[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
UNEMPLOYMENT FRAUD AND ABUSE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HUMAN RESOURCES
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JUNE 11, 2002
__________
Serial No. 107-82
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
82-682 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Human Resources
WALLY HERGER, California, Chairman
NANCY L. JOHNSON, Connecticut BENJAMIN L. CARDIN, Maryland
WES WATKINS, Oklahoma FORTNEY PETE STARK, California
SCOTT McINNIS, Colorado SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan LLOYD DOGGETT, Texas
PHIL ENGLISH, Pennsylvania
RON LEWIS, Kentucky
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2, 3
WITNESSES
U.S. Department of Labor, Hon. D. Cameron Findlay, Deputy
Secretary, accompanied by Emily Stover DeRocco, Assistant
Secretary, Employment and Training Administration.............. 7
U.S. General Accounting Office, Sigurd R. Nilsen, Ph.D.,
Director, Education, Workforce, and Income Security Issues..... 27
U.S. Department of Labor, Hon. Gordon S. Heddell, Inspector
General, Office of Inspector General........................... 40
______
Illinois Department of Employment Security, Miles Paris.......... 52
On Point Technology, Inc., Michael Lorsbach...................... 54
Woodbury, Stephen A., W.E. Upjohn Institute for Employment
Research, and Michigan State University........................ 46
SUBMISSION FOR THE RECORD
Revenue Plus, Vancouver, WA, Tim Rogers.......................... 72
UNEMPLOYMENT FRAUD AND ABUSE
----------
TUESDAY, JUNE 11, 2002
House of Representatives,
Committee on Ways and Means,
Subcommittee on Human Resources,
Washington, DC.
The Subcommittee met, pursuant to notice, at 4:02 p.m., in
room B-318 Rayburn House Office Building, Hon. Wally Herger
(Chairman of the Subcommittee) presiding.
[The advisory and revised advisory announcing the hearing
follow:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
June 4, 2002
No. HR-15
Herger Announces Hearing on Unemployment Fraud and Abuse
Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human
Resources of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on efforts to reduce fraud and abuse
of the Nation's Unemployment Compensation (UC) system. The hearing will
take place on Tuesday, June 11, 2002, in room B-318 Rayburn House
Office Building, beginning at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include representatives of the U.S. Department of Labor,
U.S. General Accounting Office, U.S. Department of Labor Office of the
Inspector General, and other UC fraud and abuse experts. However, any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
BACKGROUND:
The UC program provides benefits to unemployed workers who have a
history of employment. Within a broad Federal framework, each State
designs its own benefits program and imposes taxes on employers to pay
for regular UC benefits. A separate Federal tax is imposed on employers
to fund the Federal responsibilities under the system, including
support of administrative expenses, loans to States, and the Federal
half of extended benefits for certain workers. In fiscal year 2002, the
U.S. Department of Labor projects that 11.8 million laid-off workers
will receive UC benefits for an average of 15.5 weeks. With an average
weekly benefit amount of $244, more than $44 billion in benefits will
be paid.
Despite the size and expense of the UC program, in recent years
program integrity activities have received relatively little Federal
attention. Several factors--including State funding of regular
benefits, perceived Federal underfunding of anti-fraud and related
administrative activities, and a strong economy--are often cited as
reasons. Congress recently addressed one concern through the passage of
legislation providing additional Federal funds to States, which may be
used for additional program integrity activities, among other purposes.
As signed into law on March 22, 2002, this legislation (P.L. 107-147)
provided for the immediate distribution of $8 billion in surplus
Federal UC funds to States, among other provisions.
In announcing the hearing, Chairman Herger stated: ``During the
recent economic slowdown, the Nation's Unemployment Compensation
program has been an important safety net for millions of hard-working
Americans who lost their jobs. Congress recently strengthened that
safety net by providing up to an additional 13 weeks of unemployment
benefits nationwide. While we provide benefits to millions of
unemployed American workers and their families, we also have oversight
responsibilities to ensure benefits are going to the right people.
That's part of the reason we also provided States an additional $8
billion in Federal funds to support anti-fraud efforts, among other
purposes. This hearing will review current anti-fraud efforts and
additional measures to better ensure program integrity.''
FOCUS OF THE HEARING:
The hearing will focus on waste, fraud, and abuse involving UC
benefits and consider additional measures to better ensure program
integrity.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
(202) 225-2610, by the close of business, Tuesday, June 25, 2002. Those
filing written statements who wish to have their statements distributed
to the press and interested public at the hearing should deliver their
200 copies to the Subcommittee on Human Resources in room B-317 Rayburn
House Office Building, in an open and searchable package 48 hours
before the hearing. The U.S. Capitol Police will refuse sealed-packaged
deliveries to all House Office Buildings.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. Due to the change in House mail policy, all statements and any
accompanying exhibits for printing must be submitted electronically to
[email protected], along with a fax copy to
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a
total of 10 pages including attachments. Witnesses are advised that the
Committee will rely on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. Any statements must include a list of all clients, persons, or
organizations on whose behalf the witness appears. A supplemental sheet
must accompany each statement listing the name, company, address,
telephone and fax numbers of each witness.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov/.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event
(four business days notice is requested). Questions with regard to
special accommodation needs in general (including availability of
Committee materials in alternative formats) may be directed to the
Committee as noted above.
* * * NOTICE--CHANGE IN TIME * * *
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
June 6, 2002
No. HR-15-Revised
Change in Time for Subcommittee Hearing on Unemployment Fraud and Abuse
Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human
Resources, Committee on Ways and Means, today announced that the
Subcommittee hearing on efforts to reduce fraud and abuse of the
Nation's Unemployment Compensation system scheduled for Tuesday, June
11, 2002, at 2:00 p.m., in room B-318 Rayburn House Office Building,
will be held instead at 4:00 p.m.
All other details for the hearing remain the same. (See
Subcommittee Advisory No. HR-15, dated June 4, 2002.)
Chairman HERGER. Good afternoon and welcome to today's
hearing on fraud and abuse in the Nation's unemployment
compensation (UC) program.
As we all know, unemployment benefits provide a much-needed
safety net to millions of hardworking Americans, especially in
tough economic times like we have seen in the past year. This
year alone, nearly 12 million laid-off workers will receive an
estimated $44 billion in unemployment benefits. That is twice
what we spend on cash welfare every year, and with far less
fanfare.
Recently, we expanded the unemployment safety net by
providing up to 13 additional weeks of unemployment benefits
nationwide. In a number of States with particularly high
unemployment, we made benefits available even longer to help
families that were hardest hit. Already, an estimated 1.4
million workers are receiving these extended benefits.
Providing this extra help in tough times is part of our
job, and Congress and the Administration have certainly
answered the call this year. We also have a responsibility to
make sure these funds are well spent and are going to intended
recipients who earn their displaced worker benefits.
Unfortunately, that does not always happen.
For example, the U.S. General Accounting Office (GAO),
citing U.S. Department of Labor (DOL) statistics, will describe
how last year, $2.4 billion in unemployment benefit
overpayments occurred. Over the past 10 years, overpayments
averaged $1.8 billion per year, or a whopping $18 billion in
misspent funds over that period. These staggering numbers
reflect just the overpayments we know about. We can be sure
more are out there waiting to be uncovered through better
oversight.
Specific examples of abuse already uncovered are troubling.
For example, GAO notes that in just four States, almost 3,000
fraudulent unemployment benefit claims totaling about $3.2
million were paid to individuals using Social Security numbers
that did not exist or belonged to deceased individuals.
Further investigation by GAO identified nine Social
Security numbers being used by approximately 700 individuals as
proof of eligibility for employment. Seven of the Social
Security numbers belonged to deceased individuals, and
apparently the individuals involved are illegal aliens.
Misused unemployment program funds represent taxes paid by
employers and constitute lost wages for all employees. Everyone
loses when unemployment benefits are the subject of fraud and
abuse.
In the law extending unemployment benefits this year, we
also provided States with tremendous new resources, a total of
$8 billion. These surplus Federal unemployment funds can pay
for new benefits or be used to improve anti-fraud and other
program integrity efforts. While many States are still deciding
how to use these new resources, we will highlight that
strengthening program integrity is one smart use that benefits
taxpayers, workers, and beneficiaries alike.
We thank all of our witnesses for joining us today to
review current anti-fraud efforts and how we can improve the
system so that it best serves American workers.
Without objection, each Member will have the opportunity to
submit a written statement and have it included in the record
at this point. Mr. Cardin, would you like to make an opening
statement?
[The opening statement of Chairman Herger follows:]
Opening Statement of the Hon. Wally Herger, a Representative in
Congress from the Sate of California, and Chairman
Good afternoon and welcome to today's hearing on fraud and abuse in
the nation's unemployment compensation program.
As we all know, unemployment benefits provide a much needed safety
net to millions of hardworking Americans, especially in tough economic
times like we've seen in the past year. This year alone, nearly 12
million laid off workers will receive an estimated $44 billion in
unemployment benefits. That's twice what we spend on cash welfare every
year, and with far less fanfare.
Recently, we expanded the unemployment benefits safety net by
providing up to 13 additional weeks of unemployment benefits
nationwide. In a number of States with particularly high unemployment,
we made benefits available even longer to help families that were
hardest hit. Already an estimated 1.4 million workers are receiving
these extended benefits.
Providing this extra help in tough times is part of our job, and
Congress and the Administration have certainly answered the call this
year. But we also have a responsibility to make sure these funds are
well spent, and are going to intended recipients who worked to earn
their displaced worker benefits.
Unfortunately, that doesn't always happen.
The General Accounting Office, citing Department of Labor
statistics, will describe how last year $2.4 billion in unemployment
benefit overpayments occurred. Over the past ten years, overpayments
averaged $1.8 billion per year or a whopping $18 billion in misspent
funds over that period. And these staggering numbers reflect just the
overpayments we know about. We can be sure more are out there waiting
to be uncovered through better oversight.
Specific examples of abuses already uncovered are troubling. For
example, GAO notes in their testimony that in just 4 States, almost
3,000 fraudulent unemployment benefit claims totaling about $3.2
million were paid to individuals using Social Security numbers that did
not exist or belonged to deceased individuals.
Further investigation by GAO identified nine Social Security
numbers being used by approximately 700 individuals as proof of
eligibility for employment. Seven of the Social Security numbers
belonged to deceased individuals and apparently the individuals
involved are illegal aliens.
Misused unemployment program funds represent taxes paid by
employers, and constitute lost wages for all employees. Everyone loses
when unemployment benefits are the subject of fraud and abuse.
In the law extending unemployment benefits this year, we also
provided States with tremendous new resources--a total of $8 billion.
These surplus Federal unemployment funds can pay for new benefits or be
used to improve anti-fraud and other program integrity efforts. While
many States are still deciding how to use these new resources, we will
highlight that strengthening program integrity is one smart use that
benefits taxpayers, workers, and beneficiaries alike.
We thank all of our witnesses for joining us today to review
current anti-fraud efforts and how we can improve the system so that it
best serves American workers.
Mr. CARDIN. Thank you, Mr. Chairman. Let me join you in
looking forward to our witnesses today. Obviously, any time
that Unemployment Insurance (UI) funds are used for purposes
that are not permitted under the law, we want to join you in
any type of corrections for fraud and abuse.
Mr. Chairman, let me tell you that there are many ways that
we think we should be looking at and focusing our attention on,
whether the Unemployment Insurance funds that are collected or
should be collected are used for their rightful purposes.
Clearly, fraud and abuse among beneficiaries is wrong. We need
to make sure that our States have the adequate tools in order
to deal with that.
Let me just also point out that an individual who is
entitled to Unemployment Insurance benefits who is denied
benefits, that is also an area that we need to take a look at.
You mentioned that we have a report from, I believe you
said GAO, that indicates that those that are using wrongful
Social Security numbers amount to about $3.2 million annually.
Well, we know in 1998, there were $600 million of benefits that
should have been paid that were not paid under the Unemployment
Insurance law because claimants did not have the adequate
information presented mainly through their employers in order
to get these benefits.
So, I think we need to take a look at not just the fraud
and abuse on the beneficiary side, but also the mistakes that
are being made on the employers' side to make sure that the
right benefits are being paid under law.
Let me also indicate that fraud and abuse can take place on
the revenue side. Employers are supposed to submit the
revenues, the Unemployment Insurance funds, for their workers.
We know that there is misclassification of certain employees as
independent contractors. I think that is another area that we
need to take a look, to make sure that we are collecting the
appropriate revenues under the Unemployment Insurance funds.
Lastly, let me point out that I think any hearing today, at
this time, taking place on Unemployment Insurance benefits has
to take a look at the long-term unemployed Americans. We have
many people who are reaching the end of their extended benefits
that we recently passed. We need to take a look to make sure
that those people who are unemployed, who are unable to find
unemployment because of the state of our economy, are protected
under the safety net that you mentioned in your opening
statement. I would hope that at this hearing we will also have
an opportunity to take a look to see whether that is working
the way Congress intended.
Thank you very much, Mr. Chairman.
[The opening statement of Mr. Cardin follows:]
Opening Statement of the Hon. Benjamin L. Cardin, a Representative in
Congress from the State of Maryland
Mr. Chairman, I look forward to hearing our witnesses' suggestions
on reducing fraud and improving the administration of the unemployment
insurance system. If people are receiving benefits that they are not
entitled to, then we should take all necessary steps to address any
potential fraud.
However, in evaluating program integrity, we must remember that
benefits are sometimes denied inappropriately, just as they are
sometimes paid inappropriately. For example, a recent study found that
roughly $600 million in unemployment insurance benefits were wrongfully
denied in fiscal year 1998.
Sometimes employers provided inaccurate information regarding an
applicant's wages and other times the local unemployment agency made
errors in assessing an individual's eligibility. The report, which we
will hear about later today, suggests that very few of the wrongfully
denied claims resulted from errors made by applicants.
This committee needs to know how the Department of Labor is
responding to that analysis so we can ensure that jobless Americans are
receiving the benefits to which they are entitled.
We also need to recognize that fraud can occur on the revenue side
of the unemployment system as well as on the payment side. If UI taxes
are not paid when due, the system will become under-funded. One area of
particular concern pointed out by a recent report commissioned by the
Department of Labor is the misclassification of certain employees as
independent contractors, for whom employers do not pay unemployment
taxes. Mr. Chairman, let me conclude by mentioning the fact that the
13-week extension of unemployment benefits that we passed in March just
expired for those jobless workers who first filed for the extension.
The Federal legislation included a potential 2nd round of extended
unemployment benefits, but very few States will qualify for that second
13 weeks.
I hope any discussion of additional UI reforms will consider the
fate of those long-term unemployed Americans who are still looking for
work, especially since the number of workers who have been unemployed
for six months or longer has tripled over the last year. I also
strongly believe that we should address barriers to low-wage and part-
time workers receiving unemployment benefits.
Thank you.
Chairman HERGER. Thank you, Mr. Cardin.
Before we move to our testimony, I want to remind our
witnesses to limit their oral statements to 5 minutes. However,
without objection, all of the written testimony will be made a
part of the permanent record.
For our first witness today, we are honored to have the
Honorable D. Cameron Findlay, Deputy Secretary of the U.S.
Department of Labor, accompanied by the Honorable Emily Stover
DeRocco, Assistant Secretary, Employment and Training
Administration (ETA) for the U.S. Department of Labor. Thank
you so much. With that, if you would testify, please.
STATEMENT OF HON. D. CAMERON FINDLAY, DEPUTY SECRETARY, U.S.
DEPARTMENT OF LABOR, ACCOMPANIED BY HON. EMILY STOVER DEROCCO,
ASSISTANT SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION
Mr. FINDLAY. Thank you, Mr. Chairman and Ranking Member
Cardin. I am very happy to appear before you today to discuss
the ways in which we are trying to reduce overpayments and
fraud in the Unemployment Insurance system.
I ask that my written testimony be included in the record,
but I will just summarize for you all a few of the key points.
Obviously, as you said, the Unemployment Insurance system
is the key to the economic security of our Nation. To carry out
the vital mission of this program, it is essential that
benefits are paid properly to eligible workers and that systems
are in place to minimize overpayments, fraud, and abuse. As you
probably know, improving financial management is a major
initiative within the President's management agenda. I heard
the same numbers that the Chairman quoted a few minutes ago,
and they sounded very high to me, as well. So, a few months
ago, I convened a task force within the U.S. Department of
Labor to begin getting at the problem of overpayments. I would
like to share with you today some of the solutions we are
pursuing.
At the outset, it is important to define the problem we are
talking about and to recognize that there are different
categories of overpayments. According to data from our
Employment and Training Administration for 2001, 8.2 percent of
all unemployment benefits, for a total of $2.45 billion, are
classified as overpayments. This total can really be broken
down into four categories.
First, approximately $385 million can be attributed to what
we call technical eligibility issues, for instance, payments
made to individuals who did not adequately document their job
search, but were actually searching for jobs and otherwise meet
the eligibility requirements.
Second, $120 million of the total can be attributed to
overpayments made in the absence of fraud, but which the State
agency affirmatively chooses not to recover. For example, if an
employer inadvertently overstates the income of an employee and
the claimant is not at fault, many States elect not to recover
this sort of overpayment.
Third, $1.37 billion of the total can be classified as non-
fraud overpayments that are potentially recoverable.
Finally, $580 million can be attributed to fraud or abuse
within the system.
While integrity of the program has been a longstanding
priority of the DOL, as this Committee knows, much of the work
to ensure integrity must be done by the States, which have
primary responsibility for administering the UI program. States
already carry out benefit payment control activities to
identify and collect UI overpayments, such as cross-matching
information within various computer databases. In 2001, States
were able to use these sorts of cross-matches to establish for
recovery some $227 million. While this is a significant figure,
it is not large enough, and the DOL is working with States to
enhance their computer cross-matching capabilities to increase
even further the identification and collection of overpayments.
Cross-matching UI benefit records with existing State new
hire directories provides a much quicker determination that
claimants have gone back to work, thus preventing claimants who
do find work from continuing to claim benefits. The 1996
welfare reform legislation required employers to report all new
employees within 20 days of the date of hire. The new hire
directories thus provide more real-time hiring data, and the
DOL is actively encouraging States to use these directories.
However, currently, only one-half of the States are doing so.
The DOL is also seeking legislation to provide access for
State UI agencies to the National Directory of New Hires, which
will permit States to find claimants who work in other States
or who work for employers that report their hires in other
States. We would like to thank the Committee for including such
legislation in the Temporary Assistance for Needy Families
(TANF) reauthorization bill that recently passed the full
House.
Another promising cross-matching opportunity involves
Social Security data. The DOL is working to implement a data
exchange system that will allow States to verify Social
Security numbers during the initial claims process, which will,
in turn, lead to a reduction of fraudulent claims filed with
false identification.
Given the promise that all these sorts of data-matching
holds, the Administration has requested $10 million in the
fiscal year 2003 budget to help States gain access to all data
that can improve the detection and recovery of UI overpayments.
I might say that is about a 28-percent increase over the past
few years in terms of the amount of money we are devoting to
integrity.
The DOL is also sponsoring in 2003, a National Integrity
Conference with the National Association of State Workforce
Agencies, to exchange best practices and help States do their
job.
In addition to this $10 million request, enactment of the
Temporary Emergency Unemployment Compensation Act provided $8
billion in Reed Act funds to the States. This legislation
provided States with substantial funds they can use for their
integrity efforts, and we have certainly suggested to States
they ought to use the Reed Act funds in that way.
Finally, we have proposed a major reform of the UI program
in the President's budget that would enhance the incentive for
States to devote the proper attention to overpayments. If
States understand how their administrative expenditures pay off
in collecting overpayments, they may increase such
expenditures. Currently, their administrative moneys are
essentially constrained by Federal contributions.
Mr. Chairman and Members of the Subcommittee, I hope we
have provided you with a good picture of the scope of the
problem and of our efforts to combat it. I would be pleased to
answer any questions you might have.
[The prepared statement of Mr. Findlay follows:]
Statement of the Hon. D. Cameron Findlay, Deputy Secretary,
U.S. Department of Labor
Mr. Chairman and distinguished Members of the Subcommittee, I
appreciate the opportunity to appear before you today to discuss
federal and state efforts to reduce overpayments, fraud, and abuse in
our nation's Unemployment Insurance (UI) benefit payment program.
The UI program is key to the economic security of our nation. As
the primary source of temporary, partial wage replacement for workers
laid off and seeking jobs, UI is an important stabilizer during
economic downturns. About 3.4 million workers currently are claiming
regular UI benefits--a 30% increase over this time in 2001 and a 90%
increase over this time in 2000. An additional 1.4 million workers
currently are claiming temporary extended unemployment compensation
pursuant to the 13-week UI program extension enacted by Congress on
March 8, 2002.
To maintain the vital mission of the UI program, it is essential
that benefits are paid promptly to eligible workers and that integrity
systems are in place to minimize overpayments, fraud, and abuse. As you
probably know, improving financial management is a major initiative
within the President's Management Agenda (PMA), the President's plan to
improve government performance and efficiency. Under the PMA, the
Office of Management and Budget has identified UI overpayments as one
of the Department of Labor's primary financial management challenges.
As a member of the President's Management Council, I am charged with
implementing the PMA at the Department of Labor, and I personally take
this UI issue very seriously. I have convened a task force comprised
of, among other individuals, officials from the Employment and Training
Administration, or ETA, our agency that administers the UI program, and
our Office of Chief Financial Officer, to develop a plan to address
this issue. I am pleased to share with you today some of the solutions
that we currently are pursuing.
Overpayments, Fraud, and Abuse: An Overview
At the outset, it is important to define the scope of this problem
and to recognize that there are different categories of UI
overpayments, each of which calls for a different response. According
to ETA's Benefit Accuracy Measurement (BAM) data for calendar year
2001, 8.2% of all unemployment benefits, or a total of $2.45 billion,
are classified as overpayments. Of this $2.45 billion, approximately
$385 million can be attributed to technical eligibility issues,
primarily meeting a State's work search requirements. In other words,
many UI payments, while technically ``overpayments'' under current
state eligibility definitions within the UI program, are made to
individuals who failed to meet certain technical eligibility
requirements but otherwise meet the primary UI eligibility requirements
of being unemployed through no fault of their own and wanting to work.
For instance, a payment made to a claimant who failed to maintain
sufficient documentation concerning his ongoing work search
requirements would be considered an ``overpayment'' under the BAM
program. States, however, would not necessarily seek recovery of such
an overpayment.
An additional $120 million of the $2.45 billion in total UI
overpayments for 2001 can be attributed to overpayments made in the
absence of fraud or abuse which the State agency chooses not to
recover. For example, an employer may inadvertently overstate quarterly
wages, resulting in an impermissibly large UI payment made to a
claimant. Because there is no fault on the part of the individual
claimant in such an instance, many states would not attempt to recover
such an overpayment. $1.37 billion of the $2.45 billion in total
overpayments are classified as nonfraud overpayments that are
recoverable. These include cases such as where an initial finding of
eligibility is reversed following an employer's appeal, and where a
claimant has erroneously reported earnings.
Finally, $580 million of the $2.45 billion in total UI overpayments
for 2001, or 1.9% of total UI payments for that year, was attributable
to fraud or abuse within the UI program. By any standard, these figures
add up to a lot of money. That is why the Department of Labor has been
hard at work on the problem.
New Initiatives To Address the UI Overpayment Problem
Integrity of the UI program is a priority for the Department of
Labor and the Administration. However, much of the work to ensure that
integrity must be done by the states, which, as you know, actually
administer the UI program. States already carry out various Benefit
Payment Control activities to identify and collect UI overpayments,
such as cross-matching information within various computer databases.
In 2001, states used various computer cross-matches to establish for
recovery as UI overpayments some $227 million--or about 32% of the
total established for recovery that year. While this is a significant
figure, the Department is encouraging states to enhance their computer
cross-matching capabilities to increase even further the identification
and collection of UI overpayments.
Let me give you some examples of how cross-matching improves the
detection and collection of UI overpayments. The largest single cause
of UI overpayments involves individuals who are collecting UI benefits
while working. Indeed, approximately 31% of the overall BAM estimate of
overpayments in 2001 was due to such individuals. Because UI wage
records are reported quarterly, there is a significant lag period
before these types of overpayments can be identified via the
traditional wage/benefits cross-match. UI overpayments are often the
result.
Cross-matching UI benefit records with new-hire directories offers
a promising opportunity to reduce this lag period, thus preventing
claimants who find work from continuing to claim UI benefits. The
Personal Responsibility and Work Opportunity Reconciliation Act of 1996
(PRWORA) required the development of such new-hire directories for the
purpose of locating parents delinquent in child support payments. Under
this statute, employers are required to report all new employees within
as few as 20 days of the date of hire. In addition, PRWORA permits
states to access their new-hire directories for UI purposes. Because of
its usefulness in UI overpayment prevention and detection, the
Department is actively promoting the use of new-hire directories by all
states. However, currently, only about half of the states are utilizing
these directories. I pledge to this Subcommittee that the Department
will redouble its efforts in the future so that more states will take
advantage of this important tool.
As you know, some claimants find work out-of-state or work for
multi-state employers that report employment and wages to a different
state. The Department is working to prevent abuses of such systems,
which could include allowing state UI agencies access to information in
the National Directory of New Hires. Any action would be done in a way
that protects personal information. We commend the Committee for
including such access in the Temporary Assistance for Needy Families
reauthorization bill (HR 4737).
Another promising cross-matching opportunity involves Social
Security data. States recently have implemented systems to take UI
claims over the telephone and Internet. While these innovations have
enabled states to handle significant increases in claims volume, states
now need new tools to verify the identities of claimants filing
electronically. The Department is working to implement a data exchange
system that will give states access to Social Security Administration
data during the initial claims process. This system will lead to a
reduction of fraudulent claims filed with false identification. The
Social Security Administration will also benefit by having access to
benefit information that will help reduce overpayments within the
Supplemental Security Income program.
