California Fails Federal Oversight on 7 Programs

A new state audit has found that California failed to meet federal requirements for seven out of 22 programs reviewed, with “pervasive” noncompliance identified in the state’s unemployment benefits program.

The findings raise concerns about the state’s continued eligibility for billions in federal funding.

The audit, conducted by independent firm Macias Gini & O’Connell LLP (MGO) and summarized by Deputy State Auditor Linus Li, outlines multiple issues with the administration and oversight of federally funded programs in the state.

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“This report concludes that the State did not materially comply with certain requirements for seven of the 22 federal programs or clusters of programs (federal programs) MGO audited, including one program for which the noncompliance was pervasive,” Li wrote.

“Additionally, although MGO concluded that the State materially complied with requirements for the remaining federal programs it audited, the State continues to experience certain deficiencies in its accounting and administrative practices that affect its internal controls over compliance with federal requirements.”

The program with the most serious concerns was California’s unemployment insurance system, administered by the Employment Development Department (EDD).

The audit revealed that nearly $200 million in “potentially ineligible payments” were made during 2023 alone — several years after the state distributed an estimated $55 billion in fraudulent unemployment benefits during the COVID-19 lockdown period.

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Among 138 pandemic unemployment assistance claims that auditors reviewed, 91 — or 66% — had verification issues.

These ranged from missing documentation to insufficient identity verification.

California State Assembly Minority Leader James Gallagher responded to the audit’s findings by calling out Governor Gavin Newsom’s administration for what he described as misplaced priorities.

“While Gavin Newsom chases the national spotlight, Californians are left with an administration that can’t accomplish the basic functions of government,” Gallagher told The Center Square.

“The federal government is right to take a look at this spending and decide if it’s appropriate to keep throwing resources at an administration that treats it like Monopoly money.”

The report comes at a time when the state continues to face financial pressures in its unemployment insurance fund.

According to the California Legislative Analyst’s Office (LAO), the fund carries an annual structural deficit of $2 billion.

In addition, California owes $20 billion to the federal government for loans taken to cover unemployment claims during the pandemic and is accruing approximately $1 billion in interest payments each year.

To close the funding gap, the LAO has estimated that payroll taxes — which fund unemployment benefits — would have to increase dramatically.

Under current law, employers pay $42 per employee earning $46,800 or more annually.

The LAO says that figure would need to rise to $889.20 per employee, a more than 21-fold increase, to meet the state’s funding needs.

The audit’s findings could place federal funding for California’s programs at risk.

If the U.S. Department of Labor or other federal agencies determine that noncompliance persists, the state may be required to repay certain amounts or could face reductions in future allocations.

As of now, no formal penalties have been announced, but the audit’s publication is expected to prompt further oversight and possible investigations into the state’s use of federal funds.

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