Report to the Chairman, Subcommittee

on Human Resources, Committee on

Ways and Means,

House of Representatives

United States General Accounting Office

GAO

July 2002 UNEMPLOYMENT

INSURANCE

Increased Focus on

Program Integrity

Could Reduce Billions

in Overpayments

GAO-02-697
Page i GAO-02-697 Unemployment Insurance Overpayments

Letter 1

Results in Brief 2

Background 4

More than $2 Billion in Overpayments Estimated in 2001 7

Overpayments Caused by Management and Operational Practices

at the State and Federal Level 13

Conclusions 28

Recommendations 29

Agency Comments and Our Evaluation 30

Appendix I Categories of Overpayments Estimated by Labor’s

Quality Assurance System (U.S. Totals for 2001) 32

Appendix II Comments from the Department of Labor 33

Appendix III GAO Contacts and Staff Acknowledgments 40

GAO Contacts 40

Staff Acknowledgments 40

Related GAO Products 41

Tables

Table 1: Categories of Overpayments Estimated by Labor’s Quality

Assurance System (U.S. Totals for 2001) 10

Table 2: Overpayments That Labor Estimates Could Have Been

Detected and Recovered in 2001 12

Table 3: Categories of Overpayments Estimated by Labor’s Quality

Assurance System (U.S. Totals for 2001) 32

Figures

Figure 1: Regional Structure of the Department of Labor’s

Employment and Training Administration 5

Figure 2: Overpayments Estimated by Labor’s Quality Assurance

System, 1992 to 2001 8

Contents
Page ii GAO-02-697 Unemployment Insurance Overpayments

Abbreviations

BAM Benefit Accuracy Measurement

BPC Benefit Payment Control

DI Disability Insurance

DLC Desired Levels of Achievement

ITSC Information Technology Support System

NDNH National Directory of New Hires

OASI Old Age and Survivors Insurance

OIG Office of Inspector General

SOLQ State Online Query system

SQSP State Quality Service Plan

SSA Social Security Administration

SSN Social Security Number

UI Unemployment Insurance

WIA Workforce Investment Act

WRIS Wage Record Interchange System
Page 1 GAO-02-697 Unemployment Insurance Overpayments

July 12, 2002

The Honorable Wally Herger

Chairman, Subcommittee on Human Resources

Committee on Ways and Means

House of Representatives

Dear Mr. Chairman:

The Department of Labor’s Unemployment Insurance (UI) Program paid

about $30 billion in benefits in calendar year 2001 to workers who lost

their jobs. The UI program is a federal-state partnership designed to

partially replace the lost earnings of individuals who become unemployed

through no fault of their own and to stabilize the economy in times of

economic recession. Each state taxes employers to finance a UI trust fund

that can be drawn upon in economic downturns.1

 The health of each

state’s trust fund depends, in part, on the amount of taxes collected from

employers; current economic conditions, such as the level of

unemployment; and 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 and place unnecessary burdens on a state’s trust

fund. Overpayments include payments that should not have been made or

were made for incorrect amounts.

In recent years, 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. In light of the dramatic increase

in the number of unemployed workers filing for UI benefits in the past

year and the program’s potential exposure to fraud and overpayments, you

asked us to determine (1) the extent and type of overpayments in the UI

program, including those that may be attributable to fraud or abuse; and

(2) the factors that contribute to overpayments in the UI program, as well

as actions taken by Labor to ensure program integrity.

 1 “State” in this report includes the 50 states as well as three non-state jurisdictions covered

by the UI program—the District of Columbia, Puerto Rico, and the Virgin Islands.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-697 Unemployment Insurance Overpayments

To address these issues, we reviewed internal Labor guidance and

documentation, performance plans and reports, as well as performance

data relevant to Labor’s oversight of the UI program. We also reviewed

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.2

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. We performed our

work between September 2001 and May 2002 in accordance with generally

accepted government auditing standards.

Of the $30 billion in UI benefits paid in calendar year 2001, the Department

of Labor estimates that a total of about $2.4 billion in overpayments

occurred, including about $577 million (24 percent) attributable to fraud or

abuse. Labor’s analysis suggests that the states could have potentially

detected and/or recovered about $1.3 billion of the total overpayments that

year given their current policies and procedures. Labor based these

estimates on data from its quality assurance system. This system identifies

numerous overpayment categories, including individuals who (1) receive

UI benefits while working, (2) fail to register for employment services in

their state, and (3) fail to look for a new job as required. Labor’s quality

assurance system estimate contrasts with the $650 million in

overpayments reported by the states’ benefit payment control systems in

fiscal year 2001, including about $370 million in overpayments that were

recovered. Our analysis suggests that Labor’s quality assurance system

estimate represents a more complete assessment of the true level of

overpayments in the UI program than the amount reported by the states.

This is primarily due 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 process can generally produce.

 2

 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.

Results in Brief
Page 3 GAO-02-697 Unemployment Insurance Overpayments

Overpayments in the UI program result from management and operational

practices we identified at both the state and federal level. At the state

level, we found that many states do not sufficiently balance the need to

quickly process and pay UI claims with the need to control program

payments. For example, we found that five of the six states we visited had

diverted staff from benefit payment control operations to claims

processing activities over the past year in response to increases in the

volume of UI claims. Moreover, while a number of states we visited

routinely use independent automated data sources to verify key

information that can affect claimants’ eligibility for benefits—such as an

individual’s wages and employment status—they also rely heavily on selfreported information from claimants for other important data, such as a

claimant’s receipt of other federal or state program benefits and whether

they are citizens of the United States. Many of these states lack access to

data sources for verifying claimants’ identity in a timely manner and thus

rely on verification processes that are incomplete or information sources

that are only checked periodically.

In addition to the practices we identified at the state level that contribute

to overpayments, we found that policies and directives from the

Department of Labor affect states’ priorities and procedures in a manner

that makes overpayments more likely. For example, the performance

measures that Labor uses to gauge states’ operations tend to emphasize

payment timeliness more heavily than payment accuracy. Labor has also

been reluctant to link the states’ performance on payment accuracy to the

annual administrative budget as a way of providing incentives or sanctions

for good or poor performers. Despite these problems, we found that Labor

has taken actions to improve UI program integrity by working to obtain

data from additional sources that could help states make more accurate

eligibility decisions and developing a performance measure in its fiscal

year 2003 performance plan for gauging state payment accuracy in future

years. While we recognize the importance of paying UI claimants in a

timely manner, our work suggests that both Labor and the states could do

more to reduce improper payments.