Given the promise that data cross-matching holds, the
Administration has requested $10 million in the FY 2003 budget to help
states gain access to all data that can improve the detection and
recovery of UI overpayments. Also, recognizing the need to emphasize
the problem and promote best practices, the Department in 2003 will
sponsor a national integrity conference with the National Association
of State Workforce Agencies to identify and disseminate successful
practices, studies, and integrity information.
The Department will develop a new operational definition of UI
overpayments and set a new Government Performance and Results Act
(GPRA) goal for addressing overpayments. We are working to develop a
definition of overpayments that is comparable among states and covers
most recoverable overpayments. This new definition will more accurately
describe UI overpayments by recognizing those errors that are technical
in nature (e.g., based on insufficient documentation of work search)
and excluding those overpayments that are non-detectable on a cost-
effective basis. This is not an attempt to redefine the problem out of
existence, but rather to recognize that, as I explained earlier, a
significant portion of UI payments technically considered
``overpayments'' under current program definitions is being paid to
claimants who meet the primary UI eligibility requirements.
Finally, we have proposed a major reform of the UI program in the
President's budget that shifts responsibility for funding the
administration of the program from the federal government to the
states. Since UI is paid based on state law, states are in a better
position to determine costs of running the program to reduce
overpayments, fraud, and abuse. Also, insufficient funding for state
administration in the past has caused states to reduce their integrity
activities, because they are unable to reduce their core activities of
paying benefits and collecting taxes and wage records. States will have
a strong incentive to address overpayments, fraud, and abuse under this
new system, as state funds spent on reducing abuse may result in
savings in state funds used for benefit payments.
Funding for These Initiatives
In addition to the $10 million request noted previously, enactment
of the Temporary Emergency Unemployment Compensation Act--and the
resulting $8 billion ``Reed Act'' distribution of federal unemployment
funds to states--has provided states with substantial funds that may be
used to make UI program improvements, including implementing
initiatives that address UI overpayment, fraud, and abuse. The
Department of Labor has suggested that states consider using these Reed
Act funds for, among other purposes, improving UI claims filing and
payment methods and reducing UI overpayment, fraud, and abuse.
The initiatives described above can be developed and implemented
with these Reed Act funds. Using these funds for these initiatives
requires an appropriation by each state legislature. Some states
already have appropriated Reed Act funds to pay for technology and
system upgrades, and we will encourage other states to do so.
Conclusion
Mr. Chairman and Members of the Subcommittee, I trust that we have
provided you with a clear picture of the scope of the UI overpayment
problem and the Department of Labor's efforts to work with the states
to address this important problem. We appreciate your longstanding
commitment to the integrity of the UI program, and we request your
continued support in our ongoing efforts to minimize overpayments,
fraud, and abuse within the UI program. Thank you for the opportunity
to testify today. I will be pleased to answer any questions that you
may have about my Department's efforts to reduce overpayments, fraud,
and abuse in the UI program.
Chairman HERGER. Thank you very much, Mr. Findlay. Now, the
gentleman from Louisiana, Mr. McCrery, to inquire.
Mr. McCRERY. Thank you, Mr. Chairman.
Mr. Findlay, as you probably know, this Subcommittee has
been very active in trying to ferret fraud and abuse in a
number of programs. One of those that we pay particular
attention to at the behest of the GAO is Supplemental Security
Income (SSI). The GAO has said for a number of years that the
SSI Program has a high risk of fraud and abuse, so we have
focused on that. I am going to read to you a number of things
that we have done in the SSI Program to try to prevent fraud
and abuse. I would like, when I conclude, for you to tell me if
the States are doing any of these kinds of things to prevent
fraud and abuse in the UI system.
For SSI, for example, we have tried to ensure that
prisoners do not receive benefits by creating a bounty system,
rewarding prisons for reporting their inmate rosters for
comparison with SSI rolls. We have barred fugitive felons and
probation and parole violators from receiving benefits, and
providing information sharing to make this effective.
We encourage death matches to ensure benefits stop when
individuals die or that others are not claiming benefits based
on a deceased person's records; denying benefits for 10 years
for those who claim benefits in more than one State, offsetting
Federal income tax refunds or other benefits to recover
overpayments, providing for enhanced recovery of overpayments,
and mandating recovery of overpayments for those who commit
fraud. In other words, no hardship waivers for those who commit
fraud.
Creating penalties for false and misleading statements made
in the attempt to claim benefits. Restricting eligibility of
non-citizens. For UI, for example, there are some who are here
who are not eligible to work. Are we making sure that those who
work illegally then do not get hired or lose their job and
claim UI benefits?
Encouraging information sharing between Federal and State
agencies charged with administering benefits or that have
information that could better ensure the right people are
getting the right benefits.
Are the States doing any of these kinds of things to try to
prevent fraud and abuse? Is your DOL cooperating with the
States to try to do some of these kinds of things?
Mr. FINDLAY. Whether States are doing each one of those
things, I think we would have to get back to you in writing,
but let me say this.
The measures relating to prisoners, while extremely
effective in the SSI context, may be less important in this
context, Congressman. The reason is that by its very nature,
our program usually runs out after 13 weeks, and so by the time
an individual is in prison, usually, the benefits have run out.
Some States have done some analysis to see whether prisoners
are receiving unemployment benefits, and they have found that
the number is exceedingly small. So, I think that things
dealing with prisoners, while very important in other contexts,
may be a little less important here.
Mr. McCRERY. While it may be less important, it is also a
fairly easy thing to do, to match lists.
Mr. FINDLAY. Yes, and some States do cross-matches with
correctional facilities. We certainly are willing to consider
that and to work with States to do that. I would not want to
give this Committee the impression that is going to pay off as
much as some of the other measures that we are talking about.
Mr. McCRERY. No.
Mr. FINDLAY. States are required to verify alien status
with the Immigration and Naturalization Service (INS), so
States are doing that. In general, aliens, under certain
circumstances, can receive unemployment benefits if they have
INS work authorization, but those that should not be receiving
it generally are not.
In terms of some of the other questions you asked about
fraud, all of our States are required to impose penalties for
fraud and to work to ferret out fraud and, obviously, not to
pay people that they believe to be defrauding the system.
Then in terms of some of the offsets. States are doing
offsets from income tax refunds and other sorts of payments
that States might be making. On a State-by-State basis, I think
I would have to go back to our people and get more detailed
information for you.
[The information follows:]
CROSS-MATCHING
States currently cross-match benefit information with various
computer databases, primarily wage and benefit records and new hire
directories. It is important to note that unemployment insurance (UI)
has a number of controls:
LThere must be employment reported by an employer. UI
is time limited for each claim. Each week must be claimed.
LBenefit Accuracy Measurement data has not indicated
any significant problem with overpayments to these populations.
LEvery state imposes a penalty for fraud, including
holding the claimant ineligible for a set period of time.
LMost states with income taxes intercept refunds to
retire UI overpayments.
LMany states do ``death matches.'' It doesn't produce
significant numbers.
Also, states do have techniques for minimizing payments to
prisoners and ineligible aliens. Among them:
LSome states crossmatch with local and state
correctional institutions. Data indicates this is not very
productive.
LStates are required to verify alien status with the
Immigration and Naturalization Service (INS). (In general,
aliens can collect UI if they have INS work authorization.)
Mr. McCRERY. Thank you, Mr. Chairman.
Chairman HERGER. Thank you. The gentleman from Maryland,
the Ranking Member, Mr. Cardin, to inquire.
Mr. CARDIN. Thank you, Mr. Chairman.
Mr. Findlay, I believe the DOL has developed a UI
overpayment system called the Benefit Accuracy Measurement, or
BAM, to try to determine nationwide the extent of overpayments.
Do you have any similar effort or plan in regards to the
accuracy of the tax payments that employers are making, as to
whether there is an underpayment of the tax payments for
unemployment insurance benefits?
Mr. FINDLAY. I am fairly certain that our performance
measures require States to ensure the accuracy of tax payments,
but beyond that, I do not know the details of what our program
is.
Mr. CARDIN. If you could make that available to our
Committee, I would appreciate it, because we obviously want to
make sure that we are collecting the right amount of revenue,
as well as, making sure we are not overpaying the benefits.
[The information follows:]
ACCURACY OF EMPLOYER TAX PAYMENTS
Besides the performance measures mentioned below, State Work force
Agencies are required by the Department's UI Audit Policy to audit 2%
of the tax paying employers in their state each year.
LThe Audit Policy requires the state UI agency to
verify the existence of each business being audited.
LThis requirement was included in the Audit Policy to
help detect fictitious employer schemes.
LMany states have either developed computerized
systems to help detect fictitious employer schemes or they use
the Fictitious Employer Detection System, which was provided by
the Employment and Training Administration.
LThey also work very closely with the Department's
Office of Inspector General to detect and prosecute the
offenders.
In addition, states have modified their Employer Status
Determination forms--the forms used to determine whether an employer is
subject to the state's UI tax--and trained their employees to help
identify employers who may be attempting to manipulate experience rates
through a variety of different schemes that have been discovered over
time.
Also, some employers are late in paying their taxes. When this
happens, states routinely send dunning notices and impose penalty and
interest on the employers. The amount of the penalty/interest varies
from state to state.
For the quarter ending December 31, 2002, our reports show that, as
of the due date of the reports, 632,000 employers were delinquent in
paying contributions. This represents about 9% of all employers.
However, it should be noted that many of these delinquent employers
have since ``paid up'' due to state collection activities. Also, it
needs to be noted that employers routinely go out of business with no
assets--these will be included in the delinquencies.
As to detecting misclassification, a large part of the audit
function noted above is aimed at detecting misclassifications. Also, if
an individual files a claim and is denied because s/he was classified
as an independent contractor, the individual has the right to review.
If the review determines that the individual was in fact an employee,
s/he is entitled to benefits.
Further, the Department sponsored research on this subject and a
final report was issued in 2000 (Study of Alternative Work
Arrangements: Independent Contractors, Planmatics, Inc.). Among the
findings:
LThe number one reason for misclassification is
savings related to workers compensation/disability costs. A
second reason is avoiding EEO type lawsuits and other laws
associated with having employees.
LIn the 9 states visited, the percent of audited
employers with misclassified workers ranged from 10-30%.
LIn the 9 states visited, the percentage of tax
revenues underreported varied from 0.26% to 7.46%.
LAssuming a 1% level of misclassification over the
period measured, the loss in revenue due to underreporting
would be an annual average $198 million. About 80,000 workers
annually are not receiving UI due to misclassification.
The Department developed the Tax Performance System (TPS), formerly
called Revenue Quality Control, to assist in exercising its general
oversight responsibilities toward the UI program and to help meet its
responsibility to protect and maintain the soundness of the
Unemployment Trust Fund. TPS divides tax operations into major
functional components and specifies key performance objectives based on
3 dimensions of quality--timeliness, accuracy, and completeness. The
tax functions reviewed include status determination, cashering, report
delinquency, collections, field audit, and account maintenance.
Monitoring tax activities has been a longstanding priority for the
Department. National performance standards have been established for
the following tax activities:
LPercent of new status determinations within 90 days
of quarter end date;
LPercent of new status determinations within 180 days
of quarter end date; and
LAccuracy of a sample of new status determinations.
The Department also tracks performance for:
Timeliness Measures
LEmployer Report Filing Timeliness
LSecuring Delinquent Reports Timeliness
LResolving Delinquent Reports Timeliness
LEmployer Payments Timeliness
LSuccessor Status Determination Timeliness
Quality Measures
LDelinquent Reports Resolution Quality
LCollection Actions Quality
LTurnover of Receivables to Tax Due
LWrite-off of Receivables to Tax Due
LAccounts Receivable as a Proportion of Tax Due
LField Audits Quality
LField Audit Penetration, Employers
LField Audit Penetration, Wages
LPercent Change as a Result of Field Audit
Accuracy Measures
LPosting New Determinations Accuracy
LSuccessor Determinations Accuracy
LPosting Successor Determinations Accuracy
LInactivating Employer Accounts Accuracy
LPosting Inactivations Accuracy
LEmployer Reports Processing Accuracy
LEmployer Debits/Billings Accuracy
LEmployer Credits/Refunds Accuracy
LBenefit Charging Accuracy
LExperience Rating Accuracy
Mr. CARDIN. The Chairman mentioned and you mentioned the
fact that Congress in the recently passed legislation made $8
billion of Reed money available, Reed Act distributions,
available to our States that can be used for integrity issues
within the system. Do you know how the money is being spent by
the States? Do you have any early reports to the Committee?
Mr. FINDLAY. What we have is precisely that, Congressman
Cardin, early reports. The States have to pass legislation in
order to use the Reed Act funds. We believe 12 States have done
so so far. We also have asked the States, what are they going
to do with the Reed Act money.
So far as I could tell from the chart that I read on the
way over here, about half the States have plans, or have
already put in place plans, to use some of the money for
administration, which would, of course, help our integrity
efforts. We know also that several States so far have indicated
they intend to increase payment levels, as well. Beyond that,
we really do not have very much information.
Mr. CARDIN. We have requested certain information be made
available by GAO. I do not know when we are going to get that
information presented to the Committee, but obviously, any
information you can make available to us would be helpful.
Mr. FINDLAY. We would be happy to give you what we know,
but as I say, until the States pass legislation, everything
should come with a big caveat.
[The information follows:]
$8 BILLION REED ACT DISTRIBUTION
Enactment of the Temporary Emergency Unemployment Compensation Act
has provided states with an enormous opportunity to make program
improvements including initiatives that address fraud and abuse. The $8
billion ``Reed Act'' distribution of excess Federal unemployment funds
to states can be used for the payment of benefits or for the
administration of UI and services by the public Employment Service (ES)
through the One-Stop system. The Department of Labor suggested that
states consider using these Reed Act funds for the following purposes:
LEstablishing a revolving fund for automation costs;
LImproving UI and ES performance;
LImproving UI claims filing and payment methods;
LAdministering One-Stops; and
LReducing UI fraud and abuse.
Using Reed Act funds for administration or services requires an
appropriation by the state legislature. As you know, states are
currently struggling with other issues such as budget deficits.
Therefore, most states have not yet had the opportunity to appropriate
their Reed Act funds. However, we have collected anecdotal information
from most states regarding their plans. About a dozen states have
appropriated Reed Act funds this year. Uses include:
LPaying for technology and system upgrades;
LCovering basic administration costs;
LPaying for additional reemployment services; and
LPaying for additional staff.
Another dozen states have appropriations in the legislative
process, and a number have advised us they will seek appropriations
during their next legislative session. Some states indicated they
expect to leave all of the money in their trust funds to pay benefits,
improve solvency, and avoid tax increases. Other states plan to leave a
portion of their Reed Act money in their fund for these purposes. A
couple of states would be borrowing but for the Reed Act distribution.
Finally, a few states have enacted minor benefit increases or
expansions since the date of the distribution.
Mr. CARDIN. Of course, States can use it to enhance
benefits, and that is one of the areas that we were concerned,
as to whether they, in fact, will do that or not. You are
indicating seven States are at least planning to do that. You
have got 1.4 million workers who are currently claiming
extended unemployment benefits that we enacted last March. Do
you have any idea of how many of these people will exhaust
their extended benefits before they are able to find
employment, and how many of these individuals will be covered
under the second trigger in those States that meet the
additional benefits?
Mr. FINDLAY. In terms of the first question, how many would
exhaust before they could find employment, I do not think we do
have that number because I think it would require a fairly
complex calculation.
In terms of your second question, which I am momentarily
forgetting, Congressman----
Mr. CARDIN. How many States would qualify for the trigger
for the additional weeks of benefits beyond the extended
benefits?
Mr. FINDLAY. Yes, we do have the answer to that. It is nine
States: California, Idaho, Massachusetts, Michigan, New Jersey,
Oregon, Pennsylvania, Washington, and Wisconsin.
Mr. CARDIN. So if you are in those States, you would then
be entitled to additional benefits. So, there is a large number
of people who will not be entitled to benefits, at least be in
States that will not be entitled to benefits, and we do not
know how many people are going to still be unemployed, unable
to find employment that have exhausted their extended benefits.
Our preliminary information is that we are talking about
hundreds of thousands of individuals who will exhaust their
benefits, and be in States that do not provide additional
benefits because the trigger that we are using, the insured
rates, are difficult to meet in many of the States. I think it
is something we need to take a look at, because we find that
when times are very difficult, as you point out, some of the
mis-payments are not fraudulent.
Some of these, the States do not want to recover for
whatever reasons, and it seems to me, in difficult economic
times, when benefits are not being made available to meet the
needs that are out there, chances of mis-payments are higher
and something we need to make sure--we do not want anybody to
receive payments they are not entitled to, but it would be also
nice to have recommendations on changing the policy in order to
meet the legitimate needs of the people who cannot find
employment.
Thank you, Mr. Chairman.
Mr. FINDLAY. Thank you.
Chairman HERGER. Thank you. The gentlelady from
Connecticut, Mrs. Johnson, to inquire.
Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman.
When do you expect the DOL will have the new operational
definition of UI overpayments ready for use?
Mr. FINDLAY. We are putting together a new goal under the
government Performance and Results Act (GRPRA). All of our
goals for fiscal year 2003 should be in place about the
beginning of fiscal year 2003, so I think we are looking at
this autumn.
Mrs. JOHNSON OF CONNECTICUT. Have you done any studies or
have you thought about doing any studies of those States that
rely almost entirely on self-reporting of information for
eligibility versus those States that check information?
Mr. FINDLAY. What we require at the Federal level is that
States show us that they have a system that is reasonably
calculated to ensure integrity of the system, and we do not
typically mandate to States precisely how they do that, or we
have not in the past.
I think our thumb has been on the scale a little bit too
much in terms of benefit promptness in the past. I think we may
want to suggest to States that they do more than they have, and
we are not only reconstituting our GPRA goal, but we also will
be redoing our performance measures for States. We, I think,
all recognize in the DOL that we need to elevate the importance
of these integrity issues as well as the payment promptness
issues.
Beyond that, I do not want to get into the specifics of
what we will be doing with States that do not do particular
kinds of matches. I think it is fair to say that at the
leadership level of the DOL, we want to be a little bit more
prescriptive with States than we have been in the past in terms
of carrying out these integrity efforts.
Mrs. JOHNSON OF CONNECTICUT. I think it would be useful to
do some studies of States that have different systems of
eligibility and those that do the matching and other things to
confirm eligibility versus those that do not. I know in my
State, we have gone to pretty much telephone registration for
unemployment benefits and I think there is very little
oversight of that system. So, I am interested in, as the DOL
moves forward, you are really doing some comparative studies so
we have some material on which to move forward to demonstrate
the States' best practices and to hold them to a higher
standard.
Do you have any information about whether States that cover
part-time employees have more fraud problems than those that
cover only full-time employees?
Mr. FINDLAY. I do not before me, but I am sure we can give
you whatever we have got on that.
[The information follows:]
We do not have any empirical evidence to suggest that states which
pay benefits to those seeking only part-time work have more fraud than
those states which require full-time availability.
Mrs. JOHNSON OF CONNECTICUT. I hope you will look at that,
because my guess is that there is no difference and that we are
not having any more difficulty with part-time than full-time,
but I think we need to know that, because over the course of
events, I think the issue of part-time unemployment
compensation for part-time unemployed is going to be an
increasingly important issue for us to address. I think before
we address that, we have to find a better way of making sure
that unemployment compensation is going to those who are
eligible and not going to those who are not eligible.
So, you could be a big help to us in refining more clearly
what constitutes fraud and abuse. How do you know it? On what
do you base your estimate, that really, a very small amount of
the overpayment, about 25 percent or less, is actually fraud
and abuse. Overpayments are a different problem, but fraud and
abuse is intolerable.
Mr. FINDLAY. I think that is exactly our point, that
overpayments are not overpayments. There are different types of
overpayments, some of which deserve different responses than
others. I would not think that it would be the DOL's priority
to force States to spend a lot of time and effort going after
people who are unemployed, looking for work, carrying out all
the duties they are supposed to be carrying out in terms of
looking for work, but used the wrong form for one of their job
search documentation requirements.
Mrs. JOHNSON OF CONNECTICUT. Absolutely.
Mr. FINDLAY. On the other hand, at the other end of the
spectrum, I think for fraud and abuse, fictitious employers,
fictitious employees, or Social Security numbers that relate to
people who are deceased, those are the sorts of areas that are
absolutely clear. We should be devoting more efforts to.
Mrs. JOHNSON OF CONNECTICUT. Thank you.
Mr. FINDLAY. Thanks.
Chairman HERGER. Thank you. The gentleman from Texas, Mr.
Doggett, to inquire.
Mr. DOGGETT. Thank you very much, Mr. Chairman.
I am pleased that we have your added input about the
importance of addressing any fraud that might be in the system
and undermine confidence in the system. I think it is equally
as important that we recognize that workers who do become
unemployed through no fault of their own and who cannot access
the benefits they need, feel the system has acted in an abusive
way to them.
At one of our earlier hearings, I inquired about the number
of eligible individuals as a percent of total unemployment for
the States over the last 20 years. The DOL was kind enough to
provide that information, and I note in my own State of Texas
that over the last 20 years, the number has varied from as low
as 18 percent in several different years, never getting higher
than 31 percent. So, there are a lot of workers out there who
are unemployed that are not getting benefits.
There has been some indication by our staff that after the
end of this week, there will only be about four States that
will be triggered in on extended unemployment benefits. Is that
right?
Mr. FINDLAY. I think, just before you arrived, Congressman,
I said that number is nine States.
Mr. DOGGETT. Okay. I do not think that Texas is one of
them.
Mr. FINDLAY. You are correct.
Mr. DOGGETT. I am wondering if you think we ought to
revisit the trigger mechanism to determine whether those people
who are jobless should be eligible for additional unemployment
benefits.
Mr. FINDLAY. Let me address your first question first,
which was on the recipiency rate. It is true that some people
who are within the total unemployment rate do not receive
unemployment benefits. These sorts of people are typically new
entrants to the work force. A very large percentage of them are
new entrants who have not actually been in a job before, and so
they are not unemployed in the sense that they lost a job.
Another large percentage is re-entrants, which may well be
men or women who stayed home to care for a child for a few
years and are going back to work. Those are effectively like
new entrants, in a sense.
Then job leavers, who leave of their own accord,
voluntarily, who are not covered by the system.
If you set those aside, actually, a very large percentage
of the job losers are eligible for and receive unemployment
benefits. I think the figures that I saw said that 52 percent
of the total unemployment rate is job losers and 46 percent of
all total unemployed are eligible to receive unemployment
benefits.
So really, given the current eligibility requirements, it
is a pretty close fit and the recipiency rate is pretty close
to where it ought to be----
Mr. CARDIN. Will the gentleman yield for one moment?
Mr. DOGGETT. Yes.
Mr. CARDIN. It is our understanding, though, there may be
eight States that qualify today. Some of these States are going
to trigger off at the end of the month so that it looks like
there would be only four States by next month who would still
be eligible.
Mr. FINDLAY. I am told that is correct, Congressman, and
Congressman, on your second question about revisiting the
trigger mechanism, I think in our view, it is premature.
Typically, the unemployment insurance program is a 13-week
program. Earlier this year, we together took a step that is
extraordinary, which is extending it another 13 weeks. I think
the idea is that the system should be one that also encourages
people to continue looking for a job and getting back to work.
So, whether we want to take essentially a third bite at the
apple now, we would like to see how the economy goes. There are
some signs out there that the economy is doing better. The
unemployment----
Mr. DOGGETT. Of course, for some of these individuals, the
economy is not going very well if they have exhausted all their
unemployment benefits. If I understand your testimony, and I
respect whatever your opinion might be, but we are going to
have four to six States next month that do not have any
extended unemployment benefits, including my State of Texas.
Your feeling is that we do not need to do anything about that
at this point----
Mr. FINDLAY. I think----
Mr. DOGGETT. As far as unemployment benefits.
Mr. FINDLAY. I think it is premature to make that decision.
Typically, the Temporary Emergency Unemployment Compensation
Act is put in place by Congress during recessions, and it
happened earlier this year because there had been a one quarter
dip in GDP, gross domestic product. It happened previously, I
believe, in the early nineties when there was a similar thing.
So I think--I am sorry, if I could just finish these last few
words.
Mr. DOGGETT. Sure.
Mr. FINDLAY. I think the norm is the unemployment insurance
system that Congress enacted, which is a 13-week program, there
have to be unusual circumstances for us to do that and right
now, it is unclear whether those circumstances exist.
Mr. DOGGETT. Just one follow-up, if I might, on your
earlier comment about the fact that we, of course--I think the
logical inference from your comment was that you would never
expect 100 percent of the unemployed would be covered, but my
worry to you would be, you can take any given year in this data
and there are vast variations between the States. As I said, in
some years, in Texas, 72 percent of the unemployed got no
benefits, whereas in other States, the same year, getting 60,
70 percent. How do you explain the variation?
Chairman HERGER. If the gentleman could conclude----
Mr. DOGGETT. That is the end of my question. How do you
explain the variation?
Chairman HERGER. We are a minute over time here, but maybe
we can respond. Could you very quickly respond?
Mr. FINDLAY. I think this is one that I would probably
prefer to respond in writing----
Mr. DOGGETT. That would be fine.
Mr. FINDLAY. I do not have an answer for you right now,
Congressman.
Mr. DOGGETT. Sure. Since you are giving it back to the
States and their discretion, if you could address why you see
such tremendous variations in the data that were supplied on
March 18. Thank you very much.
Mr. FINDLAY. We would be happy to supply that.
[The information follows:]
RECIPIENCY
Most of the research done on UI recipiency concerns the marked
decline in the U.S. average recipiency rate over the last 30 years.
However, several studies have attempted to explain why there is such
dramatic variation in recipiency rates among states. These studies
demonstrate a strong relationship between implementing policy and
administrative changes that tighten UI eligibility and sharp declines
in recipiency rates. Changes include:
LTightening qualification standards in specific
professions;
LLengthening disqualification periods for certain
actions including voluntarily leaving a job;
LIncreasing offsets of other income such as pensions;
LIncreasing base qualifying wages; and
LAdopting more restrictive ability to work and other
nonmonetary requirements;
In short, differences in state monetary and nonmonetary eligibility
requirements are believed to be one of the main reasons for the wide
variation in recipiency rates among states.
