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82–682 2002

UNEMPLOYMENT FRAUD AND ABUSE

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JUNE 11, 2002

Serial No. 107–82

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

WES WATKINS, Oklahoma 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

WILLIAM J. COYNE, Pennsylvania 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

KAREN L. THURMAN, Florida 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

Allison Giles, Chief of Staff 

Janice Mays, Minority Chief Counsel 

SUBCOMMITTEE ON HUMAN RESOURCES

WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut 

WES WATKINS, Oklahoma 

SCOTT MCINNIS, Colorado 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

PHIL ENGLISH, Pennsylvania 

RON LEWIS, Kentucky 

BENJAMIN L. CARDIN, Maryland 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

LLOYD DOGGETT, Texas

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii

C O N T E N T S 

Page 

Advisories announcing the hearing ........................................................................ 2, 3

WITNESSES 

U.S. Department of Labor, Hon. D. Cameron Findlay, Deputy Secretary, 

accompanied by Emily Stover DeRocco, Assistant Secretary, Employment 

and Training Administration .............................................................................. 7

U.S. General Accounting Office, Sigurd R. Nilsen, Ph.D., Director, Education, 

Workforce, and Income Security Issues ............................................................. 27

U.S. Department of Labor, Hon. Gordon S. Heddell, Inspector General, Office 

of Inspector General ............................................................................................. 40

Illinois Department of Employment Security, Miles Paris .................................. 52

On Point Technology, Inc., Michael Lorsbach ....................................................... 54

Woodbury, Stephen A., W.E. Upjohn Institute for Employment Research, 

and Michigan State University ........................................................................... 46

SUBMISSION FOR THE RECORD 

Revenue Plus, Vancouver, WA, Tim Rogers .......................................................... 72

(1)

UNEMPLOYMENT FRAUD AND ABUSE 

TUESDAY, JUNE 11, 2002

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HUMAN RESOURCES, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 4:02 p.m., in room 

B–318 Rayburn House Office Building, Hon. Wally Herger (Chairman of the Subcommittee) presiding. 

[The advisory and revised advisory announcing the hearing follow:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HUMAN RESOURCES

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1025

June 4, 2002

No. HR–15

Herger Announces Hearing on Unemployment 

Fraud and Abuse 

Congressman Wally Herger (R–CA), Chairman, Subcommittee on Human Resources of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on efforts to reduce fraud and abuse of the Nation’s 

Unemployment Compensation (UC) system. The hearing will take place on 

Tuesday, June 11, 2002, in room B–318 Rayburn House Office Building, beginning at 2:00 p.m.

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Witnesses will include representatives 

of the U.S. Department of Labor, U.S. General Accounting Office, U.S. Department 

of Labor Office of the Inspector General, and other UC fraud and abuse experts. 

However, any individual or organization not scheduled for an oral appearance may 

submit a written statement for consideration by the Committee and for inclusion in 

the printed record of the hearing.

BACKGROUND:

The UC program provides benefits to unemployed workers who have a history of 

employment. Within a broad Federal framework, each State designs its own benefits 

program and imposes taxes on employers to pay for regular UC benefits. A separate 

Federal tax is imposed on employers to fund the Federal responsibilities under the 

system, including support of administrative expenses, loans to States, and the Federal half of extended benefits for certain workers. In fiscal year 2002, the U.S. Department of Labor projects that 11.8 million laid-off workers will receive UC benefits for an average of 15.5 weeks. With an average weekly benefit amount of $244, 

more than $44 billion in benefits will be paid.

Despite the size and expense of the UC program, in recent years program integrity activities have received relatively little Federal attention. Several factors—including State funding of regular benefits, perceived Federal underfunding of antifraud and related administrative activities, and a strong economy—are often cited 

as reasons. Congress recently addressed one concern through the passage of legislation providing additional Federal funds to States, which may be used for additional 

program integrity activities, among other purposes. As signed into law on March 22, 

2002, this legislation (P.L. 107–147) provided for the immediate distribution of $8 

billion in surplus Federal UC funds to States, among other provisions.

In announcing the hearing, Chairman Herger stated: ‘‘During the recent economic 

slowdown, the Nation’s Unemployment Compensation program has been an important safety net for millions of hard-working Americans who lost their jobs. Congress 

recently strengthened that safety net by providing up to an additional 13 weeks of 

unemployment benefits nationwide. While we provide benefits to millions of unemployed American workers and their families, we also have oversight responsibilities 

to ensure benefits are going to the right people. That’s part of the reason we also 

provided States an additional $8 billion in Federal funds to support anti-fraud efforts, among other purposes. This hearing will review current anti-fraud efforts and 

additional measures to better ensure program integrity.’’

FOCUS OF THE HEARING:

The hearing will focus on waste, fraud, and abuse involving UC benefits and consider additional measures to better ensure program integrity.

3

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Due to the change in House mail policy, any person or organization 

wishing to submit a written statement for the printed record of the hearing should 

send it electronically to hearingclerks.waysandmeans@mail.house.gov, along with a 

fax copy to (202) 225–2610, by the close of business, Tuesday, June 25, 2002. Those 

filing written statements who wish to have their statements distributed to the press 

and interested public at the hearing should deliver their 200 copies to the Subcommittee on Human Resources in room B–317 Rayburn House Office Building, in 

an open and searchable package 48 hours before the hearing. The U.S. Capitol Police will refuse sealed-packaged deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement 

or exhibit submitted for the printed record or any written comments in response to a request 

for written comments must conform to the guidelines listed below. Any statement or exhibit not 

in compliance with these guidelines will not be printed, but will be maintained in the Committee 

files for review and use by the Committee.

1. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along 

with a fax copy to (202) 225–2610, in Word Perfect or MS Word format and MUST NOT exceed 

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely 

on electronic submissions for printing the official hearing record.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee.

3. Any statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness.

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov/.

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call (202) 225–1721 or (202) 

226–3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

* * * NOTICE—CHANGE IN TIME * * *

f ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HUMAN RESOURCES 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1025

June 6, 2002

No. HR–15–Revised 

Change in Time for Subcommittee Hearing on 

Unemployment Fraud and Abuse 

Congressman Wally Herger (R–CA), Chairman, Subcommittee on Human Resources, Committee on Ways and Means, today announced that the Subcommittee 

hearing on efforts to reduce fraud and abuse of the Nation’s Unemployment Compensation system scheduled for Tuesday, June 11, 2002, at 2:00 p.m., in room B–

318 Rayburn House Office Building, will be held instead at 4:00 p.m.

All other details for the hearing remain the same. (See Subcommittee Advisory 

No. HR–15, dated June 4, 2002.)

f4

Chairman HERGER. Good afternoon and welcome to today’s 

hearing on fraud and abuse in the Nation’s unemployment compensation (UC) program. 

As we all know, unemployment benefits provide a much-needed 

safety net to millions of hardworking Americans, especially in 

tough economic times like we have seen in the past year. This year 

alone, nearly 12 million laid-off workers will receive an estimated 

$44 billion in unemployment benefits. That is twice what we spend 

on cash welfare every year, and with far less fanfare. 

Recently, we expanded the unemployment safety net by providing up to 13 additional weeks of unemployment benefits nationwide. In a number of States with particularly high unemployment, 

we made benefits available even longer to help families that were 

hardest hit. Already, an estimated 1.4 million workers are receiving these extended benefits. 

Providing this extra help in tough times is part of our job, and 

Congress and the Administration have certainly answered the call 

this year. We also have a responsibility to make sure these funds 

are well spent and are going to intended recipients who earn their 

displaced worker benefits. Unfortunately, that does not always 

happen. 

For example, the U.S. General Accounting Office (GAO), citing 

U.S. Department of Labor (DOL) statistics, will describe how last 

year, $2.4 billion in unemployment benefit overpayments occurred. 

Over the past 10 years, overpayments averaged $1.8 billion per 

year, or a whopping $18 billion in misspent funds over that period. 

These staggering numbers reflect just the overpayments we know 

about. We can be sure more are out there waiting to be uncovered 

through better oversight. 

Specific examples of abuse already uncovered are troubling. For 

example, GAO notes that in just four States, almost 3,000 fraudulent unemployment benefit claims totaling about $3.2 million were 

paid to individuals using Social Security numbers that did not exist 

or belonged to deceased individuals. 

Further investigation by GAO identified nine Social Security 

numbers being used by approximately 700 individuals as proof of 

eligibility for employment. Seven of the Social Security numbers 

belonged to deceased individuals, and apparently the individuals 

involved are illegal aliens. 

Misused unemployment program funds represent taxes paid by 

employers and constitute lost wages for all employees. Everyone 

loses when unemployment benefits are the subject of fraud and 

abuse. 

In the law extending unemployment benefits this year, we also 

provided States with tremendous new resources, a total of $8 billion. These surplus Federal unemployment funds can pay for new 

benefits or be used to improve anti-fraud and other program integrity efforts. While many States are still deciding how to use these 

new resources, we will highlight that strengthening program integrity is one smart use that benefits taxpayers, workers, and beneficiaries alike. 

5

We thank all of our witnesses for joining us today to review current anti-fraud efforts and how we can improve the system so that 

it best serves American workers. 

Without objection, each Member will have the opportunity to 

submit a written statement and have it included in the record at 

this point. Mr. Cardin, would you like to make an opening statement? 

[The opening statement of Chairman Herger follows:]

Opening Statement of the Hon. Wally Herger, a Representative in Congress 

from the Sate of California, and Chairman 

Good afternoon and welcome to today’s hearing on fraud and abuse in the nation’s 

unemployment compensation program. 

As we all know, unemployment benefits provide a much needed safety net to millions of hardworking Americans, especially in tough economic times like we’ve seen 

in the past year. This year alone, nearly 12 million laid off workers will receive an 

estimated $44 billion in unemployment benefits. That’s twice what we spend on cash 

welfare every year, and with far less fanfare. 

Recently, we expanded the unemployment benefits safety net by providing up to 

13 additional weeks of unemployment benefits nationwide. In a number of States 

with particularly high unemployment, we made benefits available even longer to 

help families that were hardest hit. Already an estimated 1.4 million workers are 

receiving these extended benefits. 

Providing this extra help in tough times is part of our job, and Congress and the 

Administration have certainly answered the call this year. But we also have a responsibility to make sure these funds are well spent, and are going to intended recipients who worked to earn their displaced worker benefits. 

Unfortunately, that doesn’t always happen. 

The General Accounting Office, citing Department of Labor statistics, will describe 

how last year $2.4 billion in unemployment benefit overpayments occurred. Over the 

past ten years, overpayments averaged $1.8 billion per year or a whopping $18 billion in misspent funds over that period. And these staggering numbers reflect just 

the overpayments we know about. We can be sure more are out there waiting to 

be uncovered through better oversight. 

Specific examples of abuses already uncovered are troubling. For example, GAO 

notes in their testimony that in just 4 States, almost 3,000 fraudulent unemployment benefit claims totaling about $3.2 million were paid to individuals using Social 

Security numbers that did not exist or belonged to deceased individuals. 

Further investigation by GAO identified nine Social Security numbers being used 

by approximately 700 individuals as proof of eligibility for employment. Seven of the 

Social Security numbers belonged to deceased individuals and apparently the individuals involved are illegal aliens. 

Misused unemployment program funds represent taxes paid by employers, and 

constitute lost wages for all employees. Everyone loses when unemployment benefits 

are the subject of fraud and abuse. 

In the law extending unemployment benefits this year, we also provided States 

with tremendous new resources—a total of $8 billion. These surplus Federal unemployment funds can pay for new benefits or be used to improve anti-fraud and other 

program integrity efforts. While many States are still deciding how to use these new 

resources, we will highlight that strengthening program integrity is one smart use 

that benefits taxpayers, workers, and beneficiaries alike. 

We thank all of our witnesses for joining us today to review current anti-fraud 

looking forward to our witnesses today. Obviously, any time that 

efforts and how we can improve the system so that it best serves American workers.

Mr. CARDIN. Thank you, Mr. Chairman. Let me join you in 

f Unemployment Insurance (UI) funds are used for purposes that are 

not permitted under the law, we want to join you in any type of 

corrections for fraud and abuse. 

Mr. Chairman, let me tell you that there are many ways that we 

think we should be looking at and focusing our attention on, 

whether the Unemployment Insurance funds that are collected or 

6

should be collected are used for their rightful purposes. Clearly, 

fraud and abuse among beneficiaries is wrong. We need to make 

sure that our States have the adequate tools in order to deal with 

that. 

Let me just also point out that an individual who is entitled to 

Unemployment Insurance benefits who is denied benefits, that is 

also an area that we need to take a look at. 

You mentioned that we have a report from, I believe you said 

GAO, that indicates that those that are using wrongful Social Security numbers amount to about $3.2 million annually. Well, we 

know in 1998, there were $600 million of benefits that should have 

been paid that were not paid under the Unemployment Insurance 

law because claimants did not have the adequate information presented mainly through their employers in order to get these benefits. 

So, I think we need to take a look at not just the fraud and abuse 

on the beneficiary side, but also the mistakes that are being made 

on the employers’ side to make sure that the right benefits are 

being paid under law. 

Let me also indicate that fraud and abuse can take place on the 

revenue side. Employers are supposed to submit the revenues, the 

Unemployment Insurance funds, for their workers. We know that 

there is misclassification of certain employees as independent contractors. I think that is another area that we need to take a look, 

to make sure that we are collecting the appropriate revenues under 

the Unemployment Insurance funds. 

Lastly, let me point out that I think any hearing today, at this 

time, taking place on Unemployment Insurance benefits has to 

take a look at the long-term unemployed Americans. We have 

many people who are reaching the end of their extended benefits 

that we recently passed. We need to take a look to make sure that 

those people who are unemployed, who are unable to find unemployment because of the state of our economy, are protected under 

the safety net that you mentioned in your opening statement. I 

would hope that at this hearing we will also have an opportunity 

to take a look to see whether that is working the way Congress intended. 

Thank you very much, Mr. Chairman. 

[The opening statement of Mr. Cardin follows:]

Opening Statement of the Hon. Benjamin L. Cardin, a Representative in 

Congress from the State of Maryland 

Mr. Chairman, I look forward to hearing our witnesses’ suggestions on reducing 

fraud and improving the administration of the unemployment insurance system. If 

people are receiving benefits that they are not entitled to, then we should take all 

necessary steps to address any potential fraud. 

However, in evaluating program integrity, we must remember that benefits are 

sometimes denied inappropriately, just as they are sometimes paid inappropriately. 

For example, a recent study found that roughly $600 million in unemployment insurance benefits were wrongfully denied in fiscal year 1998.

Sometimes employers provided inaccurate information regarding an applicant’s 

wages and other times the local unemployment agency made errors in assessing an 

individual’s eligibility. The report, which we will hear about later today, suggests 

that very few of the wrongfully denied claims resulted from errors made by applicants. 

7

This committee needs to know how the Department of Labor is responding to that 

analysis so we can ensure that jobless Americans are receiving the benefits to which 

they are entitled. 

We also need to recognize that fraud can occur on the revenue side of the unemployment system as well as on the payment side. If UI taxes are not paid when due, 

the system will become under-funded. One area of particular concern pointed out 

by a recent report commissioned by the Department of Labor is the misclassification 

of certain employees as independent contractors, for whom employers do not pay unemployment taxes. Mr. Chairman, let me conclude by mentioning the fact that the 

13-week extension of unemployment benefits that we passed in March just expired 

for those jobless workers who first filed for the extension. The Federal legislation 

included a potential 2nd round of extended unemployment benefits, but very few 

States will qualify for that second 13 weeks. 

I hope any discussion of additional UI reforms will consider the fate of those longterm unemployed Americans who are still looking for work, especially since the 

number of workers who have been unemployed for six months or longer has tripled 

over the last year. I also strongly believe that we should address barriers to lowwage and part-time workers receiving unemployment benefits. 

Thank you.

Chairman HERGER. Thank you, Mr. Cardin. 

Before we move to our testimony, I want to remind our witnesses 

f to limit their oral statements to 5 minutes. However, without objection, all of the written testimony will be made a part of the permanent record. 

For our first witness today, we are honored to have the Honorable D. Cameron Findlay, Deputy Secretary of the U.S. Department of Labor, accompanied by the Honorable Emily Stover 

DeRocco, Assistant Secretary, Employment and Training Administration (ETA) for the U.S. Department of Labor. Thank you so 

much. With that, if you would testify, please. 

STATEMENT OF HON. D. CAMERON FINDLAY, DEPUTY SECRETARY, U.S. DEPARTMENT OF LABOR, ACCOMPANIED BY 

HON. EMILY STOVER DEROCCO, ASSISTANT SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION 

Mr. FINDLAY. Thank you, Mr. Chairman and Ranking Member 

Cardin. I am very happy to appear before you today to discuss the 

ways in which we are trying to reduce overpayments and fraud in 

the Unemployment Insurance system. 

I ask that my written testimony be included in the record, but 

I will just summarize for you all a few of the key points. 

Obviously, as you said, the Unemployment Insurance system is 

the key to the economic security of our Nation. To carry out the 

vital mission of this program, it is essential that benefits are paid 

properly to eligible workers and that systems are in place to minimize overpayments, fraud, and abuse. As you probably know, improving financial management is a major initiative within the 

President’s management agenda. I heard the same numbers that 

the Chairman quoted a few minutes ago, and they sounded very 

high to me, as well. So, a few months ago, I convened a task force 

within the U.S. Department of Labor to begin getting at the problem of overpayments. I would like to share with you today some of 

the solutions we are pursuing. 

At the outset, it is important to define the problem we are talking about and to recognize that there are different categories of 

overpayments. According to data from our Employment and Training Administration for 2001, 8.2 percent of all unemployment beneVerDate Dec 13 2002 02:57 Jan 04, 2003 Jkt 082682 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\C682A.XXX C682A
8

fits, for a total of $2.45 billion, are classified as overpayments. This 

total can really be broken down into four categories. First, approximately $385 million can be attributed to what we 

call technical eligibility issues, for instance, payments made to individuals who did not adequately document their job search, but 

were actually searching for jobs and otherwise meet the eligibility 

requirements. Second, $120 million of the total can be attributed to overpayments made in the absence of fraud, but which the State agency 

affirmatively chooses not to recover. For example, if an employer 

inadvertently overstates the income of an employee and the claimant is not at fault, many States elect not to recover this sort of 

overpayment. Third, $1.37 billion of the total can be classified as non-fraud 

overpayments that are potentially recoverable. Finally, $580 million can be attributed to fraud or abuse within 

the system. 

While integrity of the program has been a longstanding priority 

of the DOL, as this Committee knows, much of the work to ensure 

integrity must be done by the States, which have primary responsibility for administering the UI program. States already carry out 

benefit payment control activities to identify and collect UI overpayments, such as cross-matching information within various computer databases. In 2001, States were able to use these sorts of 

cross-matches to establish for recovery some $227 million. While 

this is a significant figure, it is not large enough, and the DOL is 

working with States to enhance their computer cross-matching capabilities to increase even further the identification and collection 

of overpayments. 

Cross-matching UI benefit records with existing State new hire 

directories provides a much quicker determination that claimants 

have gone back to work, thus preventing claimants who do find 

work from continuing to claim benefits. The 1996 welfare reform 

legislation required employers to report all new employees within 

20 days of the date of hire. The new hire directories thus provide 

more real-time hiring data, and the DOL is actively encouraging 

States to use these directories. However, currently, only one-half of 

the States are doing so. 

The DOL is also seeking legislation to provide access for State 

UI agencies to the National Directory of New Hires, which will permit States to find claimants who work in other States or who work 

for employers that report their hires in other States. We would like 

to thank the Committee for including such legislation in the Temporary Assistance for Needy Families (TANF) reauthorization bill 

that recently passed the full House. 

Another promising cross-matching opportunity involves Social 

Security data. The DOL is working to implement a data exchange 

system that will allow States to verify Social Security numbers 

during the initial claims process, which will, in turn, lead to a reduction of fraudulent claims filed with false identification. 

Given the promise that all these sorts of data-matching holds, 

the Administration has requested $10 million in the fiscal year 

2003 budget to help States gain access to all data that can improve 

the detection and recovery of UI overpayments. I might say that is 

9

about a 28-percent increase over the past few years in terms of the 

amount of money we are devoting to integrity. 

The DOL is also sponsoring in 2003, a National Integrity Conference with the National Association of State Workforce Agencies, 

to exchange best practices and help States do their job. In addition to this $10 million request, enactment of the Tem- porary Emergency Unemployment Compensation Act provided $8 

billion in Reed Act funds to the States. This legislation provided 

States with substantial funds they can use for their integrity efforts, and we have certainly suggested to States they ought to use 

the Reed Act funds in that way. 

Finally, we have proposed a major reform of the UI program in 

the President’s budget that would enhance the incentive for States 

to devote the proper attention to overpayments. If States understand how their administrative expenditures pay off in collecting 

overpayments, they may increase such expenditures. Currently, 

their administrative moneys are essentially constrained by Federal 

contributions. 

Mr. Chairman and Members of the Subcommittee, I hope we 

have provided you with a good picture of the scope of the problem 

and of our efforts to combat it. I would be pleased to answer any 

questions you might have. 

[The prepared statement of Mr. Findlay follows:]

Statement of the Hon. D. Cameron Findlay, Deputy Secretary,

U.S. Department of Labor 

Mr. Chairman and distinguished Members of the Subcommittee, I appreciate the 

opportunity to appear before you today to discuss federal and state efforts to reduce 

overpayments, fraud, and abuse in our nation’s Unemployment Insurance (UI) benefit payment program. 

The UI program is key to the economic security of our nation. As the primary 

source of temporary, partial wage replacement for workers laid off and seeking jobs, 

UI is an important stabilizer during economic downturns. About 3.4 million workers 

currently are claiming regular UI benefits—a 30% increase over this time in 2001 

and a 90% increase over this time in 2000. An additional 1.4 million workers currently are claiming temporary extended unemployment compensation pursuant to 

the 13-week UI program extension enacted by Congress on March 8, 2002. 