We are including recommendations in this report to the Secretary of Labor

to improve Labor’s use of existing management and operational tools that

could encourage states to place greater emphasis on program integrity

activities. These recommendations include better utilizing Labor’s

administrative authority to encourage states to place additional emphasis

on program integrity activities, and studying the feasibility of using

existing automated data sources to help states verify claimants’ earnings

and employment status, as well as UI benefits that they may be receiving
Page 4 GAO-02-697 Unemployment Insurance Overpayments

in other states. In its response to our draft report, Labor generally agreed

with our recommendations, and identified a number of current and

planned initiatives that it believes will address some of the issues we

identified. Labor also provided a number of technical comments that we

have incorporated into our draft report as appropriate.

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 U.S. Department of Labor and the states, provides temporary cash

benefits to workers who lose their jobs through no fault of their own. The

program also serves to stabilize the economy in times of economic

recession. Labor is responsible for overseeing the UI program to ensure

that the states operate an effective and efficient Unemployment Insurance

Program. Labor is also responsible for monitoring state operations and

procedures, providing technical assistance and training, as well as

analyzing UI program data to diagnose potential problems. To oversee the

program, Labor’s Employment and Training Administration maintains 10

offices in 6 geographic regions that are responsible for working with states

in a specific geographic area (see fig.1).3

 The regional offices are the

states’ main point of contact with Labor and serve as a vital link between

headquarters and the states for providing technical assistance and

clarifying program policies, objectives, and priorities. Moreover, the

regional offices have primary responsibility for overseeing the fiscal and

management integrity of the UI program.

 3

 Labor recognizes six regions, but some of these regions have administrative responsibility

split between two cities. For example, Region 1 comprises both Boston, which oversees the

New England states, and New York City, which has responsibility for New York State, New

Jersey, Puerto Rico, and the Virgin Islands.

Background
Page 5 GAO-02-697 Unemployment Insurance Overpayments

Figure 1: Regional Structure of the Department of Labor’s Employment and Training Administration

Source: Department of Labor.

Although Labor provides oversight and guidance to ensure that each state

operates its program in a manner that is consistent with federal guidelines,

the federal-state structure of UI places primary responsibility for

administering the program on the states. The states also have wide latitude

to administer their UI programs in a manner that best suits their needs

within the guidelines established by federal law. For example, 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.

The UI program is funded through federal and state taxes levied on

employers. The states collect the portion of the tax needed to pay

unemployment insurance benefits, whereas state and federal

administrative costs and other related federal costs of the UI program are

financed through the federal tax. Labor holds these funds in trust on

I

II

III

V

IV

VI
Page 6 GAO-02-697 Unemployment Insurance Overpayments

behalf of the states in the Unemployment Trust Fund of the U.S. Treasury.

To obtain annual UI administrative funding from Labor, states submit an

annual request for funding as part of their State Quality Service Plan

(SQSP).4

 Labor reviews each state’s plan and subsequently determines if

any adjustment in funding is required. The regional offices may also

negotiate changes and revisions to the states’ funding requests before the

final allocation is approved. In fiscal year 2001, Labor provided about $2.3

billion to states to administer their programs.

To be eligible for UI benefits in most states, unemployed workers must

fulfill five general conditions within overall federal guidelines. They must:

• have worked for a specified amount of time in a job that is covered by

the unemployment insurance program;

• have left their prior jobs involuntarily (such as by employer layoff) or

have quit their jobs for “good cause”;

• be currently “able and available” for work, and, in most states, actively

seeking work;

• enroll in employment services or job training programs (in some

states); and

• be legally eligible to work—for example, noncitizens must be lawfully

admitted to work in the United States, or lawfully present for other

reasons.

Each state’s laws provide specific requirements for claimants to meet

these general conditions, and each state determines individual eligibility,

the amount and duration of benefits, and disqualification provisions.

Because Labor provides states with the flexibility to design their own UI

program, the eligibility policies and laws governing the administration of

the UI program vary from one state to another. In general, however,

claimants apply for UI benefits over the telephone, via computer using the

Internet, or in person at a local office.5

 State claims representatives are

responsible for determining each claimant’s eligibility for UI benefits by

gathering and (when possible) verifying important information, such as

their identity, employment history, why they no longer are working, and

other sources of income they may have. Once the claim has been

 4

 The SQSP is intended to be a management tool for states to ensure consistent

performance as well as a mechanism for determining where resources should be placed.

5

 Traditionally, UI claims were filed in-person in employment offices; however, many states

have transitioned to remote claims filing using telephone systems or the Internet.
Page 7 GAO-02-697 Unemployment Insurance Overpayments

submitted for processing, the state sends forms to the claimant’s

employer(s) requesting them to verify the claimant’s wages and the reason

they are no longer working. If the individual’s claim for UI is approved, the

state then determines the amount of UI benefits, depending on the

individual’s earnings during the prior year and other factors. UI benefits

may be mailed to a claimant’s home or post office box, or sent

electronically to a bank account. In general, most states are expected to

provide the first benefits to the claimant within 21 days of the date the

state determined that the claimant was entitled to benefits.

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. This process also involves reporting the reason for the

overpayment—such as wages that the claimant failed to report. Each state

is required to report overpayments along with other data to Labor on a

quarterly basis. By contrast, Labor’s benefit accuracy measurement data

are an estimate of the total overpayments in the UI program—in each state

and the nation as a whole—based on a statistically valid examination of a

sample of paid and denied claims. Benefit accuracy measurement is one of

the main quality assurance systems that Labor uses to measure payment

accuracy in the program.

Of the $30 billion in UI benefits paid nationwide in 2001, Labor estimates

that about $2.4 billion in UI overpayments occurred.6

 About one-quarter of

these overpayments ($577 million) were identified as fraud, according to

its quality assurance data. Overpayments may occur because individuals

work while receiving benefits, fail to register for employment services, fail

to look for a new job, or misrepresent their identity. Other sources of

overpayments include agency errors and inaccurate or untimely

information provided by employers. Of the $2.4 billion in projected

overpayments, Labor estimates that about $1.3 billion could have

potentially been detected and/or recovered in 2001 given existing state

procedures and policies. In contrast, the states reported that $650 million

in overpayments were made in 2001, of which $370 million was actually

recovered. Overall, Labor’s overpayment estimate is about three times

higher than that reported by the states. The difference in the overpayment

 6

 UI benefit and overpayment data reflect calendar year 2001.