Other research indicates that the wage-replacement rate affects
recipiency rates. States with high replacement rates provide a larger
incentive to apply for benefits.
Finally, some research demonstrates that the economic and
industrial make-up of the state impacts on recipiency rates. States
with a larger number of union workers may have higher recipiency rates.
(For more information, see Analysis of Unemployment Insurance
Recipiency Rates, David Wittenburg et al).
Chairman HERGER. Again, Mr. Findlay, is it not correct, we
do have 39 weeks of regular unemployment plus that we have
added an additional 13 weeks to that, is that correct?
Mr. FINDLAY. Yes, that is correct.
Chairman HERGER. Thank you. With that----
Mr. CARDIN. Could the gentleman just yield for 1 minute,
just to clarify that point. Is it not 26 plus 13?
Mr. FINDLAY. Exactly. Excuse me. I may have said a 13-week
program. It is normally 26 weeks, plus we extend it for 13.
Some States will have the opportunity to have an additional 13.
Chairman HERGER. Thank you. The gentleman from
Pennsylvania, Mr. English, to inquire.
Mr. ENGLISH. Thank you, Mr. Chairman.
In reviewing the material that is being brought before the
Subcommittee today, I wonder if you could comment on what are
the most pronounced technical eligibility issues that have led
to overpayment.
Mr. FINDLAY. I think, as I understand it, the sorts of
issues we are talking about relate to job search issues;
whether someone is registered with the employment service (ES),
whether that person is properly documenting job searches,
whether in a State that requires, say, four inquiries a week,
the person only has documentation for three or only did three.
These people are otherwise eligible for unemployment in the
sense that they are unemployed and are ready, willing, and able
to work.
Mr. ENGLISH. One of the areas where we have tried to
micromanage the States in designing a UI system is in
essentially requiring that the States impose search for work
requirements. This is understandable, but I am wondering if you
could comment on whether these provisions are unusually
difficult to enforce for States.
Mr. FINDLAY. I guess I would answer that States impose
different work search requirements and they enforce them in
different ways. I do not know if I could characterize any of
the requirements as unusually difficult to enforce, or----
Mr. ENGLISH. Is a search for work by an individual
something that is inherently very easy to audit?
Mr. FINDLAY. Well, I think it is a little bit difficult to
audit. You have to do it. There has to be some element of self-
certification by the employee.
Mr. ENGLISH. I have a two-part question, and this has to do
with the accuracy of the figures we are being given today. What
percentage of the overpayments are you attributing to
individuals who are collecting unemployment insurance payments,
but are actually still gainfully employed?
Mr. FINDLAY. That number would be some portion of the $1.3
billion of non-fraud recoverable, and probably a large
percentage of that. I do not have the exact percentage off the
top of my head, but quite typically, what will happen is that
an employee will be collecting unemployment benefits, will find
a job, but there is a time lag before the employee reports new
employment. Therefore, the person can get a couple extra checks
while he or she is actually working.
Mr. ENGLISH. In your answer, you are identifying where they
are participating in the formal economy and that brings me to
the second point of my question. What percentage of the
overpayments can be attributed to individuals who are
participating in the informal or underground economy, having
left a formal job, and are able to combine some income stream
which is unreported with the unemployment benefits? Do you have
any current measurement of that, or what sorts of estimates are
built into this report?
Mr. FINDLAY. Certainly, there must be people out there who
are participating in an underground economy and also collecting
unemployment benefits. I just checked with my colleague, and we
do not have any estimate as to what that percentage would be.
Mr. ENGLISH. Is it fair to say that the figures you are
presenting here today, because you are not estimating or you
are not giving us a very clear estimate of what you attribute
to the underground economy, you may actually be substantially
underestimating the number of overpayments that occur?
Mr. FINDLAY. As I said, I am certain that there are some
claimants out there who are receiving income from mowing lawns,
painting houses, doing work for cash, that sort of thing.
Beyond that, I do not really have any very good estimate of how
much that understates or overstates the problem.
Mr. ENGLISH. That is good to know. My final question is, in
the testimony, actually, in the GAO report, it is noted that
overpayments have changed relatively little over the last 10
years. To what do you attribute that?
Mr. FINDLAY. As I say, I think it is because the DOL and
the States have not put as much of a focus on preventing
overpayments as they have on ensuring prompt payments. I think
that is a mistake. I think that at the Federal level, we should
be doing more to ensure the integrity of the system. That is
why we are planning a new GPRA goal, why we are planning new
performance measures, why we have sought more money, and why, I
think, that in the performance measures we place on the States,
we will likely be asking them to do more to protect the
integrity of the program.
Mr. ENGLISH. Thank you, Mr. Chairman.
Chairman HERGER. Thank you. The gentleman's time has
expired. The gentleman from Michigan, Mr. Levin, to inquire.
Mr. LEVIN. As I understand it, the hearing is on this issue
of overpayments and underpayments, and so forth, and I do not
mean to minimize for certain that set of issues. I do think we
want to be sure about proscriptive here, and I am sorry if I
missed the earlier part of it. How many people have exhausted
their benefits in the last 12 months, do you know?
Mr. FINDLAY. I do not know that number off the top of my
head.
[The information follows:]
Number of exhaustions--12 months ending December 2001: 2.8 million.
Mr. LEVIN. How about the last 6 months?
Mr. FINDLAY. I think that it is in the hundreds of
thousands who will be coming off the Temporary Emergency
Unemployment Compensation Act in the next couple of weeks or
so.
[The information follows:]
Number of exhaustions--6 months ending December 2001: 1.6 million.
Mr. LEVIN. Then what happens to them?
Mr. FINDLAY. Unless they are in a State that would trigger
under the 4-percent trigger, they would cease receiving
unemployment benefits.
Mr. LEVIN. Have you made any suggestions to this Congress
as to what should happen to those people?
Mr. FINDLAY. As I discussed with Congressman Doggett a few
minutes ago, we think that with the signs in the economy
improving, that it is a little too early to say whether we want
to have another emergency unemployment compensation system put
in place. So, we have not suggested to Congress that they make
any changes to current law.
Mr. LEVIN. Are you studying the present trigger mechanism?
Mr. FINDLAY. Under the emergency program or under the
regular program or both?
Mr. LEVIN. Both.
Mr. FINDLAY. Under the regular program, we have proposed to
this Committee, or to this Congress, as you all know, that the
trigger be reduced, making it easier for States to trigger, as
part of our comprehensive unemployment insurance reform
proposal. In terms of what the appropriate trigger for the
final 13 weeks in the Temporary Emergency Unemployment
Compensation Act would go, we have not had any discussions
about changing that trigger, to my knowledge, if new
legislation were to be proposed.
Mr. LEVIN. You are having discussions with the Congress
about changing the trigger, the basic. Where do those
discussions stand?
Mr. FINDLAY. We had unveiled our proposal, and we are
presently clearing the legislation through the Office of
Management and Budget, OMB, for our comprehensive UI/ES, reform
proposal, which would, among other things, lower the permanent
trigger from 5 percent to 4 percent. It would make it easier
for States to trigger on.
Mr. LEVIN. This is your comprehensive reform proposal?
Mr. FINDLAY. Yes, sir.
Mr. LEVIN. A new proposal is forthcoming?
Mr. FINDLAY. Yes. We certainly have shared with many people
in the Congress the basic elements of the proposal, which would
be to reduce the trigger, reduce over time the Federal
unemployment tax from 0.8 percent to 0.2 percent, to turn over
administration to the States largely, and to leave the Federal
Government in place for loans and general oversight of the
program. We would not have this kind of unique system where the
Federal Government raises money through a Federal tax and turns
it over to the States to administer the States' programs.
Mr. LEVIN. So how does that portion differ from the
previous reform proposal?
Mr. FINDLAY. It is very----
Mr. LEVIN. It sounds to me, we have seen it before.
Mr. FINDLAY. It is very similar, except that I think
previous reform proposals had not proposed quite as much
devolution to States of their own administration, and there are
a couple of other small elements that are not worth talking
about.
Mr. LEVIN. This provides more?
Mr. FINDLAY. More devolution, yes, sir.
Mr. LEVIN. Do you think that the change in the trigger
should be held up until we discuss the rest of the reform
package?
Mr. FINDLAY. Absolutely. No, I am just joking.
Mr. LEVIN. I think you are serious.
Mr. FINDLAY. I want to say, Congressman----
Mr. LEVIN. That has been the history of this up until now.
Mr. FINDLAY. I want to say that I like it better when I am
sitting up there with you in the China Human Rights Commission
than when I am down here and you get to ask the questions, but
no, we believe it is a comprehensive reform----
Mr. LEVIN. I am just doing it constructively because we
have been wrestling with these issues and we want your
attention and your help. We have been struggling with these for
years.
Mr. FINDLAY. If I could answer----
Mr. LEVIN. Four years----
Mr. FINDLAY. Let me answer your question seriously, because
I gave a flip answer. We do think that we should have a
comprehensive reform proposal that takes heed of all of these
issues that we have raised with the unemployment insurance
system. I think if we start taking piecemeal bits of it, just
reducing the Federal unemployment tax, which employers would
love, just increasing the trigger, which others would love, I
think that is not a good way to make policy, and we ought to
consider all these issues as a comprehensive whole.
Mr. LEVIN. Thank you. I appreciate your response.
Mr. FINDLAY. Thanks.
Chairman HERGER. Thank you very much.
Just as a comment, Mr. Findlay, you mentioned that about
half of the States now compare their unemployment rolls with
their State directory of new hires. The information in the
State directory has been gathered from employers for use in
collecting child support, in keeping with the 1996 Welfare
Reform Law, so doing the match places no added burden on the
employers and could save them money by reducing improper
benefit payments. It appears from a variety of sources that a
major source of the abuse occurs when unemployment claimants or
recipients do not report their return to work. Therefore,
running this match directly would appear to address that very
problem. Would you have a comment on this?
Mr. FINDLAY. Yes. We think that the State new hire
directories are absolutely key to reducing overpayments. They
really get at several of the issues that we have been talking
about here today. Currently, for whatever reason, only about
half the States are doing so. We are going to use some of our
integrity money that we are asking for in the fiscal year 2003
budget to encourage more States to do so. While we have not
formulated our performance measures, I would anticipate that
our performance measures would encourage States even more to
begin using these new hire directories because they are
absolutely critical to reducing overpayments.
Chairman HERGER. I thank you very much. Are there any
further questions? With that, I thank you very much, Mr.
Findlay, for your testimony.
[Questions submitted by Chairman Herger to Mr. Findlay, and
his responses follow:]
U.S. Department of Labor
Employment and Training Administration
Washington, DC 20210
The Honorable Wally Herger
Chairman, Subcommittee on Human Resources
Committee on Ways and Means
United States Senate
Washington, DC 20515
Dear Chairman Herger:
Thank you for your letter dated June 17, 2002, requesting
additional information about the Department of Labor's efforts to
increase prevention, detection, and recovery of unemployment insurance
(UI) overpayments. Your letter was forwarded to the Employment and
Training Administration for response because this office is responsible
for oversight of the Federal-state UI program. Answers to your
questions follow:
1. Does the Department have any specific proposals or suggestions to
assist States in preventing or better recovering overpayments? Aside
from matching [UI benefit payments] with the State Directory of New
Hires, what are the most promising new approaches that have been tried
in this area?
Response: As we have testified and as you have noted, use of data
from State Directories of New Hires is a very valuable new tool for
quick detection and possible prevention of UI overpayments. We believe
that access to Social Security Administration data for verification of
Social Security Numbers, names, and pension information will also prove
to be of great value in preventing erroneous payments. These two new
tools are the cornerstones of the Department's plans to assist states
in preventing and detecting overpayments, and the administration has
requested $10 million in the fiscal year 2003 budget to help states
implement access to these data.
Follow-up activities (establishment of debt and collection efforts)
after a potential overpayment has been detected through a computer
crossmatch are very staff intensive, and due to Federal spending
constraints, in recent years appropriations for these activities have
been less than the administration's requests. The Unemployment
Insurance and Employment Service Reform New Balance proposal, announced
with the President's Budget for 2003, gives states overall
responsibility for determining their own administrative funding levels
and gives them the ability to target funding to benefit payment control
activities at the levels that they believe are appropriate.
In addition, the $8 billion ``Reed Act'' distribution to states in
2002 gives states the opportunity to focus additional resources on
benefit payment control activities. The Department has suggested that
states consider using these funds for, among other purposes, improving
UI claims filing and payment methods and reducing UI overpayments,
fraud, and abuse. Some states already have appropriated Reed Act funds
to pay for technology and system upgrades.
Additionally, there are several other systems/efforts underway that
should have positive effects:
LNational Directory of New Hires. Each state's access
to new hire data is currently limited to the State Directory.
Access to the National Directory of New Hires would make
information available about Federal employment and provide
access to data reported by multi-state employers that have
chosen to report all wages to one state. We commend the
Committee for including this access in the Temporary Assistance
for Needy Families reauthorization bill (H.R. 4737).
LIllegal Aliens. To prevent overpayments to non-
citizens, states use an Immigration and Naturalization Service
(INS) automated system for verifying immigration status and
work authorization. INS has installed enhanced verification
capability in eight states that automatically generates a
secondary inquiry when the identifying information is at
variance with that provided by the claimant. Implementation of
this automated process is underway in two additional states,
and within the next 18 months, the remaining states should be
included.
LNational Conference on UI Integrity. The Department,
along with the National Association of State Work force
Agencies, is sponsoring a national integrity conference in 2003
to identify and disseminate successful practices, studies, and
integrity information among the states.
2. When do you expect your negotiations with the Social Security
Administration will result in an agreement to better share data to
ensure the accuracy and validity of Social Security numbers provided in
claiming unemployment benefits?
Response: The Department and the Social Security Administration
(SSA) have reached agreement, and work is currently underway to
establish a real time data exchange capability between SSA and each
state UI agency. The telecommunications aspect of this exchange is
expected to be completed in 2002. Each state will then have to install
software to interface with their existing UI benefits system. We expect
data exchanges with SSA to begin during the first half of 2003.
3. Please describe in greater detail the current performance standards
and goals that are designed to enhance state recovery of overpayments.
How has this changed in recent years?
Response: The Department requires each state to operate a unit for
benefit payment control purposes with the following goals:
LDetect benefits paid due to state agency errors or
due to willful misrepresentation or error by claimants;
LDeter claimants from obtaining benefits through
willful misrepresentation; and
LRecover benefits obtained by fraud, willful
misrepresentation, and other claimant errors.
The Department relies upon periodic on-site reviews of states'
operating procedures to gauge the quality of performance in achieving
these goals. Additionally, data analysis has focused on the recovery of
overpayments--both fraud and nonfraud. These analyses compare the
amount of overpayments recovered against the amount of overpayments
established during a given year and initially 55% was set as a
``desired level of achievement.'' In the mid 1990's, the Department
recognized that this benchmark could provide a disincentive to
establish as many overpayments as possible because recoveries were
limited by staff capacity; therefore, the 55% goal was officially
dropped from the UI performance measurement system. However, some
states still use the 55% indicator as a goal.
It is very difficult to define a measure of performance related to
overpayment prevention, detection, and recovery. As greater efforts are
made to detect overpayments, such as using the State Directory of New
Hires as the primary detection tool, the rate of overpayments may
increase due to more efficient screening of potential cases for
investigation, thereby reducing the number of false leads, while the
average dollar amounts established per overpayment (in addition to the
dollar amounts recovered) may decrease due to prompt interception
before benefits are overpaid. In establishing measures related to
overpayments, it is important to be sure that the incentives they
create promote best practices. Our efforts to design new measures
addressing UI benefit payment integrity are described below.
4. Your testimony mentions that the Department will be setting a
new Government Performance and Results Act (GPRA) goal for addressing
unemployment program overpayments. What is your timeline on developing
and implementing that goal? Will the States be held accountable for
this goal? If so how, and if not, why not?
Response: The Department is engaged in the development of a UI
payment accuracy measure as part of a plan to improve UI program
integrity and reduce overpayments. We are seeking state and stakeholder
as well as OMB, OIG and GAO input regarding a measure. After
development, we will establish a baseline and a new GPRA goal from
which to measure improvements in payment accuracy nationwide. We plan
to complete work on the goal by September 30, 2002. The goal, like
other GPRA goals, will be expressed as a measure of aggregate national
performance. The Department is at the same time embarking on a review
of the overall UI performance management system. This review will
encompass all aspects of the performance system, including the
development of measures related to overpayment prevention, detection,
and recovery. We recognize, however, that applying nationwide goals
across states will be difficult due to differences in states' laws that
affect the potential for overpayments to occur.
Should you need clarification or explanation of the answers to your
questions, please do not hesitate to contact me at (202) 693-2700 or
have a member of your staff contact Grace Kilbane or Cheryl Atkinson in
the Office of Workforce Security. They can be reached at 693-3200.
Sincerely,
Hon. Emily Stover DeRocco
Assistant Secretary
Chairman HERGER. I would like to call up our second panel,
Sigurd R. Nilsen, Ph.D., Director of Education, Work force, and
Income Security Issues at the U.S. General Accounting Office;
the Honorable Gordon S. Heddell, the Inspector General at the
U.S. Department of Labor; Miles Paris, Deputy Director of
Program Support for the Illinois Department of Employment
Security; Stephen Woodbury, Ph.D., Professor at Michigan State
University; and Michael Lorsbach, Principal, On Point
Technology, Incorporated.
I thank each of you for joining us this afternoon to
testify on this important issue.
Mr. Nilsen.
STATEMENT OF SIGURD R. NILSEN, PH.D., DIRECTOR, EDUCATION,
WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING
OFFICE
Dr. NILSEN. Thank you, Mr. Chairman and Members of the
Subcommittee. I am pleased to be here today to discuss the
findings from our draft report on UI overpayments prepared at
the request of Chairman Herger, focusing on the extent and type
of overpayments, the factors that contribute to overpayments,
and Federal and State management issues that affect the ability
of States to control overpayments.
Over the past 10 years, as we have heard earlier, the
annual overpayment rate estimated by DOL's Quality Assurance
System has remained fairly constant at about 8.4 percent. As UI
payments have increased this past year with rising
unemployment, overpayments reached $2.4 billion in 2001. The
DOL data shows that of this $2.4 billion in overpayments, about
a quarter, or $560 million, was attributable to fraud or abuse.
The primary sources of UI overpayments are, first,
unreported earnings or benefit payments, accounting for 38
percent of overpayments, about $900 million, and the source of
more than half the fraud or abuse reported in the program.
Second, eligibility issues, such as not being able or
available for work, failing to register for employment
services, or not looking for a new job, as required, account
for about 36 percent of overpayments, or about $860 million.
Third, about 20 percent of overpayments, roughly $500
million, was due to becoming unemployed for reasons not covered
by State law, such as being fired for cause.
Although some categories of overpayment are more difficult
than others to detect or recover, DOL's analysis suggests that
the States could have detected and recovered about $1.3 billion
of the $2.4 billion in estimated overpayments in 2001. However,
only $370 million was actually recovered.
Officials at DOL and in some States emphasize that
overpayments are more likely to be recovered if they can be
detected quickly. States generally recover a substantial
proportion of the overpayments they detect by offsetting a
claimant's current and future UI benefits. However, UI benefits
tend to be paid out over a relatively short period of time,
about 14 weeks on average, and current overpayment detection
and recovery activities may begin long after individuals leave
the rolls. This inability to verify eligibility information in
a timely manner places the program at substantial risk for
overpayments that may never be recovered.
Because States rely heavily on claimants' self-reporting of
eligibility information, timely verification of this
information using independent sources is key to limiting UI
overpayments. For example, access to more timely sources of
data, such as the State new hires data, can provide information
on individuals' current employment status. States that use this
data have reported that it is helpful in detecting overpayments
more quickly. However, we found that the new hires data is not
routinely used in all States. Two of the six States we visited
do not currently use their new hires data to verify claimants'
earnings or employment status. Yet, one of the States we
visited reported that because the new hires data detects
overpayments earlier than other detection methods, the size of
its overpayment at the time of detection was reduced by nearly
75 percent.
The National Directory of New Hires would provide similar
employment and earnings information on claimants across States
to verify eligibility, but so far, access to this information
is limited by statute, except, as we have heard, it is in the
TANF reauthorization bill.
We also found that some States do not independently verify
the receipt of income from benefit programs such as Workers'
Compensation or Social Security disability payments, which can
also affect UI eligibility. Further, in addition to verifying
eligibility up front, the States need to more aggressively use
these same sources of data to verify continuing eligibility.
The limited focus on overpayments has been fostered by
DOL's approach to managing the UI program, which emphasizes
quickly processing and paying UI claims with only limited
attention to overpayment prevention, detection, and collection.
For example, most of the first 12 performance measures, called
Tier 1 measures by DOL, assesses whether States meet specified
timeframes for certain activities and no measure in those 12
gauges the accuracy of UI payments. The DOL also gives Tier 1
measures more weight than the remaining 60 measures, called
Tier 2 measures, which assess other aspects of State
performance, including overpayment collection. Officials from
most of the States we visited told us that the Tier 1 and Tier
2 measures make the UI program complex to administer and may
contribute to an environment in which overpayment are more
likely.
In conclusion, Mr. Chairman, the vulnerabilities that we
have identified are attributable to a management approach in
DOL and in many States that places greater emphasis on quickly
processing and paying UI claims than on controlling program
payments. Our work suggests that using more front-end automated
data sources to verify claimant eligibility before overpayments
are made is an effective and efficient method to protect
program funds.
However, absent a change in the current approach to
managing the UI program at both the Federal and the State
level, it is unlikely that the deficiencies we identified will
be sufficiently addressed. Without more active involvement from
DOL in emphasizing the need to balance payment timeliness with
payment accuracy, States may be reluctant to implement needed
changes in their management philosophy and operations.
Mr. Chairman, this concludes my prepared statement. I will
be happy to respond to any questions you or other Members of
the Subcommittee may have.
[The prepared statement of Dr. Nilsen follows:]
Statement of Sigurd R. Nilsen, Ph.D., Director, Education Workforce,
and Income Security Issues, U.S. General Accounting Office
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the Department of Labor's
Unemployment Insurance (UI) program, which is a key component in
ensuring the financial security of America's workforce. The UI program
is a federal-state partnership designed to partially replace lost
earnings of individuals who become unemployed through no fault of their
own and to stabilize the economy in times of economic downturn. The UI
program paid about $30 billion in benefits in calendar year 2001 to
workers who lost their jobs. The health of each state's UI program
depends, in part, on the ability of the state to control its benefit
payments by accurately determining individuals' eligibility for UI
benefits in a timely manner. Inaccurate or untimely eligibility
information may contribute to overpayments and fraud.
Reports from Labor's Office of Inspector General (OIG) and others
have identified numerous aspects of the UI program that may be
vulnerable to overpayments and fraud. Today, I will be providing
information from our draft report that we have provided to Labor for
its comment on our findings, conclusions, and recommendations. Our
report is due to be issued in July 2002. I will discuss (1) the extent
and type of overpayments in the UI program, including those that may be
attributable to fraud or abuse; (2) the factors that contribute to
overpayments in the UI program; and (3) the broader management issues
that may affect the states' ability to effectively control their UI
benefit payments.
To address these issues, we reviewed internal Labor guidance and
documentation, performance plans and reports, performance data, as well
as overpayment data from Labor's Benefit Accuracy Measurement (BAM) and
Benefit Payment Control (BPC) systems. In addition, we conducted in-
depth interviews with more than 100 management and line staff in
Labor's headquarters and 6 regional offices, as well as UI officials in
6 states--California, Colorado, Illinois, Maryland, Massachusetts, and
New York.\1\ We selected these states based on numerous criteria,
including performance data from the Department of Labor, size of their
workforce, availability of overpayment detection and recovery tools,
and geographic location. Finally, we spoke with other groups that are
involved in unemployment insurance, such as employer representatives
and the National Association of State Workforce Agencies.
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\1\ We also interviewed the Utah UI Director by telephone because
this state has been utilizing some practices that other states could
use to verify claimants' eligibility for UI benefits, such as on-line
access to the Social Security Administration's State Online Query
system to verify the validity of individuals' social security numbers.
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In summary, our work shows that of the $30 billion in UI benefits
paid in calendar year 2001, Labor estimates that this includes about
$2.4 billion in overpayments, including $560 million attributable to
fraud or abuse. Labor's analysis also suggests that the states could
have detected and/or recovered about $1.3 billion of the total
overpayments given their current policies and procedures. Labor based
these estimates on data from its quality assurance system, which
involves an in-depth analysis of individual UI claims in each state.
Labor's quality assurance data document numerous categories of
overpayments, including individuals who work while receiving benefits,
or misrepresent their identity. Other sources of overpayments include
agency errors and inaccurate or untimely information provided by
employers. Our work shows that management and operational practices at
both the state and federal level contribute to overpayments in the UI
program. At the state level, many states place a higher priority on
quickly processing and paying UI claims than on taking the necessary
steps to adequately verify claimants' initial and continued eligibility
for UI benefits. As a result, we found that many states do not
adequately verify information reported by claimants. At the federal
level, we found that Labor's policies and directives emphasize quickly
processing and paying claims, with only limited attention given to
payment accuracy. While we recognize the importance of paying benefits
to individuals in a timely manner, Labor's performance measurement
system does not provide sufficient incentives and sanctions for states
to balance the need for payment timeliness with the need for payment
accuracy.
Background
The UI program was established by Title III of the Social Security
Act in 1935 and is a key component in ensuring the financial security
of America's workforce. This complex program, which is administered
jointly by the federal Department of Labor's Employment and Training
Administration and the states, provides temporary cash benefits to
workers who lose their jobs through no fault of their own. Labor is
responsible for monitoring state operations and procedures, providing
technical assistance and training, as well as analyzing UI program data
to diagnose potential problems. Although Labor provides oversight and
guidance to ensure that each state operates its program in a manner
that is consistent with federal guidelines, primary responsibility for
administering the program lies with the states.
