Investigating Covid Relief Programs
Shortly after the 118th Congress convened in early January Representative James Comer, the new chairman of the House Oversight Committee, announced that his committee would be investigating waste, fraud and abuse in the government’s roughly $5 trillion Covid relief programs. High on his committee’s agenda would be an effort to uncover how much theft took place in the nation’s unemployment insurance programs. It’s tempting to simply write-off this effort as just another Republican Benghazi-style witch hunt designed to embarrass the Biden administration in anticipation of the 2024 elections. While this investigation may indeed turn out to be another exercise in political theatre, the subjects of the committee’s inquiries clearly warrant serious investigation.
The CARES Act was enacted in late March 2020 to address economic hardships that were anticipated to arise out of the Covid pandemic. Unfortunately, the magnitude of the appropriations contained in the Act and the haste and manner in which it was enacted created a veritable fantasyland for those inclined toward fraud. The terms of the Act were negotiated over a period of about 10 days and the Act was approved in the Senate by a vote of 96-0 and by acclimation in the House. Thus, the very manner and speed in which this piece of legislation came to be enacted telegraphed that it was not well-conceived.
While authorizing expenditures of approximately $2.2 trillion, the Act created over a dozen different programs, each dwarfing any previous initiative. In some cases these programs had no predecessors which meant that there was no government agency in place to administer them. Even those programs that had a predecessor were so large that they easily overwhelmed the capabilities of the government agencies assigned to administer them. This prompted former Senator Chris Dodd to prophesy that passing the legislation was the easy part and that administering the programs created by the Act would prove far more difficult.
Among the programs included in the CARES Act were the following:
• Supplemental and Extended Unemployment Insurance ($590 billion),
• Paycheck Protection Program ($349 billion),
• Grants to State and Local Governments ($339 billion),
• Loans to Large Corporations ($500 billion), and
• Tax Refunds for Low Income Families ($560 billion)
Some of these programs were later augmented with additional funding contained in subsequent legislation. For example, the size of the Paycheck Protection Program (“PPP”) was later raised to $780 billion; and an additional $300 billion was added to the unemployment insurance programs.
The Paycheck Protection Program
Among the more problematic of these programs was the Paycheck Protection Program (or “PPP”) which was intended provide short-term financial assistance to small businesses (defined as companies with 500 or fewer employees). This funding was intended to enable them to continue in business while the nation’s economy was being placed in a near-dormant state in an effort to contain the spread of the Covid virus. To make the appropriated funds quickly available they were to be provided in the form of loans insured by the federal government that would be forgiven if the recipient used the loan proceeds in specific ways such as spending at least 60% on retaining its employees. The size of the loans was based upon the size of each recipient’s payroll; and to initiate their loans applicants simply had to pledge that the economic threat of the pandemic made the funding necessary.
The PPP was administered by the Small Business Administration (the “SBA”), which prior to the pandemic was administering small business loans aggregating approximately $600 billion. Thus, the program’s ultimate $780 billion funding more than doubled the volume of loans being overseen by the SBA. This required the SBA to abbreviate many of its procedures and to rely heavily on privately owned financial institutions to identify loan recipients and to process and administer their loans.
Normally, the screening process utilized by financial institutions takes place before their loans are funded. In the case of the PPP loans, however, the job of checking the borrower’s eligibility to participate in the program and to qualify for its loan to be forgiven was to take place when the borrower applied to have its loan forgiven. To assure the public that this was not simply another government handout to the business community (like the $800 billion TARP Program bailing out financial institutions at the onset of the Great Recession), Treasury Secretary Mnuchin asserted that "We are going to have a very robust process to review loans before loans are forgiven." He went on to say that in the forgiveness process, loan recipients would be required to provide actual data supporting their claims for forgiveness.
At the outset, the SBA turned to commercial banks to act as it intermediaries. While this is the way the SBA had traditionally operated, these banks tend to work with businesses with which they had a previous lending relationships. The result was that within a couple of weeks virtually all of the program’s initial $349 billion appropriation was gobbled up by relatively large “small businesses.” Thus, even though the PPP was to be directed to all small businesses adversely affected by the pandemic, billions of dollars went to companies owned bywealthy celebrities, including Tom Brady and Khloe Kardashian as well as companies that thrived during COVID, like many manufacturing and construction firms. Also, a number of large corporations were successful in tapping into these funds by having their operating subsidiaries individually apply for PPP loans.