More than $2 Billion

in Overpayments

Estimated in 2001
Page 8 GAO-02-697 Unemployment Insurance Overpayments

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

documents overpayments that often cannot be detected in many states

using their existing benefit payment control procedures.7

Figure 2: Overpayments Estimated by Labor’s Quality Assurance System, 1992 to

2001

Source: Labor’s quality assurance data (2001).

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 8.0 percent in 2001 to 9.2

percent in 1999 and averaging about 8.5 percent during that period.

Overpayments averaged about $1.8 billion per year and reaching a high of

 7

 We are unable to assess the precision of these Department of Labor estimates.

Overpayments Have

Changed Little During Last

10 Years

Dollars in millions

 0

 500

1,000

1,500

2,000

2,500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Year
Page 9 GAO-02-697 Unemployment Insurance Overpayments

about $2.4 billion in 2001. (See fig. 2.) The slight increase in overpayments

estimated by the quality assurance system in 2001 is likely related to the

overall increase in total UI benefits paid that year.

The overpayments estimated by Labor’s quality assurance data fall into a

number of categories. 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” violations).

(See table 1.) 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). (See app. I.) The quality assurance data also classify

overpayments as being “fraud” or “nonfraud”. Fraud can occur when

claimants intentionally misrepresent eligibility information, employers file

fraudulent claims, or state UI program personnel abuse sensitive

information such as social security numbers for personal gain. Of the total

overpayments estimated by Labor in 2001, about $577 million (24 percent)

were attributed to fraud. Although this estimate takes into account each

state’s individual laws, we found that the states differ substantially in how

they define fraud. For example, some states may include overpayments

resulting from unreported earnings 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.
Page 10 GAO-02-697 Unemployment Insurance Overpayments

Table 1: Categories of Overpayments Estimated by Labor’s Quality Assurance System (U.S. Totals for 2001)

Dollars in millions

Categories of overpayments Fraud Nonfraud

Total

overpayment

Percent of total

overpayments

Eligibility Issues—claimant was not eligible for UI benefits

because they were (1) not able and available to work, (2) not

actively searching for work, (3) an illegal alien, (4) not enrolled

in employment services as required by state law, or (5) not

eligible for other reasons.

$106.2 $757.2 $863.4 35

Benefit Year Earnings—errors in reported or unreported

income that may affect claimants’ eligibility for UI, including

severance or vacation pay, and social security benefits.

326.6 437.9 764.5 31

Separation Issues—claimant became unemployed for

reasons not covered by state or federal law for receipt of UI

benefits including (1) voluntarily leaving employment, (2)

being discharged or fired, and (3) other reasons.

126.2 386.1 512.3 21

Base Period Wages—errors in reporting/recording claimants’

earnings or amount of work during the period in which

eligibility is determined.

 10.2 190.3 200.5 8

Dependent Issues—erroneous reporting/recording of

dependents’ information.

 0. 2 24.6 24.8 1

Other Causes—errors due to other factors, such as benefits

paid during a period of disqualification or reversal of benefits

due to an appeals decision.

 8.1 77.3 85.4 4

Totala$577.4 $1,873.5 $2,450.9 100

Note: The overpayments are presented in categorical groupings as defined in Labor’s Employment

and Training (ET) Handbook 395.

a

Total overpayments do not include data from Colorado and Puerto Rico.

Source: Labor’s quality assurance data (2001).

Overall, the largest overpayment categories in 2001 were attributed to

eligibility issues (35 percent), benefit year earnings (31 percent), and

separation issues (21 percent). Federal and state officials told us that some

categories of overpayments are more difficult to detect than others. For

example, some officials told us that it can be difficult for states to

accurately determine, in a cost-effective manner, if a claimant is actively

searching for a job (an eligibility requirement in some states). In

particular, there is not a readily available source of information that states

can access for information on whether each claimant is actively looking

for employment. Work search requirements vary considerably from state

to state, and can have a substantial impact on state payment accuracy

rates. Moreover, states generally lack sufficient resources to permit their

benefit payment control personnel to conduct in-depth examinations of

each claimant’s activities to determine if they are eligible. States that have

only a limited work search requirement (or no requirement at all) may not

establish overpayments for UI claimants who fail to look for a new job. In
Page 11 GAO-02-697 Unemployment Insurance Overpayments

contrast, states with rigorous work search policies are more likely to

establish overpayments for claimants who do not meet this requirement.

Although some categories of overpayments are more difficult than others

to detect or recover, Labor’s analysis suggests that the states could have

potentially detected and recovered about $1.3 billion (54 percent) of the

$2.4 billion in estimated overpayments in 2001. This estimate is based on

Labor’s analysis of the types of overpayment errors the states’ benefit

payment control operations were most likely to be able to identify and

recover given their current policies and procedures. (See table 2.) In

particular, states’ benefit payment control activities tend to focus on

detecting overpayments that result from unreported income (benefit year

earnings or base wage period violations) and payments to individuals who

are not entitled to UI benefits due to the circumstances under which they

became unemployed (separation issues). For example, benefit payment

control staff may use the “Wage/Benefit Crossmatch” to identify and

examine claimants who received UI benefits during a week in which they

appear to have earned wages.

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 unreported or underreported income from social security

programs, illegal aliens claiming benefits, and unreported vacation or

severance pay. Furthermore, based on Labor’s analysis, we believe 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 estimate, the

states reported about $653 million in overpayments in 2001—roughly half

the total that Labor’s quality assurance system identified. Moreover, at the

time of our review, the states reported that they had recovered about $370

million of this amount.
Page 12 GAO-02-697 Unemployment Insurance Overpayments

Table 2: Overpayments That Labor Estimates Could Have Been Detected and

Recovered in 2001

Dollars in millions

Categories of overpayment Amounta

Benefit Year Earnings $693.9

Separation Issues (including discharge and voluntary quit) 385.0

Able and Available 145.5

Social Security violations 34.3

Illegal Aliens 29.9

Dependency violation 17.8

Severance/Vacation Pay 27.1

Total $1,333.6

a

Total may not add due to rounding.