State claims representatives determine claimants' eligibility for
UI benefits by gathering essential information, such as their identity,
employment history, and other sources of income they may have. To
enhance the efficiency and cost-effectiveness of their UI systems, many
states have established centralized service centers that allow
claimants to apply for benefits by telephone, fax, or the Internet,
rather than in person at a local office. To be eligible for UI benefits
in most states, claimants must (1) have worked for a specified amount
of time in a job that is covered by the unemployment insurance program;
(2) have left their prior jobs involuntarily (such as by employer
layoff) or have quit their jobs for ``good cause''; (3) be currently
``able and available'' for work, and, in most states, actively seeking
work; (4) enroll in employment services or job training programs (in
some states); and (5) be legally eligible to work--for example,
noncitizens must be lawfully admitted to work in the United States, or
lawfully present for other reasons. States are generally expected to
provide benefits to the claimant within 14 to 35 days of application.
The UI program is funded through federal and state taxes levied on
employers. States' taxes pay the actual unemployment insurance
benefits, whereas administrative costs are generally financed through
the federal tax. Labor holds these funds in the Unemployment Trust Fund
of the U.S. Treasury. To obtain annual funding from Labor to administer
their programs, states submit a request via their annual State Quality
Service Plan (SQSP). Labor reviews each state's plan and makes
adjustments in funding as necessary. In fiscal year 2001, Labor
provided about $2.3 billion to states to administer their programs.
To ensure UI program integrity, Labor funds two principal kinds of
activities for detecting and measuring UI overpayments at the state
level--Benefit Payment Control and Benefit Accuracy Measurement. Each
state is required to operate a benefit payment control division that is
responsible for detecting and recovering overpayments. Each state is
required to report overpayment data to Labor on a quarterly basis. By
contrast, Labor's benefit accuracy measurement data is an estimate of
the total overpayments in the UI program--in each state and the nation
as a whole--based on an examination of a sample of paid and denied
claims. Benefit accuracy measurement is one of the main quality
assurance systems that Labor uses to assess payment accuracy in the
program.
More Than $2 Billion in Overpayments Detected in 2001
Labor's data show that of the $2.4 billion in estimated
overpayments about $1.3 billion could have been detected and/or
recovered by the states in 2001 given their existing policies and
procedures.\2\ In contrast, the states reported that $650 million in
overpayments were made in 2001, of which $370 million was actually
recovered. The difference in the overpayment figures produced by the
two systems can be attributed to the fact that Labor's quality
assurance estimate is based on a more comprehensive examination of
individual UI claims than the states' benefit payment control
activities can generally produce. Our analysis suggests that Labor's
quality assurance system estimate is a more complete assessment of the
true level of overpayments in the UI program, partly because the system
provides a more in-depth review of individual UI cases and causes of
payment errors. We are currently in the process of verifying the
precision of these estimates.\3\
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\2\ These estimates are based on preliminary data from Labor
available at the time of our review.
\3\ We have not yet been able to obtain data on confidence
intervals, so we are unsure of the precision of these estimates.
Overpayments Have Changed Little During
the Last 10 Years
Over the past 10 years, the annual overpayment rate estimated by
Labor's quality assurance system has remained fairly constant as a
percentage of total benefits paid--ranging from a low of 7.9 percent in
2001 to 9.2 percent in 1999, and averaging about 8.4 percent during
that period. Overpayments averaged about $1.8 billion per year and
reached a high of $2.4 billion in 2001. (See fig. 1.)
Figure 1: Overpayments Estimated by Labor's Quality Assurance System,
1992 to 2001
[GRAPHIC] [TIFF OMITTED] 82682B.002
Source: Department of Labor quality assurance data.
The overpayments estimated by Labor's quality assurance data occur
for a number of reasons. Some overpayments result from errors in
claimants' reporting or the state agency's recording of important
eligibility information, such as wages or other sources of income that
a claimant obtained while receiving UI benefits (``benefit year
earnings'' or ``base period wages''). Overpayments also occur because
claimants are not able and/or available to work, fail to register for
employment services as required by their state, or fail to look for a
new job as required (``eligibility'' violations). Claimants may also be
overpaid because they become unemployed for reasons not covered by
state law--such as being fired (``separation'' issues). Finally,
overpayments may occur due to erroneous reporting or recording of a
claimant's dependent information (``dependency'' issues), or other
causes such as reversal of benefits paid due to an appeals decision
(``other'' causes). (See fig. 2.) The quality assurance data also
classifies overpayments as being ``fraud'' or ``nonfraud.'' Fraud can
occur when claimants intentionally misrepresent eligibility
information, employers file fraudulent claims, or state UI program
personnel misuse their access to sensitive information. Of the total
overpayments estimated by Labor in 2001, about $560 million (24
percent) were attributed to fraud. Of this amount, about $313 million
(56 percent) were due to unreported earnings. However, we found that
the states differ substantially in how they define fraud. For example,
some states may include overpayments resulting from unreported earnings
such as fraud, while other states do not. Thus, state-to-state
comparisons of the level of fraud in the UI program and the activities
that constitute fraud are difficult to make.
Figure 2: Categories of $2.4 Billion in Overpayments Estimated by
Labor's Quality Assurance System (2001)
[GRAPHIC] [TIFF OMITTED] 82682A.001
Note: Numbers in parentheses are in millions of dollars.
Source: Labor's quality assurance data.
Although some categories of overpayments are more difficult than
others to detect or recover, Labor's analysis suggests that the states
could have detected and recovered about $1.3 billion of the $2.4
billion in estimated overpayments in 2001. In particular, Labor's data
show that existing state processes and procedures could have detected
more overpayments attributable to unreported recipient income and wages
and payments to individuals who are not entitled to UI benefits due to
the circumstances under which they became unemployed. Labor's analysis
also suggests that other types of overpayments are likely to be
detected by most states given their current policies and procedures.
These include income from social security programs, unreported vacation
or severance pay, and illegal aliens claiming benefits. Furthermore,
Labor's analysis showed that a substantial proportion of the
overpayments detected by the states could be recovered using commonly
available procedures, such as offsetting claimants' current and future
benefits, and intercepting other sources of income, such as state tax
refunds. Labor determined that the remaining $1.1 billion in estimated
overpayments could probably not be detected or recovered by the states
due to limitations in their existing policies and procedures. For
example, overpayments caused by state agency errors are generally not
pursued for recovery.
LLabor's Quality Assurance System Data Provide a More Complete
Representation of UI Overpayments
In contrast to Labor's quality assurance overpayment estimate, the
states' benefit payment control systems reported about $650 million in
overpayments in 2001, of which about $370 million was recovered. Based
on our analysis as well as analysis performed by Labor's Division of
Performance Management, we believe that Labor's quality assurance
system data represent a more complete assessment of the true level of
UI overpayments than the benefit payment control figure reported by the
states. In particular, the quality assurance system is able to estimate
all the potential overpayments that have occurred in each state's UI
program because it is based on a statistically valid sample of UI
claims from each state. Moreover, quality assurance investigators are
able to conduct a more detailed, comprehensive analysis of each case
reviewed than is typically possible for most states' benefit payment
control operations. For example, investigators are generally able to
spend more time verifying the accuracy of the claims information by
personally contacting employers, claimants, and third parties. They
also typically commit between 5 and 8 hours examining a single case,
allowing for a more in-depth review of a claimant's eligibility. By
contrast, the states' benefit payment control activities are often
affected by factors that limit their ability to detect and/or recover
overpayments. These factors include (1) limited staffing and funding
and (2) a lack of access to timely data sources. Moreover, benefit
payment control personnel are required to quickly examine thousands of
cases to identify overpayments, thus potentially limiting their ability
to thoroughly review cases for payment accuracy.
LOverpayments Caused by Management and Operational Practices at the
State and Federal Level
We identified various management and operational practices at both
the federal and state level that contribute to UI overpayments. In
particular, both Labor and the states tend to place primary emphasis on
quickly processing and paying UI claims and may not sufficiently
balance the need to make timely payments with ensuring payment
accuracy. While we recognize the importance of providing UI benefits in
a timely manner to individuals who are unemployed, our work suggests
that Labor and the states do not always take the necessary steps to
adequately verify claimants' initial and continuing eligibility for
benefits. While some of the states we visited use automated data
sources to determine if claimants are working or obtaining other
benefits while receiving UI, others rely heavily on self-reported
information from claimants to make payment decisions. In addition, we
found that Labor's performance measures generally emphasize payment
timeliness at the expense of payment accuracy. Moreover, Labor has been
reluctant to link the states' performance on payment accuracy to the
annual administrative funding process as a way of holding states
accountable for performance. Despite these problems, we found that
Labor is taking some actions to improve UI program integrity, such as
working to help states obtain automated data sources essential to
making more accurate and timely eligibility decisions.
LStates Do Not Always Balance Need for Payment Timeliness with Payment
Accuracy
The emphasis that an agency places on critical program activities
can be measured, in part, by the level of staff and other resources
devoted to those activities. Consistent with stated program objectives,
most of the states we visited place a primary emphasis on quickly
processing and paying UI claims, but do not always balance this focus
with adequate attention to program integrity. In particular, we found
that program managers commonly moved staff assigned to program
integrity activities (such as benefit payment control) to claims
processing positions in response to increases in the number of UI
claims being filed. For example, one state was using only 4 of the 16
positions (25 percent) it was allotted by Labor for benefit payment
control. Only one of the six states we visited was fully staffing its
benefit payment control operations. The remaining states had
transferred staff into other positions, including claims processing.
Another state stopped drawing its quality assurance sample for a period
of time and moved staff responsible for these operations into claims
processing positions when unemployment claims increased during the
third quarter of 2001.\4\ Many federal and state officials we
interviewed told us that states move staff into claims processing roles
from other positions because they lack funding to properly administer
all the necessary activities of their UI programs.
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\4\ Several state officials told us that the number of UI claims
have increased since the terrorist attacks of September 11, 2001, and
have forced them to move staff resources from benefit payment control
or benefit accuracy measurement activities into claims taking
positions.
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LStates Vary in Their Use of Automation to Independently Verify
Claimants' Information
While states differed in the level of staff and resources devoted
to program integrity activities, we also found variation in the
processes and tools they used to verify information that could affect a
claimant's eligibility for UI benefits, such as identity, alien status,
wages, employment status, or receipt of other federal or state
benefits. All of the states we visited conduct basic computer matches
that detect potential UI overpayments due to unreported earnings. For
example, each state regularly conducts a ``Wage/Benefit Crossmatch''
that compares the database of UI claimants with the state's database of
individuals' wages to identify UI recipients who may have unreported
income in the same state in which they are receiving UI benefits.
However, because state wage data are only available quarterly, the
crossmatch relies on information that may be several months old by the
time the match is conducted. This delay allows some overpayments to
remain undetected for a long period of time. Officials at Labor and in
some states emphasized that overpayments are more likely to be
recovered if they can be detected quickly. States generally recover a
substantial proportion of the overpayments they detect by offsetting a
claimant's current and future UI benefits. However, UI benefits tend to
be paid out over a relatively short period of time--about 14 weeks on
average--and overpayment detection and recovery activities may begin
long after individuals leave the UI rolls. This inability to obtain
timely eligibility information places the program at substantial risk
for overpayments that may never be recovered.
More timely sources of data than the ``Wage/Benefit Crossmatch''
exist to verify a claimant's employment status. State new hires data
can provide information on individuals' current employment status.\5\
States that use this data source have reported that it is helpful in
detecting overpayments more quickly. However, we found that the new
hires data are not routinely used in all states. Two of the six states
we visited do not currently use their new hires data to verify
claimants' earnings or employment status.\6\ Yet, one of the states we
visited reported that because the new hires data detect overpayments
earlier than other detection methods, the size of its average
overpayment at the time of detection has been reduced by nearly 75
percent, from about $2,800 to roughly $750. Labor's OIG has identified
the new hire database as a potentially useful tool for detecting
overpayments resulting from unreported income, which represents a
substantial portion of the total UI overpayments each year.\7\ Although
Labor has encouraged each state to use its own new hires database for
purposes of administering their UI program, a number of states
nationwide still do not use it.
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\5\ Each state is required to maintain a database of individuals
who were recently hired to help state child support enforcement
agencies locate non-custodial parents who owe child support payments.
\6\ All states were required to create a state directory of newly
hired employees as part of the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996. Each state's directory
periodically reports state unemployment insurance, wage and new hires
data to the National Directory of New Hires for purposes of locating
noncustodial parents in other states who owe child support payments.
\7\ See the U.S. Department of Labor, Office of Inspector General,
Unemployment Insurance Integrity: Fraud and Vulnerabilities in the
System (1P-03-315-0001-PE) March 31, 1999.
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While the states' directory of new hires data are useful for
verifying claimants' employment status, a main limitation is that they
only identify this information for claimants within a given state. To
detect unreported or underreported wages in other states, some states
also use an ``Interstate Crossmatch'' that is facilitated by Labor.\8\
However, this match also typically relies on wage data that are about 4
to 6 months old. Another type of match called the ``Interstate
Inquiry'' allows states to check a claimant's UI and employment status
in other states. However, this system can generally only be used to
check individual claimants and is not designed to verify the status of
large numbers of claimants simultaneously.
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\8\ This match is conducted using Labor's Interstate Connection
Network.
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To enhance the ability of states to verify the status of claimants
who could be working or receiving UI benefits in other states, many
officials we spoke with advocated giving states access to the Office of
Child Support Enforcement's National Directory of New Hires (NDNH). The
NDNH is a comprehensive source of unemployment insurance, wage, and new
hires data for the whole nation. However, current law limits access to
the NDNH and does not permit individual states to obtain data from it
for purposes of verifying claimants' eligibility for UI.\9\ One
possible alternative to the NDNH suggested by some officials for
tracking interstate wages and UI benefit receipt is the Department of
Labor's Wage Record Interchange System (WRIS). This system, which was
developed in response to the Workforce Investment Act (WIA) of 1998, is
a ``data clearinghouse'' that makes UI wage records available to states
seeking employment and wage information on individuals in other
states.\10\ Certain federal officials and others familiar with WRIS
told us that with some modification--such as incorporating the more
timely new hires data from the states--WRIS could be a logical
alternative to the NDNH because the computer network for sharing data
among the states already exists. However, WRIS currently lacks
important pieces of information (such as states' new hires data) that
would make it most useful as an interstate verification tool. Moreover,
in a recent report, we noted that some states have been reluctant to
become involved with WRIS, partly because of concerns about the cost of
administering the system.\11\ Furthermore, we noted that if not all
states participate, the value of WRIS will be diminished--even for
participating states--because no data will be available from
nonparticipating states' UI wage records.
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\9\ See 42 U.S.C. 653 (l).
\10\ WRIS helps participating states track the employment status of
individuals who have participated in WIA job training programs in other
states.
\11\ Labor agreed to fund WRIS for the first year of its operation,
but has not committed to funding future years. The estimated annual
cost of administering the system is $2 million. See Workforce
Investment Act: Improvements Needed in Performance Measures to Provide
a More Accurate Picture of WIA's Effectiveness, GAO-02-275,
(Washington, D.C.: Feb. 1, 2002).
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LSome States May Not Verify Claimants' Receipt of Other Programs'
Benefits
Claimants' eligibility for UI benefits may be affected if they are
receiving benefits from other state or federal programs. For example,
claimants in some states are ineligible for UI benefits, or they may
receive reduced benefits if they are receiving workers' compensation.
Overpayments can occur if claimants do not accurately report the
existence or amount of such benefits when they apply for UI, or if the
state employment security agency fails to verify the information in a
timely manner.\12\ Only two of the six states we visited verify
claimants' receipt of workers' compensation using independent sources
of information. Moreover, at least one of these states only checks for
receipt of workers' compensation if the claimant self-reports that they
are currently receiving such benefits. Similarly, receipt of some
federal benefits such as cash payments from Social Security programs
may affect a UI claimant's eligibility for or amount of benefits.\13\
For example, one state we visited requires claims representatives to
ask claimants if they are currently receiving Social Security
Disability Insurance (DI), which could reduce or eliminate the UI
benefits they are eligible to receive. However, if a claimant states
that he or she is not receiving DI benefits, then no further actions
are taken to independently verify this information. Labor's quality
assurance data estimate that in 2001, about $30 million in UI
overpayments were due to unreported social security benefits, such as
DI.
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\12\ State laws differ from one another in terms of how benefits
that are received from other federal or state programs affect
claimants' eligibility for UI benefits.
\13\ The Social Security Administration is responsible for
administering programs including the Old Age and Survivors Insurance,
Supplemental Security Income, and Disability Insurance.
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LSome States Fail to Adequately Verify Claimants' Identity and Whether
They Are Legal Residents
To ensure that UI benefits are paid only to individuals who are
eligible to receive them, it is important that states verify claimants'
identity and whether they are legal residents.\14\ However, states may
be vulnerable to fraud and overpayments because they rely heavily on
claimants to self-report important identity information such as their
social security number (SSN), or are unable to verify such information
in a timely manner. Prior investigations by Labor's OIG demonstrate
that the failure or inability of state employment security agencies to
verify claimants' identity have likely contributed to millions of
dollars in UI overpayments stemming from fraud. One audit conducted in
four states (Florida, Georgia, North Carolina, and Texas) revealed that
almost 3,000 UI claims totaling about $3.2 million were paid to
individuals using SSNs that did not exist, or belonged to deceased
individuals. Furthermore, the OIG concluded that illegal aliens filed a
substantial proportion of these claims.\15\
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\14\ Although some categories of noncitizens may be eligible for UI
benefits, such as those authorized to work in the United States at the
time they apply for benefits, others, including illegal aliens, are
not. See Federal Unemployment Tax Act 3304 Section (a)(14)(A).
\15\ See Department of Labor Office of Inspector General,
Verification of Social Security Numbers Could Prevent Unemployment
Insurance Payments to Illegal Aliens, 04-98-001-03-315, March 2, 1998.
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We found that vulnerabilities remain with regard to verifying
claimants' identity and citizenship status. For example, none of the
six states we visited have access to the Social Security
Administration's (SSA) State Online Query (SOLQ) system, which can be
used to verify the identity of claimants applying for UI by matching
their name, date of birth, and SSN in real time. At the time of our
review, only two states had access to this system because they were
participating in a pilot project with SSA. The states we visited
generally use a batch file method in which large numbers of SSNs are
periodically sent to SSA for verification.\16\ This process tends to be
less timely than online access for verifying claimants' initial
eligibility for benefits. One state we visited reported that it does
not perform any verification of the SSNs that UI claimants submit
because a prior system it used for verifying SSNs identified only a
small number of potential violations. In addition, all six states we
visited rely mainly on claimants to accurately self-report their
citizenship status when they first apply for UI benefits. State
officials told us that they generally do not verify this information
with the Immigration and Naturalization Service (INS) unless the
claimant states that he or she is a noncitizen. Labor estimates that
about $30 million in overpayments in 2001 were due to illegal alien
violations.
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\16\ States report sending SSNs to SSA for verification in
intervals ranging from daily to once per quarter (every 3 months).
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Even if individuals do not misrepresent their identity or
citizenship status to illegally obtain UI benefits, the potential for
fraud and abuse may still exist. For example, one state we visited
revealed that they, along with a bordering state, identified nine SSNs
that are currently being illegally used by multiple individuals as
proof of eligibility for employment. Upon further investigation, we
determined that these SSNs are being used by approximately 700
individuals in at least 29 states, and that seven of the SSNs belonged
to deceased individuals. Although we did not find any instances in
which UI benefits were obtained by those individuals earning wages
under these numbers, both state and federal officials agreed that the
potential for these individuals to fraudulently apply for and receive
UI benefits in the future was possible. At the Subcommittee's request,
our Office of Special Investigations is currently investigating the use
of these SSNs. Initial indications are that the individuals involved
are illegal aliens.
LStates May Not Receive Timely Information from Employers
To varying degrees, officials from all of the six states we visited
told us that employers or their agents do not always comply in a timely
manner with state requests for information needed to determine a
claimant's eligibility for UI benefits. For example, one state UI
Director reported that about 75 percent of employers fail to respond to
requests for wage information in a timely manner. In addition, a Labor
OIG audit conducted between 1996 and 1998 revealed that 22 out of 53
states experienced a nonresponse rate of 25 percent or higher for wage
requests sent to employers.\17\ A more in-depth review of seven states
in this audit also showed that $17 million in overpayments occurred in
four of the states because employers did not respond to the states'
request for wage information. We discussed these issues with an
official from a national employer representative organization who told
us that some employers may resist requests to fill out paperwork from
states because they view the process as cumbersome, time-consuming, and
cannot always see how fraud and UI overpayments can affect their tax
rate. In particular, because employers are unlikely to experience an
immediate increase in the UI taxes they pay to the state as a direct
result of overpayments, they do not see the benefit in complying with
state requests for wage data in a timely manner. Although Labor has
taken some limited actions to address this issue, our work to date
shows that failure of employers to respond to requests for information
in a timely manner is still a problem.\18\
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\17\ See U.S. Department of Labor, Office of Inspector General,
Examination of UI Benefit/Wage Crossmatch and Analysis of Employers Who
Fail to Respond to the States' Requests for Weekly Wage Data (05-99-
005-03-315) March 1999.
\18\ Labor recently funded a grant to one state to facilitate more
effective coordination and cooperation between the state and its
employers. As a result of its actions, this state reported that about
80 percent of the state's employers comply with state requests for
information in a timely manner.
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LStates Vary in Their Ability To Recover Overpayments
While most states recover a large proportion of their overpayments
by offsetting claimants' current or future benefits, some of the states
we visited have additional overpayment recovery tools for individuals
who are no longer receiving UI. These tools include state tax refund
offset, wage garnishment, and use of private collection agencies.\19\
Some of these procedures, such as the state tax refund offset, are
viewed as particularly effective. For example, one state reported
overpayment collections of about $11 million annually between 1998 and
2000 resulting from this process. Other states have increased
overpayment collections by allowing more aggressive criminal penalties
for individuals who are suspected of UI fraud. For example, one state
prosecutes UI fraud cases that exceed a minimum threshold as felonies
instead of misdemeanors. Officials in this state told us that the
threat of imprisonment often encourages claimants suspected of fraud to
make restitution for UI overpayments. According to state officials,
this initiative resulted in $37 million in additional overpayment
collections in calendar years 2000 and 2001. However, other states we
visited lacked many of these tools. For example, one state relied
primarily on offsets against current UI claims to recover overpayments
because its laws and policies did not permit the use of many of the
tools that other states have found to be effective for collecting
overpayments from individuals who have left the UI rolls.
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\19\ For UI claimants who have outstanding overpayments, the state
tax refund offset allows a state to intercept the individual's state
tax refund to recover an overpayment; wage garnishment allows the state
to recover UI overpayments from an individual's paycheck when they
return to work; and private collection agencies can pursue overpayments
when the state has been unsuccessful in recovering using its existing
collection procedures.
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Labor's Management Places Insufficient Emphasis on Program Integrity
In general, Labor's approach to managing the UI program has
emphasized quickly processing and paying UI claims, with only limited
attention to overpayment prevention, detection, and collection. This
approach is most evident in the priorities that are emphasized in
Labor's recent annual performance plans, the UI program's performance
measurement system, and the limited use of quality assurance data to
correct vulnerabilities in states' UI operations. For example, Labor's
recent annual performance plans required under the Government
Performance and Results Act of 1993 have not included strategies or
goals to improve payment accuracy in state UI programs. In addition, we
found that Labor's system for measuring and improving UI program
performance is primarily geared to assess the timeliness of various
state operations.\20\ Most of the first 12 performance measures (called
``Tier I'') assess whether states meet specified timeframes for certain
activities, such as the percentage of first payments made to claimants
within 14 to 35 days. However, none of the Tier I measures gauge the
accuracy of UI payments. Labor also gives Tier I measures more weight
than the remaining measures (called ``Tier II''), which assess other
aspects of state performance, including overpayment collections. Labor
has developed national criteria specifying the minimum acceptable level
of performance for most Tier I measures.\21\ States that fail to meet
the minimum established criteria are generally required to submit a
``Corrective Action Plan'' to Labor. Moreover, Labor has indicated that
it may withhold the administrative funding of states that continually
do not meet Tier I performance goals. By contrast, the Tier II measures
do not have national minimum performance criteria and are generally not
enforced as strictly by Labor. Labor could set Tier II criteria on a
state-by-state basis and withhold funding in case of subsequent
noncompliance.
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\20\ This system, called ``UI Performs,'' was developed with input
and coordination from the states. The system incorporates more than 70
performance measures to gauge states' performance, including the
timeliness, quality, and accuracy of benefit decisions.
\21\ The national minimum performance criteria are performance
measures that are applied uniformly to all states.
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Officials from most of the states we visited also told us that the
Tier I and Tier II measures make the UI program complex to administer
and may contribute to an environment in which overpayments are more
likely. In particular, these officials told us that because the
measures are so numerous and are designed to monitor a wide range of
activities, it is difficult to place sufficient emphasis on more
fundamental management issues, such as payment accuracy. There are
currently more than 70 Tier I and Tier II measures that gauge how
states perform in terms of the timeliness, quality, and accuracy of
benefit decisions. Faced with competing priorities, some states tend to
focus most of their staff and resources on meeting certain measures
such as payment timeliness, but may neglect other activities such as
those dealing with program integrity.
We believe, however, that Labor can do more to encourage states to
balance payment timeliness with the need for payment accuracy in a
manner that does not require the complete withholding of administrative
funds. For example, under federal regulations covering funds to states,
Labor may temporarily withhold cash payments, disallow costs, or
terminate part of a state's administrative funding due to noncompliance
with grant agreements or statutes.\22\ Withholding or delaying a
portion of these funds is one way Labor can potentially persuade states
to implement basic payment control policies and procedures. In
addition, while completing the annual budget process, Labor could
prioritize additional administrative funding to states to help them
achieve or surpass agreed upon payment accuracy performance levels.\23\
However, we found that Labor is only using such tools to a limited
degree to help states enhance their program integrity activities.
