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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Human Resources, Committee on Ways and
Means, House of Representatives.
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:
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.[Footnote 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.
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 BI 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.[Footnote
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.[Footnote
3]
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 figure 1.)
Figure 1: Overpayments Estimated by Labor's Quality Assurance System,
1992 to 2001:
[Refer to PDF for image: vertical bar graph]
The graph depict overpayments for the years 1992 through 2001.
Source: Department of Labor quality assurance data.
[End of figure]
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 figure 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):
[Refer to PDF for image: pie-chart]
Benefits year earnings/Base period wages ($905.2 million): 38.1%;
Eligibility issues ($858.8 million): 36.1%;
Separation issues ($505.4 million): 21.3%;
Other causes ($82.4 million): 3.5%;
Dependent issues ($25.2 million): 1.1%.
Source: Labor's quality assurance data.
[End of figure]
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.
Labor'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.
Overpayments 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.
States 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.[Footnote 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.
States 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.
[Footnote 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.[Footnote 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.[Footnote 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.
[Footnote 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.
[Footnote 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.[Footnote 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.
[Footnote 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.
Some 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.[Footnote 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.[Footnote 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.
Some 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.[Footnote 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.[Footnote 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 of SSNs are
periodically sent to SSA for verification.[Footnote 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.
States 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.[Footnote 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.[Footnote 18]
States 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.
[Footnote 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.
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.
[Footnote 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.[Footnote 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.
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.[Footnote 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.[Footnote 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 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.[Footnote 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.
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.[Footnote 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.
[Footnote 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.
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 Contacts and Staff Acknowledgments:
For information regarding this testimony, please contact Sigurd R.
Nilsen, Director, Education, Workforce, and Income Security Issues, at
(202) 5127215. Individuals who made key contributions to this
testimony include Daniel Bertoni, Jeremy Cox, Cheryn Powell, and
Salvatore Sorbello.
[End of section]
Related GAO Products:
Workforce Investment Act: Improvements Needed in Performance Measures
to Provide a More Accurate Picture of WL4's Effectiveness. [hyperlink,
http://www.gao.gov/products/GAO-02-275] Washington, D.C.: February l,
2002.
Strategies to Manage Improper Payments: Learning from Public and
Private Sector Organizations. [hyperlink,
http://www.gao.gov/products/GAO-02-69G]. Washington, D.C.: October 2001.
Department of Labor: Status of Achieving Key Outcomes and Addressing
Major Management Challenges. [hyperlink,
http://www.gao.gov/products/GAO-01-779]. Washington, D.C.: June 15, 2001.
Unemployment Insurance: Role as Safety Net for Low-Wage Workers is
Limited. [hyperlink, http://www.gao.gov/products/GAO-01-181]. Washington,
D.C.: December 29, 2000.
Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity. [hyperlink, http://www.gao.gov/products/GAO/HEHS-00-119].
Washington, D.C.: September 13, 2000.
Supplemental Security Income: Action Needed on Long-Standing Problems
Affecting Program Integrity. [hyperlink,
http://www.gao.gov/products/GAO/HEHS-98-158]. Washington, D.C.: September
14, 1998.
Supplemental Security Income: Opportunities Exist for Improving
Payment Accuracy. [hyperlink, http://www.gao.gov/products/GAO/HEHS-98-75].
Washington, D.C.: March 27, 1998.
Supplemental Security Income: Administrative and Program Savings
Possible by Directly Accessing State Data. [hyperlink,
http://www.gao.gov/products/GAO/HEHS-96-163]. Washington, D.C.: August 29,
1996.
[End of section]
Footnotes:
[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.
[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.
[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.
[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 (1).
[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.
[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.
[16] States report sending SSNs to SSA for verification in intervals
ranging from daily to once per quarter (every 3 months).
[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.
[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.
[22] See 29 C.F.R. 97.43.
[23] See 20 C.F.R. 601.6.
[24] See Department of Labor, Employment and Training Administration,
UI Performs 2000 Annual Report, p.9.
[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.
[End of section]