To maintain the vital mission of the UI program, it is essential that benefits are 

paid promptly to eligible workers and that integrity systems are in place to minimize overpayments, fraud, and abuse. As you probably know, improving financial 

management is a major initiative within the President’s Management Agenda 

(PMA), the President’s plan to improve government performance and efficiency. 

Under the PMA, the Office of Management and Budget has identified UI overpayments as one of the Department of Labor’s primary financial management challenges. As a member of the President’s Management Council, I am charged with implementing the PMA at the Department of Labor, and I personally take this UI 

issue very seriously. I have convened a task force comprised of, among other individuals, officials from the Employment and Training Administration, or ETA, our agency that administers the UI program, and our Office of Chief Financial Officer, to 

develop a plan to address this issue. I am pleased to share with you today some 

of the solutions that we currently are pursuing. 

Overpayments, Fraud, and Abuse: An Overview

At the outset, it is important to define the scope of this problem and to recognize 

that there are different categories of UI overpayments, each of which calls for a different response. According to ETA’s Benefit Accuracy Measurement (BAM) data for 

calendar year 2001, 8.2% of all unemployment benefits, or a total of $2.45 billion, 

are classified as overpayments. Of this $2.45 billion, approximately $385 million can 

be attributed to technical eligibility issues, primarily meeting a State’s work search 

requirements. In other words, many UI payments, while technically ‘‘overpayments’’

10

under current state eligibility definitions within the UI program, are made to individuals who failed to meet certain technical eligibility requirements but otherwise 

meet the primary UI eligibility requirements of being unemployed through no fault 

of their own and wanting to work. For instance, a payment made to a claimant who 

failed to maintain sufficient documentation concerning his ongoing work search requirements would be considered an ‘‘overpayment’’ under the BAM program. States, 

however, would not necessarily seek recovery of such an overpayment. An additional $120 million of the $2.45 billion in total UI overpayments for 2001 

can be attributed to overpayments made in the absence of fraud or abuse which the 

State agency chooses not to recover. For example, an employer may inadvertently 

overstate quarterly wages, resulting in an impermissibly large UI payment made to 

a claimant. Because there is no fault on the part of the individual claimant in such 

an instance, many states would not attempt to recover such an overpayment. $1.37 

billion of the $2.45 billion in total overpayments are classified as nonfraud overpayments that are recoverable. These include cases such as where an initial finding of 

eligibility is reversed following an employer’s appeal, and where a claimant has erroneously reported earnings. Finally, $580 million of the $2.45 billion in total UI overpayments for 2001, or 

1.9% of total UI payments for that year, was attributable to fraud or abuse within 

the UI program. By any standard, these figures add up to a lot of money. That is 

why the Department of Labor has been hard at work on the problem. 

New Initiatives To Address the UI Overpayment Problem 

Integrity of the UI program is a priority for the Department of Labor and the Administration. However, much of the work to ensure that integrity must be done by 

the states, which, as you know, actually administer the UI program. States already 

carry out various Benefit Payment Control activities to identify and collect UI overpayments, such as cross-matching information within various computer databases. 

In 2001, states used various computer cross-matches to establish for recovery as UI 

overpayments some $227 million—or about 32% of the total established for recovery 

that year. While this is a significant figure, the Department is encouraging states 

to enhance their computer cross-matching capabilities to increase even further the 

identification and collection of UI overpayments. 

Let me give you some examples of how cross-matching improves the detection and 

collection of UI overpayments. The largest single cause of UI overpayments involves 

individuals who are collecting UI benefits while working. Indeed, approximately 

31% of the overall BAM estimate of overpayments in 2001 was due to such individuals. Because UI wage records are reported quarterly, there is a significant lag period before these types of overpayments can be identified via the traditional wage/

benefits cross-match. UI overpayments are often the result. 

Cross-matching UI benefit records with new-hire directories offers a promising opportunity to reduce this lag period, thus preventing claimants who find work from 

continuing to claim UI benefits. The Personal Responsibility and Work Opportunity 

Reconciliation Act of 1996 (PRWORA) required the development of such new-hire directories for the purpose of locating parents delinquent in child support payments. 

Under this statute, employers are required to report all new employees within as 

few as 20 days of the date of hire. In addition, PRWORA permits states to access 

their new-hire directories for UI purposes. Because of its usefulness in UI overpayment prevention and detection, the Department is actively promoting the use of 

new-hire directories by all states. However, currently, only about half of the states 

are utilizing these directories. I pledge to this Subcommittee that the Department 

will redouble its efforts in the future so that more states will take advantage of this 

important tool. 

As you know, some claimants find work out-of-state or work for multi-state employers that report employment and wages to a different state. The Department is 

working to prevent abuses of such systems, which could include allowing state UI 

agencies access to information in the National Directory of New Hires. Any action 

would be done in a way that protects personal information. We commend the Committee for including such access in the Temporary Assistance for Needy Families reauthorization bill (HR 4737). 

Another promising cross-matching opportunity involves Social Security data. 

States recently have implemented systems to take UI claims over the telephone and 

Internet. While these innovations have enabled states to handle significant increases in claims volume, states now need new tools to verify the identities of claimants filing electronically. The Department is working to implement a data exchange 

system that will give states access to Social Security Administration data during the 

initial claims process. This system will lead to a reduction of fraudulent claims filed 

with false identification. The Social Security Administration will also benefit by havVerDate Dec 13 2002 02:57 Jan 04, 2003 Jkt 082682 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 E:\HR\OC\C682A.XXX C682A
11

ing access to benefit information that will help reduce overpayments within the Supplemental Security Income program. 

Given the promise that data cross-matching holds, the Administration has requested $10 million in the FY 2003 budget to help states gain access to all data 

that can improve the detection and recovery of UI overpayments. Also, recognizing 

the need to emphasize the problem and promote best practices, the Department in 

2003 will sponsor a national integrity conference with the National Association of 

State Workforce Agencies to identify and disseminate successful practices, studies, 

and integrity information. 

The Department will develop a new operational definition of UI overpayments and 

set a new Government Performance and Results Act (GPRA) goal for addressing 

overpayments. We are working to develop a definition of overpayments that is comparable among states and covers most recoverable overpayments. This new definition will more accurately describe UI overpayments by recognizing those errors that 

are technical in nature (e.g., based on insufficient documentation of work search) 

and excluding those overpayments that are non-detectable on a cost-effective basis. 

This is not an attempt to redefine the problem out of existence, but rather to recognize that, as I explained earlier, a significant portion of UI payments technically 

considered ‘‘overpayments’’ under current program definitions is being paid to claimants who meet the primary UI eligibility requirements. 

Finally, we have proposed a major reform of the UI program in the President’s 

budget that shifts responsibility for funding the administration of the program from 

the federal government to the states. Since UI is paid based on state law, states 

are in a better position to determine costs of running the program to reduce overpayments, fraud, and abuse. Also, insufficient funding for state administration in 

the past has caused states to reduce their integrity activities, because they are unable to reduce their core activities of paying benefits and collecting taxes and wage 

records. States will have a strong incentive to address overpayments, fraud, and 

abuse under this new system, as state funds spent on reducing abuse may result 

in savings in state funds used for benefit payments. 

Funding for These Initiatives

In addition to the $10 million request noted previously, enactment of the Temporary Emergency Unemployment Compensation Act—and the resulting $8 billion 

‘‘Reed Act’’ distribution of federal unemployment funds to states—has provided 

states with substantial funds that may be used to make UI program improvements, 

including implementing initiatives that address UI overpayment, fraud, and abuse. 

The Department of Labor has suggested that states consider using these Reed Act 

funds for, among other purposes, improving UI claims filing and payment methods 

and reducing UI overpayment, fraud, and abuse. 

The initiatives described above can be developed and implemented with these 

Reed Act funds. Using these funds for these initiatives requires an appropriation by 

each state legislature. Some states already have appropriated Reed Act funds to pay 

for technology and system upgrades, and we will encourage other states to do so. 

Conclusion

Mr. Chairman and Members of the Subcommittee, I trust that we have provided 

you with a clear picture of the scope of the UI overpayment problem and the Department of Labor’s efforts to work with the states to address this important problem. We appreciate your longstanding commitment to the integrity of the UI program, and we request your continued support in our ongoing efforts to minimize 

overpayments, fraud, and abuse within the UI program. Thank you for the opportunity to testify today. I will be pleased to answer any questions that you may have 

about my Department’s efforts to reduce overpayments, fraud, and abuse in the UI 

the gentleman from Louisiana, Mr. McCrery, to inquire. 

program.

Chairman HERGER. Thank you very much, Mr. Findlay. Now, 

f Mr. MCCRERY. Thank you, Mr. Chairman. 

Mr. Findlay, as you probably know, this Subcommittee has been 

very active in trying to ferret fraud and abuse in a number of programs. One of those that we pay particular attention to at the behest of the GAO is Supplemental Security Income (SSI). The GAO 

12

has said for a number of years that the SSI Program has a high 

risk of fraud and abuse, so we have focused on that. I am going 

to read to you a number of things that we have done in the SSI 

Program to try to prevent fraud and abuse. I would like, when I 

conclude, for you to tell me if the States are doing any of these 

kinds of things to prevent fraud and abuse in the UI system. 

For SSI, for example, we have tried to ensure that prisoners do 

not receive benefits by creating a bounty system, rewarding prisons 

for reporting their inmate rosters for comparison with SSI rolls. We 

have barred fugitive felons and probation and parole violators from 

receiving benefits, and providing information sharing to make this 

effective. 

We encourage death matches to ensure benefits stop when individuals die or that others are not claiming benefits based on a deceased person’s records; denying benefits for 10 years for those who 

claim benefits in more than one State, offsetting Federal income 

tax refunds or other benefits to recover overpayments, providing for 

enhanced recovery of overpayments, and mandating recovery of 

overpayments for those who commit fraud. In other words, no hardship waivers for those who commit fraud. 

Creating penalties for false and misleading statements made in 

the attempt to claim benefits. Restricting eligibility of non-citizens. 

For UI, for example, there are some who are here who are not eligible to work. Are we making sure that those who work illegally then 

do not get hired or lose their job and claim UI benefits? 

Encouraging information sharing between Federal and State 

agencies charged with administering benefits or that have information that could better ensure the right people are getting the right 

benefits. 

Are the States doing any of these kinds of things to try to prevent fraud and abuse? Is your DOL cooperating with the States to 

try to do some of these kinds of things? 

Mr. FINDLAY. Whether States are doing each one of those 

things, I think we would have to get back to you in writing, but 

let me say this. 

The measures relating to prisoners, while extremely effective in 

the SSI context, may be less important in this context, Congressman. The reason is that by its very nature, our program usually 

runs out after 13 weeks, and so by the time an individual is in prison, usually, the benefits have run out. Some States have done some 

analysis to see whether prisoners are receiving unemployment benefits, and they have found that the number is exceedingly small. 

So, I think that things dealing with prisoners, while very important 

in other contexts, may be a little less important here. 

Mr. MCCRERY. While it may be less important, it is also a fairly 

easy thing to do, to match lists. 

Mr. FINDLAY. Yes, and some States do cross-matches with correctional facilities. We certainly are willing to consider that and to 

work with States to do that. I would not want to give this Committee the impression that is going to pay off as much as some of 

the other measures that we are talking about. 

Mr. MCCRERY. No. 

Mr. FINDLAY. States are required to verify alien status with the 

Immigration and Naturalization Service (INS), so States are doing 

13

that. In general, aliens, under certain circumstances, can receive 

unemployment benefits if they have INS work authorization, but 

those that should not be receiving it generally are not. 

In terms of some of the other questions you asked about fraud, 

all of our States are required to impose penalties for fraud and to 

work to ferret out fraud and, obviously, not to pay people that they 

believe to be defrauding the system. 

Then in terms of some of the offsets. States are doing offsets 

from income tax refunds and other sorts of payments that States 

might be making. On a State-by-State basis, I think I would have 

to go back to our people and get more detailed information for you. 

[The information follows:]

CROSS–MATCHING 

States currently cross-match benefit information with various computer databases, primarily wage and benefit records and new hire directories. It is important 

to note that unemployment insurance (UI) has a number of controls:

• There must be employment reported by an employer. UI is time limited for 

each claim. Each week must be claimed. • Benefit Accuracy Measurement data has not indicated any significant problem with overpayments to these populations. • Every state imposes a penalty for fraud, including holding the claimant ineligible for a set period of time. • Most states with income taxes intercept refunds to retire UI overpayments. • Many states do ‘‘death matches.’’ It doesn’t produce significant numbers.

Also, states do have techniques for minimizing payments to prisoners and ineligible aliens. Among them:

• Some states crossmatch with local and state correctional institutions. Data indicates this is not very productive. • States are required to verify alien status with the Immigration and Naturalization Service (INS). (In general, aliens can collect UI if they have INS 

Mr. M

Chairman HERGER. Thank you. The gentleman from Maryland, 

work authorization.)

CCRERY. Thank you, Mr. Chairman. 

f the Ranking Member, Mr. Cardin, to inquire. 

Mr. CARDIN. Thank you, Mr. Chairman. 

Mr. Findlay, I believe the DOL has developed a UI overpayment 

system called the Benefit Accuracy Measurement, or BAM, to try 

to determine nationwide the extent of overpayments. Do you have 

any similar effort or plan in regards to the accuracy of the tax payments that employers are making, as to whether there is an underpayment of the tax payments for unemployment insurance benefits? 

Mr. FINDLAY. I am fairly certain that our performance measures require States to ensure the accuracy of tax payments, but beyond that, I do not know the details of what our program is. 

Mr. CARDIN. If you could make that available to our Committee, 

I would appreciate it, because we obviously want to make sure that 

we are collecting the right amount of revenue, as well as, making 

sure we are not overpaying the benefits. 

[The information follows:]

ACCURACY OF EMPLOYER TAX PAYMENTS 

Besides the performance measures mentioned below, State Work force Agencies 

are required by the Department’s UI Audit Policy to audit 2% of the tax paying employers in their state each year.

14

• The Audit Policy requires the state UI agency to verify the existence of each 

business being audited. • This requirement was included in the Audit Policy to help detect fictitious 

employer schemes. • Many states have either developed computerized systems to help detect fictitious employer schemes or they use the Fictitious Employer Detection System, which was provided by the Employment and Training Administration. • They also work very closely with the Department’s Office of Inspector General 

to detect and prosecute the offenders.

In addition, states have modified their Employer Status Determination forms— the forms used to determine whether an employer is subject to the state’s UI tax— and trained their employees to help identify employers who may be attempting to 

manipulate experience rates through a variety of different schemes that have been 

discovered over time. 

Also, some employers are late in paying their taxes. When this happens, states 

routinely send dunning notices and impose penalty and interest on the employers. 

The amount of the penalty/interest varies from state to state. 

For the quarter ending December 31, 2002, our reports show that, as of the due 

date of the reports, 632,000 employers were delinquent in paying contributions. This 

represents about 9% of all employers. However, it should be noted that many of 

these delinquent employers have since ‘‘paid up’’ due to state collection activities. 

Also, it needs to be noted that employers routinely go out of business with no assets—these will be included in the delinquencies. 

As to detecting misclassification, a large part of the audit function noted above 

is aimed at detecting misclassifications. Also, if an individual files a claim and is 

denied because s/he was classified as an independent contractor, the individual has 

the right to review. If the review determines that the individual was in fact an employee, s/he is entitled to benefits. 

Further, the Department sponsored research on this subject and a final report 

was issued in 2000 (Study of Alternative Work Arrangements: Independent Contractors, Planmatics, Inc.). Among the findings:

• The number one reason for misclassification is savings related to workers 

compensation/disability costs. A second reason is avoiding EEO type lawsuits 

and other laws associated with having employees. • In the 9 states visited, the percent of audited employers with misclassified 

workers ranged from 10–30%. • In the 9 states visited, the percentage of tax revenues underreported varied 

from 0.26% to 7.46%. • Assuming a 1% level of misclassification over the period measured, the loss 

in revenue due to underreporting would be an annual average $198 million. 

About 80,000 workers annually are not receiving UI due to misclassification.

The Department developed the Tax Performance System (TPS), formerly called 

Revenue Quality Control, to assist in exercising its general oversight responsibilities 

toward the UI program and to help meet its responsibility to protect and maintain 

the soundness of the Unemployment Trust Fund. TPS divides tax operations into 

major functional components and specifies key performance objectives based on 3 dimensions of quality—timeliness, accuracy, and completeness. The tax functions reviewed include status determination, cashering, report delinquency, collections, field 

audit, and account maintenance. Monitoring tax activities has been a longstanding 

priority for the Department. National performance standards have been established 

for the following tax activities:

• Percent of new status determinations within 90 days of quarter end date; 

• Percent of new status determinations within 180 days of quarter end date; 

and 

• Accuracy of a sample of new status determinations.

The Department also tracks performance for: 

Timeliness Measures 

• Employer Report Filing Timeliness 

• Securing Delinquent Reports Timeliness 

• Resolving Delinquent Reports Timeliness 

• Employer Payments Timeliness 

• Successor Status Determination Timeliness 

Quality Measures 

• Delinquent Reports Resolution Quality 

15

• Collection Actions Quality • Turnover of Receivables to Tax Due • Write-off of Receivables to Tax Due • Accounts Receivable as a Proportion of Tax Due • Field Audits Quality • Field Audit Penetration, Employers • Field Audit Penetration, Wages • Percent Change as a Result of Field Audit 

Accuracy Measures 

• Posting New Determinations Accuracy • Successor Determinations Accuracy 

• Posting Successor Determinations Accuracy 

• Inactivating Employer Accounts Accuracy 

• Posting Inactivations Accuracy 

• Employer Reports Processing Accuracy 

• Employer Debits/Billings Accuracy 

• Employer Credits/Refunds Accuracy 

• Benefit Charging Accuracy 

fact that Congress in the recently passed legislation made $8 bilMr. CARDIN. The Chairman mentioned and you mentioned the 

• Experience Rating Accuracy

f lion of Reed money available, Reed Act distributions, available to 

our States that can be used for integrity issues within the system. 

Do you know how the money is being spent by the States? Do you 

have any early reports to the Committee? 

Mr. FINDLAY. What we have is precisely that, Congressman 

Cardin, early reports. The States have to pass legislation in order 

to use the Reed Act funds. We believe 12 States have done so so 

far. We also have asked the States, what are they going to do with 

the Reed Act money. 

So far as I could tell from the chart that I read on the way over 

here, about half the States have plans, or have already put in place 

plans, to use some of the money for administration, which would, 

of course, help our integrity efforts. We know also that several 

States so far have indicated they intend to increase payment levels, 

as well. Beyond that, we really do not have very much information. 

Mr. CARDIN. We have requested certain information be made 

available by GAO. I do not know when we are going to get that information presented to the Committee, but obviously, any information you can make available to us would be helpful. 

Mr. FINDLAY. We would be happy to give you what we know, 

but as I say, until the States pass legislation, everything should 

come with a big caveat. 

[The information follows:]

$8 BILLION REED ACT DISTRIBUTION 

Enactment of the Temporary Emergency Unemployment Compensation Act has 

provided states with an enormous opportunity to make program improvements including initiatives that address fraud and abuse. The $8 billion ‘‘Reed Act’’ distribution of excess Federal unemployment funds to states can be used for the payment 

of benefits or for the administration of UI and services by the public Employment 

Service (ES) through the One-Stop system. The Department of Labor suggested that 

states consider using these Reed Act funds for the following purposes:

• Establishing a revolving fund for automation costs; 

• Improving UI and ES performance; 

• Improving UI claims filing and payment methods; 

• Administering One-Stops; and 

• Reducing UI fraud and abuse.

16

Using Reed Act funds for administration or services requires an appropriation by 

the state legislature. As you know, states are currently struggling with other issues 

such as budget deficits. Therefore, most states have not yet had the opportunity to 

appropriate their Reed Act funds. However, we have collected anecdotal information 

from most states regarding their plans. About a dozen states have appropriated 

Reed Act funds this year. Uses include:

• Paying for technology and system upgrades; • Covering basic administration costs; • Paying for additional reemployment services; and • Paying for additional staff.

Another dozen states have appropriations in the legislative process, and a number 

have advised us they will seek appropriations during their next legislative session. 

Some states indicated they expect to leave all of the money in their trust funds to 

pay benefits, improve solvency, and avoid tax increases. Other states plan to leave 

a portion of their Reed Act money in their fund for these purposes. A couple of 

states would be borrowing but for the Reed Act distribution. Finally, a few states 

have enacted minor benefit increases or expansions since the date of the distribution.

and that is one of the areas that we were concerned, as to whether 

Mr. CARDIN. Of course, States can use it to enhance benefits, 

f they, in fact, will do that or not. You are indicating seven States 

are at least planning to do that. You have got 1.4 million workers 

who are currently claiming extended unemployment benefits that 

we enacted last March. Do you have any idea of how many of these 

people will exhaust their extended benefits before they are able to 

find employment, and how many of these individuals will be covered under the second trigger in those States that meet the additional benefits? 

Mr. FINDLAY. In terms of the first question, how many would 

exhaust before they could find employment, I do not think we do 

have that number because I think it would require a fairly complex 

calculation. 

In terms of your second question, which I am momentarily forgetting, Congressman—— Mr. CARDIN. How many States would qualify for the trigger for 

the additional weeks of benefits beyond the extended benefits? 

Mr. FINDLAY. Yes, we do have the answer to that. It is nine 

States: California, Idaho, Massachusetts, Michigan, New Jersey, 

Oregon, Pennsylvania, Washington, and Wisconsin. 

Mr. CARDIN. So if you are in those States, you would then be 

entitled to additional benefits. So, there is a large number of people 

who will not be entitled to benefits, at least be in States that will 

not be entitled to benefits, and we do not know how many people 

are going to still be unemployed, unable to find employment that 

have exhausted their extended benefits. 