---------------------------------------------------------------------------
\22\ See 29 C.F.R. 97.43.
\23\ See 20 C.F.R. 601.6.
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LLabor Has Not Fully Utilized Its Quality Assurance Data to Improve
State Operations
Labor has also been reluctant to use its quality assurance data as
a management tool to encourage states to place greater emphasis on
program integrity. According to an internal agency performance report
and Labor officials, quality assurance data should be used to identify
vulnerabilities in state program operations, measure the effectiveness
of efforts to address these vulnerabilities, and help states develop
mechanisms that prevent overpayments from occurring.\24\ However, as
currently administered, Labor's quality assurance system does not
achieve all of these objectives. In particular, Labor lacks an
effective mechanism to link its quality assurance data with specific
improvements that are needed in states' operations. For example, over
the last decade, payment errors due to unreported income have
consistently represented between 20 and 30 percent of annual UI
overpayments. While Labor's quality assurance system has repeatedly
identified income reporting as a vulnerable area, it has not always
played an active role in helping states develop specific strategies for
improving their performance in this area. Of particular concern to us
is that the overpayment rate for the nation has shown little
improvement over the last 10 years. This suggests that Labor and some
of the states are not adequately using quality assurance data to
address program policies and procedures that allow overpayments to
occur.
---------------------------------------------------------------------------
\24\ See Department of Labor, Employment and Training
Administration, UI Performs 2000 Annual Report, p.9.
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Labor Gives Inadequate Attention to Overpayment Recoveries
Finally, Labor has given limited attention to overpayment
collections. Currently, Labor requires states to collect at least 55
percent of all the overpayments they establish annually through their
benefit payment control operations. This 55 percent performance target
has not been modified since 1979 despite advancements in technology
over the last decade, such as automatic state tax refund intercepts,
that could make overpayment recovery more efficient. At the time of our
review, only 34 out of 53 states met or exceeded the minimum standard
of 55 percent. A small number of federal and state officials told us
that states tend to devote the minimum possible resources to meet it
each year. However, our work shows that Labor has not actively sought
to improve overpayment collections by requiring states to incrementally
increase the percentage of overpayments they recover each year.
Labor is Taking Actions To Improve Program Integrity
At the time of our review, Labor was continuing to implement a
series of actions to help states with the administration of their UI
programs. For example, Labor is helping states use the Information
Technology Support Center (ITSC) as a resource for states to obtain
technical information and best practices for administering their UI
programs.\25\
---------------------------------------------------------------------------
\25\ ITSC is a collaborative effort involving the Department of
Labor, state employment security agencies, private sector
organizations, and the state of Maryland. It was created in 1994 to
help states adopt more efficient, timely, and cost-effective service
for their unemployment service claimants.
---------------------------------------------------------------------------
Labor also provides technical assistance and training for state
personnel, as well as coordination and support for periodic program
integrity conferences. In its annual budget justification, Labor has
requested a limited amount of funding for the states for program
integrity purposes, such as $35 million in fiscal year 2001 for states
to improve benefit overpayment detection and collection, eligibility
reviews, and field tax audits. More recently, Labor has been developing
a new payment accuracy indicator in its Annual Performance Plan for
fiscal year 2003 for the states' UI programs that will establish a
baseline measurement for benefit payment accuracy during 2002. Labor
also plans to provide states with additional quality assurance data on
the nature and cause of overpayments to help them better target areas
of vulnerability and identify more effective means of preventing
overpayments.
At the time of our review, Labor was also developing a legislative
proposal to give state employment security agencies access to the NDNH
to verify UI claimants' employment and benefit status in other states.
Our analysis suggests that use of this data source could potentially
help states reduce their exposure to overpayments. For example, if the
directory had been used by all states to detect claimants' unreported
or underreported income, it could have helped prevent or detect
hundreds of millions of dollars in overpayments in 2001 alone.\26\ In
addition, Labor is working to develop an agreement with the Social
Security Administration that would grant states access to SSA's SOLQ
system. States that used this system would be able to more quickly
validate the accuracy of each claimant's SSN and identity at the time
of application for UI benefits.
---------------------------------------------------------------------------
\26\ This assumes that the top two categories of overpayments
(``benefit year earnings'' and ``base period wages'') were
substantially reduced or eliminated by use of the NDNH.
---------------------------------------------------------------------------
Conclusions
Despite the various efforts by Labor and some states to improve the
integrity of the UI program, problems still exist. The vulnerabilities
that we have identified are partly attributable to a management
approach in Labor and many states that emphasizes quickly processing
and paying UI claims without a similar focus on controlling program
payments. While we recognize the importance of paying unemployed
individuals in a timely manner, this approach has likely contributed to
the consistently high level of overpayments over time, and as such, may
have increased the burden placed on some state UI trust funds. As the
number of UI claimants has risen over the last year, many states have
felt pressured to quickly process and pay additional claims. The
results of our work suggest that, in this environment, overpayments are
not likely to abate and could increase.
Labor is taking some steps to improve UI program integrity by
helping enhance existing state operations, such as working to obtain
access to important data sources. Our prior work suggests that using
more front-end automated data sources to verify claimant eligibility
before overpayments are made is a more efficient method of protecting
program funds than trying to recover overpayments after they have
occurred. In the case of the UI program, access to data sources such as
the NDNH or WRIS could help states reduce overpayments caused by
unreported income, which accounts for more than one-third of the
overpayments in 2001. However, absent a change in the current approach
to managing the UI program at both the federal and state level, it is
unlikely that the deficiencies we identified will be sufficiently
addressed. In particular, without more active involvement from Labor in
emphasizing the need to balance payment timeliness with payment
accuracy, states may be reluctant to implement needed changes in their
management philosophy and operations. With increased emphasis on
payment accuracy, Labor's system of performance measures could help
encourage states to place a higher priority on program integrity
activities. Moreover, an effective strategy to help states control
benefit payments will also require use of its quality assurance data to
identify areas for improvement and work with the states to implement
changes to policies and procedures that allow overpayments to occur.
However, Labor must be willing to link state performance in the area of
program integrity to tangible incentives and disincentives, such as
through the annual administrative funding process. Ultimately, a
coordinated effort between Labor and the states is needed to address
the weaknesses we have identified and reduce the program's exposure to
improper payments. Without such an effort, Labor risks continuing the
policies and procedures that have contributed to consistently high
levels of UI overpayments over the last decade.
Mr. Chairman, this concludes my prepared statement. I will be happy
to respond to any questions you or other members of the Subcommittee
may have.
GAO Contact and Staff Acknowledgments
For information regarding this testimony, please contact Sigurd R.
Nilsen, Director, Education, Workforce, and Income Security Issues, at
(202) 512-7215. Individuals who made key contributions to this
testimony include Daniel Bertoni, Jeremy Cox, Cheryn Powell, and
Salvatore Sorbello.
Related GAO Products
Workforce Investment Act: Improvements Needed in Performance
Measures to Provide a More Accurate Picture of WIA's Effectiveness.
GAO-02-275 Washington, D.C.: February 1, 2002.
Strategies to Manage Improper Payments: Learning from Public and
Private Sector Organizations. GAO-02-69G. Washington, D.C.: October
2001.
Department of Labor: Status of Achieving Key Outcomes and
Addressing Major Management Challenges. GAO-01-779. Washington, D.C.:
June 15, 2001.
Unemployment Insurance: Role as Safety Net for Low-Wage Workers is
Limited. GAO-01-181. Washington, D.C.: December 29, 2000.
Benefit and Loan Programs: Improved Data Sharing Could Enhance
Program Integrity. GAO/HEHS-00-119. Washington, D.C.: September 13,
2000.
Supplemental Security Income: Action Needed on Long-Standing
Problems Affecting Program Integrity. GAO/HEHS-98-158. Washington,
D.C.: September 14, 1998.
Supplemental Security Income: Opportunities Exist for Improving
Payment Accuracy. GAO/HEHS-98-75. Washington, D.C.: March 27, 1998.
Supplemental Security Income: Administrative and Program Savings
Possible by Directly Accessing State Data. GAO/HEHS-96-163. Washington,
D.C.: August 29, 1996.
Chairman HERGER. Thank you, Dr. Nilsen. Now, Mr. Heddell
will testify.
STATEMENT OF HON. GORDON S. HEDDELL, INSPECTOR GENERAL, OFFICE
OF INSPECTOR GENERAL, U.S. DEPARTMENT OF LABOR
Mr. HEDDELL. Good afternoon, Mr. Chairman and Members of
the Subcommittee. Thank you for inviting me to testify today in
my capacity as the Inspector General of the U.S. Department of
Labor. I am pleased to discuss my office's assessment of the
integrity of the Unemployment Insurance program.
Preserving the integrity of the UI program has been a
longstanding concern of the Office of Inspector General (OIG).
Our investigative casework and audits show that the program
remains vulnerable to fraud, waste, and abuse, which result in
millions in losses to the UI trust fund. Based on this body of
work, we believe that more can be done by the DOL to strengthen
the integrity of the program.
From an investigative perspective, we have focused on three
types of unemployment insurance schemes involving fictitious or
fraudulent employers, internal embezzlement, and identity
theft.
Mr. Chairman, a fictitious employer scheme involves the
creation of a company that exists only on paper with no actual
employees, business operations, or cash outlays for taxes. In
many of these cases, the individuals will operate in multiple
States and include family, friends, or others who have been
recruited to assume false identities in order to collect UI
benefits.
Conversely, a fraudulent employer scheme usually involves a
legitimate business with employees and valid business expenses.
However, the employer actively engages in fraudulent activity,
such as allowing non-employees to file claims against their
company in exchange for a cut of the claimants' benefits.
In one illustrative case, an individual used 13 fictitious
companies and 36 fictitious claimants, using names and Social
Security numbers of deceased persons, to collect over $135,000
in UI benefits from California, $65,000 from Massachusetts,
$16,000 from Nevada, and $15,000 from Texas.
Another type of scheme involves fraud and embezzlement
committed by State personnel who administer the UI program.
These schemes vary in complexity. A simple fraud arrangement
may be the acceptance of a payoff by a State employee in
exchange for approving an unauthorized UI claim. These
arrangements, however, can mushroom into operations involving
multiple individuals when State employees work with outside
employers to certify false employment information. An
illustration involves a New Jersey State employee who defrauded
the State of $325,000 over a 7-year period by sending false
wage and employment information to local unemployment offices
to verify the employment of as many as 30 co-conspirators. In
return, he received half of his co-conspirators' UI benefit
checks.
Identity theft schemes are another means of defrauding the
program. Under this type of scheme, individual identities are
stolen to apply for UI benefits. In one case, a California man
orchestrated and then used an identity theft scheme designed to
obtain UI benefits by filing over 30 fraudulent claims totaling
more than $130,000. The stolen identities were obtained from
customer transaction receipts printed by a Los Angeles public
employees' credit union.
Mr. Chairman, in addition to these types of fraud schemes,
there are internal control weaknesses and other vulnerabilities
that impact the integrity of the UI system that we have
identified. They include the DOL's ability to detect, recover,
and reduce, overpayments; the misuse of administrative grant
funds by States; the misclassification of workers and its
impact on employers' payment of UI taxes; and the
vulnerabilities created by telephone and Internet claims
systems now in place by most States.
With respect to overpayments, we are concerned that the BAM
system, which uses statistical sampling techniques to project
the total UI benefit overpayments made, is not being utilized
to reduce the number of overpayments.
In addition, we are concerned about the cross-matches
conducted by States as part of their benefit payment control
activities. States cross-match weekly UI benefit records with
quarterly wage records in order to detect possible
overpayments. An inherent weakness in this process is that
States must rely on employers to provide detailed wage
information. Our audit of seven States found that many
employers failed to submit this information for a variety of
reasons. As a consequence, we estimated $17 million in
overpayments were not being detected in four of the seven
States.
Mr. Chairman, another area of concern involves the use of
UI administrative grant funds, which are issued to the States
for the cost of processing unemployment claims, collecting UI
taxes, and other activities. In just three OIG audits, we
questioned costs of nearly $20 million related to improper uses
of these funds.
Our work has also disclosed that not all employers
voluntarily pay their fair share of UI taxes. Some employers
intentionally misclassify their employees as independent
contractors in order to hide the wages they pay out, or will
utilize employee leasing companies in order to avoid paying
benefits or taxes. Such activities result in lost contributions
to State UI trust funds.
Finally, we are concerned about the unintended consequences
that remote claims filing may have on the integrity of the
program. Based on our audits and investigative casework, the
OIG has made several recommendations to the DOL and the
Congress for strengthening and enhancing the integrity of the
UI program. Among our recommendations is the need to grant the
OIG and the DOL unimpeded access to unemployment insurance,
Social Security, and new hire data for fraud detection and
program evaluation purposes, to enhance fraud detection and
investigative training for State personnel, and to improve the
UI cross-match system for detecting overpayments.
In conclusion, Mr. Chairman, my office will continue to
provide oversight and conduct investigations to ensure that the
UI program operates effectively and efficiently and that
benefits go to only those who are eligible.
This concludes my statement, and I would be pleased to
answer any questions you or any other Subcommittee Members may
have. Thank you.
[The prepared statement of Mr. Heddell follows:]
Statement of the Hon. Gordon S. Heddell, Inspector General, Office of
Inspector General, U.S. Department of Labor
Good afternoon, Mr. Chairman and Members of the Subcommittee. Thank
you for inviting me to testify today in my capacity as the Inspector
General of the U.S. Department of Labor. I am pleased to discuss my
Office's assessment of the integrity of the Unemployment Insurance (UI)
program. The views I express this afternoon may not be representative
of those of the Department.
Administration and Oversight of the UI Program
Mr. Chairman, as you know, the UI program is vital in ensuring the
financial security of America's workforce. This multi-billion dollar
entitlement program, administered through a unique Federal-State
partnership, provides temporary financial assistance to workers who
lose their jobs through no fault of their own. Benefits are paid out so
long as workers meet certain eligibility requirements. Funding for
these benefits comes from employer taxes deposited into the
Unemployment Trust Fund. States are primarily responsible for the
collection of these taxes and the payment of benefits through State
Workforce Agencies (SWAs), while the Department is charged with
ensuring that states comply with applicable laws and regulations, and
with providing oversight, policy guidance, and technical assistance to
the states.
In addition to the Department, the OIG has certain oversight
responsibilities regarding the UI program. Preserving the integrity of
the UI program has been a long-standing concern of the OIG. Our
investigative casework and audits show that the UI program remains
vulnerable to fraud, waste and abuse, which result in millions in
losses to the UI trust fund. We conduct periodic audits of the program
that look at internal controls and program integrity, among others. We
also engage in casework that identifies complex interstate UI fraud
schemes, as well as single claimant fraud cases committed by federal
employees or ex-military personnel. Based on this body of work, we
believe that more can be done by the Department to strengthen the
integrity of the UI program. We have highlighted UI program integrity
as one of the top management issues facing the Department. Congress
also recognized the importance of improving the integrity of the UI
program in a 2001 report on Government mismanagement, as well as OMB in
a report released last month on erroneous payments.
Fraud Against the UI Program
As with any multi-billion dollar benefit payment program, the UI
program is vulnerable to fraud and abuse. We have focused our UI
investigative activities on three types of schemes: 1) fictitious or
fraudulent employer schemes; 2) internal embezzlement schemes; and 3)
identity theft or imposter schemes. I will elaborate on each of these
areas.
Fictitious/Fraudulent Employer Schemes
Mr. Chairman, a fictitious employer scheme involves creating a
company that exists only on paper with no actual employees, business
operations, cash outlays for taxes or any other normal business
expenses. The intent is to have in place a company that is used to file
fraudulent claims. In many of these cases, the individuals will operate
in multiple states and include their family and friends, or individuals
who have been recruited to assume false identities in order to collect
UI benefits. Conversely, a fraudulent employer scheme usually involves
a legitimate business with employees and valid business expenses.
However, the employer actively engages in fraudulent activity such as
laying off workers, only to return them to work under a cash system, or
allowing non-employees to file claims against the company in exchange
for part of the claimants' benefits. Unfortunately, mail, telephone,
and Internet claims filing, which are designed to make the program run
more effectively, can have the unintended effect of facilitating these
types of schemes because they eliminate the need to fill out UI forms
in person. In one case that is illustrative of how these schemes can
result in significant losses to the UI program, an individual used 13
fictitious companies and 36 fictitious claimants using names and Social
Security numbers of deceased persons to collect over $135,000 from
California, approximately $65,000 from Massachusetts, $16,000 from
Nevada, and over $15,000 from Texas. The individual submitted
fraudulent interstate UI claims based on false reported wages, and then
collected the benefit checks from various locations based on claims
filed by mail.
Internal Embezzlement Schemes
Fraud and embezzlement of UI funds by state personnel who
administer the program is another problem in the UI system. These
schemes vary in complexity. A simple fraud scheme may be the acceptance
of a payoff by a state UI employee in exchange for the approval of an
unauthorized UI claim. These schemes, however, can mushroom into
operations involving multiple individuals when state UI employees work
with outside employers who certify false employment information. We
believe that advanced technology, which has consolidated certain tasks
into a single job that once had been handled by several people, has had
the unintended effect of facilitating this type of fraud since it has
eliminated certain controls by reducing the levels of peer review and
supervisory oversight in UI offices. An illustration of this type of
internal embezzlement involves a New Jersey state employee who sent
false wage and employment information to local unemployment offices to
verify the employment of as many as 30 co-conspirators. The scheme
consisted of registering four fictitious companies with New Jersey for
the purpose of ``employing'' his co-conspirators. The individual and
his co-conspirators filed false UI applications claiming that they had
been laid off from these companies and thus entitled to benefits. The
state employee then verified their employment with UI offices and used
a false name to disguise his involvement. In return, he received half
of the co-conspirators' UI benefit checks.
Identity Theft or Imposter Schemes
Fraud against this program has also been carried out through
identity theft. Under this type of scheme, individual identities are
stolen and then used to apply for UI benefits. Identity theft victims
are usually unaware that someone is using their identity.
Unfortunately, fraud detection in these cases is complicated because
any preliminary fraud screening that may be done would disclose that
the employer and employee actually exist. An example of how such a
scheme can operate involves our investigation of a California man who
orchestrated an identity theft scheme designed to obtain UI benefits by
filing over 30 fraudulent claims totaling more than $130,000. The
stolen identities were obtained from customer transaction receipts
printed by a Los Angeles public employees' credit union. This credit
union, like others, uses Social Security numbers as customer account
numbers. Victims of the scheme included 18 Los Angeles City and two Los
Angeles County employees. The individual used the UI system to create
fictitious employers and had the benefit checks sent to his home.
Assisted by his girlfriend, he would then deposit the fraudulent UI
checks into bank accounts that he controlled.
Internal Control Weaknesses and Other Vulnerabilities in the UI Program
Mr. Chairman, in addition to fraud schemes, there are a number of
internal control weaknesses and other vulnerabilities that impact the
integrity of the UI system. Over the years, OIG work has also
identified weaknesses or vulnerabilities relative to: 1) overpayment
detection, recovery and reduction; 2) misuse of administrative grant
funds by states; 3) misclassification of workers and its impact on
employers' payment of UI taxes; and 4) vulnerabilities created by
telephone and Internet claims systems now in place by most states. In
our opinion, these weaknesses can be compounded by the program's
requirements that timely benefit payments be provided to unemployed
workers.
Overpayment Detection, Recovery and Reduction
With respect to overpayments, Mr. Chairman, the OIG is concerned
about the efficiency and effectiveness of the Department's activities
to detect, recover, and reduce UI benefit overpayments. The Department
funds two systems that measure UI benefit overpayments. The Benefit
Accuracy Measurement (BAM) system uses statistical sampling techniques
to project the total UI benefit overpayments made. The Benefit Payment
Control (BPC) system at each state identifies and investigates benefit
overpayments, establishes receivables, and collects overpayments.
Benefit Accuracy Measurement System
As part of our audit of the DOL FY 2001 financial statements, we
noted that the BAM system projected overpayments of $2.3 billion for FY
2001. For the same period, actual overpayments identified by BPC
totaled $669 million, or just one-third of the amount estimated by BAM
activities. We also noted that overpayment rates projected by BAM have
remained relatively flat at approximately 8.5 percent over the past 12
years. This raises a concern that the BAM system is not being utilized
to reduce the amount of overpayments.
To examine these seemingly divergent results more closely, the OIG
is performing an audit of the Department's oversight role regarding UI
benefit overpayments. Our ultimate objective is to assess BAM results
and identify how the system can best be utilized to reduce the amount
of overpayments.
Benefit Payment Control System
As part of their BPC activities, states routinely conduct
crossmatches to compare weekly UI benefit payment records with
quarterly wage records reported by employers in order to detect
possible overpayments. When claimants are identified with both UI
benefits and wages for the same period, a potential UI overpayment case
is developed. This has historically been the most effective overpayment
detection tool used by the states. However, a 1999 audit we conducted
of the crossmatch systems in seven states--Illinois, Texas, California,
New Jersey, Maryland, Kentucky and Florida--showed inherent weaknesses
in this fraud detection method. Foremost among these weaknesses was the
failure of employers to respond to the states' requests for detailed
wage information. This information is critical because it provides
specific information as to how much the claimant earned on a weekly
basis, which states can then use to determine if an overpayment has
occurred. As a consequence, we estimated $17 million in overpayments
were not being detected in four of the seven states we audited. Many
employers failed to respond because they either misunderstood the
purpose of the request or were confused over who should respond.
To improve the UI benefit-wage crossmatch overpayment system, we
recommended that:
LETA provide policy guidance and direction to the SWAs
to ensure that employers are reminded of their responsibility
to respond to wage requests, and that adequate follow-up
routinely occurs for those who fail to respond, particularly
those with the highest potential for overpayments.
LETA assume a leadership role in assuring that SWAs
obtain timely access to the data of the National Directory of
New Hires, established under the welfare reform legislation,
and to fully incorporate that data into UI Benefit Payment
Control operations.
ETA has agreed to take corrective action, and we will work with them to
ensure that they implement our recommendations.
The Use of UI Administrative Grant Funds by States
Mr. Chairman, another area of concern involves the use of UI
administrative grant funds. These funds are issued to the states for
the costs of processing unemployment claims, collecting UI taxes, and
all necessary related activities. State funding is based on the cost of
proper and efficient administration and such other factors as the
Secretary deems appropriate. In just three audits, we identified
questioned costs of nearly $20 million related to improper uses of UI
administrative grant funds. Included in the amount of questioned costs
we identified were unallowable charges for direct and indirect costs,
overcharges for state automatic data processing and information
technology central service costs, and un-allocable maintenance and
operating expenses relating to building space occupied by non-SWA
personnel. Amid SWA complaints that administrative funding is
inadequate, the inefficiency identified by our audits points to the
need for more careful use of current funding to allow more to be done
to enhance quality control and other essential functions.
Misclassification of Workers and Lost Contributions to State UI Trust
Funds
Our work has also disclosed that not all employers voluntarily pay
their fair share of UI taxes. Some employers intentionally misclassify
their employees as independent contractors in order to hide the wages
they pay out in order to avoid paying benefits or taxes. Employee
leasing companies are another method used to avoid paying taxes. These
companies lease workers back to client firms, serving as the employer
of record for purposes of UI tax payments and experience-rating
calculations. Losses to UI trust funds occur when companies purchase an
inactive or defunct company that has few or no employees and very low
tax rates. Upon purchasing this ``shell'' company, the employee leasing
company obtains that company's lower UI rate and transfers employees
from other affiliated entities to the lower UI tax-rated shell company,
thereby avoiding higher taxes. This undermines the state's experience
rating system, which is designed to assess UI tax rates based on an
individual employer's history of UI tax assessments paid, versus
benefits charged.
To combat these activities, SWAs rely on field audits to determine
whether employers are reporting all UI-covered wages and paying their
fair share of UI taxes. In March 1999, we reviewed the field audit
practices of 12 states. We determined that if states adopted some of
the best practices used by the top performing states, the
identification of non-compliant employers could be improved. Among the
best practices we found were: 1) selecting a significant percentage of
employers based on Standard Industrial Classification codes that
identify employers with the highest probability for non-compliance; and
2) implementing a blocked claims audit program that encourages the
conversion of field audit investigations into audits. In response to
the latter recommendation, ETA revised its reporting instructions to
permit states to take credit for blocked claims audits. As a result of
our audit, almost $16 million in additional taxes have been recovered
as a result of ETA's implementation of our recommended actions.
Telephone and Internet Claims Systems
Over the last several years, almost all states have moved from
traditional in-person claims services to telephone or Internet claims
services, or both to improve the delivery of services. Shifting to
remote claims filing via the telephone or Internet has reduced
administrative costs for states, and users have cited the convenience,
ease, and privacy it provides. However, we are concerned that as remote
claims filing increases, the ability of states to monitor the integrity
of the claims-filing process will be eliminated. Reducing or
eliminating personal contacts during the initial claims filing process
removes a first-line defense against fraud schemes. In addition,
electronic claims filing effectively enlarges the potential universe of
identity theft victims, and makes it easier to initiate multiple state
schemes from a single location. We are concerned that this type of
activity will only increase absent up-front identity or eligibility
verification, or the implementation of proper controls and safeguards.
Current and Future OIG Work in the UI Program
Mr. Chairman, the OIG will continue to engage in proactive
investigative casework, audits, and evaluations designed to improve the
integrity of the UI program. The following is a brief description of
our planned work in this area.
In FY 2003, we plan to conduct a comprehensive, nationwide
initiative to help safeguard the integrity of the UI program. Our
initiative will focus on identifying systemic weaknesses that make the
program vulnerable to fraud and overpayments; identifying and
disseminating information on best practices used by the states to
detect fraud; and determining if UI administrative funding is used to
its maximum effect. Specifically, we will continue to expand our
investigative efforts to detect and investigate interstate, fraudulent
employer schemes used to defraud the program. We will also continue to
audit the Department's oversight role regarding UI benefit
overpayments, and will follow up on our earlier audits that highlighted
excessive charges by the Treasury Department to the UI trust fund to
pay for the IRS' costs of administering the fund. Finally, we will
begin looking into issues related to the solvency of state UI trust
funds and how states have been using the $8 billion in Reed Act
distributions they received in March.
