Unemployment Insurance: Enhanced Focus on Program Integrity Could
Reduce Overpayments (11-JUN-02, GAO-02-820T).			 
                                                                 
The Department of Labor's Unemployment Insurance (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 health of each state's UI program depends, in part,
on the ability of the states to control benefit payments by	 
accurately determining eligibility for UI benefits in a timely	 
manner. 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. 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 or recovered $1.3	 
billion of the total overpayments given their current policies	 
and procedures. The 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. At the federal level,	 
Labor's policies and directives emphasize quickly processing and 
paying claims, with only limited attention given to payment	 
accuracy. Although paying benefits to individuals in a timely	 
manner is important, 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.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-820T					        
    ACCNO:   A03550						        
  TITLE:     Unemployment Insurance: Enhanced Focus on Program	      
Integrity Could Reduce Overpayments				 
     DATE:   06/11/2002 
  SUBJECT:   Claims processing					 
	     Eligibility determinations 			 
	     Fraud						 
	     Income maintenance programs			 
	     Insurance claims					 
	     Overpayments					 
	     Performance measures				 
	     Social security number				 
	     Unemployment compensation programs 		 
	     OCSE National Directory of New Hires		 
	     SSA State Online Query System			 
	     DOL Unemployment Insurance Program 		 
	     DOL Wage Record Interchange System 		 
	     DOL Benefit Accuracy Measurement System		 
	     DOL Benefit Payment Control System 		 
	     Social Security Disability Insurance		 
	     Program						 
                                                                 

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GAO-02-820T
     
Testimony Before the Subcommittee on Human Resources, Committee on Ways and
Means, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 4: 00 p. m. Tuesday, June 11, 2002
UNEMPLOYMENT

INSURANCE Enhanced Focus on Program Integrity Could Reduce Overpayments

Statement by Sigurd R. Nilsen, Director Education, Workforce, and Income
Security Issues

GAO- 02- 820T

Page 1 GAO- 02- 820T

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 indepth 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

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.

Page 2 GAO- 02- 820T

unemployment insurance, such as employer representatives and the National
Association of State Workforce Agencies.

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.

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.
Background

Page 3 GAO- 02- 820T

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.

Page 4 GAO- 02- 820T

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

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.)

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. More Than
$2 Billion

in Overpayments Detected in 2001

Overpayments Have Changed Little During the Last 10 Years

Page 5 GAO- 02- 820T

Figure 1: Overpayments Estimated by Labor?s Quality Assurance System, 1992
to 2001

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

Page 6 GAO- 02- 820T

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)

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

38.1%  Benefits year earnings/ Base period wages ($ 905.2)

36.1% 

Eligibility issues ($ 858.8)

21.3% 

Separation issues ($ 505.4)

1.1%

Dependent issues ($ 25.2)

3.5%

Other causes ($ 82.4)



Page 7 GAO- 02- 820T

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.

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. Labor?s Quality Assurance

System Data Provide a More Complete Representation of UI Overpayments

Page 8 GAO- 02- 820T

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.

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 Overpayments Caused

by Management and Operational Practices at the State and Federal Level

States Do Not Always Balance Need for Payment Timeliness with Payment
Accuracy

Page 9 GAO- 02- 820T

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.

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

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.

5 Each state is required to maintain a database of individuals who were
recently hired to help state child support enforcement agencies locate
noncustodial parents who owe child support payments. States Vary in Their
Use of

Automation to Independently Verify Claimants? Information

Page 10 GAO- 02- 820T

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.

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.

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

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. 8 This match is conducted using
Labor?s Interstate Connection Network.

9 See 42 U. S. C. 653 (l).

Page 11 GAO- 02- 820T

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.

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

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).

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. Some States May Not Verify

Claimants? Receipt of Other Programs? Benefits

Page 12 GAO- 02- 820T

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.

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 selfreport
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

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

13 The Social Security Administration is responsible for administering
programs including the Old Age and Survivors Insurance, Supplemental
Security Income, and Disability Insurance .

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- 00103- 315, March 2, 1998. Some States Fail to
Adequately

Verify Claimants? Identity and Whether They Are Legal Residents

Page 13 GAO- 02- 820T

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.

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.

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

16 States report sending SSNs to SSA for verification in intervals ranging
from daily to once per quarter (every 3 months). States May Not Receive
Timely

Information from Employers

Page 14 GAO- 02- 820T

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

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

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.

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. States
Vary in Their Ability To

Recover Overpayments

Page 15 GAO- 02- 820T

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.

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

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. Labor?s Management

Places Insufficient Emphasis on Program Integrity

Page 16 GAO- 02- 820T

enforced as strictly by Labor. Labor could set Tier II criteria on a state-
bystate basis and withhold funding in case of subsequent noncompliance.

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.

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

22 See 29 C. F. R. 97.43. 23 See 20 C. F. R. 601.6. Labor Has Not Fully
Utilized Its

Quality Assurance Data to Improve State Operations

Page 17 GAO- 02- 820T

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.

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.

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

24 See Department of Labor, Employment and Training Administration, UI
Performs 2000 Annual Report, p. 9. Labor Gives Inadequate

Attention to Overpayment Recoveries

Labor is Taking Actions To Improve Program Integrity

Page 18 GAO- 02- 820T

Center (ITSC) as a resource for states to obtain technical information and
best practices for administering their UI programs. 25

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.

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

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.

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

Page 19 GAO- 02- 820T

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.

Page 20 GAO- 02- 820T

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.

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. GAO
Contacts and

Staff Acknowledgments

Page 21 GAO- 02- 820T

Workforce Investment Act: Improvements Needed in Performance Measures to
Provide a More Accurate Picture of WIA?s Effectiveness.

GAO- 02- 275 Washington, D. C.: February1, 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.:
September14, 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. Related GAO Products

(130167)
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