Our preliminary information is that we are talking about hundreds of thousands of individuals who will exhaust their benefits, 

and be in States that do not provide additional benefits because the 

trigger that we are using, the insured rates, are difficult to meet 

in many of the States. I think it is something we need to take a 

look at, because we find that when times are very difficult, as you 

point out, some of the mis-payments are not fraudulent. 

Some of these, the States do not want to recover for whatever 

reasons, and it seems to me, in difficult economic times, when benefits are not being made available to meet the needs that are out 

there, chances of mis-payments are higher and something we need 

17

to make sure—we do not want anybody to receive payments they 

are not entitled to, but it would be also nice to have recommendations on changing the policy in order to meet the legitimate needs 

of the people who cannot find employment. 

Thank you, Mr. Chairman. 

Mr. FINDLAY. Thank you. 

Chairman HERGER. Thank you. The gentlelady from Connecticut, Mrs. Johnson, to inquire. 

Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman. 

When do you expect the DOL will have the new operational definition of UI overpayments ready for use? 

Mr. FINDLAY. We are putting together a new goal under the 

government Performance and Results Act (GRPRA). All of our goals 

for fiscal year 2003 should be in place about the beginning of fiscal 

year 2003, so I think we are looking at this autumn. 

Mrs. JOHNSON OF CONNECTICUT. Have you done any studies or have you thought about doing any studies of those States 

that rely almost entirely on self-reporting of information for eligibility versus those States that check information? 

Mr. FINDLAY. What we require at the Federal level is that 

States show us that they have a system that is reasonably calculated to ensure integrity of the system, and we do not typically 

mandate to States precisely how they do that, or we have not in 

the past. 

I think our thumb has been on the scale a little bit too much in 

terms of benefit promptness in the past. I think we may want to 

suggest to States that they do more than they have, and we are 

not only reconstituting our GPRA goal, but we also will be redoing 

our performance measures for States. We, I think, all recognize in 

the DOL that we need to elevate the importance of these integrity 

issues as well as the payment promptness issues. 

Beyond that, I do not want to get into the specifics of what we 

will be doing with States that do not do particular kinds of 

matches. I think it is fair to say that at the leadership level of the 

DOL, we want to be a little bit more prescriptive with States than 

we have been in the past in terms of carrying out these integrity 

efforts. 

Mrs. JOHNSON OF CONNECTICUT. I think it would be useful 

to do some studies of States that have different systems of eligibility and those that do the matching and other things to confirm 

eligibility versus those that do not. I know in my State, we have 

gone to pretty much telephone registration for unemployment benefits and I think there is very little oversight of that system. So, I 

am interested in, as the DOL moves forward, you are really doing 

some comparative studies so we have some material on which to 

move forward to demonstrate the States’ best practices and to hold 

them to a higher standard. 

Do you have any information about whether States that cover 

part-time employees have more fraud problems than those that 

cover only full-time employees? 

Mr. FINDLAY. I do not before me, but I am sure we can give 

you whatever we have got on that. 

[The information follows:]

18

We do not have any empirical evidence to suggest that states which pay benefits 

to those seeking only part-time work have more fraud than those states which require full-time availability.

that, because my guess is that there is no difference and that we 

Mrs. JOHNSON OF CONNECTICUT. I hope you will look at 

f are not having any more difficulty with part-time than full-time, 

but I think we need to know that, because over the course of 

events, I think the issue of part-time unemployment compensation 

for part-time unemployed is going to be an increasingly important 

issue for us to address. I think before we address that, we have to 

find a better way of making sure that unemployment compensation 

is going to those who are eligible and not going to those who are 

not eligible. 

So, you could be a big help to us in refining more clearly what 

constitutes fraud and abuse. How do you know it? On what do you 

base your estimate, that really, a very small amount of the overpayment, about 25 percent or less, is actually fraud and abuse. 

Overpayments are a different problem, but fraud and abuse is intolerable. 

Mr. FINDLAY. I think that is exactly our point, that overpayments are not overpayments. There are different types of overpayments, some of which deserve different responses than others. I 

would not think that it would be the DOL’s priority to force States 

to spend a lot of time and effort going after people who are unemployed, looking for work, carrying out all the duties they are supposed to be carrying out in terms of looking for work, but used the 

wrong form for one of their job search documentation requirements. 

Mrs. JOHNSON OF CONNECTICUT. Absolutely. 

Mr. FINDLAY. On the other hand, at the other end of the spectrum, I think for fraud and abuse, fictitious employers, fictitious 

employees, or Social Security numbers that relate to people who 

are deceased, those are the sorts of areas that are absolutely clear. 

We should be devoting more efforts to. 

Mrs. JOHNSON OF CONNECTICUT. Thank you. 

Mr. FINDLAY. Thanks. 

Chairman HERGER. Thank you. The gentleman from Texas, Mr. 

Doggett, to inquire. 

Mr. DOGGETT. Thank you very much, Mr. Chairman. 

I am pleased that we have your added input about the importance of addressing any fraud that might be in the system and undermine confidence in the system. I think it is equally as important 

that we recognize that workers who do become unemployed 

through no fault of their own and who cannot access the benefits 

they need, feel the system has acted in an abusive way to them. 

At one of our earlier hearings, I inquired about the number of 

eligible individuals as a percent of total unemployment for the 

States over the last 20 years. The DOL was kind enough to provide 

that information, and I note in my own State of Texas that over 

the last 20 years, the number has varied from as low as 18 percent 

in several different years, never getting higher than 31 percent. So, 

there are a lot of workers out there who are unemployed that are 

not getting benefits. 

19

There has been some indication by our staff that after the end 

of this week, there will only be about four States that will be triggered in on extended unemployment benefits. Is that right? 

Mr. FINDLAY. I think, just before you arrived, Congressman, I 

said that number is nine States. 

Mr. DOGGETT. Okay. I do not think that Texas is one of them. 

Mr. FINDLAY. You are correct. 

Mr. DOGGETT. I am wondering if you think we ought to revisit 

the trigger mechanism to determine whether those people who are 

jobless should be eligible for additional unemployment benefits. 

Mr. FINDLAY. Let me address your first question first, which 

was on the recipiency rate. It is true that some people who are 

within the total unemployment rate do not receive unemployment 

benefits. These sorts of people are typically new entrants to the 

work force. A very large percentage of them are new entrants who 

have not actually been in a job before, and so they are not unemployed in the sense that they lost a job. 

Another large percentage is re-entrants, which may well be men 

or women who stayed home to care for a child for a few years and 

are going back to work. Those are effectively like new entrants, in 

a sense. 

Then job leavers, who leave of their own accord, voluntarily, who 

are not covered by the system. 

If you set those aside, actually, a very large percentage of the job 

losers are eligible for and receive unemployment benefits. I think 

the figures that I saw said that 52 percent of the total unemployment rate is job losers and 46 percent of all total unemployed are 

eligible to receive unemployment benefits. 

So really, given the current eligibility requirements, it is a pretty 

close fit and the recipiency rate is pretty close to where it ought 

to be—— Mr. CARDIN. Will the gentleman yield for one moment? 

Mr. DOGGETT. Yes. 

Mr. CARDIN. It is our understanding, though, there may be 

eight States that qualify today. Some of these States are going to 

trigger off at the end of the month so that it looks like there would 

be only four States by next month who would still be eligible. 

Mr. FINDLAY. I am told that is correct, Congressman, and Congressman, on your second question about revisiting the trigger 

mechanism, I think in our view, it is premature. Typically, the unemployment insurance program is a 13-week program. Earlier this 

year, we together took a step that is extraordinary, which is extending it another 13 weeks. I think the idea is that the system 

should be one that also encourages people to continue looking for 

a job and getting back to work. 

So, whether we want to take essentially a third bite at the apple 

now, we would like to see how the economy goes. There are some 

signs out there that the economy is doing better. The unemployment——

Mr. DOGGETT. Of course, for some of these individuals, the 

economy is not going very well if they have exhausted all their unemployment benefits. If I understand your testimony, and I respect 

whatever your opinion might be, but we are going to have four to 

six States next month that do not have any extended unemployVerDate Dec 13 2002 02:57 Jan 04, 2003 Jkt 082682 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\C682A.XXX C682A
20

ment benefits, including my State of Texas. Your feeling is that we 

do not need to do anything about that at this point——

Mr. FINDLAY. I think——

Mr. DOGGETT. As far as unemployment benefits. 

Mr. FINDLAY. I think it is premature to make that decision. 

Typically, the Temporary Emergency Unemployment Compensation 

Act is put in place by Congress during recessions, and it happened 

earlier this year because there had been a one quarter dip in GDP, 

gross domestic product. It happened previously, I believe, in the 

early nineties when there was a similar thing. So I think—I am 

sorry, if I could just finish these last few words. 

Mr. DOGGETT. Sure. 

Mr. FINDLAY. I think the norm is the unemployment insurance 

system that Congress enacted, which is a 13-week program, there 

have to be unusual circumstances for us to do that and right now, 

it is unclear whether those circumstances exist. 

Mr. DOGGETT. Just one follow-up, if I might, on your earlier 

comment about the fact that we, of course—I think the logical inference from your comment was that you would never expect 100 

percent of the unemployed would be covered, but my worry to you 

would be, you can take any given year in this data and there are 

vast variations between the States. As I said, in some years, in 

Texas, 72 percent of the unemployed got no benefits, whereas in 

other States, the same year, getting 60, 70 percent. How do you explain the variation? 

Chairman HERGER. If the gentleman could conclude——

Mr. DOGGETT. That is the end of my question. How do you explain the variation? 

Chairman HERGER. We are a minute over time here, but maybe 

we can respond. Could you very quickly respond? 

Mr. FINDLAY. I think this is one that I would probably prefer 

to respond in writing—— Mr. DOGGETT. That would be fine. 

Mr. FINDLAY. I do not have an answer for you right now, Congressman. 

Mr. DOGGETT. Sure. Since you are giving it back to the States 

and their discretion, if you could address why you see such tremendous variations in the data that were supplied on March 18. Thank 

you very much. 

Mr. FINDLAY. We would be happy to supply that. 

[The information follows:]

RECIPIENCY 

Most of the research done on UI recipiency concerns the marked decline in the 

U.S. average recipiency rate over the last 30 years. However, several studies have 

attempted to explain why there is such dramatic variation in recipiency rates among 

states. These studies demonstrate a strong relationship between implementing policy and administrative changes that tighten UI eligibility and sharp declines in 

recipiency rates. Changes include:

• Tightening qualification standards in specific professions; 

• Lengthening disqualification periods for certain actions including voluntarily 

leaving a job; 

• Increasing offsets of other income such as pensions; 

• Increasing base qualifying wages; and 

• Adopting more restrictive ability to work and other nonmonetary requirements;

21

In short, differences in state monetary and nonmonetary eligibility requirements 

are believed to be one of the main reasons for the wide variation in recipiency rates 

among states. 

Other research indicates that the wage-replacement rate affects recipiency rates. 

States with high replacement rates provide a larger incentive to apply for benefits. 

Finally, some research demonstrates that the economic and industrial make-up of 

the state impacts on recipiency rates. States with a larger number of union workers 

may have higher recipiency rates. (For more information, see Analysis of Unemployment Insurance Recipiency Rates, 

fDavid Wittenburg et al).

Chairman HERGER. Again, Mr. Findlay, is it not correct, we do 

have 39 weeks of regular unemployment plus that we have added 

an additional 13 weeks to that, is that correct? 

Mr. FINDLAY. Yes, that is correct. 

Chairman HERGER. Thank you. With that——

Mr. CARDIN. Could the gentleman just yield for 1 minute, just 

to clarify that point. Is it not 26 plus 13? 

Mr. FINDLAY. Exactly. Excuse me. I may have said a 13-week 

program. It is normally 26 weeks, plus we extend it for 13. Some 

States will have the opportunity to have an additional 13. 

Chairman HERGER. Thank you. The gentleman from Pennsylvania, Mr. English, to inquire. 

Mr. ENGLISH. Thank you, Mr. Chairman. 

In reviewing the material that is being brought before the Subcommittee today, I wonder if you could comment on what are the 

most pronounced technical eligibility issues that have led to overpayment. 

Mr. FINDLAY. I think, as I understand it, the sorts of issues we 

are talking about relate to job search issues; whether someone is 

registered with the employment service (ES), whether that person 

is properly documenting job searches, whether in a State that requires, say, four inquiries a week, the person only has documentation for three or only did three. These people are otherwise eligible 

for unemployment in the sense that they are unemployed and are 

ready, willing, and able to work. 

Mr. ENGLISH. One of the areas where we have tried to micromanage the States in designing a UI system is in essentially requiring that the States impose search for work requirements. This 

is understandable, but I am wondering if you could comment on 

whether these provisions are unusually difficult to enforce for 

States. 

Mr. FINDLAY. I guess I would answer that States impose different work search requirements and they enforce them in different 

ways. I do not know if I could characterize any of the requirements 

as unusually difficult to enforce, or——

Mr. ENGLISH. Is a search for work by an individual something 

that is inherently very easy to audit? 

Mr. FINDLAY. Well, I think it is a little bit difficult to audit. 

You have to do it. There has to be some element of self-certification 

by the employee. 

Mr. ENGLISH. I have a two-part question, and this has to do 

with the accuracy of the figures we are being given today. What 

percentage of the overpayments are you attributing to individuals 

who are collecting unemployment insurance payments, but are actually still gainfully employed? 

22

Mr. FINDLAY. That number would be some portion of the $1.3 

billion of non-fraud recoverable, and probably a large percentage of 

that. I do not have the exact percentage off the top of my head, but 

quite typically, what will happen is that an employee will be collecting unemployment benefits, will find a job, but there is a time 

lag before the employee reports new employment. Therefore, the 

person can get a couple extra checks while he or she is actually 

working. 

Mr. ENGLISH. In your answer, you are identifying where they 

are participating in the formal economy and that brings me to the 

second point of my question. What percentage of the overpayments 

can be attributed to individuals who are participating in the informal or underground economy, having left a formal job, and are able 

to combine some income stream which is unreported with the unemployment benefits? Do you have any current measurement of 

that, or what sorts of estimates are built into this report? 

Mr. FINDLAY. Certainly, there must be people out there who 

are participating in an underground economy and also collecting 

unemployment benefits. I just checked with my colleague, and we 

do not have any estimate as to what that percentage would be. 

Mr. ENGLISH. Is it fair to say that the figures you are presenting here today, because you are not estimating or you are not 

giving us a very clear estimate of what you attribute to the underground economy, you may actually be substantially underestimating the number of overpayments that occur? 

Mr. FINDLAY. As I said, I am certain that there are some claimants out there who are receiving income from mowing lawns, painting houses, doing work for cash, that sort of thing. Beyond that, I 

do not really have any very good estimate of how much that understates or overstates the problem. 

Mr. ENGLISH. That is good to know. My final question is, in the 

testimony, actually, in the GAO report, it is noted that overpayments have changed relatively little over the last 10 years. To what 

do you attribute that? 

Mr. FINDLAY. As I say, I think it is because the DOL and the 

States have not put as much of a focus on preventing overpayments 

as they have on ensuring prompt payments. I think that is a mistake. I think that at the Federal level, we should be doing more 

to ensure the integrity of the system. That is why we are planning 

a new GPRA goal, why we are planning new performance measures, why we have sought more money, and why, I think, that in 

the performance measures we place on the States, we will likely be 

asking them to do more to protect the integrity of the program. 

Mr. ENGLISH. Thank you, Mr. Chairman. 

Chairman HERGER. Thank you. The gentleman’s time has expired. The gentleman from Michigan, Mr. Levin, to inquire. 

Mr. LEVIN. As I understand it, the hearing is on this issue of 

overpayments and underpayments, and so forth, and I do not mean 

to minimize for certain that set of issues. I do think we want to 

be sure about proscriptive here, and I am sorry if I missed the earlier part of it. How many people have exhausted their benefits in 

the last 12 months, do you know? 

Mr. FINDLAY. I do not know that number off the top of my 

head. 

23

[The information follows:]

Number of exhaustions

Mr. LEVIN. How about the last 6 months? 

Mr. FINDLAY. I think that it is in the hundreds of thousands 

—12 months ending December 2001: 2.8 million.

f who will be coming off the Temporary Emergency Unemployment 

Compensation Act in the next couple of weeks or so. 

[The information follows:]

Number of exhaustions

Mr. LEVIN. Then what happens to them? 

Mr. FINDLAY. Unless they are in a State that would trigger 

—6 months ending December 2001: 1.6 million.

f under the 4-percent trigger, they would cease receiving unemployment benefits. 

Mr. LEVIN. Have you made any suggestions to this Congress as 

to what should happen to those people? 

Mr. FINDLAY. As I discussed with Congressman Doggett a few 

minutes ago, we think that with the signs in the economy improving, that it is a little too early to say whether we want to have another emergency unemployment compensation system put in place. 

So, we have not suggested to Congress that they make any changes 

to current law. 

Mr. LEVIN. Are you studying the present trigger mechanism? 

Mr. FINDLAY. Under the emergency program or under the regular program or both? 

Mr. LEVIN. Both. 

Mr. FINDLAY. Under the regular program, we have proposed to 

this Committee, or to this Congress, as you all know, that the trigger be reduced, making it easier for States to trigger, as part of our 

comprehensive unemployment insurance reform proposal. In terms 

of what the appropriate trigger for the final 13 weeks in the Temporary Emergency Unemployment Compensation Act would go, we 

have not had any discussions about changing that trigger, to my 

knowledge, if new legislation were to be proposed. 

Mr. LEVIN. You are having discussions with the Congress about 

changing the trigger, the basic. Where do those discussions stand? 

Mr. FINDLAY. We had unveiled our proposal, and we are presently clearing the legislation through the Office of Management 

and Budget, OMB, for our comprehensive UI/ES, reform proposal, 

which would, among other things, lower the permanent trigger 

from 5 percent to 4 percent. It would make it easier for States to 

trigger on. 

Mr. LEVIN. This is your comprehensive reform proposal? 

Mr. FINDLAY. Yes, sir. 

Mr. LEVIN. A new proposal is forthcoming? 

Mr. FINDLAY. Yes. We certainly have shared with many people 

in the Congress the basic elements of the proposal, which would be 

to reduce the trigger, reduce over time the Federal unemployment 

tax from 0.8 percent to 0.2 percent, to turn over administration to 

the States largely, and to leave the Federal Government in place 

for loans and general oversight of the program. We would not have 

this kind of unique system where the Federal Government raises 

24

money through a Federal tax and turns it over to the States to administer the States’ programs. 

Mr. LEVIN. So how does that portion differ from the previous reform proposal? 

Mr. FINDLAY. It is very—— Mr. LEVIN. It sounds to me, we have seen it before. 

Mr. FINDLAY. It is very similar, except that I think previous reform proposals had not proposed quite as much devolution to 

States of their own administration, and there are a couple of other 

small elements that are not worth talking about. 

Mr. LEVIN. This provides more? 

Mr. FINDLAY. More devolution, yes, sir. 

Mr. LEVIN. Do you think that the change in the trigger should 

be held up until we discuss the rest of the reform package? 

Mr. FINDLAY. Absolutely. No, I am just joking. 

Mr. LEVIN. I think you are serious. 

Mr. FINDLAY. I want to say, Congressman—— Mr. LEVIN. That has been the history of this up until now. 

Mr. FINDLAY. I want to say that I like it better when I am sitting up there with you in the China Human Rights Commission 

than when I am down here and you get to ask the questions, but 

no, we believe it is a comprehensive reform—— Mr. LEVIN. I am just doing it constructively because we have 

been wrestling with these issues and we want your attention and 

your help. We have been struggling with these for years. 

Mr. FINDLAY. If I could answer—— Mr. LEVIN. Four years—— Mr. FINDLAY. Let me answer your question seriously, because 

I gave a flip answer. We do think that we should have a comprehensive reform proposal that takes heed of all of these issues 

that we have raised with the unemployment insurance system. I 

think if we start taking piecemeal bits of it, just reducing the Federal unemployment tax, which employers would love, just increasing the trigger, which others would love, I think that is not a good 

way to make policy, and we ought to consider all these issues as 

a comprehensive whole. 

Mr. LEVIN. Thank you. I appreciate your response. 

Mr. FINDLAY. Thanks. 

Chairman HERGER. Thank you very much. 

Just as a comment, Mr. Findlay, you mentioned that about half 

of the States now compare their unemployment rolls with their 

State directory of new hires. The information in the State directory 

has been gathered from employers for use in collecting child support, in keeping with the 1996 Welfare Reform Law, so doing the 

match places no added burden on the employers and could save 

them money by reducing improper benefit payments. It appears 

from a variety of sources that a major source of the abuse occurs 

when unemployment claimants or recipients do not report their return to work. Therefore, running this match directly would appear 

to address that very problem. Would you have a comment on this? 

Mr. FINDLAY. Yes. We think that the State new hire directories 

are absolutely key to reducing overpayments. They really get at 

several of the issues that we have been talking about here today. 

Currently, for whatever reason, only about half the States are 

25

doing so. We are going to use some of our integrity money that we 

are asking for in the fiscal year 2003 budget to encourage more 

States to do so. While we have not formulated our performance 

measures, I would anticipate that our performance measures would 

encourage States even more to begin using these new hire directories because they are absolutely critical to reducing overpayments. 

Chairman HERGER. I thank you very much. Are there any further questions? With that, I thank you very much, Mr. Findlay, for 

your testimony. 

[Questions submitted by Chairman Herger to Mr. Findlay, and 

his responses follow:]

U.S. Department of Labor 

Employment and Training Administration 

Washington, DC 20210

The Honorable Wally Herger 

Chairman, Subcommittee on Human Resources 

Committee on Ways and Means 

United States Senate 

Washington, DC 20515 

Dear Chairman Herger: 

Thank you for your letter dated June 17, 2002, requesting additional information 

about the Department of Labor’s efforts to increase prevention, detection, and recovery of unemployment insurance (UI) overpayments. Your letter was forwarded to 

the Employment and Training Administration for response because this office is responsible for oversight of the Federal-state UI program. Answers to your questions 

follow:

1. Does the Department have any specific proposals or suggestions to assist 

States in preventing or better recovering overpayments? Aside from matching [UI benefit payments] with the State Directory of New Hires, what are 

the most promising new approaches that have been tried in this area?