Source: Labor’s quality assurance data (2001).

The quality assurance and the benefit payment control systems differ in

the scope and the methods of the activities they use to identify

overpayments. On the basis of 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 they review

than is typically possible for most states’ benefit payment control

operations. For example, the investigator is generally able to identify many

types of overpayments because they can spend more time verifying the

accuracy of the information provided to the state by personally contacting

employers, claimants, and third parties. In addition, investigators typically

spend between 5 and 8 hours examining a single case, which allows them

to perform a relatively in-depth review of a claimant’s eligibility. By

contrast, the states’ benefit payment control activities are often affected

by operational and policy factors that limit their ability to detect and/or

recover overpayments. These factors include limited staffing and funding,

cost-benefit considerations (e.g., the costs associated with recovering an

overpayment may be greater than the overpayment amount), and a lack of

access to timely data sources. Moreover, benefit payment control

personnel are required to quickly examine thousands of cases to identify

Labor’s Quality Assurance

System Data Provides a

More Complete

Representation of UI

Overpayments
Page 13 GAO-02-697 Unemployment Insurance Overpayments

overpayments, thus potentially limiting their ability to thoroughly review

cases for payment accuracy.

We identified various management and operational practices at both the

state and federal level that contribute to UI overpayments. At the state

level, we found that a number of states place primary emphasis on quickly

processing and paying UI claims and may not take the necessary steps to

adequately verify claimants’ initial and continuing eligibility for benefits. In

particular, five of the six states we visited were not fully staffing their

benefit payment control operations and had moved staff to claims

processing activities. In addition, 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.

States also tend to establish UI program policies and priorities in response

to direction from the Department of Labor, which in some instances may

contribute to overpayments. For example, the performance measures that

Labor uses to gauge states’ operations tend to emphasize payment

timeliness more heavily than payment accuracy. In addition, 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. Labor has taken some actions to improve UI

program integrity, such as working to obtain additional automated data

sources that could help states make more accurate eligibility decisions and

developing a payment accuracy performance measure. However, Labor

and the states have not placed sufficient emphasis on balancing the often

competing priorities of quickly processing and paying UI claims, with the

need to ensure that only eligible individuals receive benefits.

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. Most of the states we visited placed primary emphasis on

quickly processing and paying UI claims, with less attention given to

program integrity operations. 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

Overpayments Caused

by Management and

Operational Practices

at the State and

Federal Level

States Place Main

Emphasis on Quickly

Processing and Paying UI

Claims
Page 14 GAO-02-697 Unemployment Insurance Overpayments

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 2001.8

 Many federal and state officials we interviewed

told us that states move staff into claims processing roles from other

positions because they lack adequate funding to properly administer all

the necessary activities of their UI programs. In this regard, some state

officials told us that they anticipated additional funding from the federal

government which they could use to increase the resources and staff

dedicated to benefit payment control and other program integrity

operations.9

 However, a number of officials told us that historically the UI

program’s primary objective has been to pay claimants in the most

expeditious manner possible, and that this would continue to be a guiding

principle of the program.10

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. The most important information requiring verification generally

includes an individual’s wages and employment status, receipt of other

federal or state benefits, identity, and citizenship status. All of the states

we visited conduct basic computer matches that help them to 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

 8

 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.

9

 The Job Creation and Worker Assistance Act of 2002 provided up to a 13-week, federally

funded extension of UI benefits for the states. In addition, the act provided for the

distribution of about $8 billion to the states as part of the Employment Security

Administrative Funding Act of 1954 (also referred to as the Reed Act). This $8 billion

allocation is intended to strengthen state trust funds - allowing states to pay UI benefits

without cutting benefit levels or increasing employer taxes. These funds also may be used

to expand benefits and to pay administrative costs for UI, including activities related to

program integrity, as well as job service programs.

10 Labor officials told us that payment timeliness is emphasized partly due to the 1971

Supreme Court decision California Dept. of Human Resources Development v. Java, 402

U.S. 121, that emphasized the need for states to pay UI benefits as promptly as was

administratively feasible.

States Vary in Their Use of

Automation to Independently

Verify Claimants’ Information
Page 15 GAO-02-697 Unemployment Insurance Overpayments

identify UI recipients who may have unreported income in the same state

in which they are receiving UI benefits. Labor and the states generally

view this match as an effective tool for identifying claimants who may

have unreported wages within the state. 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. In general, the

states tend to recover a substantial proportion of the overpayments they

detect by offsetting a claimant’s current and future UI benefits. Because UI

benefits tend to be paid out over a relatively short period of time—about

14 weeks on average—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, such as the State Directory of New

Hires (referred to as the “state new hires database”).11 The states’ new

hires databases can provide information on individuals’ current

employment status, and have been found to be effective in preventing or

reducing the amount of UI overpayments. However, we found that this

data source is not routinely used in all states. For example, two of the

states we visited do not currently use their new hires database to verify

claimants’ earnings or employment status.12 Officials in one state told us

that they currently lacked access to the state’s new hires database (but are

seeking access), while those in another state questioned the costeffectiveness of its use. However, other states that use this data source

have reported that it is helpful in detecting overpayments more quickly

than the Wage/Benefit crossmatch. For example, one state reported that

because the new hires data detects overpayments earlier than other

detection methods, the size of its average overpayment at the time of

 11 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.

12 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.
Page 16 GAO-02-697 Unemployment Insurance Overpayments

detection has been reduced from about $2,800 to roughly $750. Moreover,

the same state reported that it detected about 6,700 overpayments totaling

over $4 million using its new hire database between July 2000 and

December 2001. Overall, use of the new hire database in this state

accounted for more than 35 percent of all instances of overpayments

detected during that period.13 Another state reported increased

overpayment collections of about $19 million over 4 years, in part due to

earlier detections from the new hires database. Labor’s OIG has identified

the new hire database as a potentially useful tool for detecting

overpayments resulting from unreported income, which makes up a

substantial portion of the total overpayments estimated by the quality

assurance system each year.14 Although Labor has encouraged each state

to use its own new hires database for purposes of administering their UI

program, we found that nationally a number of states still do not use this

data source.

