho and Oregon.

“We understand that the scope of the recommendations that we’re putting forward in this report are significant,” said LAO analyst Ann Hollingshead. “This is just an honest reflection of the severity of the underlying problems in the system.”

State lawmakers last revamped unemployment taxes in 1984. And businesses are already voicing opposition to temporary tax hikes to pay down California’s deep federal debt. One bill to recalibrate how the system is paid for — raising unemployment taxes to eventually increase weekly benefits — died in committee this year.

Robert Moutrie, a policy advocate for the California Chamber of Commerce, said that the business group is still reviewing the details of the LAO proposal. In the past, the Chamber has favored tightening unemployment eligibility to reduce benefit payments, labeling any form of tax increases and proposals to expand the unemployment system “job killers.”

Daniela Urban, executive director of the Sacramento Center for Workers’ Rights, said there is broad agreement on how unstable the current situation is but discord on where to go from here. She and other labor advocates say that unemployment is one area where California businesses have long underpaid compared to other states, and that the system has not kept up with non-traditional jobs and increasing costs of living.

“We’re in a huge hole, and that’s not financially acceptable,” Urban said. “But how and when to make those changes I think is what the contention is.”

In addition to the funding hole, the pandemic revealed other problems at EDD. Tech systems buckled: jammed call centers, spotty online accounts and a patchwork behind-the-scenes process for tracking unemployment claims. The agency is currently overhauling these systems with EDDNext.

Last year, the agency hired Salesforce to remake the MyEDD online system that workers use to manage their accounts. It brought in Amazon Web Services to update and integrate EDD phone systems that left as many as 40 million calls a month unanswered during the pandemic.

Early next year, the state will award a contract for the biggest chunk of the project — a new central system for EDD personnel to manage claims, which comes with more than 600 pages of specifications.

“We are making tremendous investments in modernizing EDD and the work is going well,” the agency said in a statement.

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CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.