Newsom Has His Own Massive State Fraud Problem
Dear John,
Tim Walz perp-walked himself out of the Minnesota governor’s race last week, beset by evidence that fraudsters have plundered his state’s federally funded food, housing, daycare, and Medicaid programs. It’s “what has been described as the nation’s largest COVID-era scheme,” says Fox News, with the U.S. attorney in Minnesota estimating “the fraud could exceed $1 billion and rise to as high as $9 billion.”
The “nation’s largest COVID-era scheme”? Au contraire, California remains the leader in that category, a ranking the Golden State won’t give up easily. And the state’s fraud scandal could come back to haunt Governor Gavin Newsom as he gears up for an expected presidential run.
In a new report, California’s independent auditor says Newsom has still failed to fix vulnerabilities in the state’s unemployment insurance system six years after international crime gangs stole some $33 billion, including $20 billion in federal funds.
California’s Employment Development Division (EDD) “continues to be a high‑risk agency because of insufficient improvement in managing its UI [unemployment insurance] program,” the auditor found. The agency “continues to have high rates of improper UI payments, including fraudulent payments,” and “failed to meet acceptable levels in more than half of the measures on which the federal government evaluates its performance.”
“These inadequacies have resulted in a substantial risk of serious detriment to the state and its residents,” the auditor concludes.
California’s employers hardly need a reminder. Like the governors of 21 other states, Newsom also accepted federal loans intended to backstop state unemployment-insurance trust funds during Covid lockdowns. Unlike those other governors, Newsom has refused to repay his loan.
California businesses will pick up the tab. They’ll do that through the Federal Unemployment Tax Act, which requires the IRS to collect federal payroll withholding tax of 0.6 percent on the first $7,000 of each employee’s income, or $42. But when it encounters a deadbeat governor, FUTA requires the IRS to raise that rate by 0.3 percentage points for each year that the federal loan remains unpaid.
Today, thanks to Newsom, some 4 million California employers now pay three times the standard rate, $126 per employee. The next payment is due January 31. That ought to be politically popular.
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One of those California employers is Bill Proestler, who runs 5 Star Car Wash & Detail Centers, with two locations about halfway between San Francisco and Sacramento. A year ago, when the FUTA rate was only 1.2 percent per employee, Proestler paid an additional $6,000 in federal unemployment withholding. Despite the 2025 increase, he’ll pay about the same this time — but only because he aggressively slashed his payroll from 80 employees to about 50.
“I’ve automated operations as far as we possibly can,” he tells National Review. Car exteriors are now completely machine-washed. “It’s interiors that are the problem,” he says, those labor-intensive “fine touches and details our customers expect” and that no robot can match. He has cashiered his cashier: “The entire [point-of-sale process] is totally automated,” he says, a human having been replaced by a kiosk.
Proestler hates the layoffs, not only because they affect “the customer experience” but because he knows the pain of each person he terminates and the increased burden of those still on the job. That includes Proestler himself.
“I’m not complaining,” he says. “I love work. But I do mind getting my pocket picked by the state of California.”
He also worries about the ripple effects — the injury to his employees and their families, his customers, and vendors. The rising payroll tax on small businesses “eliminates the entry-level jobs that a high school kid could get. It shuts down a way into the workforce where you can develop the basic skills for a lifetime of work — the routine of work, the experience, the work ethic.” Fewer jobs means less money flowing through the economy, and ironically, he notes, “that means less tax revenue to the state. It’s a downward spiral, and it’s spiraling faster and faster.”
“It’s going to get worse” for small businesses, he says, because, alongside the rising federal withholding, he notes other regulatory injuries, including an increase in the minimum wage to $16.90. “That’s a burden on every service business in California. And now we still have to pay the federal government money that Newsom borrowed in 2020, paid out to criminals, and that loan is still in arrears?”
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Things look much better for Julie Su. First appointed by Governor Jerry Brown, Su remained as Newsom’s appointed state secretary of labor. In that role, she was still in charge of the Employment Development Division during the heist. For years before Covid, she ignored the state auditor’s warnings about vulnerabilities in the state’s unemployment benefits system, arguing that the tougher identity-verification standards the auditor recommended would disproportionately hurt black and brown Californians.