Recommendations for Strengthening the UI Program
Based on our audits and investigative casework, the OIG has made
several recommendations to the Department and the Congress for
strengthening and enhancing the integrity of the UI program. Among our
recommendations is the need to:
LGrant the OIG and the Department unimpeded access to
UI, Social Security, and New Hire data for fraud detection and
program evaluation
purposes
LThe OIG and the Department needs efficient access to data
that is maintained by other agencies such as state UI and
Social Security wage records; and wage data contained in
databases such as the National Directory of New Hires. Such
data would be used for two primary purposes: 1) to aid in our
fraud detection and investigative efforts; and 2) to better
help us and the Department assess program performance and
return-on-investment. If we had routine and expeditious access
to the centralized Social Security wage database, we could more
efficiently and consistently verify eligibility of program
applicants and whether their Social Security numbers are valid.
This would aid in identifying potential overpayments and
preventing millions of dollars in future losses.
LEnhance fraud detection and investigative training
for state personnel
LIn order to better detect fraud and abuse, state personnel
who are responsible for benefit payment control, tax, and
internal security need to be provided high-quality, consistent
training. Any training should focus on fraud prevention and
detection, information sharing regarding common fraud schemes,
and dissemination of best practices used by the states. This
transfer of knowledge will assist the states in their efforts
to improve their enforcement and oversight capabilities.
LImprove the UI benefit-wage crossmatch overpayment
system
LAlthough ETA has distributed to the states our 1999 audit
report on the UI benefit-wage crossmatch overpayment system,
ETA should implement a corrective action plan to address our
findings and recommendations in order to detect the millions in
overpayments that are being missed.
Conclusion
In conclusion Mr. Chairman, the UI program provides financial
assistance to workers who lose their jobs through no fault of their
own. It is vital, therefore, that the UI program function effectively
and efficiently, and that UI benefits only go to those who are eligible
to receive these benefits. My Office will continue to provide oversight
and conduct investigations to this end. This concludes my full
statement. I would be pleased to answer any questions you or any other
Subcommittee Members may have.
Chairman HERGER. Thank you very much, Mr. Heddell. Now, Dr.
Woodbury to testify.
STATEMENT OF STEPHEN A. WOODBURY, PH.D., PROFESSOR OF
ECONOMICS, MICHIGAN STATE UNIVERSITY, EAST LANSING, MICHIGAN,
AND SENIOR ECONOMIST, W.E. UPJOHN INSTITUTE FOR EMPLOYMENT
RESEARCH
Dr. WOODBURY. Thank you, Mr. Chairman. The integrity of the
unemployment insurance system has three aspects: Whether
workers receive more benefits than they are entitled to under
the law, whether workers receive less than they are entitled to
under the law, and whether employers pay the taxes that they
are obligated to pay under the law.
The UI overpayments have been tracked by the DOL since 1987
with the Benefit Accuracy Measurement system, or BAM program.
In addition, the DOL is now implementing a Denied Claims
Accuracy, or DCA program, to track the extent to which UI
claims are incorrectly or wrongfully denied and, therefore,
result in underpayment. To date, the only information on the
extent of underpayments from incorrectly denied claims comes
from a pilot study that the DOL conducted with the cooperation
of five States in 1997-1998.
Regarding employer compliance, the DOL appears to have no
immediate plans to implement a revenue quality control program,
although it has discussed this in the past. Such a program
would track the degree of compliance with the unemployment
insurance payroll tax. Information does exist on the extent of
employer compliance from one study that was conducted in
Illinois in 1987.
My testimony focuses on findings from the Denied Claims
Accuracy pilot study from 1997-1998 and about the extent of UI
overpayments and underpayments that can be gleaned from that
study. My hope is that by combining the DCA pilot data with the
BAM data from the same States in the same time period, I can
give you a slightly more complete picture of UI overpayments
and underpayments than BAM alone can give.
In my written testimony, I provide some background on how
BAM and the DCA programs work. Briefly, under the BAM program,
each State randomly samples a predetermined number of benefit
payments each week and investigates each of those payments to
determine whether the payment was proper. Investigations are
performed by telephone and in person with the claimant,
employers, and third parties in order to determine whether the
payment complied with the laws and policies of the State.
In addition to giving estimates of overpayments, BAM yields
estimates of the extent of underpayments made on paid claims.
That is, an investigator may find that a payment was less than
it should have been, and this will be recorded and reported.
The BAM program has no way of estimating underpayments that
result from UI claims that should have been paid, but were
denied wrongfully.
The DCA program fills this main gap in the BAM program by
drawing and investigating random samples of UI claims that were
denied. Now, a UI claim can be denied for any of three broad
reasons. It may fail the State's monetary eligibility criteria,
that is, the worker may not have enough earnings in the base
period. It may fail to meet the State's separation eligibility
criteria, if a worker quits or is discharged, for example,
rather than being laid off for lack of work. Or, the claim may
fail to meet the non-separation eligibility criteria, meaning
the worker may not have been able, available, and searching for
work.
So, in both the denied claims pilot project 1997-1998 and
the Denied Claims Accuracy program that is now starting, States
drew or are drawing three random samples for monetary,
separation, and non-separation denials and investigating each
of those in a manner similar to the BAM.
Now, the findings of the Denied Claims Accuracy pilot
project are displayed in table 1 of my written testimony. Just
briefly, the five States that participated were Nebraska, New
Jersey, South Carolina, West Virginia, and Wisconsin. These are
the only States and the only time period for which data exists
on the extent of underpayments caused by incorrect denials in
addition to underpayments on paid claims and all types of
overpayments.
Column two of the table shows that overpayments as a
percentage of UI benefits paid ranged between 2.2 and 12
percent in those five pilot States that I mentioned, with a
weighted average of 7-percent, roughly, in those States. That 7
percent average is a little below the national average
overpayment rate of 8.6 that BAM found. So the pilot States
seem to be fairly representative. They are slightly more
accurate.
The BAM has found repeatedly that the main reason for these
overpayments are three: Workers failing to report all or part
of their earnings while they are claiming benefits; violations
of the separation criteria, meaning simple error, generally, on
the part of the agency; and workers failing to search for work
as required by State law.
Column three shows the underpayments on paid claims that
come from BAM. They are relatively low, one-half of 1 percent
to 1.2 percent, with an average of 1 percent.
Column four is what is unique to the DCA pilot study. It
shows that underpayments caused by wrongful denials range from
1.5 to 9 percent of total UI benefits paid in the five pilot
States, with a weighted average of 3.4 percent. The underlying
causes of underpayments vary with the type of wrongful denial,
but employer underreporting of wages is the main cause of the
wrongful monetary denials. Simple agency error is the main
cause of wrongful separation and non-separation denials.
Now, how closely these five pilot States resemble the rest
of the United States in their underpayments due to wrongful
denials is unknown, but applying the average weight of
underpayments caused by wrongful denials to the entire Nation
suggests that the benefits lost from wrongful denials during
fiscal year 1998 were in excess of $635 million.
Column five shows the sum of underpayments on unpaid claims
and underpayments from wrongful denials. A comparison shows
that in one State, underpayments actually exceed overpayments.
In two, overpayments exceed underpayments, but by less than 33
percent. In the remaining two States, overpayments exceed
underpayments more substantially. Over all in the five States,
overpayments exceed underpayments by about 64 percent. That is,
a dollar of underpayment is outmatched by about $1.64 of
overpayment. This excess of overpayments relative to
underpayments is substantially less than the picture that
emerges if one examines the BAM data alone, and that would
suggest that overpayments exceed underpayments by seven times
or more.
I can see I am out of time, so I will end my statement
there. Thank you.
Chairman HERGER. Thank you very much, and again, the rest
of your comments can be submitted for the record.
Dr. WOODBURY. Yes.
Chairman HERGER. Thank you, Dr. Woodbury.
Dr. WOODBURY. Thank you.
[The prepared statement of Dr. Woodbury follows:]
Statement of Stephen A. Woodbury\1\, Ph.D., Professor of Economics,
Michigan State University, East Lansing, Michigan, and Senior
Economist, W.E. Upjohn Institute for Employment Research
Unemployment Insurance Overpayments and Underpayments
The integrity of the Unemployment Insurance (UI) system has three
aspects: whether workers, fraudulently or otherwise, receive more
benefits than they are entitled to under the law, whether workers
receive less than they are entitled to under the law, and whether
employers pay the taxes that they are obligated to pay under the law
(Skrable 1999).
---------------------------------------------------------------------------
\1\ Opinions expressed are the author's.
---------------------------------------------------------------------------
UI overpayments have been tracked by the Labor Department since
1987 with the Benefit Accuracy Measurement (BAM) program. As a result,
much is known about overpayment of UI benefits (see any of the UI
PERFORMS Annual Reports published by the U.S. Department of Labor; for
example, U.S. Department of Labor 1998, 1999).
In addition, the Department is now implementing a Denied Claims
Accuracy (DCA) program to track the extent to which UI claims are
incorrectly (or wrongfully) denied and therefore result in
underpayments. To date, the only information on the extent of
underpayments from incorrectly denied claims comes from a pilot study
that the Department conducted with the cooperation of five states in
1997-98 (Woodbury and Vroman 1999, 2000).
Regarding employer compliance, the Department appears to have no
immediate plans to implement a Revenue Quality Control program that
would track the degree of compliance with the UI payroll tax. However,
information on the extent of employer compliance does exist from a
study conducted in Illinois in 1987 (Blakemore, Burgess, Low, and St.
Louis 1996; Burgess, Blakemore, and Low 1998; see below).
This testimony focuses on findings about the extent of UI
overpayments and underpayments from the five-state DCA pilot study of
1997-98. Combining the DCA pilot data with BAM data from the same
states and time period gives a more complete picture of UI overpayments
and underpayments--and hence of the UI program's integrity--than BAM
alone can give.
How the Bam and DCA Programs Work
Under the BAM program, each state randomly samples a predetermined
number of benefit payments each week (between 9 and 35, depending on
the size of the state) and investigates each of those payments to
determine whether the payment was proper. Investigations are performed
by telephone and in-person with the claimant, employers, and third
parties in order to to determine whether the payment complied with the
laws and policies of the state. Because BAM randomly samples paid
claims, the Department can estimate, on an annual basis, total
overpayments in each state and nationally.
In addition to giving estimates of overpayments, BAM yields
estimates of the extent of underpayments made on paid claims. That is,
an investigator may find that a payment was less than it should have
been, and this will be recorded and reported. However, BAM has no way
of estimating underpayments that result from UI claims that should have
been paid but were denied. BAM only samples and investigates UI
payments; no payment exists when a claim is denied.
The DCA program fills the main gap in the BAM program by drawing
and investigating random samples of UI claims that were denied. A UI
claim can be denied for any of three broad reasons:
LThe claim may fail to meet the state's monetary
eligibility criteria; that is, the worker may not have earned
enough during roughly the year before claiming benefits. This
is a monetary denial.
LThe claim may fail to meet the state's separation
eligibility criteria; that is, the worker may have quit or been
discharged for cause rather than being laid off due to lack of
work. This is a separation denial.
LThe claim may fail to meet the state's nonseparation
eligibility criteria; that is, the worker may not have been
able, available, and searching for work during the week in
question. This is a nonseparation denial.
Accordingly, in both the DCA Pilot Project of 1997-98 and the DCA
program that is now starting, states drew (or draw) three separate
random samples--one of monetary denials, a second of separation
denials, and a third of nonseparation denials. Each of these is
investigated in a manner similar to that used to investigate paid
claims under BAM, and the correctness of the denial is determined.
Findings from Five-State Pilot Project
Table 1 displays UI overpayments and underpayments for 1997-98 in
the five states that participated in the DCA Pilot Project--Nebraska,
New Jersey, South Carolina, West Virginia, and Wisconsin. These are the
only states (and the only time period) for which data exist on the
extent of underpayments caused by incorrect denials, in addition to
underpayments on paid claims and all types of overpayments.
Column 2 shows that overpayments as a percentage of total UI
benefits paid ranged between 2.2 and 12 percent in the five pilot
states, with a weighted average of 7.2 percent in those states. This is
slightly below the national average overpayment rate of 8.6 percent.
The BAM reports show that the main reasons for these overpayments are
(1) workers failing to report all or part of their earnings while
claiming benefits, (2) violations of the separation eligibility
criteria, and (3) workers failing to search for work as required by
state law and policy.
Column 3 shows that underpayments on paid claims (again as a
percentage of total UI benefits paid) ranged from 0.5 to 1.2 percent in
the five pilot states, with a weighted average of 1.0 percent. This was
very close to the national average underpayment rate of 0.9 percent.
Column 4 shows that underpayments caused by wrongful denials ranged
from 1.4 to 9.0 percent of total UI benefits paid in the five pilot
states, with a weighted average of 3.4 percent. The DCA reports show
that wrongful monetary denials account for 39 percent of these
underpayments, wrongful separation denials account for 36 percent, and
wrongful nonseparation denials account for 25 percent. Also, the
underlying causes of underpayments vary with the type of wrongful
denial: Employer underreporting of wages is the main cause of wrongful
monetary denials; agency error is the main cause of wrongful separation
and nonseparation denials.
How closely the five pilot states resemble the rest of the United
States in underpayments due to wrongful denials is unknown; however,
applying the average rate of underpayments caused by wrongful denials
to the entire nation suggests that benefits lost from wrongful denials
during fiscal year 1998 were in excess of $635 million.
Column 5 shows the sum of underpayments on paid claims and
underpayments from wrongful denials. A comparison of columns 5 and 2
shows that in one state (Nebraska) underpayments exceed overpayments.
In two (West Virginia and Wisconsin) overpayments exceed underpayments
by less than 33 percent. In the remaining two states (New Jersey and
South Carolina) overpayments exceed underpayments more substantially.
In the five pilot states overall, overpayments exceed underpayments by
about 64 percent; $1.00 of underpayment is outmatched by $1.64 of
overpayment. This excess of overpayments relative to underpayments is
substantially less than the picture that emerges if one examines only
the BAM data, which would suggest that overpayments exceed
underpayments by 7 times or more. A view of the UI system's integrity
that focuses only on paid claims (as BAM does) and that neglects the
accuracy of denials is quite incomplete.
Implications
Because the BAM program samples and investigates only paid claims,
BAM offers an incomplete picture of the extent of the UI program's
integrity. In particular, the extent of underpayments cannot be
appraised in the BAM program because BAM overlooks the correctness of
denied UI claims. A denied claim never generates a payment, so it
cannot be sampled under BAM. In effect, incorrectly denied claims slip
under BAM's radar. The Labor Department is well aware of this point and
is implementing the DCA program to fill the gap.
What can be done to improve the UI program's integrity? The UI
system faces an obvious dilemma. Decisions must be made on whether to
pay benefits to millions of UI claimants in a timely manner. Too much
concern about overpayments is likely to result in states denying
benefits to eligible claimants. Too much concern about underpayments is
likely to result in states paying claimants who are in fact ineligible.
This dilemma notwithstanding, three policies would clearly improve
the soundness and accuracy of the UI program. First, one of the three
main reasons for overpayments is a worker's failure to search
adequately for work (U.S. Department of Labor 1999). It follows that
improved monitoring and enforcement of the work search test would
improve the program's integrity. An obvious and direct approach would
be to increase the resources available to the states to conduct
eligibility review interviews. An alternative would be to expand the
Worker Profiling and Reemployment Services System (WPRS), which has
existed since 1994. There are good reasons for enforcing the work
search test apart from UI program integrity: Available evidence
suggests that workers who search more and (as a result) return to work
sooner improve both their earnings and their likelihood of staying
employed in the long run (Woodbury 2001).
Second, the DCA Pilot Project found that the most common reason for
wrongful monetary denials is employer error--meaning essentially that
an employer underreported or failed to report a worker's wages
(Woodbury and Vroman 1999, 2000). Such underreporting has been
documented in an extensive study involving random audits of Illinois
employers (Blakemore, Burgess, Low, and St. Louis 1996). That study
found that employers underreported the number of workers by over 13
percent and underreported UI taxable wages by over 4 percent. This
represents a significant leakage of revenues from the system. Moreover,
such underreporting has the effect of increasing the likelihood that
workers will be wrongfully denied benefits because employer wage
reports are the basis of determining a worker's monetary eligibility
for UI benefits. A feasible and well-researched approach to mitigating
this problem is to implement audits of firms that are most likely to be
out of compliance with the law, as determined by a statistical model
(Burgess, Blakemore, and Low 1998). Such a program would require
resources, but the evidence suggests that those resources would be
recovered several times over as a result of improved enforcement of the
UI tax law.
Third, the DCA Pilot Project also found that the most common reason
for wrongful separation and nonseparation denials is agency error--
meaning an incorrect decision or action taken by UI personnel (Woodbury
and Vroman 1999, 2000). In conducting the DCA Pilot Project, the
project's monitors heard repeatedly that it was difficult to attract
and retain qualified front-line UI personnel because the work is
difficult and the financial rewards meager compared with other
available pursuits. But the accuracy of decisions about UI eligibility
hinges on the skills, training, and experience of these front-line
personnel. If integrity of the UI system is to improve, then more must
be done to attract and retain qualified and experienced personnel. A
commitment of additional resources for administering the UI system
could meet this goal.
References
Blakemore, Arthur E., Paul L. Burgess, Stuart A. Low, and Robert
St. Louis. ``Employer Tax Evasion in the Unemployment Insurance
System.'' Journal of Labor Economics 14 (April 1996): 210-230.
Burgess, Paul L. ``Compliance with Unemployment-Insurance Job-
Search Regulations.'' Journal of Law and Economics 35 (October 1992):
371-396.
Burgess, Paul L., Arthur E. Blakemore, and Stuart A. Low. ``Using
Statistical Profiles to Improve Unemployment Insurance Tax
Compliance.'' In Reform of the Unemployment Insurance System, edited by
Laurie J. Bassi and Stephen A. Woodbury. Stamford, CT: JAI Press, 1998.
Pp. 243-271.
Skrable, Burman. ``Fraud, Abuse, and Errors in the Unemployment
Insurance System.'' In Unemployment Insurance in the United States:
Analysis of Policy Issues, edited by Christopher J. O'Leary and Stephen
A. Wandner. Kalamazoo, MI: W.E. Upjohn Institute for Employment
Research, 1997. Pp. 423-456.
U.S. Department of Labor. UI PERFORMS CY 1997 Annual Report.
Washington, DC: Employment and Training Administration, Unemployment
Insurance Service, August 1998.
U.S. Department of Labor. UI PERFORMS CY 1998 Annual Report.
Washington, DC: Employment and Training Administration, Unemployment
Insurance Service, August 1999.
Woodbury, Stephen A. ``Unemployment Duration, Recall, and
Subsequent Earnings: Evidence from Randomized Trials.'' Manuscript,
Michigan State University and W.E. Upjohn Institute, November 2001.
Woodbury, Stephen A. and Wayne Vroman. Denied Claims Accuracy Pilot
Project. Report Prepared for the Division of Performance Review,
Unemployment Insurance Service, Employment and Training Administration,
U.S. Department of Labor. Kalamazoo, MI: W.E. Upjohn Institute for
Employment Research, May 1999.
Woodbury, Stephen A. and Wayne Vroman. Denied Claims Accuracy Pilot
Project: Follow-Up Report. Report Prepared for the Division of
Performance Review, Office of Workforce Security, Employment and
Training Administration, U.S. Department of Labor. Kalamazoo, MI: W.E.
Upjohn Institute for Employment Research, August 2000.
Table 1.--Unemployment Insurance Overpayments and Underpayments in the Denied Claims Accuracy (DCA) Pilot
Project States, 1997-98
(1) (2) (3) (4) (5)
Total UI Underpayments
State Benefits Overpayments (as Underpayments (as % of UI paid)
paid % of UI paid) (as % of UI paid) from wrongful Total
($1,000s) on paid claims denials
Nebraska........................ 42,472 7.1 0.6 9.0 9.6
New Jersey...................... 1,053,409 6.8 1.2 2.5 3.7
South Carolina.................. 164,376 12.0 0.4 4.0 4.4
West Virginia................... 126,475 2.2 0.5 1.4 1.9
Wisconsin....................... 465,148 7.9 0.8 5.2 6.0
Five-state total a.............. 1,851,879 7.2 1.0 3.4 4.4
U.S. total...................... 18,770,000 8.6 0.9 na na
Sources: Columns 1, 2, and 3 are drawn from U.S. Department of Labor (1998, 1999). Column 4 is drawn from
Woodbury and Vroman (1999, 2000). Column 5 is the sum of columns 3 and 4.
Note: a The figures in columns 2, 3, 4, and 5 are averages of the five pilot states, weighted by total UI
benefits paid in each state.
Chairman HERGER. Now, Mr. Paris to testify.
STATEMENT OF MILES PARIS, DEPUTY DIRECTOR, PROGRAM SUPPORT,
ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY, CHICAGO, ILLINOIS
Mr. PARIS. Thank you very much, Mr. Chairman and Members of
the Subcommittee, for the opportunity to appear before you
today. I apologize if some of my comments are repetitive from
previous testimony.
I am here to discuss the Illinois Department of Employment
Security's experience in using our State's new hire directory
to detect cases in which individuals continued to claim
unemployment benefits after returning to work. The directory
has enabled us to reduce the amount of overpayments in many
such cases, and we also believe helped in the recovery of those
overpayments.
As you know, the 1996 welfare reform law required each
State to have a new hire directory to strengthen its child
support enforcement. When Illinois enacted legislation
establishing its directory in 1997, it assigned the Department
the responsibility for maintaining this directory. From the
outset, the legislation authorized the Department to use the
directory for unemployment insurance purposes.
Accordingly, in designing the directory, the Department
incorporated an automatic cross-match with its Benefit
Information System. The cross-match looks for individuals who
have been reported as a new hire and continue to receive
benefits after having been reported as a new hire.
When the cross-match identifies an individual who meets
these criteria, the adjudication process begins. The local
office in which the individual filed the claim is expected to
resolve this matter within 14 days to determine whether there
was an overpayment. The 14 days was a self-imposed timeframe to
try to limit the amount of overpayment that was being incurred.
The Department's emphasis is on minimizing and recovering
overpayments as opposed to penalizing the claimant. However,
local offices will refer serious cases, for example, of repeat
offenders, to the agency's Benefit Payment Control Unit for the
possible institution of administrative fraud proceedings.
Prior to the institution of the new hire cross-match, the
Department relied primarily on cross-matches between its
benefits system and its wage record system, which is derived
from employers' quarterly wage reports. We still use this wage
records cross-match, and we think they are certainly still
useful. However, employer wage reports are first due in the
month following the close of the quarter and can take up to
another month to be posted on the agency's wage record system.
Consequently, a claimant could have been receiving overpayments
for up to 5 months before the agency would have had a chance to
discover the situation.
In contrast, the new hire reports are due within 20 days of
the date of hire and posted to the system within days after
receipt, at which point the cross-match occurs. By permitting
early detection, new hire cross-match actually reduces the
amount of overpayments. For example, for the fiscal year that
just ended, the average overpayment detected by the wage record
cross-match was $1,800. For the same period of time, the
overpayments detected by the new hire cross match averaged
$296.
We also believe that earlier detection also fosters the
recovery process by enabling the Department to begin the
process sooner when it is easier to find the claimant, and
frequently while he or she is still employed and earning wages.
The Department has recovered nearly 60 percent of the
overpayments identified through the new hire cross-match since
State fiscal year 1999, the first full year in which the
Illinois new hire directory was operational.
While the new hire cross-match has been a substantial help
in reducing and recovering overpayments, there are some holes.
For example, multi-State employers may not necessarily choose
to report their new hires to Illinois, which is their option,
based on the law. Also, the Illinois directory will not reveal
a claimant who finds work in one of Illinois' neighboring
States.
Granting State unemployment insurance agencies access to
the National Directory of New Hires would enable us to build
upon the success we have had with the State directory and
greatly assist other States. The National Association of State
Work force Agencies strongly supports access to the national
directory, as well. While the Subcommittee's recent TANF
reauthorization package is outside the Department's
jurisdiction, we greatly appreciate the fact that the package
would grant us access to the national directory and look
forward to working together toward that end.
Thank you for your time and attention. I would be happy to
try to answer any questions.
[The prepared statement of Mr. Paris follows:]
Statement of Miles Paris, Deputy Director, Program Support, Illinois
Department of Employment Security, Chicago, Illinois
Thank you, Mr. Chairman and members of the Subcommittee, for the
opportunity to appear before you today. I am here to discuss the
Illinois Department of Employment Security's experience in using our
State's New Hire Directory to detect cases in which individuals
continue to claim unemployment benefits after returning to work. The
Directory has enabled us to reduce the amount of overpayments in many
such cases and, we believe, has also helped in the recovery of those
overpayments.
As you know, the 1996 welfare reform law required each state to
have a new hire directory to strengthen child support enforcement.
Illinois enacted legislation establishing its Directory in 1997 and
assigned the Department the responsibility for maintaining the
Directory. From the outset, the legislation authorized the Department
to use the Directory for unemployment insurance purposes. Accordingly,
in designing the Directory, the Department incorporated an automatic
cross match with its benefit information system--the data base of
individuals with unemployment benefit claims. The cross match looks for
each individual who has 1) been reported as a new hire, 2) continued to
receive benefits after having been reported as a new hire and 3) failed
to report any earnings when certifying as to his or her eligibility for
the week in which the hire was reported.
When the cross match identifies an individual who meets all three
criteria, the Department's benefit system automatically notifies the
individual that an issue has arisen with respect to his or her claim
and issues a questionnaire to the individual and the employer, to
establish the individual's precise return-to-work date. The claimant
has the option of responding to the questionnaire in person, by mail or
over the telephone.