Response: As we have testified and as you have noted, use of data from State Directories of New Hires is a very valuable new tool for quick detection and possible 

prevention of UI overpayments. We believe that access to Social Security Administration data for verification of Social Security Numbers, names, and pension information will also prove to be of great value in preventing erroneous payments. These 

two new tools are the cornerstones of the Department’s plans to assist states in preventing and detecting overpayments, and the administration has requested $10 million in the fiscal year 2003 budget to help states implement access to these data. 

Follow-up activities (establishment of debt and collection efforts) after a potential 

overpayment has been detected through a computer crossmatch are very staff intensive, and due to Federal spending constraints, in recent years appropriations for 

these activities have been less than the administration’s requests. The Unemployment Insurance and Employment Service Reform New Balance proposal, announced 

with the President’s Budget for 2003, gives states overall responsibility for determining their own administrative funding levels and gives them the ability to target 

funding to benefit payment control activities at the levels that they believe are appropriate. 

In addition, the $8 billion ‘‘Reed Act’’ distribution to states in 2002 gives states 

the opportunity to focus additional resources on benefit payment control activities. 

The Department has suggested that states consider using these funds for, among 

other purposes, improving UI claims filing and payment methods and reducing UI 

overpayments, fraud, and abuse. Some states already have appropriated Reed Act 

funds to pay for technology and system upgrades. 

Additionally, there are several other systems/efforts underway that should have 

positive effects:

• National Directory of New Hires. Each state’s access to new hire data is 

currently limited to the State Directory. Access to the National Directory of 

New Hires would make information available about Federal employment and 

provide access to data reported by multi-state employers that have chosen to 

report all wages to one state. We commend the Committee for including this 

access in the Temporary Assistance for Needy Families reauthorization bill 

(H.R. 4737). 

26

• Illegal Aliens. To prevent overpayments to non-citizens, states use an Immigration and Naturalization Service (INS) automated system for verifying immigration status and work authorization. INS has installed enhanced 

verification capability in eight states that automatically generates a secondary inquiry when the identifying information is at variance with that provided by the claimant. Implementation of this automated process is underway 

in two additional states, and within the next 18 months, the remaining states 

should be included. • National Conference on UI Integrity. The Department, along with the 

National Association of State Work force Agencies, is sponsoring a national 

integrity conference in 2003 to identify and disseminate successful practices, 

studies, and integrity information among the states.

2. When do you expect your negotiations with the Social Security Administration will result in an agreement to better share data to ensure the accuracy and validity of Social Security numbers provided in claiming unemployment benefits?

Response: The Department and the Social Security Administration (SSA) have 

reached agreement, and work is currently underway to establish a real time data 

exchange capability between SSA and each state UI agency. The telecommunications aspect of this exchange is expected to be completed in 2002. Each state will 

then have to install software to interface with their existing UI benefits system. We 

expect data exchanges with SSA to begin during the first half of 2003.

3. Please describe in greater detail the current performance standards and 

goals that are designed to enhance state recovery of overpayments. How 

has this changed in recent years?

Response: The Department requires each state to operate a unit for benefit payment control purposes with the following goals:

• Detect benefits paid due to state agency errors or due to willful misrepresentation or error by claimants; 

• Deter claimants from obtaining benefits through willful misrepresentation; 

and 

• Recover benefits obtained by fraud, willful misrepresentation, and other 

claimant errors.

The Department relies upon periodic on-site reviews of states’ operating procedures to gauge the quality of performance in achieving these goals. Additionally, 

data analysis has focused on the recovery of overpayments—both fraud and 

nonfraud. These analyses compare the amount of overpayments recovered against 

the amount of overpayments established during a given year and initially 55% was 

set as a ‘‘desired level of achievement.’’ In the mid 1990’s, the Department recognized that this benchmark could provide a disincentive to establish as many overpayments as possible because recoveries were limited by staff capacity; therefore, 

the 55% goal was officially dropped from the UI performance measurement system. 

However, some states still use the 55% indicator as a goal. 

It is very difficult to define a measure of performance related to overpayment prevention, detection, and recovery. As greater efforts are made to detect overpayments, such as using the State Directory of New Hires as the primary detection tool, 

the rate of overpayments may increase due to more efficient screening of potential 

cases for investigation, thereby reducing the number of false leads, while the average dollar amounts established per overpayment (in addition to the dollar amounts 

recovered) may decrease due to prompt interception before benefits are overpaid. In 

establishing measures related to overpayments, it is important to be sure that the 

incentives they create promote best practices. Our efforts to design new measures 

addressing UI benefit payment integrity are described below.

4. Your testimony mentions that the Department will be setting a new 

Government Performance and Results Act (GPRA) goal for addressing unemployment program overpayments. What is your timeline on developing 

and implementing that goal? Will the States be held accountable for this 

goal? If so how, and if not, why not?

Response: The Department is engaged in the development of a UI payment accuracy measure as part of a plan to improve UI program integrity and reduce overpayments. We are seeking state and stakeholder as well as OMB, OIG and GAO input 

regarding a measure. After development, we will establish a baseline and a new 

GPRA goal from which to measure improvements in payment accuracy nationwide. 

We plan to complete work on the goal by September 30, 2002. The goal, like other 

GPRA goals, will be expressed as a measure of aggregate national performance. The 

27

Department is at the same time embarking on a review of the overall UI performance management system. This review will encompass all aspects of the performance system, including the development of measures related to overpayment prevention, detection, and recovery. We recognize, however, that applying nationwide goals 

across states will be difficult due to differences in states’ laws that affect the potential for overpayments to occur. 

Should you need clarification or explanation of the answers to your questions, 

please do not hesitate to contact me at (202) 693–2700 or have a member of your 

staff contact Grace Kilbane or Cheryl Atkinson in the Office of Workforce Security. 

They can be reached at 693–3200. 

Sincerely, 

Hon. Emily Stover DeRocco 

f Assistant Secretary

Chairman HERGER. I would like to call up our second panel, 

Sigurd R. Nilsen, Ph.D., Director of Education, Work force, and Income Security Issues at the U.S. General Accounting Office; the 

Honorable Gordon S. Heddell, the Inspector General at the U.S. 

Department of Labor; Miles Paris, Deputy Director of Program 

Support for the Illinois Department of Employment Security; Stephen Woodbury, Ph.D., Professor at Michigan State University; 

and Michael Lorsbach, Principal, On Point Technology, Incorporated. 

I thank each of you for joining us this afternoon to testify on this 

important issue. 

Mr. Nilsen. 

STATEMENT OF SIGURD R. NILSEN, PH.D., DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, U.S. 

GENERAL ACCOUNTING OFFICE 

Dr. NILSEN. Thank you, Mr. Chairman and Members of the 

Subcommittee. I am pleased to be here today to discuss the findings from our draft report on UI overpayments prepared at the request of Chairman Herger, focusing on the extent and type of overpayments, the factors that contribute to overpayments, and Federal 

and State management issues that affect the ability of States to 

control overpayments. 

Over the past 10 years, as we have heard earlier, the annual 

overpayment rate estimated by DOL’s Quality Assurance System 

has remained fairly constant at about 8.4 percent. As UI payments 

have increased this past year with rising unemployment, overpayments reached $2.4 billion in 2001. The DOL data shows that of 

this $2.4 billion in overpayments, about a quarter, or $560 million, 

was attributable to fraud or abuse. 

The primary sources of UI overpayments are, first, unreported 

earnings or benefit payments, accounting for 38 percent of overpayments, about $900 million, and the source of more than half the 

fraud or abuse reported in the program. 

Second, eligibility issues, such as not being able or available for 

work, failing to register for employment services, or not looking for 

a new job, as required, account for about 36 percent of overpayments, or about $860 million. 

Third, about 20 percent of overpayments, roughly $500 million, 

was due to becoming unemployed for reasons not covered by State 

law, such as being fired for cause. 

28

Although some categories of overpayment are more difficult than 

others to detect or recover, DOL’s analysis suggests that the States could have detected and recovered about $1.3 billion of the $2.4 billion in estimated overpayments in 2001. However, only $370 million was actually recovered. 

Officials at DOL and in some States emphasize that overpayments are more likely to be recovered if they can be detected quickly. States generally recover a substantial proportion of the overpayments they detect by offsetting a claimant’s current and future UI 

benefits. However, UI benefits tend to be paid out over a relatively 

short period of time, about 14 weeks on average, and current overpayment detection and recovery activities may begin long after individuals leave the rolls. This inability to verify eligibility information in a timely manner places the program at substantial risk for 

overpayments that may never be recovered. 

Because States rely heavily on claimants’ self-reporting of eligibility information, timely verification of this information using 

independent sources is key to limiting UI overpayments. For example, access to more timely sources of data, such as the State new 

hires data, can provide information on individuals’ current employment status. States that use this data have reported that it is helpful in detecting overpayments more quickly. However, we found 

that the new hires data is not routinely used in all States. Two of 

the six States we visited do not currently use their new hires data 

to verify claimants’ earnings or employment status. Yet, one of the 

States we visited reported that because the new hires data detects 

overpayments earlier than other detection methods, the size of its 

overpayment at the time of detection was reduced by nearly 75 percent. 

The National Directory of New Hires would provide similar employment and earnings information on claimants across States to 

verify eligibility, but so far, access to this information is limited by 

statute, except, as we have heard, it is in the TANF reauthorization bill. 

We also found that some States do not independently verify the 

receipt of income from benefit programs such as Workers’ Compensation or Social Security disability payments, which can also affect UI eligibility. Further, in addition to verifying eligibility up 

front, the States need to more aggressively use these same sources 

of data to verify continuing eligibility. 

The limited focus on overpayments has been fostered by DOL’s 

approach to managing the UI program, which emphasizes quickly 

processing and paying UI claims with only limited attention to 

overpayment prevention, detection, and collection. For example, 

most of the first 12 performance measures, called Tier 1 measures 

by DOL, assesses whether States meet specified timeframes for certain activities and no measure in those 12 gauges the accuracy of 

UI payments. The DOL also gives Tier 1 measures more weight 

than the remaining 60 measures, called Tier 2 measures, which assess other aspects of State performance, including overpayment collection. Officials from most of the States we visited told us that the 

Tier 1 and Tier 2 measures make the UI program complex to administer and may contribute to an environment in which overpayment are more likely. 

29

1We 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. 

In conclusion, Mr. Chairman, the vulnerabilities that we have 

identified are attributable to a management approach in DOL and 

in many States that places greater emphasis on quickly processing 

and paying UI claims than on controlling program payments. Our 

work suggests that using more front-end automated data sources to 

verify claimant eligibility before overpayments are made is an effective and efficient method to protect program funds. 

However, absent a change in the current approach to managing 

the UI program at both the Federal and the State level, it is unlikely that the deficiencies we identified will be sufficiently addressed. Without more active involvement from DOL in emphasizing the need to balance payment timeliness with payment accuracy, States may be reluctant to implement needed changes in 

their management philosophy and operations. 

Mr. Chairman, this concludes my prepared statement. I will be 

happy to respond to any questions you or other Members of the 

Subcommittee may have. 

[The prepared statement of Dr. Nilsen follows:]

Statement of Sigurd R. Nilsen, Ph.D., Director, Education Workforce, and 

Income Security Issues, U.S. General Accounting Office 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Department of Labor’s Unemployment Insurance (UI) program, which is a key component in ensuring the financial 

security of America’s workforce. The UI program is a federal-state partnership designed to partially replace lost earnings of individuals who become unemployed 

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

downturn. The UI program paid about $30 billion in benefits in calendar year 2001 

to workers who lost their jobs. The health of each state’s UI program depends, in 

part, on the ability of the state to control its benefit payments by accurately determining individuals’ eligibility for UI benefits in a timely manner. Inaccurate or untimely eligibility information may contribute to overpayments and fraud. 

Reports from Labor’s Office of Inspector General (OIG) and others have identified 

numerous aspects of the UI program that may be vulnerable to overpayments and 

fraud. Today, I will be providing information from our draft report that we have provided to Labor for its comment on our findings, conclusions, and recommendations. 

Our report is due to be issued in July 2002. I will discuss (1) the extent and type 

of overpayments in the UI program, including those that may be attributable to 

fraud or abuse; (2) the factors that contribute to overpayments in the UI program; 

and (3) the broader management issues that may affect the states’ ability to effectively control their UI benefit payments. 

To address these issues, we reviewed internal Labor guidance and documentation, 

performance plans and reports, performance data, as well as overpayment data from 

Labor’s Benefit Accuracy Measurement (BAM) and Benefit Payment Control (BPC) 

systems. In addition, we conducted in-depth interviews with more than 100 management and line staff in Labor’s headquarters and 6 regional offices, as well as UI 

officials in 6 states—California, Colorado, Illinois, Maryland, Massachusetts, and 

New York.1 We selected these states based on numerous criteria, including performance data from the Department of Labor, size of their workforce, availability of overpayment detection and recovery tools, and geographic location. Finally, we spoke 

with other groups that are involved in unemployment insurance, such as employer 

representatives and the National Association of State Workforce Agencies. In summary, our work shows that of the $30 billion in UI benefits paid in cal- endar 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 inVerDate Dec 13 2002 02:57 Jan 04, 2003 Jkt 082682 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 E:\HR\OC\C682A.XXX C682A
30

2These estimates are based on preliminary data from Labor available at the time of our review. 

depth analysis of individual UI claims in each state. Labor’s quality assurance data 

document numerous categories of overpayments, including individuals who work 

while receiving benefits, or misrepresent their identity. Other sources of overpayments include agency errors and inaccurate or untimely information provided by 

employers. Our work shows that management and operational practices at both the 

state and federal level contribute to overpayments in the UI program. At the state 

level, many states place a higher priority on quickly processing and paying UI 

claims than on taking the necessary steps to adequately verify claimants’ initial and 

continued eligibility for UI benefits. As a result, we found that many states do not 

adequately verify information reported by claimants. At the federal level, we found 

that Labor’s policies and directives emphasize quickly processing and paying claims, 

with only limited attention given to payment accuracy. While we recognize the importance of paying benefits to individuals in a timely manner, Labor’s performance 

measurement system does not provide sufficient incentives and sanctions for states 

to balance the need for payment timeliness with the need for payment accuracy. 

Background 

The UI program was established by Title III of the Social Security Act in 1935 

and is a key component in ensuring the financial security of America’s workforce. 

This complex program, which is administered jointly by the federal Department of 

Labor’s Employment and Training Administration and the states, provides temporary cash benefits to workers who lose their jobs through no fault of their own. 

Labor is responsible for monitoring state operations and procedures, providing technical assistance and training, as well as analyzing UI program data to diagnose potential problems. Although Labor provides oversight and guidance to ensure that 

each state operates its program in a manner that is consistent with federal guidelines, primary responsibility for administering the program lies with the states. 

State claims representatives determine claimants’ eligibility for UI benefits by 

gathering essential information, such as their identity, employment history, and 

other sources of income they may have. To enhance the efficiency and cost-effectiveness of their UI systems, many states have established centralized service centers 

that allow claimants to apply for benefits by telephone, fax, or the Internet, rather 

than in person at a local office. To be eligible for UI benefits in most states, claimants must (1) have worked for a specified amount of time in a job that is covered 

by the unemployment insurance program; (2) have left their prior jobs involuntarily 

(such as by employer layoff) or have quit their jobs for ‘‘good cause’’; (3) be currently 

‘‘able and available’’ for work, and, in most states, actively seeking work; (4) enroll 

in employment services or job training programs (in some states); and (5) be legally 

eligible to work—for example, noncitizens must be lawfully admitted to work in the 

United States, or lawfully present for other reasons. States are generally expected 

to provide benefits to the claimant within 14 to 35 days of application. 

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

States’ taxes pay the actual unemployment insurance benefits, whereas administrative costs are generally financed through the federal tax. Labor holds these funds 

in the Unemployment Trust Fund of the U.S. Treasury. To obtain annual funding 

from Labor to administer their programs, states submit a request via their annual 

State Quality Service Plan (SQSP). Labor reviews each state’s plan and makes adjustments in funding as necessary. In fiscal year 2001, Labor provided about $2.3 

billion to states to administer their programs. 

To ensure UI program integrity, Labor funds two principal kinds of activities for 

detecting and measuring UI overpayments at the state level—Benefit Payment Control and Benefit Accuracy Measurement. Each state is required to operate a benefit 

payment control division that is responsible for detecting and recovering overpayments. Each state is required to report overpayment data to Labor on a quarterly 

basis. By contrast, Labor’s benefit accuracy measurement data is an estimate of the 

total overpayments in the UI program—in each state and the nation as a whole—

based on an examination of a sample of paid and denied claims. Benefit accuracy 

measurement is one of the main quality assurance systems that Labor uses to assess payment accuracy in the program. 

More Than $2 Billion in Overpayments Detected in 2001

Labor’s data show that of the $2.4 billion in estimated overpayments about $1.3 

billion could have been detected and/or recovered by the states in 2001 given their 

existing policies and procedures.2 In contrast, the states reported that $650 million 

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

31

3We have not yet been able to obtain data on confidence intervals, so we are unsure of the 

precision of these estimates.

The difference in the overpayment figures produced by the two systems can be attributed to the fact that Labor’s quality assurance estimate is based on a more comprehensive examination of individual UI claims than the states’ benefit payment 

control activities can generally produce. Our analysis suggests that Labor’s quality 

assurance system estimate is a more complete assessment of the true level of overpayments in the UI program, partly because the system provides a more in-depth 

review of individual UI cases and causes of payment errors. We are currently in the 

process of verifying the precision of these estimates.3

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 aver- aging about 8.4 percent during that period. Overpayments averaged about $1.8 billion per year and reached a high of $2.4 billion in 2001. (See fig. 1.) 

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

2001

Source: Department of Labor quality assurance data.

The overpayments estimated by Labor’s quality assurance data occur for a number of reasons. Some overpayments result from errors in claimants’ reporting or the 

state agency’s recording of important eligibility information, such as wages or other 

sources of income that a claimant obtained while receiving UI benefits (‘‘benefit year 

earnings’’ or ‘‘base period wages’’). Overpayments also occur because claimants are 

not able and/or available to work, fail to register for employment services as required by their state, or fail to look for a new job as required (‘‘eligibility’’ violations). Claimants may also be overpaid because they become unemployed for reasons 

not covered by state law—such as being fired (‘‘separation’’ issues). Finally, overpayments may occur due to erroneous reporting or recording of a claimant’s dependent 

information (‘‘dependency’’ issues), or other causes such as reversal of benefits paid 

due to an appeals decision (‘‘other’’ causes). (See fig. 2.) The quality assurance data 

also classifies overpayments as being ‘‘fraud’’ or ‘‘nonfraud.’’ Fraud can occur when 

claimants intentionally misrepresent eligibility information, employers file fraudulent claims, or state UI program personnel misuse their access to sensitive information. Of the total overpayments estimated by Labor in 2001, about $560 million (24 

percent) were attributed to fraud. Of this amount, about $313 million (56 percent) 


Insert offset folio 82682b.002
32

were due to unreported earnings. However, we found that the states differ substantially in how they define fraud. For example, some states may include overpayments 

resulting from unreported earnings such as fraud, while other states do not. Thus, 

state-to-state comparisons of the level of fraud in the UI program and the activities 

that constitute fraud are difficult to make. 

Figure 2: Categories of $2.4 Billion in Overpayments Estimated by Labor’s Quality 

Assurance System (2001)

Note: Numbers in parentheses are in millions of dollars. 

Source: Labor’s quality assurance data.

Although some categories of overpayments are more difficult than others to detect 

or recover, Labor’s analysis suggests that the states could have detected and recovered about $1.3 billion of the $2.4 billion in estimated overpayments in 2001. In particular, Labor’s data show that existing state processes and procedures could have 

detected more overpayments attributable to unreported recipient income and wages 

and payments to individuals who are not entitled to UI benefits due to the circumstances under which they became unemployed. Labor’s analysis also suggests 

that 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 


Insert offset folio 82682a.001
33

4Several 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. 

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 2001.4 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 

34

5 Each state is required to maintain a database of individuals who were recently hired to help 

state child support enforcement agencies locate non-custodial parents who owe child support 

payments. 6 All states were required to create a state directory of newly hired employees as part of the 

Personal Responsibility and Work Opportunity Reconciliation Act of 1996. Each state’s directory 

periodically reports state unemployment insurance, wage and new hires data to the National 

Directory of New Hires for purposes of locating noncustodial parents in other states who owe 

child support payments. 7See 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. 8This match is conducted using Labor’s Interstate Connection Network. 9See 42 U.S.C. 653 (l). 

10WRIS helps participating states track the employment status of individuals who have participated in WIA job training programs in other states. 

overpayments due to unreported earnings. For example, each state regularly conducts a ‘‘Wage/Benefit Crossmatch’’ that compares the database of UI claimants 

with the state’s database of individuals’ wages to identify UI recipients who may 

have unreported income in the same state in which they are receiving UI benefits. 

However, because state wage data are only available quarterly, the crossmatch relies on information that may be several months old by the time the match is conducted. This delay allows some overpayments to remain undetected for a long period 

of time. Officials at Labor and in some states emphasized that overpayments are 

more likely to be recovered if they can be detected quickly. States generally recover 

a substantial proportion of the overpayments they detect by offsetting a claimant’s current and future UI benefits. However, UI benefits tend to be paid out over a relatively short period of time—about 14 weeks on average—and overpayment detection and recovery activities may begin long after individuals leave the UI rolls. This 

inability to obtain timely eligibility information places the program at substantial 

risk for overpayments that may never be recovered. 