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 various types of

interstate matches that are facilitated by Labor.15 One match (called the

“Interstate Crossmatch”) is conducted quarterly by most states for all UI

claims and is designed to detect claimants who may have wages in another

state. However, this match typically relies on wage data that are typically

about 4 to 6 months old and, therefore, is of limited use in determining

claimants’ initial eligibility for benefits. The states may also use another

type of match called the “Interstate Inquiry.” This system allows a UI

claims representative to check a claimant’s UI and employment status in

other states. However, officials at Labor and the states we visited told us

that this system is generally only used if the claims representative is

suspicious about the validity of the claim. Moreover, the system can only

be used to check individual claimants and is not designed to verify the

status of large numbers of claimants simultaneously. Finally, two of the

states we visited periodically conduct their own matches with bordering

states. However, this method generally requires individual states to

 13 These figures are based on the state’s BPC data.

14 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.

15 These matches are conducted using Labor’s Interstate Connection Network.
Page 17 GAO-02-697 Unemployment Insurance Overpayments

develop formal data sharing agreements with one another, which can be

time-consuming and cumbersome.

To enhance the ability of states to verify the status of claimants who could

be working or receiving UI benefits in other states, many of the 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.16 Moreover, our prior

work examining the NDNH has revealed concern among some federal

officials that wider access to the database could jeopardize the security

and confidentiality of the information it contains. One possible alternative

to the NDNH suggested by federal and state 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.17 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, one official familiar with the system noted that while it contains

the necessary data to show whether a claimant is earning wages in another

participating state, it 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.18 Furthermore, we

noted that if not all states participate, the value of WRIS will be

 16 42 U.S.C. 653(l).

17 WRIS helps participating states track the employment status of individuals who have

participated in WIA job training programs in other states.

18 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 U.S. General Accounting Office, 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).
Page 18 GAO-02-697 Unemployment Insurance Overpayments

diminished—even for participating states—because no data will be

available from nonparticipating states’ UI wage records. This is an area

where Labor could potentially play a larger role. In particular, Labor could

explore options for enhancing WRIS as an overpayment detection tool and

facilitating states’ participation in any modified system. Although

modifying existing systems and obtaining access to new, more timely data

sources may entail additional costs for Labor and the states, our review

and prior work in other programs suggests that the potential savings in

program funds could outweigh these costs.19

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.20 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 he or she is 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.21 For example, one state’s policy manual requires claims

representatives to ask claimants if they are currently receiving Social

Security Disability Insurance (DI) or Old Age and Survivors Insurance

(OASI) benefits, which could reduce or eliminate the amount of UI

benefits they are eligible to receive. 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

 19 See U.S. General Accounting Office, Public Assistance: PARIS Project Can Help States

Reduce Improper Benefit Payments, GAO-01-935 (Washington, D.C.: Sept. 6, 2001); and

Supplemental Security Income: Action Needed on Long-Standing Problems Affecting

Program Integrity,GAO/HEHS-98-158 (Washington, D.C.: Sept. 14, 1998).

20 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.

21 The Social Security Administration is responsible for administering programs, including

Old Age and Survivors Insurance, Supplemental Security Income, and Disability Insurance.

Some States May Not Verify

Claimants’ Receipt of Other

Programs’ Benefits
Page 19 GAO-02-697 Unemployment Insurance Overpayments

estimates that in 2001, about $35 million in UI overpayments were due to

unreported social security benefits, such as DI.22

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.23 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.24

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 (Utah and

Wisconsin) 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.25 This process tends to be less timely than online access for

verifying claimants’ initial eligibility for benefits. However, one state we

visited reported that it does not perform any verification of the SSNs that

 22 The national quality assurance data does not identify which social security programs

were the primary source of errors in the Social Security category of overpayments.

23 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, 26 U.S.C. 3304(a)(14)(A).

24 See U.S. Department of Labor, Office of Inspector General, Verification of Social

Security Numbers Could Prevent Unemployment Insurance Payments to Illegal Aliens,

04-98-001-03-315, March 2, 1998.

25 States report sending SSNs to SSA for verification in intervals ranging from daily to once

per quarter (every 3 months).

Some States Fail to Adequately

Verify Claimants’ Identity and

Whether They Are Legal

Residents
Page 20 GAO-02-697 Unemployment Insurance Overpayments

UI claimants submit because a prior system it used for verifying SSNs

identified only a small number of potential violations. This state decided

that its resources could be better used to support other key work

priorities, including claims processing. 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 do not

verify this information with the Immigration and Naturalization Service if

the claimant states that he or she is a citizen. The results of our review

suggest that the inability of some states to accurately verify whether

claimants’ are lawfully present in U.S., and thus their eligibility for UI, has

contributed to program overpayments. Labor estimates that about $30

million of the $1.3 billion in overpayments that were deemed to be the

most readily detected and recovered by the states in 2001 were due to

illegal alien violations. (See table 2.)

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 it, along with a

bordering state, identified nine SSNs that are currently being illegally used

by over 700 individuals as proof of eligibility for employment. Upon

further investigation, we determined that these SSNs were being used in at

least 29 states, and 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.

Given the potential for fraudulent receipt of UI or other benefits, and the

apparently widespread misuse of social security numbers, our Office of

Special Investigations has initiated an investigation into this matter in

coordination with the Social Security Administration and the Immigration

and Naturalization Service.

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, an audit conducted between

1996 and 1998 by Labor’s OIG revealed that 22 out of 53 states experienced

a non-response rate of 25 percent or higher for wage requests sent to

States May Not Receive Timely

Information from Employers
Page 21 GAO-02-697 Unemployment Insurance Overpayments

employers.26 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. After consulting a broad crosssection of employers that are members of the organization, the official told

us that some employers may resist requests to fill out paperwork from

states because they view the process as cumbersome and time-consuming.

In addition, some employers apparently indicated that they do not receive

feedback on the results of the information they provided to the states and,

therefore, cannot see the benefit of complying with the requests. It is also

difficult for some employers to see how UI overpayments and fraud may

affect them. 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.27

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.28 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

 26 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.

27 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.