To address these problems the Congress immediately doubled the size of the program and the SBA began directing the newly appropriated funds through local banks, credit unions and financial companies that operated over the internet (“fintechcompanies”). Those lending institutions tended to work with businesses with fewer than 50 employees. This change, however, introduced a number of new problems. Drawn to this group of lenders were a number of newly created financial institutions. Because all lenders participating in the PPP were being compensated based upon the amount they loaned and because all loans were guaranteed by the federal government, they had little incentive to pay attention to who would be participating in the program. As a result, they doled out monies to a number of businesses that didn’t qualify to participate, some of which didn’t even exist prior to the pandemic. Therefore, to characterize their underwriting standards as “lax” would be a gross understatement. Particularly problematic in this regard were the fintech companies which made 29% of all PPP loans but accounted for more than half of the program’s questionable loans.
Almost within days the PPP had grown out of control. This was partly because the pandemic was progressing faster than the SBA. By the time the program was up and running, many employees of small businesses had already been laid off. Accordingly, those businesses simply chose to utilize the funds they received to address their most pressing needs. Rather than require repayment of the loans made to such companies, Congress chose to expand the permissible uses of the loan monies. For example, remedial legislation enacted in June 2020 gave some borrowers full forgiveness even if they didn't fully restore their workforce. It also allowed a company that had unsuccessfully tried to rehire a laid-off employee as having been rehired. In fact, the rules became so lenient that any small business that received $150,000 or less — which encompassed more than 90% of all borrowers — could get its full loan amount forgiven just by promising it had used the money correctly. No supporting documentation was needed. In this way Congress simply tried to sweep under the rug the mess that it had helped to create.
In short, the review process turned out to be anything but robust. Instead, the SBA primarily relied on computer models to analyze the 11.4 million PPP loans and only audited about 2% of those loans for fraud and forgiveness eligibility. Of the roughly 215,000 loans that were actually audited, only about 21,000 were denied forgiveness. An NPR analysis of data released by the SBA found that 92% of the loans that had been issued as of January of this year had been granted full or partial forgiveness. That included loans to companies with mega-rich owners.
One of the problems that bedeviled the program was that many of the smaller businesses covered by the program did not have the administrative capabilities to record and document their compliance with the program’’s forgiveness requirements. This largely explains why the SBA ultimately determined that loans made to sole proprietors -- like barbers, janitors and hairdressers-- had the highest rate (13%) of non-compliant loans. By contrast, only 3% of the loans made to small businesses with at least 10 employees were not forgiven.
While the SBA proclaimed that only about 0.2% of all PPP loans were required to be repaid, the actual number of loans that did not qualify for forgiveness was closer to 10%. This was the findings of researchers at the University of Texas who performed a much more detailed analysis. They found that 1.8 million (not 215,000) of the 11.4 million PPP loans were “questionable.” Those loans totaled approximately $76 billion.
The Unemployment Insurance Programs
The federal government’s effort to enhance unemployment insurance benefits contained in the CARES Act was even more fraught with fraud. This was a multi-faceted undertaking which expanded the scope of laid-off workers’ eligible to receive unemployment benefits by including self-employed individuals, gig workers and individuals with limited work histories (the Pandemic Unemployment Assistance or “PUA” Program). The CARES Act also supplemented state unemployment benefits by $600 per week (the Federal Pandemic Unemployment Compensation Program) and extended the period that an unemployed worker could collect benefits from 26 weeks to 39 weeks (the Pandemic Emergency Unemployment Compensation or “FPUC” Program). Because the pandemic lasted much longer than originally contemplated, the original $590 billion appropriation was later augmented with an additional $282 billion.
All unemployment insurance programs in the U.S. are administered by the states. Because much of the funding for these programs comes from the federal government, the U.S. Department of Labor (DOL) regularly publishes rules for the conduct of those programs. According to a report of the DOL’s Inspector General, the DOL’s rules include a requirement that state unemployment agencies cross-check applicants’ information against a handful of databases when determining eligibility for jobless benefits. These include a national directory of new hires, quarterly wage records submitted by employers, and an immigration database that allows states to verify applicants’ citizenship status.
The DOL has also repeatedly recommended that states seek to prevent individuals from making unemployment insurance claims in multiple states. To that end, both the Obama and Trump administration had unsuccessfully petitioned Congress to fund a program to establish a nationwide database of unemployment insurance recipients.
As in the case of the Paycheck Protection Program, the sheer number of individuals seeking unemployment benefits was so great that it overwhelmed the agencies administrating the three new federal unemployment programs. According to the Bureau of Labor Statistics, prior to the pandemic the number of weekly initial unemployment insurance claims stood at 282,000. Within three weeks after the CARES Act was enacted, initial unemployment claims rose to ten times their pre-pandemic levels; and after five months the DOL reported that an aggregate of 57.4 million new initial unemployment claims had been filed.