More timely sources of data than the ‘‘Wage/Benefit Crossmatch’’ exist to verify 

a claimant’s employment status. State new hires data can provide information on 

individuals’ current employment status.5 States that use this data source have reported that it is helpful in detecting overpayments more quickly. However, we found 

that the new hires data are not routinely used in all states. Two of the six states 

we visited do not currently use their new hires data to verify claimants’ earnings 

or employment status.6 Yet, one of the states we visited reported that because the 

new hires data detect overpayments earlier than other detection methods, the size 

of its average overpayment at the time of detection has been reduced by nearly 75 

percent, from about $2,800 to roughly $750. Labor’s OIG has identified the new hire 

database as a potentially useful tool for detecting overpayments resulting from unreported income, which represents a substantial portion of the total UI overpayments each year.7 Although Labor has encouraged each state to use its own new 

hires database for purposes of administering their UI program, a number of states 

nationwide still do not use it. 

While the states’ directory of new hires data are useful for verifying claimants’

employment status, a main limitation is that they only identify this information for 

claimants within a given state. To detect unreported or underreported wages in 

other states, some states also use an ‘‘Interstate Crossmatch’’ that is facilitated by 

Labor.8 However, this match also typically relies on wage data that are about 4 to 

6 months old. Another type of match called the ‘‘Interstate Inquiry’’ allows states 

to check a claimant’s UI and employment status in other states. However, this system can generally only be used to check individual claimants and is not designed 

to verify the status of large numbers of claimants simultaneously. 

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

working or receiving UI benefits in other states, many officials we spoke with advocated giving states access to the Office of Child Support Enforcement’s National Directory of New Hires (NDNH). The NDNH is a comprehensive source of unemployment insurance, wage, and new hires data for the whole nation. However, current 

law limits access to the NDNH and does not permit individual states to obtain data 

from it for purposes of verifying claimants’ eligibility for UI.9 One possible alternative to the NDNH suggested by some officials for tracking interstate wages and 

UI benefit receipt is the Department of Labor’s Wage Record Interchange System 

(WRIS). This system, which was developed in response to the Workforce Investment 

Act (WIA) of 1998, is a ‘‘data clearinghouse’’ that makes UI wage records available 

to states seeking employment and wage information on individuals in other states.10

Certain federal officials and others familiar with WRIS told us that with some modification—such as incorporating the more timely new hires data from the states—

WRIS could be a logical alternative to the NDNH because the computer network for 

35

11Labor 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). 12State 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. 13The 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). 15See 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. 16States report sending SSNs to SSA for verification in intervals ranging from daily to once 

per quarter (every 3 months). 

sharing data among the states already exists. However, WRIS currently lacks important pieces of information (such as states’ new hires data) that would make it 

most useful as an interstate verification tool. Moreover, in a recent report, we noted 

that some states have been reluctant to become involved with WRIS, partly because 

of concerns about the cost of administering the system.11 Furthermore, we noted 

that if not all states participate, the value of WRIS will be diminished—even for 

participating states—because no data will be available from nonparticipating states’

UI wage records. 

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.12

Only two of the six states we visited verify claimants’ receipt of workers’ compensation using independent sources of information. Moreover, at least one of these states 

only checks for receipt of workers’ compensation if the claimant self-reports that 

they are currently receiving such benefits. Similarly, receipt of some federal benefits 

such as cash payments from Social Security programs may affect a UI claimant’s 

eligibility for or amount of benefits.13 For example, one state we visited requires 

claims representatives to ask claimants if they are currently receiving Social Security Disability Insurance (DI), which could reduce or eliminate the UI benefits they 

are eligible to receive. However, if a claimant states that he or she is not receiving 

DI benefits, then no further actions are taken to independently verify this information. Labor’s quality assurance data estimate that in 2001, about $30 million in UI 

overpayments were due to unreported social security benefits, such as DI. 

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.14 However, states may be vulnerable to fraud and overpayments because they rely heavily on claimants to self-report important identity information 

such as their social security number (SSN), or are unable to verify such information 

in a timely manner. Prior investigations by Labor’s OIG demonstrate that the failure or inability of state employment security agencies to verify claimants’ identity 

have likely contributed to millions of dollars in UI overpayments stemming from 

fraud. One audit conducted in four states (Florida, Georgia, North Carolina, and 

Texas) revealed that almost 3,000 UI claims totaling about $3.2 million were paid 

to individuals using SSNs that did not exist, or belonged to deceased individuals. 

Furthermore, the OIG concluded that illegal aliens filed a substantial proportion of 

these claims.15

We found that vulnerabilities remain with regard to verifying claimants’ identity 

and citizenship status. For example, none of the six states we visited have access 

to the Social Security Administration’s (SSA) State Online Query (SOLQ) system, 

which can be used to verify the identity of claimants applying for UI by matching 

their name, date of birth, and SSN in real time. At the time of our review, only 

two states had access to this system because they were participating in a pilot 

project with SSA. The states we visited generally use a batch file method in which 

large numbers of SSNs are periodically sent to SSA for verification.16 This process 

36

17See 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. 18Labor 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. 19For 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. 

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.17 A more in-depth review of seven states in this audit also showed that $17 million in overpayments occurred in four of the states because employers did not respond to the states’ request for wage information. We discussed these issues with 

an official from a national employer representative organization who told us that 

some employers may resist requests to fill out paperwork from states because they 

view the process as cumbersome, time-consuming, and cannot always see how fraud 

and UI overpayments can affect their tax rate. In particular, because employers are 

unlikely to experience an immediate increase in the UI taxes they pay to the state 

as a direct result of overpayments, they do not see the benefit in complying with 

state requests for wage data in a timely manner. Although Labor has taken some 

limited actions to address this issue, our work to date shows that failure of employers to respond to requests for information in a timely manner is still a problem.18

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.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 

37

20This 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. 21The national minimum performance criteria are performance measures that are applied uniformly to all states. 22See 29 C.F.R. 97.43. 23See 20 C.F.R. 601.6. 

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.20 Most of the first 12 performance measures (called ‘‘Tier I’’) assess 

whether states meet specified timeframes for certain activities, such as the percentage of first payments made to claimants within 14 to 35 days. However, none of the 

Tier I measures gauge the accuracy of UI payments. Labor also gives Tier I measures more weight than the remaining measures (called ‘‘Tier II’’), which assess other 

aspects of state performance, including overpayment collections. Labor has developed national criteria specifying the minimum acceptable level of performance for 

most Tier I measures.21 States that fail to meet the minimum established criteria 

are generally required to submit a ‘‘Corrective Action Plan’’ to Labor. Moreover, 

Labor has indicated that it may withhold the administrative funding of states that 

continually do not meet Tier I performance goals. By contrast, the Tier II measures 

do not have national minimum performance criteria and are generally not enforced 

as strictly by Labor. Labor could set Tier II criteria on a state-by-state basis and 

withhold funding in case of subsequent noncompliance. 

Officials from most of the states we visited also told us that the Tier I and Tier 

II measures make the UI program complex to administer and may contribute to an 

environment in which overpayments are more likely. In particular, these officials 

told us that because the measures are so numerous and are designed to monitor a 

wide range of activities, it is difficult to place sufficient emphasis on more fundamental management issues, such as payment accuracy. There are currently more 

than 70 Tier I and Tier II measures that gauge how states perform in terms of the 

timeliness, quality, and accuracy of benefit decisions. Faced with competing priorities, some states tend to focus most of their staff and resources on meeting certain 

measures such as payment timeliness, but may neglect other activities such as those 

dealing with program integrity. 

We believe, however, that Labor can do more to encourage states to balance payment timeliness with the need for payment accuracy in a manner that does not require the complete withholding of administrative funds. For example, under federal 

regulations covering funds to states, Labor may temporarily withhold cash payments, disallow costs, or terminate part of a state’s administrative funding due to 

noncompliance with grant agreements or statutes.22 Withholding or delaying a portion of these funds is one way Labor can potentially persuade states to implement 

basic payment control policies and procedures. In addition, while completing the annual budget process, Labor could prioritize additional administrative funding to 

states to help them achieve or surpass agreed upon payment accuracy performance 

levels.23 However, we found that Labor is only using such tools to a limited degree 

to help states enhance their program integrity activities. 

38

24See 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. 26This 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. 

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.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.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’ em- ployment and benefit status in other states. Our analysis suggests that use of this 

data source could potentially help states reduce their exposure to overpayments. For 

example, if the directory had been used by all states to detect claimants’ unreported 

or underreported income, it could have helped prevent or detect hundreds of millions of dollars in overpayments in 2001 alone.26 In addition, Labor is working to 

develop an agreement with the Social Security Administration that would grant 

states access to SSA’s SOLQ system. States that used this system would be able 

39

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 Contact and Staff Acknowledgments 

For information regarding this testimony, please contact Sigurd R. Nilsen, Director, Education, Workforce, and Income Security Issues, at (202) 512–7215. Individuals who made key contributions to this testimony include Daniel Bertoni, Jeremy 

Cox, Cheryn Powell, and Salvatore Sorbello. 

Related GAO Products

Workforce Investment Act: Improvements Needed in Performance Measures to Provide a More Accurate Picture of WIA’s Effectiveness. GAO–02–275 Washington, D.C.: 

February 1, 2002. 

Strategies to Manage Improper Payments: Learning from Public and Private Sector Organizations. GAO–02–69G. Washington, D.C.: October 2001. 

Department of Labor: Status of Achieving Key Outcomes and Addressing Major 

Management Challenges. GAO–01–779. Washington, D.C.: June 15, 2001. 

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

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

Benefit and Loan Programs: Improved Data Sharing Could Enhance Program Integrity. GAO/HEHS–00–119. Washington, D.C.: September 13, 2000. 

Supplemental Security Income: Action Needed on Long-Standing Problems Affecting Program Integrity. GAO/HEHS–98–158. Washington, D.C.: September 14, 1998. 

Supplemental Security Income: Opportunities Exist for Improving Payment Accuracy. GAO/HEHS–98–75. Washington, D.C.: March 27, 1998. 

Supplemental Security Income: Administrative and Program Savings Possible by 

Directly Accessing State Data. GAO/HEHS–96–163. Washington, D.C.: August 29, 

1996.

f40

Chairman HERGER. Thank you, Dr. Nilsen. Now, Mr. Heddell 

will testify. 

STATEMENT OF HON. GORDON S. HEDDELL, INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT 

OF LABOR 

Mr. HEDDELL. Good afternoon, Mr. Chairman and Members of 

the Subcommittee. Thank you for inviting me to testify today in my 

capacity as the Inspector General of the U.S. Department of Labor. 

I am pleased to discuss my office’s assessment of the integrity of 

the Unemployment Insurance program. 

Preserving the integrity of the UI program has been a longstanding concern of the Office of Inspector General (OIG). Our investigative casework and audits show that the program remains 

vulnerable to fraud, waste, and abuse, which result in millions in 

losses to the UI trust fund. Based on this body of work, we believe 

that more can be done by the DOL to strengthen the integrity of 

the program. 

From an investigative perspective, we have focused on three 

types of unemployment insurance schemes involving fictitious or 

fraudulent employers, internal embezzlement, and identity theft. 

Mr. Chairman, a fictitious employer scheme involves the creation 

of a company that exists only on paper with no actual employees, 

business operations, or cash outlays for taxes. In many of these 

cases, the individuals will operate in multiple States and include 

family, friends, or others who have been recruited to assume false 

identities in order to collect UI benefits. 

Conversely, a fraudulent employer scheme usually involves a legitimate business with employees and valid business expenses. 

However, the employer actively engages in fraudulent activity, 

such as allowing non-employees to file claims against their company in exchange for a cut of the claimants’ benefits. 

In one illustrative case, an individual used 13 fictitious companies and 36 fictitious claimants, using names and Social Security 

numbers of deceased persons, to collect over $135,000 in UI benefits from California, $65,000 from Massachusetts, $16,000 from Nevada, and $15,000 from Texas. 

Another type of scheme involves fraud and embezzlement committed by State personnel who administer the UI program. These 

schemes vary in complexity. A simple fraud arrangement may be 

the acceptance of a payoff by a State employee in exchange for approving an unauthorized UI claim. These arrangements, however, 

can mushroom into operations involving multiple individuals when 

State employees work with outside employers to certify false employment information. An illustration involves a New Jersey State 

employee who defrauded the State of $325,000 over a 7-year period 

by sending false wage and employment information to local unemployment offices to verify the employment of as many as 30 co-conspirators. In return, he received half of his co-conspirators’ UI benefit checks. 

Identity theft schemes are another means of defrauding the program. Under this type of scheme, individual identities are stolen to 

apply for UI benefits. In one case, a California man orchestrated 

41

and then used an identity theft scheme designed to obtain UI benefits by filing over 30 fraudulent claims totaling more than 

$130,000. The stolen identities were obtained from customer transaction receipts printed by a Los Angeles public employees’ credit 

union. 

Mr. Chairman, in addition to these types of fraud schemes, there 

are internal control weaknesses and other vulnerabilities that impact the integrity of the UI system that we have identified. They 

include the DOL’s ability to detect, recover, and reduce, overpayments; the misuse of administrative grant funds by States; the 

misclassification of workers and its impact on employers’ payment 

of UI taxes; and the vulnerabilities created by telephone and Internet claims systems now in place by most States. 

With respect to overpayments, we are concerned that the BAM 

system, which uses statistical sampling techniques to project the 

total UI benefit overpayments made, is not being utilized to reduce 

the number of overpayments. 

In addition, we are concerned about the cross-matches conducted 

by States as part of their benefit payment control activities. States 

cross-match weekly UI benefit records with quarterly wage records 

in order to detect possible overpayments. An inherent weakness in 

this process is that States must rely on employers to provide detailed wage information. Our audit of seven States found that 

many employers failed to submit this information for a variety of 

reasons. As a consequence, we estimated $17 million in overpayments were not being detected in four of the seven States. 

Mr. Chairman, another area of concern involves the use of UI administrative grant funds, which are issued to the States for the 

cost of processing unemployment claims, collecting UI taxes, and 

other activities. In just three OIG audits, we questioned costs of 

nearly $20 million related to improper uses of these funds. 

Our work has also disclosed that not all employers voluntarily 

pay their fair share of UI taxes. Some employers intentionally 

misclassify their employees as independent contractors in order to 

hide the wages they pay out, or will utilize employee leasing companies in order to avoid paying benefits or taxes. Such activities result in lost contributions to State UI trust funds. 

Finally, we are concerned about the unintended consequences 

that remote claims filing may have on the integrity of the program. 

Based on our audits and investigative casework, the OIG has made 

several recommendations to the DOL and the Congress for 

strengthening and enhancing the integrity of the UI program. 

Among our recommendations is the need to grant the OIG and the 

DOL unimpeded access to unemployment insurance, Social Security, and new hire data for fraud detection and program evaluation 

purposes, to enhance fraud detection and investigative training for 

State personnel, and to improve the UI cross-match system for detecting overpayments. 

In conclusion, Mr. Chairman, my office will continue to provide 

oversight and conduct investigations to ensure that the UI program 

operates effectively and efficiently and that benefits go to only 

those who are eligible. 

42

This concludes my statement, and I would be pleased to answer 

any questions you or any other Subcommittee Members may have. 

Thank you. 

[The prepared statement of Mr. Heddell follows:]

Statement of the Hon. Gordon S. Heddell, Inspector General, Office of 

Inspector General, U.S. Department of Labor 

Good afternoon, Mr. Chairman and Members of the Subcommittee. Thank you for 

inviting me to testify today in my capacity as the Inspector General of the U.S. Department of Labor. I am pleased to discuss my Office’s assessment of the integrity 

of the Unemployment Insurance (UI) program. The views I express this afternoon 

may not be representative of those of the Department. 

Administration and Oversight of the UI Program

Mr. Chairman, as you know, the UI program is vital in ensuring the financial security of America’s workforce. This multi-billion dollar entitlement program, administered through a unique Federal-State partnership, provides temporary financial 

assistance to workers who lose their jobs through no fault of their own. Benefits are 

paid out so long as workers meet certain eligibility requirements. Funding for these 

benefits comes from employer taxes deposited into the Unemployment Trust Fund. 

States are primarily responsible for the collection of these taxes and the payment 

of benefits through State Workforce Agencies (SWAs), while the Department is 

charged with ensuring that states comply with applicable laws and regulations, and 

with providing oversight, policy guidance, and technical assistance to the states. 

In addition to the Department, the OIG has certain oversight responsibilities regarding the UI program. Preserving the integrity of the UI program has been a 

long-standing concern of the OIG. Our investigative casework and audits show that 

the UI program remains vulnerable to fraud, waste and abuse, which result in millions in losses to the UI trust fund. We conduct periodic audits of the program that 

look at internal controls and program integrity, among others. We also engage in 

casework that identifies complex interstate UI fraud schemes, as well as single 

claimant fraud cases committed by federal employees or ex-military personnel. 

Based on this body of work, we believe that more can be done by the Department 

to strengthen the integrity of the UI program. We have highlighted UI program integrity as one of the top management issues facing the Department. Congress also 

recognized the importance of improving the integrity of the UI program in a 2001 

report on Government mismanagement, as well as OMB in a report released last 

month on erroneous payments. 

Fraud Against the UI Program 

As with any multi-billion dollar benefit payment program, the UI program is vulnerable to fraud and abuse. We have focused our UI investigative activities on three 

types of schemes: 1) fictitious or fraudulent employer schemes; 2) internal embezzlement schemes; and 3) identity theft or imposter schemes. I will elaborate on each 

of these areas. 

Fictitious/Fraudulent Employer Schemes

Mr. Chairman, a fictitious employer scheme involves creating a company that exists only on paper with no actual employees, business operations, cash outlays for 

taxes or any other normal business expenses. The intent is to have in place a company that is used to file fraudulent claims. In many of these cases, the individuals 

will operate in multiple states and include their family and friends, or individuals 

who have been recruited to assume false identities in order to collect UI benefits. 

Conversely, a fraudulent employer scheme usually involves a legitimate business 

with employees and valid business expenses. However, the employer actively engages in fraudulent activity such as laying off workers, only to return them to work 

under a cash system, or allowing non-employees to file claims against the company 

in exchange for part of the claimants’ benefits. Unfortunately, mail, telephone, and 

Internet claims filing, which are designed to make the program run more effectively, 

can have the unintended effect of facilitating these types of schemes because they 

eliminate the need to fill out UI forms in person. In one case that is illustrative 

of how these schemes can result in significant losses to the UI program, an individual used 13 fictitious companies and 36 fictitious claimants using names and Social Security numbers of deceased persons to collect over $135,000 from California, 

approximately $65,000 from Massachusetts, $16,000 from Nevada, and over $15,000 

43

from Texas. The individual submitted fraudulent interstate UI claims based on false 

reported wages, and then collected the benefit checks from various locations based 

on claims filed by mail. 

Internal Embezzlement Schemes

Fraud and embezzlement of UI funds by state personnel who administer the program is another problem in the UI system. These schemes vary in complexity. A 

simple fraud scheme may be the acceptance of a payoff by a state UI employee in 

exchange for the approval of an unauthorized UI claim. These schemes, however, 

can mushroom into operations involving multiple individuals when state UI employees work with outside employers who certify false employment information. We believe that advanced technology, which has consolidated certain tasks into a single 

job that once had been handled by several people, has had the unintended effect of 

facilitating this type of fraud since it has eliminated certain controls by reducing 

the levels of peer review and supervisory oversight in UI offices. An illustration of 

this type of internal embezzlement involves a New Jersey state employee who sent 

false wage and employment information to local unemployment offices to verify the 

employment of as many as 30 co-conspirators. The scheme consisted of registering 

four fictitious companies with New Jersey for the purpose of ‘‘employing’’ his co-conspirators. The individual and his co-conspirators filed false UI applications claiming 

that they had been laid off from these companies and thus entitled to benefits. The 

state employee then verified their employment with UI offices and used a false 

name to disguise his involvement. In return, he received half of the co-conspirators’ UI benefit checks. 

Identity Theft or Imposter Schemes

Fraud against this program has also been carried out through identity theft. 

Under this type of scheme, individual identities are stolen and then used to apply 

for UI benefits. Identity theft victims are usually unaware that someone is using 

their identity. Unfortunately, fraud detection in these cases is complicated because 

any preliminary fraud screening that may be done would disclose that the employer 

and employee actually exist. An example of how such a scheme can operate involves 

our investigation of a California man who orchestrated an identity theft scheme designed to obtain UI benefits by filing over 30 fraudulent claims totaling more than 

$130,000. The stolen identities were obtained from customer transaction receipts 

printed by a Los Angeles public employees’ credit union. This credit union, like others, uses Social Security numbers as customer account numbers. Victims of the 

scheme included 18 Los Angeles City and two Los Angeles County employees. The 

individual used the UI system to create fictitious employers and had the benefit 

checks sent to his home. Assisted by his girlfriend, he would then deposit the fraudulent UI checks into bank accounts that he controlled. 

Internal Control Weaknesses and Other Vulnerabilities in the UI Program 

Mr. Chairman, in addition to fraud schemes, there are a number of internal control weaknesses and other vulnerabilities that impact the integrity of the UI system. 

Over the years, OIG work has also identified weaknesses or vulnerabilities relative 

to: 1) overpayment detection, recovery and reduction; 2) misuse of administrative 

grant funds by states; 3) misclassification of workers and its impact on employers’ payment of UI taxes; and 4) vulnerabilities created by telephone and Internet claims 

systems now in place by most states. In our opinion, these weaknesses can be compounded by the program’s requirements that timely benefit payments be provided 

to unemployed workers. 

Overpayment Detection, Recovery and Reduction

With respect to overpayments, Mr. Chairman, the OIG is concerned about the efficiency and effectiveness of the Department’s activities to detect, recover, and reduce 

UI benefit overpayments. The Department funds two systems that measure UI benefit overpayments. The Benefit Accuracy Measurement (BAM) system uses statistical sampling techniques to project the total UI benefit overpayments made. The 

Benefit Payment Control (BPC) system at each state identifies and investigates benefit overpayments, establishes receivables, and collects overpayments. 