28 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; 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 22 GAO-02-697 Unemployment Insurance Overpayments

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 reported that by developing agreements with local district attorneys,

the state OIG has been able to use the threat of imprisonment to

encourage claimants’ suspected of fraud to make restitution for UI

overpayments. According to state officials, this initiative has 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 heavily 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 operational performance in the UI program is

primarily geared to assess the timeliness of various state operations.29

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 and

the percentage of claims appeals decided within 45 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 fraud and

nonfraud collections. Labor has developed national criteria specifying the

minimum acceptable level of performance for most Tier I measures.30

 29 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.

30 The national minimum performance criteria are performance measures that are applied

uniformly to all states.

Labor’s Management Has

Not Adequately Balanced

the Need for Payment

Timeliness with the Need

for Payment Accuracy
Page 23 GAO-02-697 Unemployment Insurance Overpayments

States that fail to meet the minimum established criteria are required to

take steps to improve their performance. Generally, states are required to

submit a “Corrective Action Plan” to Labor as part of the annual SQSP.31

Moreover, Labor has stated that it could withhold the administrative

funding of states that continue to perform below specified Tier I criteria

over an extended period of time, although this rarely occurs. By contrast,

the Tier II measures do not have national minimum performance criteria,

and are generally not enforced as strictly by Labor. For example, a state

that fails to meet Tier II measures may be encouraged to submit a

“Continuous Improvement Plan” discussing how it will address

performance problems. However, Labor generally does not require a state

to submit such a plan and does not withhold administrative funds as an

incentive to ensure state compliance with Tier II measures.

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 related to

administering the UI program, 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. These include the timeliness of first payments, the timeliness of

wage reports from employers, the quality of appeals decisions, the number

of employers that were audited, and the amount of fraud and non-fraud

collections. A number of state officials we spoke with told us that it is

difficult for states to adequately balance the attention they give to each of

the measures because they are so numerous and complex. For example,

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 in the process.

Some officials suggested reducing or revising the current measures to

make them more manageable. We raised this issue with Labor officials

during our review. However, the officials were unable to comment on

potential revisions to the measures because a previously scheduled

assessment of Labor’s performance measurement system was still

 31 The SQSP includes the state’s request for administrative funds as part of the annual

budget cycle.
Page 24 GAO-02-697 Unemployment Insurance Overpayments

ongoing. Labor indicated that revisions could potentially occur based on

their ongoing review of the performance management system.

In addition to the problems we identified with its performance measures,

Labor has been reluctant to hold states accountable by linking their

performance in areas such as payment accuracy to the annual

administrative budget process. One tool Labor possesses to influence state

behavior is the ability to withhold the state’s annual administrative grant.32

However, this sanction is rarely used because it is generally intended to

address instances of serious, sustained noncompliance by a state and is

widely viewed as defeating the purpose of the program. Thus, many

federal and state officials we interviewed perceive that Labor has few, if

any practical tools to compel state compliance with federal program

directives. Compounding this problem is the existence of “bottom line

authority”—an administrative decision made by Labor in 1986 that gave

states greater flexibility over their expenditures and reduced federal

monitoring of administrative expenditures.33 In particular, bottom line

authority permits states to move resources among cost categories—such

as from benefit payment control activities to claims processing—and

across quarters within a fiscal year, as well as use UI administrative

resources based on state assessment of its needs. Some officials we spoke

with suggested that over time the existence of bottom line authority has

hindered Labor’s ability to effectively oversee the program.

Given its current administrative authority to oversee the UI program,

Labor has not done enough in recent years 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, our review found that in the past, Labor linked the quality

assurance process to the budget process and required states to meet

specified performance levels as a condition of receiving administrative

grants. Moreover, under federal regulations covering grants to states,

Labor may temporarily withhold cash payments, disallow costs, or

terminate part of a state’s administrative grant due to noncompliance with

grant agreements or statutes.34 Withholding or delaying a portion of the

grant funds is one way Labor can potentially persuade states to implement

 32 20 C.F.R. 601.5.

33 Federal Register, Vol.. 51 No. 95, May 16 1986 (pp. 18052-18053).

34 29 C.F.R. 97.43.
Page 25 GAO-02-697 Unemployment Insurance Overpayments

basic payment control policies and procedures. In addition, during the

annual budget process, Labor reviews states’ requests for funds necessary

to administer their UI programs and ensures an equitable allocation of

funds among states.35 While completing those reviews, Labor could

prioritize administrative funding to states to help them achieve or surpass

agreed upon payment accuracy performance levels. However, we found

that Labor is only using such tools to a limited degree to help states

enhance the integrity of their UI program operations.

In addition to its overall emphasis on quickly processing and paying UI

claims, Labor has been reluctant to use its quality assurance data as a

management tool to encourage states to place greater emphasis on

program integrity. According to the UI Performs Calendar Year 2000

Annual 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.36

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.

According to its fiscal year 2003 performance plan, Labor intends to

provide states with additional data from its quality assurance system on

the sources of overpayments to assist them in crafting better front-end

procedures for preventing overpayments. However, unless Labor uses the

data to help states identify internal policies and procedures that need to be

 35 20 C.F.R. 601.6.

36 See Department of Labor, Employment and Training Administration, UI Performs

Calendar Year 2000 Annual Report, p.9.

Labor Has Not Fully Utilized Its

Quality Assurance Data to

Improve State Operations
Page 26 GAO-02-697 Unemployment Insurance Overpayments

changed, it is unclear what impact Labor’s efforts will have on improving

the integrity of states’ UI programs.

Finally, Labor has given limited attention to overpayment collections.

Currently, Labor evaluates states’ collection activities using a set of

measures called Desired Levels of Achievement (DLA).37 States are

expected 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 online access to

wage and employment information that could make overpayment recovery

more efficient. At the time of our review, 34 out of 53 states met or

exceeded the minimum standard of 55 percent. The average rate of

collections nationwide in that year was about 57 percent.38 A small number

of federal and state officials told us that states tend to devote the

minimum possible resources to meet it each year. For example, one state

official told us that over time, UI program managers are able to reasonably

calculate the number of staff that they must devote to benefit payment

control activities in order to meet the minimum level for overpayment

recoveries each year. Any additional staff are likely to be moved to claims

processing activities. Some officials also indicated that the DLA for

collections should be increased. 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 steps to address some of the vulnerabilities we identified.