The local office in which the individual filed the claim is
expected to adjudicate the matter within 14 days, to determine whether
there has been an overpayment. The Department's emphasis is on
minimizing and recovering overpayments, as opposed to penalizing the
claimant. Nevertheless, the local offices will refer egregious cases--
e.g., repeat offenders--to the agency's Benefit Payment Control Unit,
for the possible institution of administrative fraud proceedings. Where
the Department adjudicates an overpayment as a fraud, the law
effectively disqualifies the claimant from receiving benefits for up to
26 weeks, in addition to requiring repayment of the wrongfully claimed
amounts. The Department will also refer serious cases of fraud to the
Attorney General's Office, for criminal prosecution.
Prior to the institution of the New Hire cross match, the
Department relied primarily on cross matches between its benefit system
and its wage record system, which is derived from employers' quarterly
wage reports. Wage record cross matches are certainly still useful.
However, employer wage reports are first due in the month following the
close of the quarter and can take up to another month to be posted on
the agency's wage record system. Consequently, a claimant could have
been receiving overpayments for up to five months before the agency
would even have a chance of discovering the situation. In contrast, the
New Hire reports are due within 20 days of the date of hire and posted
to the system within days after receipt, at which point the cross match
occurs.
By permitting early detection, the New Hire cross match actually
prevents overpayments from occurring. Data for the last completed state
fiscal year illustrate the point. The average overpayment detected
through the wage record cross match was $1,800. The average overpayment
detected through the New Hire cross match, which identified over two-
thirds again as many overpayments as the wage record cross match, was
$296.
We believe that earlier detection also fosters the recovery process
by enabling the Department to begin the process sooner, when it is
easier to find the claimant, frequently while he or she is still
employed and earning wages. The Department has recovered nearly 60
percent of the overpayments identified through the New Hire cross match
since state fiscal year 1999--the first full year in which Illinois'
New Hire Directory was operational.
While the New Hire cross match has been a substantial help in
reducing and recovering overpayments, there are some holes. For
example, multi-state employers may not necessarily choose to report
their new hires to Illinois. Also, the Illinois directory will not
reveal a claimant who finds work in one of Illinois' neighboring
states, since those new hires would be reported to the other state. In
addition, newly hired Federal workers are not reported to any state.
Granting state unemployment insurance agencies access to the
National Directory of New Hires would enable us to build upon the
success we have had with the State Directory and greatly assist other
states. The National Association of State Workforce Agencies strongly
supports access to the National Directory, as well. As a whole, the
Subcommittee's recent TANF reauthorization package is outside the
Department's purview. However, we greatly appreciate the fact that the
package would grant us access to the National Directory and look
forward to working together toward that end.
Thank you for your time and attention. I would be happy to try to
answer any questions.
Chairman HERGER. Thank you very much for your testimony,
Mr. Paris. Mr. Lorsbach, to testify.
STATEMENT OF MICHAEL LORSBACH, PRINCIPAL, ON POINT TECHNOLOGY,
INC., LA GRANGE, ILLINOIS
Mr. LORSBACH. Thank you, Mr. Chairman. I appreciate the
opportunity to testify before you today on fraud and abuse in
the unemployment insurance program.
My background is out of 25 years of service in the
unemployment insurance community. I began my career during the
recession 1974 as a UI claims adjudicator. I became a UI fraud
investigator, an investigative supervisor, and then moved to
the information technology department, where I retained
responsibility for auditing and fraud detection systems.
After 9 years with the Illinois Department of Employment
Security, I moved to the private sector and have continued to
work with UI agencies. Part of my current responsibility is to
market a software package called the Benefit Audit Reporting
and Tracking System, or BARTS. The BARTS is a package that has
multiple auditing subsystems to detect fraud and improper
payments and also has a case management system to automate the
paperwork. The BARTS is installed in seven States.
It is in dealing with these States, including the
customized installation of the software, that gives me the
unique perspective that I bring to you today. Before I go on,
let me say that in my experience, this problem is solvable. We
will never get to 100 percent, but when a State takes ownership
of the problem and implements tools and processes to address
it, the results can be quite dramatic.
There are two primary issues that need to be addressed in
order to deal with fraud and abuse in the UI program. First is
that the States must take ownership of the problem. Over 20
years ago, the Employment and Training Administration began a
program now called the Benefit Accuracy Measurement, or BAM, in
order to uncover the sources and levels of fraud in the
unemployment insurance system. At that time, many, maybe most,
States had adamantly said that there was no fraud in the
program. Over the years, States have accepted that there is
fraud and abuse, but they continue to argue with or ignore the
BAM figures.
I believe that it is time to declare that the BAM figures
are reliable enough to serve as a foundation for new
achievement goals for the State program. Let me take a short
aside and explain.
The ETA sets goals for the States to meet. These goals then
become the marching orders for the States. Largely, it is very
important for an administrator to achieve these goals. The
goals are the radar screen. One of the BAM figures is the
number of people who are being improperly paid while working
and collecting UI at the same time. If that figure were to
translate into, say, $20 million over the course of a year,
then the State should be held accountable for uncovering, say,
60 percent of that money, or $12 million. Establishing this
clear and definable goal gets us on the radar screen.
Currently, the only goal that pertains to fraud and abuse
is one that says that States should recover 55 percent of the
overpayments that they identify. The unintended consequence of
this is that it is easier to collect 55 percent of a smaller
amount than that of a larger amount. In other words, if you
discover less fraud, it is easier to make your collections
goal.
I am sorry to say that I find this attitude rampant
throughout the States. This goal is likely the largest single
disincentive to detecting fraud and abuse. It should be
eliminated immediately.
A UI administrator is one who must continuously react to
and balance forces from multiple external sources while trying
to manage a large and complex organization. If we want
something to be done, we must get on their radar screen.
The second key to reducing fraud and abuse in UI is new
information technology. Most States still use a software
product that was developed and distributed by the ETA in 1975.
It was wonderful in its day, but it is grossly inefficient in
today's standard. In replacing these systems, we, meaning my
firm, have shown that the output of fraud cases processed can
be increased by 600 percent or more with no increase in staff.
The return on investment in dollars saved is usually in 3 to 6
months. By the second year, the annual dollar return on
investment can easily exceed 500 percent.
I firmly believe that for a very moderate cost, these
efforts could be implemented and could go a long way to solving
the fraud and abuse problem in the unemployment insurance
program. Thank you again for the opportunity to present my
views.
[The prepared statement of Mr. Lorsbach follows:]
Statement of Michael Lorsbach, Principal, On Point Technology, Inc., La
Grange, Illinois
LThe problem has been studied for over 20 years. No nationwide
solutions have been offered
Fraud and abuse has been formally studied by the Department of
Labor for over 20 years under a continuous program first called Random
Audit, later Benefit Quality Control and now called Benefit Accuracy
Measurement (BAM). The result of this ongoing study is consistent data
that clearly defines the nature and level of improper payments, fraud
and abuse in the Unemployment Insurance program. The issue then is not
in defining the problem but in implementing a solution.
Since 1975, when the Employment and Training Administration (ETA)
distributed a custom computer application to audit claimants, there has
not been a serious systematic attempt to solve the problem. Over the
past several years, the states have been granted supplemental budgets
for Integrity processes but the money seems to have been absorbed with
little or no impact on fraud and abuse.
BAM and its predecessors were established to obtain accurate
figures on improper unemployment insurance payments. The Employment and
Training Administration recognized that States had been unwilling to
acknowledge the problem and as a result established the BAM program
with a direct pipeline the ETA for both funding and data gathering.
We still live in the shadow of that denial. It is an uphill battle
getting states to own the problem. The good news is that solid proven
solutions do exist.
Most fraud and abuse is not debatable
1. The Problem must be Clearly Defined.
Part of the problem of why fraud and abuse has not been addressed
is that the definition of the problem is almost endlessly debatable.
What is an improper payment? Many issues depend on state law and vary
subtly from state to state.
But, the largest cause of overpayments is not debatable in
definition. Benefit Year Earnings, or working while collecting UI,
accounted for $573 million in improper payment in CY2000. No one can
deny that this abuse is a clear target.
End the debate. Other issues, Separation Reason, Work Search, etc.,
need to be and can be addressed but they cannot be used to cloud the
issue of Benefit Year Earnings.
It must be made a priority
2. A Matter of Priority.
It is frequently said that SESA Administrators have an average
tenure of 13 months. Upon entry to the job, most are not familiar with
the UI program. Yet they set the pace and the priorities. I have spoken
with Administrators who have no concept of improper payments, fraud
control or program auditing. It is simply not on their radar screen.
Legislative and ETA initiatives are needed to bring integrity into
the light. It should be declared that before a state can expect support
for special program funds they must consider and demonstrate strong
program integrity.
Tie goals to specific measurement
3. Goals and Accurate Measurement.
The primary measurement of how well SESA's perform, are called
Desired Levels of Achievement (DLA). There is only one DLA that has to
do with improper payments. This DLA says that states should collect 55%
of the overpayments they identify. There are two fundamental problems
with this measurement. The first is that it is not directed at
identifying improper payments only at collecting them after they have
been established. The second, an unintended consequence, is that it
becomes a disincentive to identify improper payments. With a given
staff allocation, it is much easier to meet one's collection rate if
fewer overpayments are established.
This DLA should be eliminated. It should be replaced with goals
established from BAM data. For example if BAM determines that a state
has a 3% error rate due to Benefit Year Earnings then the state should
identify say 70% of that 3%. If the state pays $500 million a year in
benefits, to meet the goal the state would have to establish $10.5
million in overpayments.
Even if this DLA is not replaced it should be eliminated
immediately. In my experience, it is a strong disincentive to fraud
control.
The auditors must be independent
4. The Auditors Report to the Audited.
It is a primary tenant of auditing that an auditing group be
independent and autonomous of the organization being audited. In almost
every SESA this autonomy does not exist. In most states, Benefit
Payment Control (BPC) is the auditing group responsible for the
investigation of improper payments and fraud. BPC commonly reports to
the Director who is responsible for the UI program. If the fraud
figures become embarrassing, it is too easy for BPC to be toned down.
The auditor should be separate from the UI program. Auditors should
be measured on the thoroughness of their audits. The State of
Washington, Office of Special Investigations, which has shown exemplary
progress in fraud control over the past decade, initiated and developed
its processes while the auditing unit reported to the Director of Legal
Services, a Division separate and equal to Unemployment Insurance.
The current systems for processing fraud are antiquated and ineffective
5. Systems are Antiquated.
In 1974 the Unemployment Insurance System Design Center, which was
funded by the ETA, began distribution of a custom computer application
for the detection of fraud and abuse in UI benefit payments. The system
was a great leap forward in making the detection process more
efficient. Most states adopted the software. The problem today is that
most states still use it. It has been modified and updated by states
but is still horribly ineffective by today's standards. Most employer
complaints of being bothered by paperwork come from forms generated by
this system.
Proven, effective system solutions exist
Highly automated computer systems exist and are very effective.
These systems have a return on investment of three months. After a year
or so when the new systems have been fully adapted it can be verified
that they can produce an annual return of 600% or more. They have been
proven to significantly reduce fraud and abuse by getting the word out
that it will no longer be tolerated.
Integrity must wrap around the UI program
6. Integrate Integrity.
There was a time when land could be developed with Government funds
and if the local community did not complain, no one cared about the
impact on the environment. Now land cannot be developed without an
environmental impact statement. I am sure that from this year forward,
no bills will be debated in Congress without a discussion of its impact
on homeland security.
Integrity must become the UI Program's point of light. No systems
or applications should be defined and no funding should be approved
without a study or statement on the impact to program integrity.
To solve the problem make the states accountable and install new
software
In summary, the most critical pieces to solving fraud and abuse in
the UI program are creating new performance measurements and installing
improved technology. The performance measurement gets the problem on
the screen. It forces everyone to pay attention.
New technology allows the rapid examination and processing of fraud
and abuse with very little manpower. Case management systems that are
fed by multiple types of audit including New Hire, can be tuned to also
examine the other more debatable issues.
Installation of compatible software in every SESA would cost about
$30 million and should save the Nation's employers about $700 million
in UI taxes per year.
Michael Lorsbach is a Principal and owner of On Point Technology,
Inc. Mr. Lorsbach began his career with the Illinois Department of
Employment Security in 1974. Mike served as a Claims Adjudicator, BPC
Investigator, and Information Technology Manager.
On Point is an information technology firm that is exclusively
dedicated to the support of State Employment Security Agencies. On
Point builds UI benefit payment, tax, and other UI support systems. On
Point personnel have consulted with over 20 states. On Point is
currently under contract with 4 SESA's.
On Point is the exclusive distributor of the Benefit Audit
Reporting and Tracking System (BARTS). BARTS is a software package that
performs multiple audits of Unemployment Insurance programs, detects
likely fraud and abuse then automatically manages the resulting cases.
BARTS is installed in Alaska, Arizona, Illinois, Kentucky, New Jersey,
Oregon and Washington.
[GRAPHIC] [TIFF OMITTED] 82682C.003
[GRAPHIC] [TIFF OMITTED] 82682D.004
[GRAPHIC] [TIFF OMITTED] 82682E.005
Chairman HERGER. Thank you, Mr. Lorsbach. I want to thank
each of you for your testimony. Now, we will turn to questions.
The gentleman from Kentucky, Mr. Lewis.
Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman.
Dr. Woodbury, in your testimony, you cite one way to limit
misspending is to better enforce the current requirement that
unemployment benefit recipients search for work. You suggest
that this would help more workers return to work sooner and
improve their earnings and likelihood of staying employed in
the long run, which all are positive effects. Could you tell us
more about how we could better ensure unemployment benefit
recipients are searching for work?
Dr. WOODBURY. Concretely, the recommendation is to give the
States resources to perform more eligibility review interviews,
that is, call workers in to ensure that they are working. The
evidence, there is substantial research to show that workers
who are called in for eligibility review interviews get moving
and get jobs faster, and the long run benefits are clear,
higher earnings and less unemployment over the long term.
Mr. LEWIS OF KENTUCKY. Do you have any idea how much in
terms of additional administrative cost, expenses----
Dr. WOODBURY. I cannot speak to that, no.
Mr. LEWIS OF KENTUCKY. Thanks.
Chairman HERGER. The gentleman from Maryland, Mr. Cardin.
Mr. CARDIN. Thank you, Mr. Chairman.
I want to thank all of you for your testimony, all Members
of our panel. I think it has been very helpful.
Dr. Nilsen, I am somewhat troubled by part of your
statement where you seem to say the States need to balance the
payment timeliness with payment accuracy. One could interpret
from that that you might be suggesting that they should
withhold payments until they have adequate information to make
sure errors are not made. I know that is not what you are
intending----
Dr. NILSEN. No, that is correct, Congressman----
Mr. CARDIN. So, I thought I would give you a chance to
clarify that.
Dr. NILSEN. Certainly, Congressman Cardin. It is just that
in the past, the history of the program is that it is focused
on moving checks out the door, which is great and it is what
this system was set up to do. As we and others have testified,
you need to make sure you are paying the right benefits to the
right people to maintain the integrity of the program. This
helps keep taxes down, makes sure that payments are being made
to those people who are truly deserving of the UI benefits. So,
it is not a matter of sacrificing one for the other, but it is
focusing on the two sides and balancing so that you are sure
you are getting the right benefits to the right people.
Mr. CARDIN. Thank you. I appreciate that clarification.
I am curious as to whether any of the Members of the panel
want to comment on Dr. Woodbury's point, and that it seems like
when we talk about the integrity of the system, we talk about
overpayments, but we do not normally talk about the fact that
employers are not paying everything they should in revenues or
that individuals are not getting the benefits they are entitled
to. To get a more balanced picture, all three should really be
reviewed, and the way the U.S. Department of Labor has set up
their models, it is more difficult to judge the other two areas
of inaccuracy than it is on overpayments. Any comments,
concerns, other than Dr. Woodbury, who expressed that in his
statement? Dr. Nilsen?
Dr. NILSEN. No, we have not looked at that side of the
program at this point.
Mr. CARDIN. Why not?
Dr. NILSEN. So far, we have not been asked to look at that
aspect of the program.
Mr. CARDIN. Well, that will be corrected.
[Laughter.]
Mr. CARDIN. Does the Inspector General have any comments on
that?
Mr. HEDDELL. I can say, Mr. Cardin, that from my office's
perspective, of course, we would like to know that every worker
is receiving the benefits that they are entitled to. In terms
of unemployment benefits, we are, of course, very concerned
about overpayments and that is predominantly where our focus
has been.
Mr. CARDIN. Why would you not also be concerned about
underpayments of revenues?
Mr. HEDDELL. Well, we----
Mr. CARDIN. That is hurting our system.
Mr. HEDDELL. As I was actually about to say, Mr. Cardin, we
are concerned that every worker should get what they are
entitled to----
Mr. CARDIN. Right.
Mr. HEDDELL. If there are, in fact, such workers, and I am
sure that this does exist, that are underpaid; I agree that
they should get what they are entitled to. However, my office
has not looked at this specifically where I could give you a
definitive answer.
Mr. CARDIN. We will try to encourage that. I mean, Dr.
Woodbury's numbers are rather alarming. The underpayment is as
high as or higher than the actual dollar amount on the
fraudulent overpayments. So certainly, we need to get more
information in order to make good policy judgments here, so we
would appreciate that.
Mr. Lorsbach, you make a very compelling point about the 55
percent. What would you substitute it with?
Mr. LORSBACH. I would substitute BAM figures. I would say
that if we accept the BAM figures as they are, BAM says that a
certain amount of people have been overpaid in a particular
State. Take that figure and say that we are going to identify a
given percent of those people and then collect the money as
seriously as you can. There is no doubt about it, you want to
get the money back, but you cannot restrict your identification
based on your collection.
Mr. CARDIN. Thank----
Mr. LORSBACH. Is that not clear?
Mr. CARDIN. I understand what you are saying, and I think
that makes more sense than the--I mean, I think you do make a
very compelling argument on the 55 percent identified by the
States. It is obviously in everyone's interest to collect as
much of the overpayment that it makes sense to collect.
As I understand it from the first witness, there are some
overpayments that there is no good policy reason to try to
collect. I think everyone agrees on that. There is some amount
of the overpayments that we do not really want to get
recovered. It is not the individual's fault. It is the system's
fault or the employer's fault and would create unusual hardship
to go after. So, I think there are at least some payments that
we do not want to try to collect.
That which we determine should be collected--should be
collected, and the percentages could work, as you point out, to
the disadvantage of the aggressive States, so it is something
we need to certainly look at. Thank you.
Mr. HEDDELL. Mr. Cardin, in terms of underpayments by
employers, we have raised concerns about employees who are not
getting fair treatment under the system. One of the things that
I point out in my full statement is the misclassification of
workers and fraud as it relates to leasing companies and
employers that are not paying their full share of taxes. These
kinds of situations do have a detrimental impact on certain
workers, particularly those workers that are in the lower
economic and lower skilled areas. So it is something we are
concerned about.
Mr. CARDIN. Thank you.
Chairman HERGER. Thank you very much, Mr. Cardin.
I just want to, for the record, state that while we and the
American taxpayers are obviously very concerned about fraud,
abuse, and overpayment, certainly for those who are not getting
their unemployment benefits as they should there is equal
concern, and this Committee wants to correct both sides.
Dr. Nilsen, I would appreciate your comment. Your points on
pages 11 and 12 about relying on self-reports of information
that might result in UC applicants not getting benefits are
very important. What sorts of information do we trust that
applicants will tell us, even though their disclosing that
information could result in their not getting the benefits they
are seeking? I might note--this almost seems reminiscent of the
old SSI Program under which we trusted prisoners to report that
they were in jail so they could stop their SSI disability
checks. Now we have a system in place, by the way, under which
prison reports list inmates for matching so we better ensure
that inmates are not getting SSI benefits. Would you comment,
please?
Dr. NILSEN. Mr. Chairman, I think what our focus in the
work that we have done indicates, that you need to verify the
information up front as quickly as possible. There are people
in self-reporting who do disclose information that, in fact,
makes them ineligible for benefits. By and large, if people are
trying to, in a sense, beat the system, they are not going to
be the people who are going to be honest with you. So in taking
claims, it is important we have systems in place that are
available to verify the accuracy of employment, to check
employment in other States, and equally important, to check the
continuing claims after initial claims have been filed.
Right now, as you state, we have information on prisoners.
None of the States we went to used that information to check on
their UI beneficiaries at this point. Part of it is because of
the timing of the program, but also we have been told that some
of it is related to the cost.
As I said, if you do not have timely information in this
program, people will already have gotten their benefits before
you are able to identify that they are ineligible or that they
have become employed and no longer eligible for benefits.
Chairman HERGER. Thank you, Dr. Nilsen.
Now, the gentleman from Washington, Mr. McDermott.
Mr. McDERMOTT. Thank you, Mr. Chairman. I am sorry I am a
little late getting here, but planes get here when they get
here.
Coming from a State that has the highest unemployment in
the country, one of the issues that has been troublesome to me,
and I have watched this both in the State legislature and then
here in the Congress, is this whole question of contract
workers. You may have discussed all of that, but Vizcaino v.
Microsoft came from our State, so we are very familiar with
this whole issue.
It seems to me that one of the biggest problems in UI today
is the classification of workers. In section 530 of the Revenue
Act 1978, there is a paragraph that expressly prohibits the
Internal Revenue Service (IRS) from issuing regulations that
would help determine whether a worker is an employee or a
contingent worker. Dr. Woodbury, could you explain to me how
that got into the law, and why it is still there?
Dr. WOODBURY. I cannot explain that, but I do think that
contract workers, independent contractors, do pose a challenge
for the system. There is a study by Planmatics that suggests
that 80,000 or so independent contractors per year would be
eligible for benefits if they were properly classified as
employees, so there clearly is a leakage there.
I think an even bigger challenge is perhaps that employers
simply underreport wages of workers. They simply do not report
to the States that they have an employee, or they underreport
the wages that they actually pay to an employee who is on the
books as an employee, not misclassified. I think that is an
even bigger challenge for the program, and I think----
Mr. McDERMOTT. So in terms of the numbers----
Dr. WOODBURY. I am sorry?
Mr. McDERMOTT. Yes, in terms of the numbers.
Dr. WOODBURY. In terms of revenues for the system, in terms
of----
Mr. McDERMOTT. That is not a Federal responsibility to make
sure that people are paying. That is a State responsibility.
Dr. WOODBURY. Yes. I think there are things the DOL could
do, I believe, to help that.
Mr. McDERMOTT. You mean DOL could do things to encourage
the States to do what is right?
Dr. WOODBURY. I believe so.
Mr. McDERMOTT. Under what mechanism?
Dr. WOODBURY. Well, the Revenue Quality Control program is
the program that the U.S. Department of Labor has had on the
books, in the wings, for over a decade now and has not
implemented it. Revenue Quality Control would presumably audit
either at random or by profiling likely abusers, employers who
are abusing the system, and auditing them intensively.
Presumably, that would create an incentive, if employers knew
this program was out there, to be more compliant.
Mr. McDERMOTT. I guess I have watched----
Dr. WOODBURY. It is not a legislative change. That would be
a change that the DOL would implement on a State-by-State
basis, auditing of employers to ensure that they are complying
with the unemployment insurance payroll tax.
Mr. McDERMOTT. Unemployment is paid for by the State. They
pay the actual benefits. They collect the money and pay the
benefits.
Dr. WOODBURY. They collect the money.
Mr. McDERMOTT. So, why does the Federal Government--why are
we in here talking about this? What problem has come up that
you think would make it necessary for us to wade into, because
if there are overpayments, it seems to me it is in the States'
interest to figure that out.
Dr. WOODBURY. Well, the existing research suggests that
Revenue Quality Control would more than pay for itself in
revenue. In other words, if the State did start auditing
employers and trying to make sure that they were complying with
the unemployment insurance payroll tax, the amount of resources
it would take to run that program would be far less than the
revenues that would be generated. So, why the States do not do
this is a matter of incentives. The State agencies do not have
the incentive to do it.
Mr. McDERMOTT. My brother ran the program in the State of
Washington. They paid for themselves. It takes a governor who
is willing to stand behind them.
Dr. WOODBURY. Yes.
Mr. McDERMOTT. Most of the governors are not enforcing it,
and it strikes me that we may--I mean, this section 530 seems
to me to be an egregious example of the Feds, on the one hand,
telling the States to do something and then not giving them
rules and regulations, and winding up with 60 percent of the
people not covered by unemployment compensation. I cannot
understand, Mr. Chairman, why that is still in the law. I mean,
whatever we do, we ought to take that out of the law and force
the IRS and the employers to sit down and define who is an
employee.
The Vizcaino v. Microsoft case, where you had one employee
sitting next to another employee and they are doing exactly the
same thing and one is a contract employee and one is getting
benefits was, I mean, it was an open and shut case. Microsoft,
of course, made all kinds of attempts to obfuscate that, but
that kind of stuff and the changing work force, an unemployment
system designed for the thirties, or the forties, or the
fifties, or sixties work force simply is not responding to what
is going on out there.
Now, I do not know whether it should be done at the Federal
level or whether it should be done at the State level, but in a
State where now have--we have gone through this. Our
unemployment tends to be cyclical and we had this with timber
and fishing and airplane production and we are now in one of
the downs. We are going to have some problems in this country
if we do not--because that is happening all over the place. All
the industries are into this now.
Thank you, Mr. Chairman.
Chairman HERGER. I thank the gentleman.
I would like to comment. The question was whether or not
the Federal Government has a responsibility in this? I think
when we consider that the Federal Government every year
collects Federal taxes and uses them to pay more than $2
billion to States to administer benefits and to prevent fraud
and abuse, that very clearly, the Federal Government does have
a responsibility to make sure that these benefits are going to
the right people.
With that, I would like to thank each of our witnesses
today for appearing before the Subcommittee. I regard this
hearing as the first stage in our efforts to better ensure
unemployment benefits are going to the intended recipients.
Clearly, when literally billions of dollars are misspent every
year, that is not the case. Especially given what we have
learned, we cannot and will not stand by and let these problems
go unaddressed.