Benefit Accuracy Measurement System 

As part of our audit of the DOL FY 2001 financial statements, we noted that the 

BAM system projected overpayments of $2.3 billion for FY 2001. For the same period, actual overpayments identified by BPC totaled $669 million, or just one-third 

of the amount estimated by BAM activities. We also noted that overpayment rates 

44

projected by BAM have remained relatively flat at approximately 8.5 percent over 

the past 12 years. This raises a concern that the BAM system is not being utilized 

to reduce the amount of overpayments. 

To examine these seemingly divergent results more closely, the OIG is performing 

an audit of the Department’s oversight role regarding UI benefit overpayments. Our 

ultimate objective is to assess BAM results and identify how the system can best 

be utilized to reduce the amount of overpayments. 

Benefit Payment Control System 

As part of their BPC activities, states routinely conduct crossmatches to compare 

weekly UI benefit payment records with quarterly wage records reported by employers in order to detect possible overpayments. When claimants are identified with 

both UI benefits and wages for the same period, a potential UI overpayment case 

is developed. This has historically been the most effective overpayment detection 

tool used by the states. However, a 1999 audit we conducted of the crossmatch systems in seven states—Illinois, Texas, California, New Jersey, Maryland, Kentucky 

and Florida—showed inherent weaknesses in this fraud detection method. Foremost 

among these weaknesses was the failure of employers to respond to the states’ requests for detailed wage information. This information is critical because it provides 

specific information as to how much the claimant earned on a weekly basis, which 

states can then use to determine if an overpayment has occurred. As a consequence, 

we estimated $17 million in overpayments were not being detected in four of the 

seven states we audited. Many employers failed to respond because they either misunderstood the purpose of the request or were confused over who should respond. 

To improve the UI benefit-wage crossmatch overpayment system, we recommended that:

• ETA provide policy guidance and direction to the SWAs to ensure that employers are reminded of their responsibility to respond to wage requests, and 

that adequate follow-up routinely occurs for those who fail to respond, particularly those with the highest potential for overpayments. 

• ETA assume a leadership role in assuring that SWAs obtain timely access to 

the data of the National Directory of New Hires, established under the welfare reform legislation, and to fully incorporate that data into UI Benefit Payment Control operations.

ETA has agreed to take corrective action, and we will work with them to ensure 

that they implement our recommendations. 

The Use of UI Administrative Grant Funds by States

Mr. Chairman, another area of concern involves the use of UI administrative 

grant funds. These funds are issued to the states for the costs of processing unemployment claims, collecting UI taxes, and all necessary related activities. State funding is based on the cost of proper and efficient administration and such other factors 

as the Secretary deems appropriate. In just three audits, we identified questioned 

costs of nearly $20 million related to improper uses of UI administrative grant 

funds. Included in the amount of questioned costs we identified were unallowable 

charges for direct and indirect costs, overcharges for state automatic data processing 

and information technology central service costs, and un-allocable maintenance and 

operating expenses relating to building space occupied by non-SWA personnel. Amid 

SWA complaints that administrative funding is inadequate, the inefficiency identified by our audits points to the need for more careful use of current funding to allow 

more to be done to enhance quality control and other essential functions. 

Misclassification of Workers and Lost Contributions to State UI Trust Funds

Our work has also disclosed that not all employers voluntarily pay their fair share 

of UI taxes. Some employers intentionally misclassify their employees as independent contractors in order to hide the wages they pay out in order to avoid paying 

benefits or taxes. Employee leasing companies are another method used to avoid 

paying taxes. These companies lease workers back to client firms, serving as the 

employer of record for purposes of UI tax payments and experience-rating calculations. Losses to UI trust funds occur when companies purchase an inactive or 

defunct company that has few or no employees and very low tax rates. Upon purchasing this ‘‘shell’’ company, the employee leasing company obtains that company’s 

lower UI rate and transfers employees from other affiliated entities to the lower UI 

tax-rated shell company, thereby avoiding higher taxes. This undermines the state’s 

experience rating system, which is designed to assess UI tax rates based on an individual employer’s history of UI tax assessments paid, versus benefits charged. 

45

To combat these activities, SWAs rely on field audits to determine whether employers are reporting all UI-covered wages and paying their fair share of UI taxes. 

In March 1999, we reviewed the field audit practices of 12 states. We determined 

that if states adopted some of the best practices used by the top performing states, 

the identification of non-compliant employers could be improved. Among the best 

practices we found were: 1) selecting a significant percentage of employers based on 

Standard Industrial Classification codes that identify employers with the highest 

probability for non-compliance; and 2) implementing a blocked claims audit program 

that encourages the conversion of field audit investigations into audits. In response 

to the latter recommendation, ETA revised its reporting instructions to permit 

states to take credit for blocked claims audits. As a result of our audit, almost $16 

million in additional taxes have been recovered as a result of ETA’s implementation 

of our recommended actions. 

Telephone and Internet Claims Systems

Over the last several years, almost all states have moved from traditional in-person claims services to telephone or Internet claims services, or both to improve the 

delivery of services. Shifting to remote claims filing via the telephone or Internet 

has reduced administrative costs for states, and users have cited the convenience, 

ease, and privacy it provides. However, we are concerned that as remote claims filing increases, the ability of states to monitor the integrity of the claims-filing process will be eliminated. Reducing or eliminating personal contacts during the initial 

claims filing process removes a first-line defense against fraud schemes. In addition, 

electronic claims filing effectively enlarges the potential universe of identity theft 

victims, and makes it easier to initiate multiple state schemes from a single location. We are concerned that this type of activity will only increase absent up-front 

identity or eligibility verification, or the implementation of proper controls and safeguards. 

Current and Future OIG Work in the UI Program 

Mr. Chairman, the OIG will continue to engage in proactive investigative casework, audits, and evaluations designed to improve the integrity of the UI program. 

The following is a brief description of our planned work in this area. 

In FY 2003, we plan to conduct a comprehensive, nationwide initiative to help 

safeguard the integrity of the UI program. Our initiative will focus on identifying 

systemic weaknesses that make the program vulnerable to fraud and overpayments; 

identifying and disseminating information on best practices used by the states to 

detect fraud; and determining if UI administrative funding is used to its maximum 

effect. Specifically, we will continue to expand our investigative efforts to detect and 

investigate interstate, fraudulent employer schemes used to defraud the program. 

We will also continue to audit the Department’s oversight role regarding UI benefit 

overpayments, and will follow up on our earlier audits that highlighted excessive 

charges by the Treasury Department to the UI trust fund to pay for the IRS’ costs 

of administering the fund. Finally, we will begin looking into issues related to the 

solvency of state UI trust funds and how states have been using the $8 billion in 

Reed Act distributions they received in March. 

Recommendations for Strengthening the UI Program 

Based on our audits and investigative casework, the OIG has made several recommendations to the Department and the Congress for strengthening and enhancing the integrity of the UI program. Among our recommendations is the need to:

• Grant the OIG and the Department unimpeded access to UI, Social Security, 

and New Hire data for fraud detection and program evaluation

purposes

The OIG and the Department needs efficient access to data that is maintained by other agencies such as state UI and Social Security wage records; 

and wage data contained in databases such as the National Directory of New 

Hires. Such data would be used for two primary purposes: 1) to aid in our 

fraud detection and investigative efforts; and 2) to better help us and the Department assess program performance and return-on-investment. If we had 

routine and expeditious access to the centralized Social Security wage database, we could more efficiently and consistently verify eligibility of program 

applicants and whether their Social Security numbers are valid. This would 

aid in identifying potential overpayments and preventing millions of dollars 

in future losses.

46

• Enhance fraud detection and investigative training for state personnel

In order to better detect fraud and abuse, state personnel who are responsible 

for benefit payment control, tax, and internal security need to be provided 

high-quality, consistent training. Any training should focus on fraud prevention and detection, information sharing regarding common fraud schemes, 

and dissemination of best practices used by the states. This transfer of knowledge will assist the states in their efforts to improve their enforcement and 

oversight capabilities.

• Improve the UI benefit-wage crossmatch overpayment system

Although ETA has distributed to the states our 1999 audit report on the UI 

benefit-wage crossmatch overpayment system, ETA should implement a corrective action plan to address our findings and recommendations in order to 

detect the millions in overpayments that are being missed.

Conclusion 

In conclusion Mr. Chairman, the UI program provides financial assistance to 

workers who lose their jobs through no fault of their own. It is vital, therefore, that 

the UI program function effectively and efficiently, and that UI benefits only go to 

those who are eligible to receive these benefits. My Office will continue to provide 

oversight and conduct investigations to this end. This concludes my full statement. 

I would be pleased to answer any questions you or any other Subcommittee MemDr. Woodbury to testify. 

bers may have.

Chairman HERGER. Thank you very much, Mr. Heddell. Now, 

f STATEMENT OF STEPHEN A. WOODBURY, PH.D., PROFESSOR 

OF ECONOMICS, MICHIGAN STATE UNIVERSITY, EAST LANSING, MICHIGAN, AND SENIOR ECONOMIST, W.E. UPJOHN INSTITUTE FOR EMPLOYMENT RESEARCH 

Dr. WOODBURY. Thank you, Mr. Chairman. The integrity of the 

unemployment insurance system has three aspects: Whether workers receive more benefits than they are entitled to under the law, 

whether workers receive less than they are entitled to under the 

law, and whether employers pay the taxes that they are obligated 

to pay under the law. 

The UI overpayments have been tracked by the DOL since 1987 

with the Benefit Accuracy Measurement system, or BAM program. 

In addition, the DOL is now implementing a Denied Claims Accuracy, or DCA program, to track the extent to which UI claims are 

incorrectly or wrongfully denied and, therefore, result in underpayment. To date, the only information on the extent of underpayments from incorrectly denied claims comes from a pilot study that 

the DOL conducted with the cooperation of five States in 1997–

1998. 

Regarding employer compliance, the DOL appears to have no immediate plans to implement a revenue quality control program, although it has discussed this in the past. Such a program would 

track the degree of compliance with the unemployment insurance 

payroll tax. Information does exist on the extent of employer compliance from one study that was conducted in Illinois in 1987. 

My testimony focuses on findings from the Denied Claims Accuracy pilot study from 1997–1998 and about the extent of UI overpayments and underpayments that can be gleaned from that study. 

My hope is that by combining the DCA pilot data with the BAM 

data from the same States in the same time period, I can give you 

47

a slightly more complete picture of UI overpayments and underpayments than BAM alone can give. 

In my written testimony, I provide some background on how 

BAM and the DCA programs work. Briefly, under the BAM program, each State randomly samples a predetermined number of 

benefit payments each week and investigates each of those payments to determine whether the payment was proper. Investigations are performed by telephone and in person with the claimant, 

employers, and third parties in order to determine whether the 

payment complied with the laws and policies of the State. 

In addition to giving estimates of overpayments, BAM yields estimates of the extent of underpayments made on paid claims. That 

is, an investigator may find that a payment was less than it should 

have been, and this will be recorded and reported. The BAM program has no way of estimating underpayments that result from UI 

claims that should have been paid, but were denied wrongfully. 

The DCA program fills this main gap in the BAM program by 

drawing and investigating random samples of UI claims that were 

denied. Now, a UI claim can be denied for any of three broad reasons. It may fail the State’s monetary eligibility criteria, that is, 

the worker may not have enough earnings in the base period. It 

may fail to meet the State’s separation eligibility criteria, if a worker quits or is discharged, for example, rather than being laid off for 

lack of work. Or, the claim may fail to meet the non-separation eligibility criteria, meaning the worker may not have been able, available, and searching for work. 

So, in both the denied claims pilot project 1997–1998 and the Denied Claims Accuracy program that is now starting, States drew or 

are drawing three random samples for monetary, separation, and 

non-separation denials and investigating each of those in a manner 

similar to the BAM. 

Now, the findings of the Denied Claims Accuracy pilot project are 

displayed in table 1 of my written testimony. Just briefly, the five 

States that participated were Nebraska, New Jersey, South Carolina, West Virginia, and Wisconsin. These are the only States and 

the only time period for which data exists on the extent of underpayments caused by incorrect denials in addition to underpayments 

on paid claims and all types of overpayments. 

Column two of the table shows that overpayments as a percentage of UI benefits paid ranged between 2.2 and 12 percent in those 

five pilot States that I mentioned, with a weighted average of 7-

percent, roughly, in those States. That 7 percent average is a little 

below the national average overpayment rate of 8.6 that BAM 

found. So the pilot States seem to be fairly representative. They are 

slightly more accurate. 

The BAM has found repeatedly that the main reason for these 

overpayments are three: Workers failing to report all or part of 

their earnings while they are claiming benefits; violations of the 

separation criteria, meaning simple error, generally, on the part of 

the agency; and workers failing to search for work as required by 

State law. 

Column three shows the underpayments on paid claims that 

come from BAM. They are relatively low, one-half of 1 percent to 

1.2 percent, with an average of 1 percent. 

48

1Opinions expressed are the author’s. 

Column four is what is unique to the DCA pilot study. It shows 

that underpayments caused by wrongful denials range from 1.5 to 

9 percent of total UI benefits paid in the five pilot States, with a 

weighted average of 3.4 percent. The underlying causes of underpayments vary with the type of wrongful denial, but employer 

underreporting of wages is the main cause of the wrongful monetary denials. Simple agency error is the main cause of wrongful 

separation and non-separation denials. 

Now, how closely these five pilot States resemble the rest of the 

United States in their underpayments due to wrongful denials is 

unknown, but applying the average weight of underpayments 

caused by wrongful denials to the entire Nation suggests that the 

benefits lost from wrongful denials during fiscal year 1998 were in 

excess of $635 million. 

Column five shows the sum of underpayments on unpaid claims 

and underpayments from wrongful denials. A comparison shows 

that in one State, underpayments actually exceed overpayments. In 

two, overpayments exceed underpayments, but by less than 33 percent. In the remaining two States, overpayments exceed underpayments more substantially. Over all in the five States, overpayments 

exceed underpayments by about 64 percent. That is, a dollar of underpayment is outmatched by about $1.64 of overpayment. This excess of overpayments relative to underpayments is substantially 

less than the picture that emerges if one examines the BAM data 

alone, and that would suggest that overpayments exceed underpayments by seven times or more. 

I can see I am out of time, so I will end my statement there. 

Thank you. 

Chairman HERGER. Thank you very much, and again, the rest 

of your comments can be submitted for the record. 

Dr. WOODBURY. Yes. 

Chairman HERGER. Thank you, Dr. Woodbury. 

Dr. WOODBURY. Thank you. 

[The prepared statement of Dr. Woodbury follows:]

Statement of Stephen A. Woodbury1, Ph.D., Professor of Economics, Michigan State University, East Lansing, Michigan, and Senior Economist, W.E. 

Upjohn Institute for Employment Research 

Unemployment Insurance Overpayments and Underpayments 

The integrity of the Unemployment Insurance (UI) system has three aspects: 

whether workers, fraudulently or otherwise, receive more benefits than they are entitled to under the law, whether workers receive less than they are entitled to under 

the law, and whether employers pay the taxes that they are obligated to pay under 

the law (Skrable 1999). 

UI overpayments have been tracked by the Labor Department since 1987 with the 

Benefit Accuracy Measurement (BAM) program. As a result, much is known about 

overpayment of UI benefits (see any of the UI PERFORMS Annual Reports published by the U.S. Department of Labor; for example, U.S. Department of Labor 

1998, 1999). 

In addition, the Department is now implementing a Denied Claims Accuracy 

(DCA) program to track the extent to which UI claims are incorrectly (or wrongfully) denied and therefore result in underpayments. To date, the only information 

on the extent of underpayments from incorrectly denied claims comes from a pilot 

study that the Department conducted with the cooperation of five states in 1997–

98 (Woodbury and Vroman 1999, 2000). 

49

Regarding employer compliance, the Department appears to have no immediate 

plans to implement a Revenue Quality Control program that would track the degree 

of compliance with the UI payroll tax. However, information on the extent of employer compliance does exist from a study conducted in Illinois in 1987 (Blakemore, 

Burgess, Low, and St. Louis 1996; Burgess, Blakemore, and Low 1998; see below). 

This testimony focuses on findings about the extent of UI overpayments and underpayments from the five-state DCA pilot study of 1997–98. Combining the DCA 

pilot data with BAM data from the same states and time period gives a more complete picture of UI overpayments and underpayments—and hence of the UI program’s integrity—than BAM alone can give. 

How the Bam and DCA Programs Work 

Under the BAM program, each state randomly samples a predetermined number 

of benefit payments each week (between 9 and 35, depending on the size of the 

state) and investigates each of those payments to determine whether the payment 

was proper. Investigations are performed by telephone and in-person with the claimant, employers, and third parties in order to to determine whether the payment 

complied with the laws and policies of the state. Because BAM randomly samples 

paid claims, the Department can estimate, on an annual basis, total overpayments 

in each state and nationally. 

In addition to giving estimates of overpayments, BAM yields estimates of the extent of underpayments made on paid claims. That is, an investigator may find that 

a payment was less than it should have been, and this will be recorded and reported. However, BAM has no way of estimating underpayments that result from 

UI claims that should have been paid but were denied. BAM only samples and investigates UI payments; no payment exists when a claim is denied. 

The DCA program fills the main gap in the BAM program by drawing and investigating random samples of UI claims that were denied. A UI claim can be denied 

for any of three broad reasons:

• The claim may fail to meet the state’s monetary eligibility criteria; that 

is, the worker may not have earned enough during roughly the year before 

claiming benefits. This is a monetary denial. 

• The claim may fail to meet the state’s separation eligibility criteria; that 

is, the worker may have quit or been discharged for cause rather than being 

laid off due to lack of work. This is a separation denial. 

• The claim may fail to meet the state’s nonseparation eligibility criteria; 

that is, the worker may not have been able, available, and searching for work 

during the week in question. This is a nonseparation denial.

Accordingly, in both the DCA Pilot Project of 1997–98 and the DCA program that 

is now starting, states drew (or draw) three separate random samples—one of monetary denials, a second of separation denials, and a third of nonseparation denials. 

Each of these is investigated in a manner similar to that used to investigate paid 

claims under BAM, and the correctness of the denial is determined. 

Findings from Five-State Pilot Project 

Table 1 displays UI overpayments and underpayments for 1997–98 in the five 

states that participated in the DCA Pilot Project—Nebraska, New Jersey, South 

Carolina, West Virginia, and Wisconsin. These are the only states (and the only 

time period) for which data exist on the extent of underpayments caused by incorrect denials, in addition to underpayments on paid claims and all types of overpayments. 

Column 2 shows that overpayments as a percentage of total UI benefits paid 

ranged between 2.2 and 12 percent in the five pilot states, with a weighted average 

of 7.2 percent in those states. This is slightly below the national average overpayment rate of 8.6 percent. The BAM reports show that the main reasons for these 

overpayments are (1) workers failing to report all or part of their earnings while 

claiming benefits, (2) violations of the separation eligibility criteria, and (3) workers 

failing to search for work as required by state law and policy. 

Column 3 shows that underpayments on paid claims (again as a percentage of 

total UI benefits paid) ranged from 0.5 to 1.2 percent in the five pilot states, with 

a weighted average of 1.0 percent. This was very close to the national average underpayment rate of 0.9 percent. 

Column 4 shows that underpayments caused by wrongful denials ranged from 1.4 

to 9.0 percent of total UI benefits paid in the five pilot states, with a weighted average of 3.4 percent. The DCA reports show that wrongful monetary denials account 

for 39 percent of these underpayments, wrongful separation denials account for 36 

percent, and wrongful nonseparation denials account for 25 percent. Also, the underVerDate Dec 13 2002 02:57 Jan 04, 2003 Jkt 082682 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 E:\HR\OC\C682A.XXX C682A
50

lying causes of underpayments vary with the type of wrongful denial: Employer 

underreporting of wages is the main cause of wrongful monetary denials; agency 

error is the main cause of wrongful separation and nonseparation denials. 

How closely the five pilot states resemble the rest of the United States in underpayments due to wrongful denials is unknown; however, applying the average rate 

of underpayments caused by wrongful denials to the entire nation suggests that 

benefits lost from wrongful denials during fiscal year 1998 were in excess of $635 

million. 

Column 5 shows the sum of underpayments on paid claims and underpayments 

from wrongful denials. A comparison of columns 5 and 2 shows that in one state 

(Nebraska) underpayments exceed overpayments. In two (West Virginia and Wisconsin) overpayments exceed underpayments by less than 33 percent. In the remaining two states (New Jersey and South Carolina) overpayments exceed underpayments more substantially. In the five pilot states overall, overpayments exceed underpayments by about 64 percent; $1.00 of underpayment is outmatched by $1.64 

of overpayment. This excess of overpayments relative to underpayments is substantially less than the picture that emerges if one examines only the BAM data, which 

would suggest that overpayments exceed underpayments by 7 times or more. A view 

of the UI system’s integrity that focuses only on paid claims (as BAM does) and that 

neglects the accuracy of denials is quite incomplete. 

Implications

Because the BAM program samples and investigates only paid claims, BAM offers 

an incomplete picture of the extent of the UI program’s integrity. In particular, the 

extent of underpayments cannot be appraised in the BAM program because BAM 

overlooks the correctness of denied UI claims. A denied claim never generates a payment, so it cannot be sampled under BAM. In effect, incorrectly denied claims slip 

under BAM’s radar. The Labor Department is well aware of this point and is implementing the DCA program to fill the gap. 

What can be done to improve the UI program’s integrity? The UI system faces 

an obvious dilemma. Decisions must be made on whether to pay benefits to millions 

of UI claimants in a timely manner. Too much concern about overpayments is likely 

to result in states denying benefits to eligible claimants. Too much concern about 

underpayments is likely to result in states paying claimants who are in fact ineligible. 