At the time of our review, Labor was continuing to implement a series of

actions that are designed to help states with the administration of their UI

programs. These include the following:

• States use the Information Technology Support Center (ITSC) as a

resource to obtain technical information and best practices for

administering their UI programs. The ITSC is a collaborative effort

 37 The DLA resulted from an administrative action taken by Labor in lieu of formal UI

regulations for measuring overpayment collections in the UI program.

38 The figure of 57 percent is based on the total overpayment figure according to the BPC

data ($653 million established and $370 million collected). However, using the quality

assurance estimate of overpayments that could be detected and recovered by the states

($1.3 billion), the collection rate drops to about 28 percent.

Labor Gives Inadequate

Attention to Overpayment

Recoveries

Labor Is Taking Actions to

Improve Program Integrity
Page 27 GAO-02-697 Unemployment Insurance Overpayments

involving the Department of Labor, state employment security

agencies, private sector organizations, and the state of Maryland. The

ITSC was created in 1994 to help states adopt more efficient, timely,

and cost-effective service for their unemployment service claimants.

• Labor provides technical assistance and training for state personnel, as

well as coordination and support for periodic program integrity

conferences. For example, for the last three years, Labor has

conducted at least 4 national training sessions focusing on the quality

of UI eligibility decisions, including payment accuracy.

• Labor requests funding for the states earmarked for program integrity

purposes. For example, in 2001, Labor allocated about $35 million for

states to improve benefit overpayment detection and collection,

eligibility reviews, and field tax audits.

Labor also plans to continue its program of offering competitive grants to

improve program integrity. For example, Labor awarded the state of

Maryland a competitive grant to develop a technical assistance guide on

methods for detecting overpayments. Similarly, Labor awarded California

a grant in 1998 to develop a guide on best practices for recovering

overpayments. In both cases, these guides were made available to all

states to help them improve the integrity of their UI programs by

identifying sources of information and methods that some states have

found to be effective.

To facilitate improved payment accuracy in the states’ UI programs, Labor

recently included an indicator in its Annual Performance Plan for FY 2003

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
Page 28 GAO-02-697 Unemployment Insurance Overpayments

dollars in overpayments in 2001 alone.39 In addition, Labor is working to

develop an agreement with the Social Security Administration that would

grant states access to the 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

and many states that does not adequately balance the need to quickly

process and pay UI claims with the need to control program payments.

While we recognize the importance of paying UI benefits to eligible

claimants 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

review suggest that, in this environment, the potential for errors and

overpayments is likely.

Labor is taking some positive steps to improve UI program integrity by

helping enhance existing state operations. 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

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 the needed changes in

their management philosophy and operations. States are also unlikely to

voluntarily increase their overpayment recovery efforts. As discussed in

this report, Labor already possesses some management and operational

tools to facilitate changes in the program. For example, with an increased

emphasis on payment accuracy, Labor’s system of performance measures

could help encourage states to place a higher priority on program integrity

activities. However, an effective strategy to help states control benefit

payments will 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. Labor could also play a

 39 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 29 GAO-02-697 Unemployment Insurance Overpayments

more active role in helping states obtain additional automated tools to

verify factors affecting claimants’ UI eligibility, such as identity,

employment status, and income, as well as ensuring that these tools are

actually used. Key to this is sustaining its efforts to expand state access to

SSA’s online database for verifying the accuracy of SSNs and developing

more efficient automated means to help states verify claimants’

employment status and any income they may be receiving in other states.

Also, Labor already possesses systems such as WRIS that, with some

modification, could potentially help states verify claimants’ eligibility

information in other states more efficiently. While implementing changes

to existing systems would likely entail some additional administrative

costs for Labor and the states, the results of this review and our prior

work in other programs suggests that the savings that result from

enhanced payment accuracy procedures (such as online access to

important data sources) and increased attention to preventing and

detecting overpayments could outweigh these costs. Finally, 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.

As currently designed and administered, the UI program remains

vulnerable to overpayments and fraud. This vulnerability extends to the

billions of dollars in additional federal funds recently distributed to the

states by Congress. Thus, 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.

To facilitate a change in Labor’s management approach that will help to

improve UI program integrity, we recommend that the Secretary of Labor

develop a management strategy to ensure that the UI program’s traditional

emphasis on quickly processing and paying UI claims is balanced with the

need for payment accuracy. Such a strategy should include the following

actions:

• Revise program performance measures to ensure increased emphasis

on payment accuracy.

• Use the annual administrative funding process or other funding

mechanisms to develop incentives and sanctions that will encourage

state compliance with payment accuracy performance measures.

Recommendations
Page 30 GAO-02-697 Unemployment Insurance Overpayments

• Use its quality assurance data more intensively to help states identify

internal policies and procedures that need to be changed to enhance

payment accuracy.

• Develop a plan to help states increase the proportion of UI

overpayments that are recovered each year.

• Study the potential for using the WRIS as an interstate eligibility

verification tool.

Labor generally agreed with our findings and our recommendations. In

particular, Labor agreed that existing performance measures emphasize

payment timeliness more heavily than payment accuracy, and noted that it

is currently in the process of reviewing these measures.

Labor also stated that our report does not sufficiently acknowledge the

challenges that are inherent in assuring payment accuracy and the current

and planned efforts by Labor and the states to address program integrity.

We believe that this report fairly characterizes the challenges that states

face in balancing the need to make timely payments with the need for

payment accuracy. In particular, the report acknowledges the fact that

some types of overpayments are more difficult for states to detect and

prevent than others, and therefore present additional challenges for states

in ensuring payment accuracy. We also list several initiatives that Labor

and the states are planning, or are currently implementing to enhance

payment accuracy in the UI program. In addition, Labor provided a

number of technical comments on our report, which we have incorporated

where appropriate.

Furthermore, Labor raised one issue in its comments that we believe

requires additional explanation. Labor questioned our assessment that it

has not fully utilized its quality assurance data to improve state operations.

Labor noted that it was responsible for the development of the

wage/benefit crossmatch system in the 1970s, and more recently has

promoted the states’ use of their state directory of new hires. While these

initiatives demonstrate areas where Labor has played a more active role in

facilitating the use of better verification tools, Labor’s response does not

directly address our finding that it is not systematically using its quality

assurance data to identify and correct vulnerabilities in states’ systems. As

our report notes, the overpayment rate estimated by the quality assurance

system has not significantly improved over the last 10 years. Thus, we

continue to believe that Labor and some of the states are not adequately

using the quality assurance data to address program policies and

Agency Comments

and Our Evaluation
Page 31 GAO-02-697 Unemployment Insurance Overpayments

procedures that allow overpayments to occur. The entire text of Labor’s

comments appears in appendix II.