In order to accommodate these three new programs foisted upon them by the federal government, state unemployment agencies had to modify their internal software. This was particularly true with respect to the PUA Program as state unemployment insurance programs had not previously covered the classes of workers comprehended by that program. In some cases, the states lacked the technical expertise to make the necessary modifications to their computer systems. To further exacerbate this problem, many state agencies were operating with antiquated computer systems which prevented them from even making the necessary modifications.
In May of 2021 the DOL Inspector General issued an interim report of the problems experienced in unemployment insurance programs created in the CARES Act. That report concluded that many of the mandatory cross-checks were not taking place. The inspector General specifically found that twenty states did not perform all the required database cross-matches and even more states did not perform all recommended ones. In addition, 21 states didn’t submit required reports to the DOL of CARES Act overpayments.
It wasn’t simply that the pandemic caused more workers to be laid off and apply for unemployment benefits, the greatly expanded unemployment programs attracted computer hackers (both foreign and domestic) who stole the identities of American workers. They not only submitted applications for unemployment benefits using stolen identities, they sold stolen identities on the internet which were used by others to submit bogus unemployment claims. In some cases, unemployment claims were submitted to numerous state unemployment agencies in the name of a single worker.
The risk of fraud was particularly great in the Pandemic Unemployment Assistance program. That program, being new, required much more effort to get it up and running. In its rush to get cash to those covered by the PUA program, Congress chose not to require the customary verification checks. Instead, it allowed for self-certification of eligibility and required no proof of income or identity. Compounding this risk, successful PUA applicants could also receive the extra $600 weekly payment provided by the FPUC program. These features proved irresistible to throngs of scammers.
The DOL’s Inspector General’s report initially estimated that at least $87 billion in fraudulent and improper payments would make their way through the system by the time the unemployment programs created in the CARES Act expired in September, 2021. That estimate, however, was based on the 10% historic rate of fraud and waste in unemployment insurance programs. Clearly, that estimate (as the Inspector General acknowledged) was too conservative in an environment wherein fraud was occurring at an “unprecedented” level.
According to the Inspector General’s report, in state after state, the volume of initial jobless claims far exceeded the number of estimated job losses. Across the U.S. from March to December 2020, the number of initial claims was equal to 68% of the nation’s labor force, which was approximately 164 million workers before the pandemic. By contrast, according to the Bureau of Labor Statistics, only about 23% of American workers were out of a job or underemployed at the peak of the pandemic. In five states — Arizona, Georgia, Hawaii, Nevada and Rhode Island — the initial unemployment insurance claims outnumbered the entire pool of civilian workers. These figures suggest that at least $163 billion of the $872.5 billion in pandemic unemployment benefits were probably paid improperly.
None of this should have come as a surprise. In 2015, the DOL had detailed the “systemic weaknesses” that make unemployment insurance programs vulnerable to fraud. Now that “the horses have left the barn”, the nation is in the process of spending $2 billion to modernize states’ unemployment insurance programs and strengthen them against fraud. The monies for this project are to come from the $1.9 trillion American Rescue Plan Act enacted in March 2021.
The House Oversight Committee’s Approach
Clearly both the Paycheck Protection Program and unemployment insurance programs initiated in the CARES Act are worthy of serious Congressional oversight even though there have already been a number of studies of these programs. Most of the problems that arose did not emanate from bureaucratic mismanagement although there is ample evidence that the SBA did a less than stellar job in scrutinizing the loans that shouldn’t have been extended or forgiven. Rather, most of the problems were caused by Congress which had failed to enable state and federal agencies to prepare themselves to deal with health emergencies and whose own flawed designs of these programs were the principal sources of the resulting debacle. Surely there will be other pandemics which means that it’s important that the House Oversight Committee undertake its investigations in a constructive manner so that the nation can be better prepared to deal with the next crisis.
Unfortunately, the early indications are that the Committee’s investigation will be taking the low road. Rather than focusing on the SBA’s management of the PPP or the DOL’s oversight of state unemployment insurance programs, the Committee is initially targeting the unemployment agencies of the States of California, New York and Pennsylvania. The choice of these state agencies is questionable as a more promising starting point would be the unemployment agencies in the five states (listed above) identified by the DOL for having honored more unemployment claims than their states entire workforce.
Also Representative Comer in announcing his committee’s initial actions also cast blame upon the Biden administration for having allowed “fraud to run rampant in federal assistance programs” even though the vast majority of the fraud that took place in those programs occurred while Trump was President. Stated another way, it would appear that House Republicans are seeking to attack the Biden administration for not having cleaned up the mess created during the Trump administration.