This dilemma notwithstanding, three policies would clearly improve the soundness and accuracy of the UI program. First, one of the three main reasons for overpayments is a worker’s failure to search adequately for work (U.S. Department of 

Labor 1999). It follows that improved monitoring and enforcement of the work 

search test would improve the program’s integrity. An obvious and direct approach 

would be to increase the resources available to the states to conduct eligibility review interviews. An alternative would be to expand the Worker Profiling and Reemployment Services System (WPRS), which has existed since 1994. There are good 

reasons for enforcing the work search test apart from UI program integrity: Available evidence suggests that workers who search more and (as a result) return to 

work sooner improve both their earnings and their likelihood of staying employed 

in the long run (Woodbury 2001). 

Second, the DCA Pilot Project found that the most common reason for wrongful 

monetary denials is employer error—meaning essentially that an employer underreported or failed to report a worker’s wages (Woodbury and Vroman 1999, 2000). 

Such underreporting has been documented in an extensive study involving random 

audits of Illinois employers (Blakemore, Burgess, Low, and St. Louis 1996). That 

study found that employers underreported the number of workers by over 13 percent and underreported UI taxable wages by over 4 percent. This represents a significant leakage of revenues from the system. Moreover, such underreporting has 

the effect of increasing the likelihood that workers will be wrongfully denied benefits because employer wage reports are the basis of determining a worker’s monetary eligibility for UI benefits. A feasible and well-researched approach to mitigating 

this problem is to implement audits of firms that are most likely to be out of compliance with the law, as determined by a statistical model (Burgess, Blakemore, and 

Low 1998). Such a program would require resources, but the evidence suggests that 

those resources would be recovered several times over as a result of improved enforcement of the UI tax law. 

Third, the DCA Pilot Project also found that the most common reason for wrongful separation and nonseparation denials is agency error—meaning an incorrect decision or action taken by UI personnel (Woodbury and Vroman 1999, 2000). In conducting the DCA Pilot Project, the project’s monitors heard repeatedly that it was 

difficult to attract and retain qualified front-line UI personnel because the work is 

51

difficult and the financial rewards meager compared with other available pursuits. 

But the accuracy of decisions about UI eligibility hinges on the skills, training, and 

experience of these front-line personnel. If integrity of the UI system is to improve, 

then more must be done to attract and retain qualified and experienced personnel. 

A commitment of additional resources for administering the UI system could meet 

this goal. 

References 

Blakemore, Arthur E., Paul L. Burgess, Stuart A. Low, and Robert St. Louis. 

‘‘Employer Tax Evasion in the Unemployment Insurance System.’’ Journal of Labor 

Economics 14 (April 1996): 210–230. 

Burgess, Paul L. ‘‘Compliance with Unemployment-Insurance Job-Search Regulations.’’ Journal of Law and Economics 35 (October 1992): 371–396. 

Burgess, Paul L., Arthur E. Blakemore, and Stuart A. Low. ‘‘Using Statistical Profiles to Improve Unemployment Insurance Tax Compliance.’’ In Reform of the Unemployment Insurance System, edited by Laurie J. Bassi and Stephen A. Woodbury. 

Stamford, CT: JAI Press, 1998. Pp. 243–271. 

Skrable, Burman. ‘‘Fraud, Abuse, and Errors in the Unemployment Insurance 

System.’’ In Unemployment Insurance in the United States: Analysis of Policy Issues, 

edited by Christopher J. O’Leary and Stephen A. Wandner. Kalamazoo, MI: W.E. 

Upjohn Institute for Employment Research, 1997. Pp. 423–456. 

U.S. Department of Labor. UI PERFORMS CY 1997 Annual Report. Washington, 

DC: Employment and Training Administration, Unemployment Insurance Service, 

August 1998. 

U.S. Department of Labor. UI PERFORMS CY 1998 Annual Report. Washington, 

DC: Employment and Training Administration, Unemployment Insurance Service, 

August 1999. 

Woodbury, Stephen A. ‘‘Unemployment Duration, Recall, and Subsequent Earnings: Evidence from Randomized Trials.’’ Manuscript, Michigan State University 

and W.E. Upjohn Institute, November 2001. 

Woodbury, Stephen A. and Wayne Vroman. Denied Claims Accuracy Pilot Project. 

Report Prepared for the Division of Performance Review, Unemployment Insurance 

Service, Employment and Training Administration, U.S. Department of Labor. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, May 1999. 

Woodbury, Stephen A. and Wayne Vroman. Denied Claims Accuracy Pilot Project: 

Follow-Up Report. Report Prepared for the Division of Performance Review, Office 

of Workforce Security, Employment and Training Administration, U.S. Department 

of Labor. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, August 

2000.

Table 1.—Unemployment Insurance Overpayments and Underpayments in the Denied Claims 

Accuracy (DCA) Pilot Project States, 1997–98

State 

(1) (2) (3) (4) (5) 

Total UI

Benefits 

paid

($1,000s) 

Overpayments

(as % of UI paid) 

Underpayments

(as % of UI paid)

on paid claims 

Underpayments

(as % of UI paid)

from wrongful denials 

Total 

Nebraska ............................................... 42,472 7.1 0.6 9.0 9.6

New Jersey ............................................. 1,053,409 6.8 1.2 2.5 3.7

South Carolina ...................................... 164,376 12.0 0.4 4.0 4.4

West Virginia ......................................... 126,475 2.2 0.5 1.4 1.9

Wisconsin .............................................. 465,148 7.9 0.8 5.2 6.0

Five-state total a ................................... 1,851,879 7.2 1.0 3.4 4.4

U.S. total ............................................... 18,770,000 8.6 0.9 na na

Sources: Columns 1, 2, and 3 are drawn from U.S. Department of Labor (1998, 1999). Column 4 is drawn from Woodbury and Vroman 

(1999, 2000). Column 5 is the sum of columns 3 and 4. 

Note: a

Chairman HERGER. Now, Mr. Paris to testify. 

The figures in columns 2, 3, 4, and 5 are averages of the five pilot states, weighted by total UI benefits paid in each state. 

f

52

STATEMENT OF MILES PARIS, DEPUTY DIRECTOR, PROGRAM 

SUPPORT, ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY, CHICAGO, ILLINOIS 

Mr. PARIS. Thank you very much, Mr. Chairman and Members 

of the Subcommittee, for the opportunity to appear before you 

today. I apologize if some of my comments are repetitive from previous testimony. 

I am here to discuss the Illinois Department of Employment Security’s experience in using our State’s new hire directory to detect 

cases in which individuals continued to claim unemployment benefits after returning to work. The directory has enabled us to reduce 

the amount of overpayments in many such cases, and we also believe helped in the recovery of those overpayments. 

As you know, the 1996 welfare reform law required each State 

to have a new hire directory to strengthen its child support enforcement. When Illinois enacted legislation establishing its directory in 

1997, it assigned the Department the responsibility for maintaining 

this directory. From the outset, the legislation authorized the Department to use the directory for unemployment insurance purposes. 

Accordingly, in designing the directory, the Department incorporated an automatic cross-match with its Benefit Information System. The cross-match looks for individuals who have been reported 

as a new hire and continue to receive benefits after having been 

reported as a new hire. 

When the cross-match identifies an individual who meets these 

criteria, the adjudication process begins. The local office in which 

the individual filed the claim is expected to resolve this matter 

within 14 days to determine whether there was an overpayment. 

The 14 days was a self-imposed timeframe to try to limit the 

amount of overpayment that was being incurred. 

The Department’s emphasis is on minimizing and recovering 

overpayments as opposed to penalizing the claimant. However, 

local offices will refer serious cases, for example, of repeat offenders, to the agency’s Benefit Payment Control Unit for the possible 

institution of administrative fraud proceedings. 

Prior to the institution of the new hire cross-match, the Department relied primarily on cross-matches between its benefits system 

and its wage record system, which is derived from employers’ quarterly wage reports. We still use this wage records cross-match, and 

we think they are certainly still useful. However, employer wage 

reports are first due in the month following the close of the quarter 

and can take up to another month to be posted on the agency’s 

wage record system. Consequently, a claimant could have been receiving overpayments for up to 5 months before the agency would 

have had a chance to discover the situation. 

In contrast, the new hire reports are due within 20 days of the 

date of hire and posted to the system within days after receipt, at 

which point the cross-match occurs. By permitting early detection, 

new hire cross-match actually reduces the amount of overpayments. For example, for the fiscal year that just ended, the average 

overpayment detected by the wage record cross-match was $1,800. 

For the same period of time, the overpayments detected by the new 

hire cross match averaged $296. 

53

We also believe that earlier detection also fosters the recovery 

process by enabling the Department to begin the process sooner 

when it is easier to find the claimant, and frequently while he or 

she is still employed and earning wages. The Department has recovered nearly 60 percent of the overpayments identified through 

the new hire cross-match since State fiscal year 1999, the first full 

year in which the Illinois new hire directory was operational. 

While the new hire cross-match has been a substantial help in 

reducing and recovering overpayments, there are some holes. For 

example, multi-State employers may not necessarily choose to report their new hires to Illinois, which is their option, based on the 

law. Also, the Illinois directory will not reveal a claimant who finds 

work in one of Illinois’ neighboring States. 

Granting State unemployment insurance agencies access to the 

National Directory of New Hires would enable us to build upon the 

success we have had with the State directory and greatly assist 

other States. The National Association of State Work force Agencies strongly supports access to the national directory, as well. 

While the Subcommittee’s recent TANF reauthorization package is 

outside the Department’s jurisdiction, we greatly appreciate the 

fact that the package would grant us access to the national directory and look forward to working together toward that end. 

Thank you for your time and attention. I would be happy to try 

to answer any questions. 

[The prepared statement of Mr. Paris follows:]

Statement of Miles Paris, Deputy Director, Program Support, Illinois 

Department of Employment Security, Chicago, Illinois 

Thank you, Mr. Chairman and members of the Subcommittee, for the opportunity 

to appear before you today. I am here to discuss the Illinois Department of Employment Security’s experience in using our State’s New Hire Directory to detect cases 

in which individuals continue to claim unemployment benefits after returning to 

work. The Directory has enabled us to reduce the amount of overpayments in many 

such cases and, we believe, has also helped in the recovery of those overpayments. 

As you know, the 1996 welfare reform law required each state to have a new hire 

directory to strengthen child support enforcement. Illinois enacted legislation establishing its Directory in 1997 and assigned the Department the responsibility for 

maintaining the Directory. From the outset, the legislation authorized the Department to use the Directory for unemployment insurance purposes. Accordingly, in designing the Directory, the Department incorporated an automatic cross match with 

its benefit information system—the data base of individuals with unemployment 

benefit claims. The cross match looks for each individual who has 1) been reported 

as a new hire, 2) continued to receive benefits after having been reported as a new 

hire and 3) failed to report any earnings when certifying as to his or her eligibility 

for the week in which the hire was reported. 

When the cross match identifies an individual who meets all three criteria, the 

Department’s benefit system automatically notifies the individual that an issue has 

arisen with respect to his or her claim and issues a questionnaire to the individual 

and the employer, to establish the individual’s precise return-to-work date. The 

claimant has the option of responding to the questionnaire in person, by mail or 

over the telephone. 

The local office in which the individual filed the claim is expected to adjudicate 

the matter within 14 days, to determine whether there has been an overpayment. 

The Department’s emphasis is on minimizing and recovering overpayments, as opposed to penalizing the claimant. Nevertheless, the local offices will refer egregious 

cases—e.g., repeat offenders—to the agency’s Benefit Payment Control Unit, for the 

possible institution of administrative fraud proceedings. Where the Department adjudicates an overpayment as a fraud, the law effectively disqualifies the claimant 

from receiving benefits for up to 26 weeks, in addition to requiring repayment of 

the wrongfully claimed amounts. The Department will also refer serious cases of 

fraud to the Attorney General’s Office, for criminal prosecution. 

54

Prior to the institution of the New Hire cross match, the Department relied primarily on cross matches between its benefit system and its wage record system, 

which is derived from employers’ quarterly wage reports. Wage record cross matches 

are certainly still useful. However, employer wage reports are first due in the month 

following the close of the quarter and can take up to another month to be posted 

on the agency’s wage record system. Consequently, a claimant could have been receiving overpayments for up to five months before the agency would even have a 

chance of discovering the situation. In contrast, the New Hire reports are due within 

20 days of the date of hire and posted to the system within days after receipt, at 

which point the cross match occurs. 

By permitting early detection, the New Hire cross match actually prevents overpayments from occurring. Data for the last completed state fiscal year illustrate the 

point. The average overpayment detected through the wage record cross match was 

$1,800. The average overpayment detected through the New Hire cross match, 

which identified over two-thirds again as many overpayments as the wage record 

cross match, was $296. 

We believe that earlier detection also fosters the recovery process by enabling the 

Department to begin the process sooner, when it is easier to find the claimant, frequently while he or she is still employed and earning wages. The Department has 

recovered nearly 60 percent of the overpayments identified through the New Hire 

cross match since state fiscal year 1999—the first full year in which Illinois’ New 

Hire Directory was operational. 

While the New Hire cross match has been a substantial help in reducing and recovering overpayments, there are some holes. For example, multi-state employers 

may not necessarily choose to report their new hires to Illinois. Also, the Illinois directory will not reveal a claimant who finds work in one of Illinois’ neighboring 

states, since those new hires would be reported to the other state. In addition, newly 

hired Federal workers are not reported to any state. 

Granting state unemployment insurance agencies access to the National Directory 

of New Hires would enable us to build upon the success we have had with the State 

Directory and greatly assist other states. The National Association of State Workforce Agencies strongly supports access to the National Directory, as well. As a 

whole, the Subcommittee’s recent TANF reauthorization package is outside the Department’s purview. However, we greatly appreciate the fact that the package would 

grant us access to the National Directory and look forward to working together toward that end. 

Thank you for your time and attention. I would be happy to try to answer any 

questions.

Mr. Paris. Mr. Lorsbach, to testify. 

Chairman HERGER. Thank you very much for your testimony, 

f STATEMENT OF MICHAEL LORSBACH, PRINCIPAL, ON POINT 

TECHNOLOGY, INC., LA GRANGE, ILLINOIS 

Mr. LORSBACH. Thank you, Mr. Chairman. I appreciate the opportunity to testify before you today on fraud and abuse in the unemployment insurance program. 

My background is out of 25 years of service in the unemployment 

insurance community. I began my career during the recession 1974 

as a UI claims adjudicator. I became a UI fraud investigator, an 

investigative supervisor, and then moved to the information technology department, where I retained responsibility for auditing and 

fraud detection systems. 

After 9 years with the Illinois Department of Employment Security, I moved to the private sector and have continued to work with 

UI agencies. Part of my current responsibility is to market a software package called the Benefit Audit Reporting and Tracking System, or BARTS. The BARTS is a package that has multiple auditing subsystems to detect fraud and improper payments and also 

has a case management system to automate the paperwork. The 

BARTS is installed in seven States. 

55

It is in dealing with these States, including the customized installation of the software, that gives me the unique perspective 

that I bring to you today. Before I go on, let me say that in my 

experience, this problem is solvable. We will never get to 100 percent, but when a State takes ownership of the problem and implements tools and processes to address it, the results can be quite 

dramatic. 

There are two primary issues that need to be addressed in order 

to deal with fraud and abuse in the UI program. First is that the 

States must take ownership of the problem. Over 20 years ago, the 

Employment and Training Administration began a program now 

called the Benefit Accuracy Measurement, or BAM, in order to uncover the sources and levels of fraud in the unemployment insurance system. At that time, many, maybe most, States had adamantly said that there was no fraud in the program. Over the 

years, States have accepted that there is fraud and abuse, but they 

continue to argue with or ignore the BAM figures. 

I believe that it is time to declare that the BAM figures are reliable enough to serve as a foundation for new achievement goals for 

the State program. Let me take a short aside and explain. 

The ETA sets goals for the States to meet. These goals then become the marching orders for the States. Largely, it is very important for an administrator to achieve these goals. The goals are the 

radar screen. One of the BAM figures is the number of people who 

are being improperly paid while working and collecting UI at the 

same time. If that figure were to translate into, say, $20 million 

over the course of a year, then the State should be held accountable 

for uncovering, say, 60 percent of that money, or $12 million. Establishing this clear and definable goal gets us on the radar screen. 

Currently, the only goal that pertains to fraud and abuse is one 

that says that States should recover 55 percent of the overpayments that they identify. The unintended consequence of this is 

that it is easier to collect 55 percent of a smaller amount than that 

of a larger amount. In other words, if you discover less fraud, it is 

easier to make your collections goal. 

I am sorry to say that I find this attitude rampant throughout 

the States. This goal is likely the largest single disincentive to detecting fraud and abuse. It should be eliminated immediately. 

A UI administrator is one who must continuously react to and 

balance forces from multiple external sources while trying to manage a large and complex organization. If we want something to be 

done, we must get on their radar screen. 

The second key to reducing fraud and abuse in UI is new information technology. Most States still use a software product that 

was developed and distributed by the ETA in 1975. It was wonderful in its day, but it is grossly inefficient in today’s standard. In replacing these systems, we, meaning my firm, have shown that the 

output of fraud cases processed can be increased by 600 percent or 

more with no increase in staff. The return on investment in dollars 

saved is usually in 3 to 6 months. By the second year, the annual 

dollar return on investment can easily exceed 500 percent. 

I firmly believe that for a very moderate cost, these efforts could 

be implemented and could go a long way to solving the fraud and 

56

abuse problem in the unemployment insurance program. Thank 

you again for the opportunity to present my views. 

[The prepared statement of Mr. Lorsbach follows:]

Statement of Michael Lorsbach, Principal, On Point Technology, Inc., La 

Grange, Illinois 

The problem has been studied for over 20 years. No nationwide solutions have been 

offered 

Fraud and abuse has been formally studied by the Department of Labor for over 

20 years under a continuous program first called Random Audit, later Benefit Quality Control and now called Benefit Accuracy Measurement (BAM). The result of this 

ongoing study is consistent data that clearly defines the nature and level of improper payments, fraud and abuse in the Unemployment Insurance program. The 

issue then is not in defining the problem but in implementing a solution. 

Since 1975, when the Employment and Training Administration (ETA) distributed 

a custom computer application to audit claimants, there has not been a serious systematic attempt to solve the problem. Over the past several years, the states have 

been granted supplemental budgets for Integrity processes but the money seems to 

have been absorbed with little or no impact on fraud and abuse. 

BAM and its predecessors were established to obtain accurate figures on improper 

unemployment insurance payments. The Employment and Training Administration 

recognized that States had been unwilling to acknowledge the problem and as a result established the BAM program with a direct pipeline the ETA for both funding 

and data gathering. 

We still live in the shadow of that denial. It is an uphill battle getting states to 

own the problem. The good news is that solid proven solutions do exist. 

Most fraud and abuse is not debatable 

1. The Problem must be Clearly Defined.

Part of the problem of why fraud and abuse has not been addressed is that the 

definition of the problem is almost endlessly debatable. What is an improper payment? Many issues depend on state law and vary subtly from state to state. 

But, the largest cause of overpayments is not debatable in definition. Benefit Year 

Earnings, or working while collecting UI, accounted for $573 million in improper 

payment in CY2000. No one can deny that this abuse is a clear target. 

End the debate. Other issues, Separation Reason, Work Search, etc., need to be 

and can be addressed but they cannot be used to cloud the issue of Benefit Year 

Earnings. 

It must be made a priority 

2. A Matter of Priority.

It is frequently said that SESA Administrators have an average tenure of 13 

months. Upon entry to the job, most are not familiar with the UI program. Yet they 

set the pace and the priorities. I have spoken with Administrators who have no concept of improper payments, fraud control or program auditing. It is simply not on 

their radar screen. 

Legislative and ETA initiatives are needed to bring integrity into the light. It 

should be declared that before a state can expect support for special program funds 

they must consider and demonstrate strong program integrity. 

Tie goals to specific measurement 

3. Goals and Accurate Measurement.

The primary measurement of how well SESA’s perform, are called Desired Levels 

of Achievement (DLA). There is only one DLA that has to do with improper payments. This DLA says that states should collect 55% of the overpayments they identify. There are two fundamental problems with this measurement. The first is that 

it is not directed at identifying improper payments only at collecting them after they 

have been established. The second, an unintended consequence, is that it becomes 

a disincentive to identify improper payments. With a given staff allocation, it is 

much easier to meet one’s collection rate if fewer overpayments are established. 

This DLA should be eliminated. It should be replaced with goals established from 

BAM data. For example if BAM determines that a state has a 3% error rate due 

to Benefit Year Earnings then the state should identify say 70% of that 3%. If the 

state pays $500 million a year in benefits, to meet the goal the state would have 

to establish $10.5 million in overpayments. 

57

Even if this DLA is not replaced it should be eliminated immediately. In my experience, it is a strong disincentive to fraud control. 

The auditors must be independent 

4. The Auditors Report to the Audited.

It is a primary tenant of auditing that an auditing group be independent and autonomous of the organization being audited. In almost every SESA this autonomy 

does not exist. In most states, Benefit Payment Control (BPC) is the auditing group 

responsible for the investigation of improper payments and fraud. BPC commonly 

reports to the Director who is responsible for the UI program. If the fraud figures 

become embarrassing, it is too easy for BPC to be toned down. 

The auditor should be separate from the UI program. Auditors should be measured on the thoroughness of their audits. The State of Washington, Office of Special 

Investigations, which has shown exemplary progress in fraud control over the past 

decade, initiated and developed its processes while the auditing unit reported to the 

Director of Legal Services, a Division separate and equal to Unemployment Insurance. 

The current systems for processing fraud are antiquated and ineffective 

5. Systems are Antiquated.

In 1974 the Unemployment Insurance System Design Center, which was funded 

by the ETA, began distribution of a custom computer application for the detection 

of fraud and abuse in UI benefit payments. The system was a great leap forward 

in making the detection process more efficient. Most states adopted the software. 

The problem today is that most states still use it. It has been modified and updated 

by states but is still horribly ineffective by today’s standards. Most employer complaints of being bothered by paperwork come from forms generated by this system. 