We are sending copies of this report to the Secretary of Labor, the

Assistant Secretary of Employment and Training, and other interested

parties. Copies will be made available to others upon request. This report

is also available at no charge on GAO’s homepage at http://www.gao.gov.

If you have any questions concerning this report please contact me at

(202) 512-7215, or Daniel Bertoni at (202) 512-5988. Other major

contributors are listed in appendix III.

Sincerely yours,

Sigurd R. Nilsen

Director, Education, Workforce,

 and Income Security Issues
Appendix I: Categories of Overpayments Estimated by Labor’s Quality Assurance System

(U.S. Totals for 2001)

Page 32 GAO-02-697 Unemployment Insurance Overpayments

In its Employment and Training Handbooks 301 and 395, the Department of Labor

provides guidance on six general categories of overpayments: Benefit Year Earnings,

Base Period Wages, Separation Issues, Eligibility Issues, Dependent Issues, and Other

Causes. These categories can be divided into various subcategories to provide more

detailed information on the causes of overpayments in the UI program. (See table 3)

Table 3: Categories of Overpayments Estimated by Labor’s Quality Assurance System (U.S. Totals for 2001)

Dollars in millions

Categories of overpaymentsa

Fraud Nonfraud

Total

overpaymentb

Percent of total

overpayments

Eligibility Issues—claimant was not eligible for UI benefitsc-- - -

Not Able or Available to Work $32.7 $134.2 $166.8 6.8

Not Actively Searching for a Job 30.6 342.8 373.4 15.2

Illegal Alien 13.3 16.6 29.9 1.2

Not Enrolled for Employment Services as Required by

State Law

 1.2 214.1 215.3 8.8

Other Types of Eligibility Issues 28.3 49.6 77.9 3.2

Benefit Year Earnings—overpayments due to erroneously

reported or unreported earnings

325.0 374.7 699.8 28.6

Severance/Vacation Pay 0.2 29.6 29.8 1.2

Social Security 1.4 33.5 34.9 1.4

Separation Issues (other)—claimant became unemployed

for reasons not covered by state or federal law for receipt

of UI benefits, including being discharged

26.6 153.4 180.1 7.3

Voluntary Quit 99.6 232.7 332.3 13.6

Base Period Wages—errors in reporting/recording wages

or amount of work

10.2 190.3 200.5 8.2

Dependent Issues—erroneous reporting/recording of

dependents’ information

 0. 2 24.6 24.8 1.0

Other Causes—such as benefits paid during a period of

disqualification or reversal of benefits due to an appeals

decision

 8.1 77.3 85.4 3.5

Total overpaymentsc$577.4 $1,873.5 $2,450.9 100

a

Main overpayment categories and their subcategories are mutually exclusive (where applicable) as presented here

for purposes of calculating total overpayments.

b

Totals may not add due to rounding.

c

Total overpayment figures do not include data from Colorado and Puerto Rico.

Source: Department of Labor’s quality assurance data (2001).

Appendix I: Categories of Overpayments

Estimated by Labor’s Quality Assurance

System (U.S. Totals for 2001)
Appendix II: Comments from the Department

of Labor

Page 33 GAO-02-697 Unemployment Insurance Overpayments

Appendix II: Comments from the Department

of Labor
Appendix II: Comments from the Department

of Labor

Page 34 GAO-02-697 Unemployment Insurance Overpayments
Appendix II: Comments from the Department

of Labor

Page 35 GAO-02-697 Unemployment Insurance Overpayments
Appendix II: Comments from the Department

of Labor

Page 36 GAO-02-697 Unemployment Insurance Overpayments
Appendix II: Comments from the Department

of Labor

Page 37 GAO-02-697 Unemployment Insurance Overpayments
Appendix II: Comments from the Department

of Labor

Page 38 GAO-02-697 Unemployment Insurance Overpayments
Appendix II: Comments from the Department

of Labor

Page 39 GAO-02-697 Unemployment Insurance Overpayments
Appendix III: GAO Contacts and Staff

Acknowledgments

Page 40 GAO-02-697 Unemployment Insurance Overpayments

Sigurd R. Nilsen, Director, (202) 512-7215

Daniel Bertoni, Assistant Director, (202) 512-5988

Jeremy D. Cox, Analyst-in-Charge, (202) 512-5717

In addition to those named above, Richard Burkard, Cheryn Powell, Frank

Putallaz, Daniel Schwimer, John Smale, and Salvatore Sorbello made key

contributions to this report.

Appendix III: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Staff

Acknowledgments
Related GAO Products

Page 41 GAO-02-697 Unemployment Insurance Overpayments

Workforce Investment Act: Improvements Needed in Performance

Measures to Provide a More Accurate Picture of WIA’s Effectiveness.

GAO-02-275. Washington, D.C.: February 1, 2002.

Strategies to Manage Improper Payments: Learning from Public and

Private Sector Organizations. GAO-02-69G. Washington, D.C.: October

2001.

Department of Labor: Status of Achieving Key Outcomes and Addressing

Major Management Challenges. GAO-01-779. Washington, D.C.: June 15,

2001.

Unemployment Insurance: Role as Safety Net for Low-Wage Workers is

Limited. GAO-01-181. Washington, D.C.: December 29, 2000.

Benefit and Loan Programs: Improved Data Sharing Could Enhance

Program Integrity. GAO/HEHS-00-119. Washington, D.C.: September 13,

2000.

Supplemental Security Income: Action Needed on Long-Standing

Problems Affecting Program Integrity. GAO/HEHS-98-158. Washington,

D.C.: September 14, 1998.

Supplemental Security Income: Opportunities Exist for Improving

Payment Accuracy. GAO/HEHS-98-75. Washington, D.C.: March 27, 1998.

Supplemental Security Income: Administrative and Program Savings

Possible by Directly Accessing State Data. GAO/HEHS-96-163.

Washington, D.C.: August 29, 1996.

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