I look forward to working with everyone interested,
including our witnesses, States, and employers, to make sure
that we better protect the integrity of these important
benefits. I trust our witnesses will continue to provide useful
insight, starting with answering any additional questions for
the record we may have.
With that, this hearing stands adjourned.
[Whereupon, at 5:39 p.m., the hearing was adjourned.]
[Questions submitted by Chairman Herger to the panel, and
their responses follow:]
U.S. General Accounting Office
Washington, DC 20548
June 24, 2002
Hon. Wally Herger
Chairman, Subcommittee on Human Resources
Committee on Ways and Means
House of Representatives
Dear Mr. Chairman:
This letter responds to your request that we address questions
following the June 11, 2002 hearing on fraud and overpayments in the
Unemployment Insurance (UI) program. We have restated each of your
questions, followed by our answer below.
1. Based on our review, which aspects of the states' unemployment
program procedures or processes are most susceptible to fraud and
overpayments? Why?
As noted in our testimony, a substantial proportion of overpayments
occur because of errors in reporting or recording claimants' wages or
other income. Another significant source of overpayments are claimants
who do not look for a new job as required by state law, or are not able
and available to work (``eligibility'' violations). Of the total $2.4
billion in overpayments estimated by Labor in 2001, about 24 percent
were attributable to fraud. A primary reason for these overpayments is
that many states place their primary emphasis on quickly processing and
paying UI claims, and may not sufficiently balance the need to make
timely payments with ensuring payment accuracy. Moreover, states may
lack access to timely information that can affect claimants'
eligibility for UI benefits, such as their identity, wages, and
benefits from other Federal or state programs.
2. What tools or procedures would allow states to improve the
integrity of their UI programs by preventing and detecting
overpayments, and recovering them once they have occurred?
As noted in our testimony, the most efficient and effective method
for states to prevent and detect overpayments is by consistently using
automated systems that allow claims representatives to verify
claimants' eligibility information at the point of application--before
benefits are paid. In general, online access to databases containing
information to verify claimants' identity, employment status, or other
important information is the most useful tool for preventing and
detecting overpayments. For example, the Social Security
Administration's State Online Query System allows participating states
to verify the identity of claimants applying for UI benefits in real
time.\1\ In lieu of online access, many states conduct periodic
computer matches with other state and Federal agencies to verify
information that claimants provide. Although such methods tend to be
less timely than online access, they are still of value in detecting
and recovering overpayments. Overall, the states that are most
effective at recovering overpayments are those that have a wide variety
of tools at their disposal, including state tax refund offset, wage
garnishment, and access to private collection agencies. Ultimately, as
emphasized in our testimony, the key to improving UI program integrity
at the state level is a commitment from state UI managers to
consistently use automated tools and other available mechanisms for
determining claimants' initial and continuing eligibility for benefits.
---------------------------------------------------------------------------
\1\ Currently only two states (Utah and Wisconsin) use this system
for their UI programs.
3. What actions could the Department of Labor take to help states
place a higher priority on UI program integrity issues? Does Labor have
the authority to implement these actions? Are legislative changes
---------------------------------------------------------------------------
needed to provide additional authority to stem further abuse?
Labor needs to more clearly emphasize the need for states to
balance payment timeliness with payment accuracy. For example, as
outlined in our testimony, Labor could revise its performance measures
in a way that places greater emphasis on payment accuracy. Labor could
also make better use of its quality assurance data to help states
identify areas for improvement and work with states to changes policies
and procedures that allow overpayments to occur. However, to be most
effective, we believe that Labor must be willing to link state
performance in the area of program integrity with tangible incentives
and disincentives, such as through the annual administrative funding
process. We believe that Labor has the authority to implement many of
the improvements we discuss in our testimony and our forthcoming
report. However, other changes that we discuss--such as providing all
states with access to the National Directory of New Hires--would
require legislation to implement.\2\
---------------------------------------------------------------------------
\2\ Section 406 of the Personal Responsibility, Work, and Family
Promotion Act of 2002 (H.R. 4737) would provide states with access to
the National Directory of New Hires for purposes of verifying
claimants' eligibility for UI benefits.
4. What changes, if any, are needed in Labor's management approach
to the UI program that will allow it to implement the actions you have
---------------------------------------------------------------------------
outlined?
While we recognize the importance of paying unemployment
beneficiaries in a timely manner, we believe that Labor's approach to
managing the UI program has historically emphasized quickly processing
and paying UI claims without a similar focus on controlling UI
payments. Thus, our work suggests that program integrity issues should
receive greater emphasis. Labor could facilitate this change in
emphasis by linking the quality assurance process to the budget process
and requiring states to meet specified performance levels as a
condition of receiving administrative grants. In addition, under
Federal regulations covering grants to states, Labor may withhold cash
payments, disallow costs, or terminate part of a state's administrative
grant due to non-compliance with grant agreements or statutes. Absent
such a change, we believe that states may be reluctant to make similar
modifications in their own management philosophy and operations,
leaving the UI program vulnerable to continued high levels of
overpayments. If you have any questions about this correspondence or
wish to discuss the issue further, please contact me at (202) 512-7215,
Daniel Bertoni at (202) 512-5988, or Jeremy Cox at (202) 512-5717.
Sincerely yours,
Sigurd R. Nilsen,
Director, Education, Workforce and
Income Security Issues
U.S. Department of Labor
Office of Inspector General
Washington, DC 20210
Hon. Wally Herger
Chairman, Subcommittee on Human Resources
House Committee on Ways and Means
B-317 Rayburn House Office Building
Washington, DC 20515
Dear Chairman Herger:
Thank you for the opportunity to testify before your Subcommittee
on my Office's effort to detect and investigate fraud, waste, and abuse
within the Unemployment Insurance (UI) program. As requested, please
find below our answers to your additional questions.
1. As was discussed at the hearing, it is very discouraging to hear
that over $2 billion of taxpayer money was fraudulently claimed or
improperly spent last year on unemployment benefits and that over the
past decade $18 billion was misspent. The high numbers--starting with a
continuously high level of known overpayments in the past 10 years, and
increases last year--suggest a need for action instead of business as
usual.
a. In recent years, what specific steps have you suggested the
Department or the States take to better combat fraud and abuse? What
specific initiatives do you now suggest the Department and States take
to address fraud and abuse?
From an investigative perspective, we have recommended to the
Department that state personnel who are responsible for benefit payment
control and internal security be provided enhanced fraud detection and
investigative training. This training should focus on fraud prevention,
information sharing among states regarding common fraud schemes, and
the dissemination of best practices utilized by high-performing states.
We have been actively involved in conducting training sessions for
state personnel based on our experience in investigating complex,
multi-state fraud schemes. During this training, we note several ``red
flags'' or indicators that are indicative of such schemes. In addition,
in 1999, we developed a white paper for ETA discussing how UI fraud
schemes operate, which was disseminated to the states. We believe that
information to be useful to the states in carrying out their
enforcement and oversight activities.
In addition, states should examine ways to enhance the integrity of
the remote claims-filing process, which has made fraud detection more
difficult. Some suggestions that states may want to utilize include: 1)
conducting random in-person interviews of telephone or Internet
claimants; and 2) improving the tracking of telephone numbers and
mailing addresses used to file claims in order to look for patterns of
voluminous calls from single numbers or mailings from the same
addresses.
Our audit work has identified several internal control weaknesses
and vulnerabilities that impact the integrity of the UI program,
especially those relative to overpayments. In a 1999 audit, we found
that the crossmatch systems used by seven states, which compares weekly
UI benefit payment records with quarterly wage records, had inherent
weaknesses. Foremost was the failure of employers to respond to state
requests for detailed wage information. As a consequence, we estimated
$17 million in overpayments were not being detected in just four of the
seven states we audited.
To improve the crossmatch system, we recommended to the Department
that policy and direction be provided to the states to ensure that: 1)
employers are reminded of their responsibilities to respond to wage
requests and follow up with those who routinely fail to respond; 2)
states select for audit those claims with the highest potential for
overpayments; and 3) states maintain a database of those employers who
are sent wage requests, and when they are returned, follow up on non-
responses. In addition, we recommended that the Department assume a
leadership role in assuring that states obtain timely access to the
data of the National Directory of New Hires, and to fully incorporate
that data into UI Benefit Payment Control operations. The Department
has agreed to take corrective action.
b. Similarly, in recent years what specific legislative initiatives
have you proposed the Congress enact to better address fraud and abuse
in this program? What legislative measures do you now suggest Congress
consider to better prevent fraud and abuse?
As I mentioned in my full statement, one legislative recommendation
to strengthen the UI program is to grant the OIG and the Department
unimpeded access to UI, Social Security, and New Hire data for fraud
detection and program evaluation purposes. Such data would be used for
two primary purposes: 1) to aid in our fraud detection and
investigative efforts; and 2) to better help us and the Department
assess program performance and return-on-investment. Routine and
expeditious access to the centralized Social Security wage database
would enable us to more efficiently and consistently verify the
eligibility of program applicants and determine whether their Social
Security Numbers (SSNs) are valid. This would aid in identifying
potential overpayments and preventing millions of dollars in future
losses.
In addition, we believe that states should be granted access to the
National Directory of New Hires database for fraud and overpayment
detection purposes. As you know, states only have access to their own
new-hire data, which limits a state's ability to detect those who
commit fraud across state lines. If given access to this directory,
states would be better able to detect these fraudulent schemes and
other overpayments.
Finally, as discussed below under question 5, we believe that
legislative consideration should be given to a process that would allow
states to perform an up front determination of claimants' work status
and verification of SSNs before payments commence.
2. Please describe any specific evidence that your office is aware
of regarding States' screening to ensure that (1) prisoners, (2)
fugitive felons, (3) probation and parole violators, and (4)
individuals applying for benefits based on the record of a deceased
individual do not access unemployment benefits.
The Department may more appropriately answer this question since we
have not conducted any reviews in this area. Notably, eligibility for
benefits for probation and parole violators depends on individual state
law. We understand that some states do obtain death records from the
SSA for validation of claims, but we do not have information as to
which states are doing it.
3. What State and Federal measures are in place to determine
whether individuals claim unemployment benefits in more than one State
at the same time? If that occurs, what are State policies to address
such double dipping?
My Office has not examined state policies regarding double dipping.
Nevertheless, we are aware through our casework that reciprocal
agreements do exist between and among some states (usually those that
are contiguous). For example, a reciprocal agreement exists among
Virginia, Maryland and the District of Columbia to exchange information
and crosscheck claimants in those three jurisdictions.
We understand that states have signed an ``interstate agreement''
that specifies that they will take, process, and pay interstate claims.
When an individual files a UI claim in any state, questions are asked
about earnings. Based on the response, claimants will be advised to
file an intrastate or an interstate claim. States will then run an
interstate crossmatch each quarter that compares their interstate
claims against all interstate claims filed. You may wish to contact the
Department directly for more details about this interstate agreement.
4. How do States determine if a noncitizen ineligible to work in
the U.S. is claiming unemployment benefits? What processes are in place
to prevent, for example, a student or someone here on a tourist visa
from working and then claiming unemployment benefits from that work?
How many individuals who applied for unemployment benefits have been
disqualified from receiving them for this reason in recent years?
Based on our prior audit work and the Department's own public
information, individuals who file claims are asked by the states
whether they are citizens of the United States. If a claimant states
that he or she is a citizen, states must accept the declaration of
citizenship. Utilizing the Systematic Alien Verification for
Entitlements (SAVE) system, data on claimants who state they are not
citizens are entered electronically into a file maintained by the INS
to determine their alien status. Claimants are denied benefits if it is
found that they are non-citizens ineligible to work in the U.S.
From what we have seen, states can do more to prevent UI benefit
payments to ineligible claimants. In 1998, we conducted an audit of how
effective Florida, Georgia, North Carolina, and Texas were in
preventing UI payments to ineligible claimants, including illegal
aliens. We found that the SAVE system has inherent limitations since it
relies on self-reporting of citizenship by claimants. We found that
screening SSNs was a more effective means of identifying illegal aliens
who had filed for UI benefits, and that if coupled with INS screening,
SSN verification would prevent many of the abuses that occur.
While we do not know how many individuals who applied for UI
benefits have been disqualified, our 1998 audit identified 2,927 UI
claims totaling over $3.2 million that were paid out to people using
SSNs that were either not issued or belonged to deceased individuals.
We selected a sample of 452 claims, were able to verify the legal
status of 241 claimants, and found that 129 of those claimants (54
percent) were illegal aliens who improperly received $200,291 in
benefits. Although we did not project nationwide the amount of UI
benefits paid out to illegal aliens, we believed at the time that
screening claimants' SSNs would prevent millions of dollars in misspent
UI benefits. We recommended to the Department that it assist the states
in developing and implementing methods of screening UI claimants for
valid SSNs, and delaying or deferring benefit payments to those
individuals without valid SSNs, among others. The Department agreed
that significant improvements could be made in the areas we addressed
in our report.
5. Have you done any work involving the abuse of Social Security
Numbers (SSNs) in order to claim unemployment benefits? What have you
found? Do you have any recommendations for us to consider in addressing
such concerns?
As I mentioned in my full statement, identity theft for purposes of
collecting benefits is one way fraud against the UI program is carried
out. The number of investigations we have initiated in this area has
increased markedly over the last 5 years, and indications are that this
type of fraud will only increase. Unfortunately, fraud detection in
these cases is complicated because any preliminary fraud screening that
may be done would only disclose that the named employee actually
exists.
In addition, as discussed in the previous question, the OIG's March
1998 audit report found 2,927 UI claims totaling over $3.2 million were
paid to individuals who had filed for UI benefits under SSNs that had
either not been issued or were issued to deceased individuals. We
recommended the Employment and Training Administration (ETA) assist the
states in developing and implementing means of screening UI claimants
for valid SSNs, and delaying or deferring benefit payments to claimants
without valid SSNs. We also recommended that ETA seek changes to
immigration laws to allow states to delay payments to alien claimants
where there are material discrepancies in alien information. ETA
responded that significant improvements could be made in areas that our
audit report addressed. However, ETA disagreed with our recommendation
that UI benefits not be paid to individuals without valid SSNs, because
ETA maintained the burden of policing the Social Security system does
not reside with the states.
We plan to revisit the issues raised in our 1998 audit. In the
meantime, we continue to recommend that ETA work with the states to
develop more streamlined, effective means to validate claimants' work
status and SSNs, and achieve a legislative or administrative solution
that would allow states to delay payments to claimants with
questionable status.
6. Earlier this year Congress passed and the President signed a law
that provides for up to 13 additional weeks of unemployment benefits
nationwide, and up to 13 weeks more in States with relatively high
unemployment rates. That is a tremendously generous program, and we
know that over a million Americans already have received these extended
benefits. Do you have any reviews in place to make sure that those
benefits are going to the right people?
We are not currently conducting any reviews of claimant eligibility
under the Temporary Extended Unemployment Compensation Act of 2002
(TEUC). Eligibility for UI benefits, however, is examined as part of
audits conducted in accordance with the Single Audit Act (SAA), as
amended. (The SAA requires that, instead of separate audits by each
agency providing funds, a single audit be performed of all Federal
funds that have been provided to a grantee.) My Office will be working
with the Department and OMB in the coming months to develop guidance
for SAA auditors to use in testing eligibility under the new TEUC
program. Also, because SAA audits are the first line of defense for UI
and other grant programs, we have initiated several studies to
determine the reliability and usefulness of single audits for the
Department's needs. We have identified some weaknesses in how DOL
programs, including UI, are being audited, and we are continuing to
work with the Department, OMB and the audit community to improve the
reliability of such audits. These efforts will be to the benefit of the
all DOL grant programs, including TEUC.
As discussed in my testimony, we are also in the process of
examining the Benefit Accuracy Measurement (BAM) system funded by ETA
and carried out by the states. BAM uses statistical sampling techniques
to project total UI benefit overpayments made to claimants. This system
will presumably cover TEUC payments.
As I mentioned in the hearing, preserving the integrity of the UI
program has been a longstanding concern of my Office. We will continue
to work with the Department and the Congress to ensure that weaknesses
and vulnerabilities are adequately addressed. If you have any
questions, or need assistance on this or any other matter, please do
not hesitate to contact me at (202) 693-5100.
Sincerely,
Hon. Gordon S. Heddell
Inspector General
Illinois Department of Employment Security
Chicago, Illinois
June 21, 2002
Hon. Wally Herger,
Chairman Subcommittee on Human Resources
B-317 Rayburn House Office Building
Washington, DC 20515
Dear Chairman Herger:
Thank you for your letter of June 17, following up on my recent
testimony on the Illinois Department of Employment Security's use of
the State's New Hire Directory as an unemployment insurance integrity
tool.
1. Your testimony indicates that Illinois is using the State
Directory of New Hires to better ensure benefits are going only to
those who have not already returned to work. What is the return on the
dollar for States and taxpayers from this match with the State
directory? How much might be saved if Illinois were allowed access to
the National Directory of New Hires as the House-passed welfare bill
would allow?
I offer the following figures in response to your question about
the return on Illinois' investment in matching the Department's
claimant data base against the State Directory. It cost approximately
$64,000 to implement the cross-match function in 1997. We estimate the
annual staff costs associated with the cross match--primarily,
investigating and adjudicating the issues it raises--to be just over $1
million, including overhead.
To gauge the return on those costs, we focused on state fiscal year
2001, which is the last full fiscal year for which we have records, the
period we examined to arrive at the average overpayment figures in my
testimony and representative of our general experience. We assumed
that, without the New Hire cross match, the overpayments in each of the
cases it detected would have continued to accumulate, up to the average
overpayment detected through the less timely wage record cross match.
Multiplying the difference between the average overpayment detected
through the New Hire cross match and the average overpayment detected
through the wage record cross match by the total number of overpayments
detected through the New Hire cross match, we estimate the New Hire
cross match prevented almost $30 million in overpayments for the year.
Regarding the potential benefits of cross matches with the National
New Hire Directory, we identified 12,044 overpayments, totaling $21
million, through the wage record cross match for state fiscal year
2001--overpayments the cross match with the State Directory did not
catch. While we cannot offer any precise figures, with access to the
National Directory, we would have had the potential to identify a
number of those cases substantially earlier than we did.
2. What other tools, including those that may be unavailable to you
due to Federal laws or regulations, would you like to have to help you
improve the integrity of your unemployment program even more?
You also asked what other tools we would like to have to preserve
benefit payment integrity. With greater emphasis on remote claims-
taking, we need to be looking at cross matches with other Government
agencies. We are currently working with the Social Security
Administration.
(SSA) on a process for dealing with claimants who attempt to use
Social Security numbers that do not belong to them and are, therefore,
ineligible for unemployment benefits. We currently match our data base
with some of SSA's records on a daily basis, and that agency is now
exploring whether there are any barriers to cross matches with its file
of deceased Social Security card holders. We will be happy to keep you
informed of developments in this area if you desire.
3. Is there a higher level of public awareness in Illinois that it
really is not a good idea to try to get unemployment benefits when you
are not entitled to them? In other words, has your work to reduce fraud
paid off so that you are seeing fewer incidences that need
investigating?
Finally, as to whether our integrity efforts have resulted in fewer
instances of people claiming benefits after returning to work, the
statistics so far do not indicate they have. The amount of overpayments
detected has actually increased since we instituted the New Hire cross
match. We believe that is attributable to the fact the cross match is
detecting substantial numbers of cases that otherwise would have
remained undetected, instead of any change in claimant behavior. It is
still our hope, however, that as word of the agency's enhanced
detection capabilities spreads, we will see a decline in the amount of
those overpayments.
Thank you again for the opportunity to discuss our experiences and
views with the Subcommittee. Please do not hesitate to contact me if
the Department can be of further assistance.
Sincerely,
Miles Paris
Deputy Director
Program Support Bureau
On Point Technology, Inc.
La Grange, IL 60525
October 18, 2002
Mr. Doug Sahmel
House Human Resources Subcommittee
B-317 Rayburn HOB
Washington, DC 20515
Dear Mr. Sahmel:
Thank you for following up with me on a response to Chairman
Herger's letter of June 17, 2002. Please excuse my delay. In this
letter I have restated Mr. Herger's questions followed by my response.
1. Can you provide some reasons why States are not taking more
aggressive steps to combat fraud and abuse in the unemployment program?
Are there any key impediments that could be addresses by Congressional
action?
Response--Let me start by saying that you may have already provided
the catalyst for change. I attended the UI Directors conference in
Whitefish, Montana this week and in several presentations the planned
new emphasis on fraud and abuse in the UI program was discussed.
In my opinion the primary reasons why combating fraud and abuse in
the UI program has not been a priority are several. A central reason is
that there was no incentive for the UI Director to solve this problem.
The ETA had no motivating standards for the States to meet. The only
Desired Level of Achievement (DLA) was that a State should collect 55%
of the overpayments it identified. It was readily agreed that the best
way to meet this standard was to identify fewer overpayments. This DLA
has been recently dropped and a new standard based on figures developed
from the Benefit Accuracy Program (BAM) is being proposed. This should
make a big difference in emphasis.
Secondly, it costs administrative dollars to solve a problem that
is repaid in trust fund dollars. In most states, until recently at
least, trust funds were flush with money and administrative funds have
been in short supply. Many administrators found that if no one was
complaining, it was more convenient to spend the administrative dollars
on problems that had a higher priority and/or more visibility. One
administrator said in a meeting when his BPC Manager proudly proclaimed
that they were saving over $30 million with their fraud control efforts
that the savings was small potatoes compared to their billion dollar
trust fund.
Third, admitting that one has an overpayment problem is
embarrassing to the Agency. If the Agency identifies and admits to the
magnitude of the problem they will likely come under attack. It is
easier to ignore the problem and hope that no one will bring up the
issue--in fact agencies were rarely challenged.
My suggestions to Congress would be to require that fraud figures
be overtly published, not covertly as they are now. Second would be to
tie funds directly to the prevention of fraud. For over 20 years BAM
and its predecessors BQC and Random Audit have been spending
approximately $20 million per year to identify the problem yet no money
has been directly allocated to solve the problem. Third and very
importantly is to tie the new fraud prevention criteria to Tier 1
goals. Tier 1 goals are those DOL goals that states are required to
meet in order to receive their funding. This would make fraud control a
priority.
2. Do good antifraud efforts tend to be cost-effective in terms of
paying for themselves over time? What produces the biggest return on
the dollar?
Response--The answer to the first question is yes, absolutely. To
really have an impact on fraud and abuse, two things need to happen.
First is that more automated systems need to be put into place. Most
fraud investigation activities, managed by the Benefit Payment Control
(BPC) unit, are paper nightmares. Most of this paperwork can be made to
disappear with the proper automation. We were able to help one state
increase the number of overpayments processed by 600% with no increase
in staff. It is my firm belief that most all states could make the same
improvements.
The return on investment is very high. If one assumes the cost of
new fraud detection, processing and collection software to be $1
million and the return to the trust fund to be $5 million annually the
return on investment is extraordinary. These are my estimates but can
be substantiated.
The second event that needs to happen is a change in culture in
BPC. Many, probably most, BPC operations have a gumshoe attitude. Many
BPC investigators think of themselves as detectives and treat their
cases accordingly, even very simple redundant cases. Needless to say
the throughput with this attitude is not very large. Paper is power and
a large case load is a sign of high status. On the positive side, my
experience shows that even though most BPC staff are very reluctant to
embrace initial automation efforts, after a year or so they are very
happy with it. They find that they deal with the truly interesting and
complex cases while the system performs all of the mundane work.
The biggest return on the dollar is automated case management. This
is where the paperwork is. This is where the process slows down. In
excess of 85% of this process can be automated. You should be made
aware that most states still use software that was developed a
distributed by the DOL in 1974. Needless to say it is horribly out of
date, and even with state enhancements automates only a small part of
the process.
3. In your testimony, you note that effective computer systems can
reduce fraud and abuse by getting the word out so it can no longer be
tolerated. Can you give us a specific example of where this has
happened?
Response--The State of Washington has conducted a test in the
Winachi region of western Washington where they audited 100% of
claimants that their software detected as having a likelihood of being
overpaid, no matter how low that likelihood. They found that the year
after that audit the fraud in this region was substantially lowered
though it continued to increase over 4 years when it almost returned to
the previous levels. This was a documented study. I do not have a copy
of it at this time but will try to obtain a copy for you or you may
contact Kathy Ramoska, Chief of Special Investigations at 360-486-3001.
Thank you again for the opportunity to respond to Congressman
Herger's letter. If you have any questions regarding my response or if
I may be of any further service, please do not hesitate to contact me.
Sincerely,
Michael Lorsbach
Principal
[A submission for the record follows:]
Statement of Tim Rogers, Revenue Plus, Vancouver, Washington
Summary Statement
We at Revenue Plus have been keenly aware of the amount of
overpayments that each state has been trying to collect using their
existing antiquated computer systems. Many states have asked us to
demonstrate to them how the Revenue Plus software will them prioritize
their collection efforts and to help them manage, track and report on
their Overpayment of Benefits. We have conducted demonstrations for the
Departments of Labor in WA, TN, LA, AL, AZ, GA, CA, and MD. Our
software has helped other Government agencies increase their revenue up
to 50% and the Overpayments Benefits group could take advantage of this
technology.
Benefits of using Revenue Plus Collection Software for Overpayments
1. Data matching--automatically links debtor accounts based on
matching demographic criteria or other matches.
2. Notes--provides complete account history of all account activity
including charges, payments, correspondence, direct contacts & etc.
3. Tickler file--provides at-a-glance information on current
collection activities for an account and prompts the collector about
the next action to be taken.
4. Automated Reports--for managers and Federal Government
requirements
5. Integration with other databases and systems
6. Tax Intercept--automated process for possible refund offset
7. Work queues'--provides a prioritized daily work list of accounts
for each collector to work the accounts with the highest priority first
States using Revenue Plus Collection Software for collection of
Overpayments and UI Taxes
1. Maryland Central Collections
2. Colorado Central Services
3. Ohio Attorney General's Office
About Revenue Plus
Revenue Plus, headquartered in Vancouver, WA is the Public Sector
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