The auditor wasn’t unique in identifying the system’s shortcomings.
“We warned her, too,” says Haywood Talcove, CEO of LexisNexis Risk Solutions’ government programs.
Talcove says his firm offered to harden the system against fraudsters without locking out legitimate claims.
Su and her staff “did whatever they could to discredit us — claimed, ‘We’re seeing no fraud. We don’t know where he’s getting these numbers. He’s just a vendor.’” When the fraud numbers began to spike in 2020, Talcove says, Su and her staff called them “accidents.” (Su did not respond to National Review’s request for comment.)
Su’s squeamishness left the system wide open to fraud. Multiple sources say that most of California’s missing money, about $26 billion, was captured by international crime gangs operating on behalf of foreign adversaries — most notably a Chinese state-sponsored cyber crimes outfit called Advanced Persistent Threat 41 or “Wicked Panda” — and is being deployed against Americans and American interests.
“The staggering fraud committed against California’s EDD during the pandemic is alarming, but the real danger lies in what those stolen billions are now funding,” says Paul Eckloff, a retired Secret Service special agent who now works alongside Talcove at LexisNexis Risk Solutions. “Nation-states and transnational criminal groups are using this money to fuel illicit narcotics, human trafficking and activities that actively undermine our financial institutions and national security.”
“Even more alarming, these groups haven’t stopped — they’re continuing to target state programs across the country, promoting terror, crime, and undermining the rule of law,” he tells National Review.
But Su’s post-scandal resume is evidence that it’s better to be lucky than good. Despite her record of California incompetence, President Joe Biden in July 2021 tapped Su — flew her out of Sacramento like the last helicopter lifting off the U.S. embassy in Saigon — to run the U.S. Department of Labor, first as deputy secretary. When her boss, former Massachusetts union activist and Boston mayor Marty Walsh, departed for the National Hockey League Players Association, Biden nominated Su to take his place. In that role, among other dubious actions, she attempted quietly to forgive California’s federal debt. Enraged, Congress blocked her confirmation. Biden refused to back down. By January 20, 2025, 682 days after her nomination, Julie Su had earned yet another distinction: longest-serving unconfirmed cabinet secretary in U.S. history.
Su wandered for only a few months in the political wilderness. And then, on New Year’s Day, she stepped back into the spotlight alongside New York City Mayor Zohran Mamdani. She’ll serve him in a newly crafted post, deputy mayor for economic justice.
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When I ask Proestler what he would say to Americans feeling hopeful about a Newsom presidential campaign in 2028, he pauses. For a moment, it seems we’ve dropped the call. And then he replies.
“I’d ask them, ‘You really want the entire country to look like California?’”
So far, the answer seems to be “yes.” Polls suggest that Newsom, who remains in office until he’s termed out in November, has never had a clearer path to the White House. Commentators are working hard to explain why that might be — why Newsom has thrived where Walz has withered. Newsom’s “idea of strength includes a willingness to fight dirty, going lower than Barack Obama could ever imagine,” observes Helen Lewis in “The Front-Runner,” her sprawling, masterful Atlantic manifesto about Newsom and the 2028 campaign. “Gavin Newsom has Hollywood-grade instincts,” writes John Mac Ghlionn in The Hill. “He was made to perform. And in modern presidential politics, performance beats conviction nine times out of ten. Newsom looks presidential in the way actors look heroic — before they’ve done anything heroic at all.”
When Proestler tells me that Walz had the good sense to quit, we quickly remind one another that Newsom is no Walz. Trump knows this, too. Walz’s departure from the Minnesota governor’s race gave the voluble president time to recalibrate his social media weapons and targets.
“California, under Governor Gavin Newscum, is more corrupt than Minnesota, if that’s possible,” Trump wrote on Truth Social. “The fraud Investigation of California has begun.”
So has the 2028 campaign for the White House.
— By CPC CEO Will Swaim. This article was originally published by National Review.
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