It’s a depressingly familiar story: taxpayers lost a massive amount of money to waste, fraud, and abuse during the pandemic. On unemployment benefit checks alone, official government estimates suggest almost $200 billion in “improper payments,” which doesn’t include losses under the most abused federal program. Counting those losses, private sector experts estimate $400 billion in misspending, or over 40 percent of all unemployment benefits paid. That’s the equivalent of over a decade of typical spending on unemployment benefits, up in smoke.
Those are nationwide figures, and little is known about misspending by state. But in a new report, I review spending on federal unemployment benefits by state for some clues. That review reveals that large blue states like New York and California received vastly disproportionate federal funding during the pandemic—even after controlling for the size of their labor force. Excessive improper payments could be a key reason why.
The figures are stark. New York received nearly 15 times as much federal funding per member of its labor force ($8,337) as the lowest-funded state, South Dakota ($567). California and Massachusetts were not far behind at 12 times as much, followed by Michigan, Hawaii, Pennsylvania, and Nevada at 11 times as much, and New Jersey at 10 times as much.
Some differences among states are expected, for several reasons.
The number of unemployed people naturally varies by state, and blue states tend to have higher unemployment rates. During the period while federal pandemic benefits were paid, state unemployment rates ranged from an average of 11.9 percent in Nevada to 3.7 percent in Nebraska and South Dakota.
Some temporary programs targeted specific populations, like the long-term unemployed. It is no surprise that Massachusetts, with a median unemployment duration of over 23 weeks in 2021, received more federal funds to pay extended benefits than South Dakota, where the median duration was just five weeks. And some federal programs matched state benefit levels, which are often higher in blue states.
Those and other factors—including the aggressiveness of states’ shutdown measures and culture of work versus benefit collection—all affected how many benefits were paid. And some red states opted out of paying federal benefits during the last few months these temporary programs operated.
But 10 to 15 times more funding in one state than another? The explanations seem insufficient to fully explain that massive gap. But high levels of fraud and abuse in big-spending states would certainly contribute, especially compared with states that did a better job preventing misspending.
Unfortunately, data about improper payment rates by state are either unavailable or useless. Earlier this year, the Department of Labor (DOL) reported that states collectively have established $63 billion in overpayments involving federal pandemic unemployment benefits—just a third of the DOL Inspector General’s conservative estimate of $191 billion in improper payments nationwide.
Individual state estimates behind that $63 billion total appear unreliable. Take California. In 2021, state officials there admitted to losing potentially $31 billion to fraud yet recently reported establishing just $43 million in pandemic overpayments. Comparatively small Colorado established 55 times as many overpayments as the Golden State.
There is plenty of anecdotal data suggesting that California and New York especially lost huge amounts to fraud and abuse during the pandemic. In addition to the $31 billion in potential fraud California officials once admitted, a 2020 report suggested that literally every self-employed person in California had applied for Pandemic Unemployment Assistance (PUA), the most-defrauded federal program. More likely, criminals saw asserting self-employment as the surest path to stealing benefits. And after federal program integrity reforms in early 2021, PUA claims elsewhere fell by two-thirds—but plummeted by 92 percent in New York, suggesting far more abuse had occurred there.
We may never know exactly how much fraud there was in some states during the pandemic. But it’s clear that Congress needs to prevent a repeat of these rip-offs, while ensuring more equity in future federal anti-recession funding across states. Among other reforms, it should require states to confirm the identity and eligibility of claimants before benefits are paid. No more “self-certification” of eligibility, as during the pandemic. Congress should also target help to the long-term unemployed while giving all states a share in flexible funding they can direct where needed. That’s the formula last applied in the recession after 9-11, when concerns about fraud and disproportionate state funding weren’t on anyone’s radar—for the obvious reason that federal policy didn’t promote it.
Matt Weidinger is a senior fellow and Rowe scholar in opportunity and mobility studies at the American Enterprise Institute.