Proven, effective system solutions exist 

Highly automated computer systems exist and are very effective. These systems 

have a return on investment of three months. After a year or so when the new systems have been fully adapted it can be verified that they can produce an annual 

return of 600% or more. They have been proven to significantly reduce fraud and 

abuse by getting the word out that it will no longer be tolerated. 

Integrity must wrap around the UI program 

6. Integrate Integrity.

There was a time when land could be developed with Government funds and if 

the local community did not complain, no one cared about the impact on the environment. Now land cannot be developed without an environmental impact statement. I am sure that from this year forward, no bills will be debated in Congress 

without a discussion of its impact on homeland security. 

Integrity must become the UI Program’s point of light. No systems or applications 

should be defined and no funding should be approved without a study or statement 

on the impact to program integrity. 

To solve the problem make the states accountable and install new software 

In summary, the most critical pieces to solving fraud and abuse in the UI program are creating new performance measurements and installing improved technology. The performance measurement gets the problem on the screen. It forces everyone to pay attention. 

New technology allows the rapid examination and processing of fraud and abuse 

with very little manpower. Case management systems that are fed by multiple types 

of audit including New Hire, can be tuned to also examine the other more debatable 

issues. 

Installation of compatible software in every SESA would cost about $30 million 

and should save the Nation’s employers about $700 million in UI taxes per year. 

Michael Lorsbach is a Principal and owner of On Point Technology, Inc. Mr. 

Lorsbach began his career with the Illinois Department of Employment Security in 

1974. Mike served as a Claims Adjudicator, BPC Investigator, and Information 

Technology Manager. 

On Point is an information technology firm that is exclusively dedicated to the 

support of State Employment Security Agencies. On Point builds UI benefit payment, tax, and other UI support systems. On Point personnel have consulted with 

over 20 states. On Point is currently under contract with 4 SESA’s. 

On Point is the exclusive distributor of the Benefit Audit Reporting and Tracking 

System (BARTS). BARTS is a software package that performs multiple audits of 

58

Unemployment Insurance programs, detects likely fraud and abuse then automatically manages the resulting cases. BARTS is installed in Alaska, Arizona, Illinois, 

Kentucky, New Jersey, Oregon and Washington.


Insert offset folio 82682c.003 Insert offset folio 82682d.004
59

each of you for your testimony. Now, we will turn to questions. The 

Chairman HERGER. Thank you, Mr. Lorsbach. I want to thank 

f gentleman from Kentucky, Mr. Lewis. 

Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. 

Dr. Woodbury, in your testimony, you cite one way to limit 

misspending is to better enforce the current requirement that unemployment benefit recipients search for work. You suggest that 

this would help more workers return to work sooner and improve 

their earnings and likelihood of staying employed in the long run, 

which all are positive effects. Could you tell us more about how we 

could better ensure unemployment benefit recipients are searching 

for work? 

Dr. WOODBURY. Concretely, the recommendation is to give the 

States resources to perform more eligibility review interviews, that 

is, call workers in to ensure that they are working. The evidence, 

there is substantial research to show that workers who are called 

in for eligibility review interviews get moving and get jobs faster, 

and the long run benefits are clear, higher earnings and less unemployment over the long term. 

Mr. LEWIS OF KENTUCKY. Do you have any idea how much 

in terms of additional administrative cost, expenses——

Dr. WOODBURY. I cannot speak to that, no. 

Mr. LEWIS OF KENTUCKY. Thanks. 

Chairman HERGER. The gentleman from Maryland, Mr. Cardin. 

Mr. CARDIN. Thank you, Mr. Chairman. 

I want to thank all of you for your testimony, all Members of our 

panel. I think it has been very helpful. 

Dr. Nilsen, I am somewhat troubled by part of your statement 

where you seem to say the States need to balance the payment 


Insert offset folio 82682e.005
60

timeliness with payment accuracy. One could interpret from that 

that you might be suggesting that they should withhold payments 

until they have adequate information to make sure errors are not 

made. I know that is not what you are intending—— Dr. NILSEN. No, that is correct, Congressman—— Mr. CARDIN. So, I thought I would give you a chance to clarify 

that. 

Dr. NILSEN. Certainly, Congressman Cardin. It is just that in 

the past, the history of the program is that it is focused on moving 

checks out the door, which is great and it is what this system was 

set up to do. As we and others have testified, you need to make 

sure you are paying the right benefits to the right people to maintain the integrity of the program. This helps keep taxes down, 

makes sure that payments are being made to those people who are 

truly deserving of the UI benefits. So, it is not a matter of sacrificing one for the other, but it is focusing on the two sides and balancing so that you are sure you are getting the right benefits to 

the right people. 

Mr. CARDIN. Thank you. I appreciate that clarification. 

I am curious as to whether any of the Members of the panel 

want to comment on Dr. Woodbury’s point, and that it seems like 

when we talk about the integrity of the system, we talk about overpayments, but we do not normally talk about the fact that employers are not paying everything they should in revenues or that individuals are not getting the benefits they are entitled to. To get a 

more balanced picture, all three should really be reviewed, and the 

way the U.S. Department of Labor has set up their models, it is 

more difficult to judge the other two areas of inaccuracy than it is 

on overpayments. Any comments, concerns, other than Dr. 

Woodbury, who expressed that in his statement? Dr. Nilsen? 

Dr. NILSEN. No, we have not looked at that side of the program 

at this point. 

Mr. CARDIN. Why not? 

Dr. NILSEN. So far, we have not been asked to look at that aspect of the program. 

Mr. CARDIN. Well, that will be corrected. 

[Laughter.] 

Mr. CARDIN. Does the Inspector General have any comments on 

that? 

Mr. HEDDELL. I can say, Mr. Cardin, that from my office’s perspective, of course, we would like to know that every worker is receiving the benefits that they are entitled to. In terms of unemployment benefits, we are, of course, very concerned about overpayments and that is predominantly where our focus has been. 

Mr. CARDIN. Why would you not also be concerned about underpayments of revenues? 

Mr. HEDDELL. Well, we——

Mr. CARDIN. That is hurting our system. 

Mr. HEDDELL. As I was actually about to say, Mr. Cardin, we 

are concerned that every worker should get what they are entitled 

to——

Mr. CARDIN. Right. 

Mr. HEDDELL. If there are, in fact, such workers, and I am sure 

that this does exist, that are underpaid; I agree that they should 

61

get what they are entitled to. However, my office has not looked 

at this specifically where I could give you a definitive answer. 

Mr. CARDIN. We will try to encourage that. I mean, Dr. 

Woodbury’s numbers are rather alarming. The underpayment is as 

high as or higher than the actual dollar amount on the fraudulent 

overpayments. So certainly, we need to get more information in 

order to make good policy judgments here, so we would appreciate 

that. 

Mr. Lorsbach, you make a very compelling point about the 55 

percent. What would you substitute it with? 

Mr. LORSBACH. I would substitute BAM figures. I would say 

that if we accept the BAM figures as they are, BAM says that a 

certain amount of people have been overpaid in a particular State. 

Take that figure and say that we are going to identify a given percent of those people and then collect the money as seriously as you 

can. There is no doubt about it, you want to get the money back, 

but you cannot restrict your identification based on your collection. 

Mr. CARDIN. Thank—— Mr. LORSBACH. Is that not clear? 

Mr. CARDIN. I understand what you are saying, and I think 

that makes more sense than the—I mean, I think you do make a 

very compelling argument on the 55 percent identified by the 

States. It is obviously in everyone’s interest to collect as much of 

the overpayment that it makes sense to collect. 

As I understand it from the first witness, there are some overpayments that there is no good policy reason to try to collect. I 

think everyone agrees on that. There is some amount of the overpayments that we do not really want to get recovered. It is not the 

individual’s fault. It is the system’s fault or the employer’s fault 

and would create unusual hardship to go after. So, I think there 

are at least some payments that we do not want to try to collect. 

That which we determine should be collected—should be collected, and the percentages could work, as you point out, to the disadvantage of the aggressive States, so it is something we need to 

certainly look at. Thank you. 

Mr. HEDDELL. Mr. Cardin, in terms of underpayments by employers, we have raised concerns about employees who are not getting fair treatment under the system. One of the things that I point 

out in my full statement is the misclassification of workers and 

fraud as it relates to leasing companies and employers that are not 

paying their full share of taxes. These kinds of situations do have 

a detrimental impact on certain workers, particularly those workers that are in the lower economic and lower skilled areas. So it 

is something we are concerned about. 

Mr. CARDIN. Thank you. 

Chairman HERGER. Thank you very much, Mr. Cardin. 

I just want to, for the record, state that while we and the American taxpayers are obviously very concerned about fraud, abuse, 

and overpayment, certainly for those who are not getting their unemployment benefits as they should there is equal concern, and 

this Committee wants to correct both sides. 

Dr. Nilsen, I would appreciate your comment. Your points on 

pages 11 and 12 about relying on self-reports of information that 

might result in UC applicants not getting benefits are very imporVerDate Dec 13 2002 02:57 Jan 04, 2003 Jkt 082682 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 E:\HR\OC\C682A.XXX C682A
62

tant. What sorts of information do we trust that applicants will tell 

us, even though their disclosing that information could result in 

their not getting the benefits they are seeking? I might note—this 

almost seems reminiscent of the old SSI Program under which we 

trusted prisoners to report that they were in jail so they could stop 

their SSI disability checks. Now we have a system in place, by the 

way, under which prison reports list inmates for matching so we 

better ensure that inmates are not getting SSI benefits. Would you 

comment, please? 

Dr. NILSEN. Mr. Chairman, I think what our focus in the work 

that we have done indicates, that you need to verify the information up front as quickly as possible. There are people in self-reporting who do disclose information that, in fact, makes them ineligible 

for benefits. By and large, if people are trying to, in a sense, beat 

the system, they are not going to be the people who are going to 

be honest with you. So in taking claims, it is important we have 

systems in place that are available to verify the accuracy of employment, to check employment in other States, and equally important, to check the continuing claims after initial claims have been 

filed. 

Right now, as you state, we have information on prisoners. None 

of the States we went to used that information to check on their 

UI beneficiaries at this point. Part of it is because of the timing of 

the program, but also we have been told that some of it is related 

to the cost. 

As I said, if you do not have timely information in this program, 

people will already have gotten their benefits before you are able 

to identify that they are ineligible or that they have become employed and no longer eligible for benefits. 

Chairman HERGER. Thank you, Dr. Nilsen. 

Now, the gentleman from Washington, Mr. McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. I am sorry I am 

a little late getting here, but planes get here when they get here. 

Coming from a State that has the highest unemployment in the 

country, one of the issues that has been troublesome to me, and I 

have watched this both in the State legislature and then here in 

the Congress, is this whole question of contract workers. You may 

have discussed all of that, but Vizcaino v. Microsoft came from our 

State, so we are very familiar with this whole issue. 

It seems to me that one of the biggest problems in UI today is 

the classification of workers. In section 530 of the Revenue Act 

1978, there is a paragraph that expressly prohibits the Internal 

Revenue Service (IRS) from issuing regulations that would help determine whether a worker is an employee or a contingent worker. 

Dr. Woodbury, could you explain to me how that got into the law, 

and why it is still there? 

Dr. WOODBURY. I cannot explain that, but I do think that contract workers, independent contractors, do pose a challenge for the 

system. There is a study by Planmatics that suggests that 80,000 

or so independent contractors per year would be eligible for benefits if they were properly classified as employees, so there clearly 

is a leakage there. 

I think an even bigger challenge is perhaps that employers simply underreport wages of workers. They simply do not report to the 

63

States that they have an employee, or they underreport the wages 

that they actually pay to an employee who is on the books as an 

employee, not misclassified. I think that is an even bigger challenge for the program, and I think—— Mr. MCDERMOTT. So in terms of the numbers—— Dr. WOODBURY. I am sorry? 

Mr. MCDERMOTT. Yes, in terms of the numbers. 

Dr. WOODBURY. In terms of revenues for the system, in terms 

of——

Mr. MCDERMOTT. That is not a Federal responsibility to make 

sure that people are paying. That is a State responsibility. 

Dr. WOODBURY. Yes. I think there are things the DOL could 

do, I believe, to help that. 

Mr. MCDERMOTT. You mean DOL could do things to encourage 

the States to do what is right? 

Dr. WOODBURY. I believe so. 

Mr. MCDERMOTT. Under what mechanism? 

Dr. WOODBURY. Well, the Revenue Quality Control program is 

the program that the U.S. Department of Labor has had on the 

books, in the wings, for over a decade now and has not implemented it. Revenue Quality Control would presumably audit either 

at random or by profiling likely abusers, employers who are abusing the system, and auditing them intensively. Presumably, that 

would create an incentive, if employers knew this program was out 

there, to be more compliant. 

Mr. MCDERMOTT. I guess I have watched—— Dr. WOODBURY. It is not a legislative change. That would be 

a change that the DOL would implement on a State-by-State basis, 

auditing of employers to ensure that they are complying with the 

unemployment insurance payroll tax. 

Mr. MCDERMOTT. Unemployment is paid for by the State. They 

pay the actual benefits. They collect the money and pay the benefits. 

Dr. WOODBURY. They collect the money. 

Mr. MCDERMOTT. So, why does the Federal Government—why 

are we in here talking about this? What problem has come up that 

you think would make it necessary for us to wade into, because if 

there are overpayments, it seems to me it is in the States’ interest 

to figure that out. 

Dr. WOODBURY. Well, the existing research suggests that Revenue Quality Control would more than pay for itself in revenue. In 

other words, if the State did start auditing employers and trying 

to make sure that they were complying with the unemployment insurance payroll tax, the amount of resources it would take to run 

that program would be far less than the revenues that would be 

generated. So, why the States do not do this is a matter of incentives. The State agencies do not have the incentive to do it. 

Mr. MCDERMOTT. My brother ran the program in the State of 

Washington. They paid for themselves. It takes a governor who is 

willing to stand behind them. 

Dr. WOODBURY. Yes. 

Mr. MCDERMOTT. Most of the governors are not enforcing it, 

and it strikes me that we may—I mean, this section 530 seems to 

me to be an egregious example of the Feds, on the one hand, telling 

64

the States to do something and then not giving them rules and regulations, and winding up with 60 percent of the people not covered 

by unemployment compensation. I cannot understand, Mr. Chairman, why that is still in the law. I mean, whatever we do, we 

ought to take that out of the law and force the IRS and the employers to sit down and define who is an employee. 

The Vizcaino v. Microsoft case, where you had one employee sitting next to another employee and they are doing exactly the same 

thing and one is a contract employee and one is getting benefits 

was, I mean, it was an open and shut case. Microsoft, of course, 

made all kinds of attempts to obfuscate that, but that kind of stuff 

and the changing work force, an unemployment system designed 

for the thirties, or the forties, or the fifties, or sixties work force 

simply is not responding to what is going on out there. 

Now, I do not know whether it should be done at the Federal 

level or whether it should be done at the State level, but in a State 

where now have—we have gone through this. Our unemployment 

tends to be cyclical and we had this with timber and fishing and 

airplane production and we are now in one of the downs. We are 

going to have some problems in this country if we do not—because 

that is happening all over the place. All the industries are into this 

now. 

Thank you, Mr. Chairman. 

Chairman HERGER. I thank the gentleman. 

I would like to comment. The question was whether or not the 

Federal Government has a responsibility in this? I think when we 

consider that the Federal Government every year collects Federal 

taxes and uses them to pay more than $2 billion to States to administer benefits and to prevent fraud and abuse, that very clearly, 

the Federal Government does have a responsibility to make sure 

that these benefits are going to the right people. 

With that, I would like to thank each of our witnesses today for 

appearing before the Subcommittee. I regard this hearing as the 

first stage in our efforts to better ensure unemployment benefits 

are going to the intended recipients. Clearly, when literally billions 

of dollars are misspent every year, that is not the case. Especially 

given what we have learned, we cannot and will not stand by and 

let these problems go unaddressed. 

I look forward to working with everyone interested, including our 

witnesses, States, and employers, to make sure that we better protect the integrity of these important benefits. I trust our witnesses 

will continue to provide useful insight, starting with answering any 

additional questions for the record we may have. 

With that, this hearing stands adjourned. 

[Whereupon, at 5:39 p.m., the hearing was adjourned.] 

[Questions submitted by Chairman Herger to the panel, and 

their responses follow:]

U.S. General Accounting Office 

Washington, DC 20548

June 24, 2002

Hon. Wally Herger 

Chairman, Subcommittee on Human Resources 

Committee on Ways and Means 

House of Representatives

Dear Mr. Chairman: 

65

1 Currently only two states (Utah and Wisconsin) use this system for their UI programs.

2Section 406 of the Personal Responsibility, Work, and Family Promotion Act of 2002 (H.R. 

4737) would provide states with access to the National Directory of New Hires for purposes of 

verifying claimants’ eligibility for UI benefits.

This letter responds to your request that we address questions following the June 

11, 2002 hearing on fraud and overpayments in the Unemployment Insurance (UI) 

program. We have restated each of your questions, followed by our answer below.

1. Based on our review, which aspects of the states’ unemployment program procedures or processes are most susceptible to fraud and overpayments? Why?

As noted in our testimony, a substantial proportion of overpayments occur because of errors in reporting or recording claimants’ wages or other income. Another 

significant source of overpayments are claimants who do not look for a new job as 

required by state law, or are not able and available to work (‘‘eligibility’’ violations). 

Of the total $2.4 billion in overpayments estimated by Labor in 2001, about 24 percent were attributable to fraud. A primary reason for these overpayments is that 

many states place their primary emphasis on quickly processing and paying UI 

claims, and may not sufficiently balance the need to make timely payments with 

ensuring payment accuracy. Moreover, states may lack access to timely information 

that can affect claimants’ eligibility for UI benefits, such as their identity, wages, 

and benefits from other Federal or state programs.

2. What tools or procedures would allow states to improve the integrity 

of their UI programs by preventing and detecting overpayments, and recovering them once they have occurred?

As noted in our testimony, the most efficient and effective method for states to 

prevent and detect overpayments is by consistently using automated systems that 

allow claims representatives to verify claimants’ eligibility information at the point 

of application—before benefits are paid. In general, online access to databases containing information to verify claimants’ identity, employment status, or other important information is the most useful tool for preventing and detecting overpayments. 

For example, the Social Security Administration’s State Online Query System allows 

participating states to verify the identity of claimants applying for UI benefits in 

real time.1 In lieu of online access, many states conduct periodic computer matches 

with other state and Federal agencies to verify information that claimants provide. 

Although such methods tend to be less timely than online access, they are still of 

value in detecting and recovering overpayments. Overall, the states that are most 

effective at recovering overpayments are those that have a wide variety of tools at 

their disposal, including state tax refund offset, wage garnishment, and access to 

private collection agencies. Ultimately, as emphasized in our testimony, the key to 

improving UI program integrity at the state level is a commitment from state UI 

managers to consistently use automated tools and other available mechanisms for 

determining claimants’ initial and continuing eligibility for benefits. 

3. What actions could the Department of Labor take to help states place 

a higher priority on UI program integrity issues? Does Labor have the authority to implement these actions? Are legislative changes needed to provide additional authority to stem further abuse?

Labor needs to more clearly emphasize the need for states to balance payment 

timeliness with payment accuracy. For example, as outlined in our testimony, Labor 

could revise its performance measures in a way that places greater emphasis on 

payment accuracy. Labor could also make better use of its quality assurance data 

to help states identify areas for improvement and work with states to changes policies and procedures that allow overpayments to occur. However, to be most effective, 

we believe that Labor must be willing to link state performance in the area of program integrity with tangible incentives and disincentives, such as through the annual administrative funding process. We believe that Labor has the authority to implement many of the improvements we discuss in our testimony and our forthcoming report. However, other changes that we discuss—such as providing all states 

with access to the National Directory of New Hires—would require legislation to implement.2

4. What changes, if any, are needed in Labor’s management approach to 

the UI program that will allow it to implement the actions you have outlined?

While we recognize the importance of paying unemployment beneficiaries in a 

timely manner, we believe that Labor’s approach to managing the UI program has 

historically emphasized quickly processing and paying UI claims without a similar 

66

focus on controlling UI payments. Thus, our work suggests that program integrity 

issues should receive greater emphasis. Labor could facilitate this change in emphasis by linking the quality assurance process to the budget process and requiring 

states to meet specified performance levels as a condition of receiving administrative 

grants. In addition, under Federal regulations covering grants to states, Labor may 

withhold cash payments, disallow costs, or terminate part of a state’s administrative 

grant due to non-compliance with grant agreements or statutes. Absent such a 

change, we believe that states may be reluctant to make similar modifications in 

their own management philosophy and operations, leaving the UI program vulnerable to continued high levels of overpayments. If you have any questions about this 

correspondence or wish to discuss the issue further, please contact me at (202) 512– 7215, Daniel Bertoni at (202) 512–5988, or Jeremy Cox at (202) 512–5717. 

Sincerely yours, 

Sigurd R. Nilsen, 

Director, Education, Workforce and 

f Income Security Issues

U.S. Department of Labor 

Office of Inspector General 

Washington, DC 20210

Hon. Wally Herger 

Chairman, Subcommittee on Human Resources 

House Committee on Ways and Means 

B–317 Rayburn House Office Building 

Washington, DC 20515

Dear Chairman Herger: 

Thank you for the opportunity to testify before your Subcommittee on my Office’s effort to detect and investigate fraud, waste, and abuse within the Unemployment 

Insurance (UI) program. As requested, please find below our answers to your additional questions.

1. As was discussed at the hearing, it is very discouraging to hear that over $2 billion of taxpayer money was fraudulently claimed or improperly 

spent last year on unemployment benefits and that over the past decade 

$18 billion was misspent. The high numbers—starting with a continuously 

high level of known overpayments in the past 10 years, and increases last 

year—suggest a need for action instead of business as usual.

a. In recent years, what specific steps have you suggested the Department or the States take to better combat fraud and abuse? What specific 

initiatives do you now suggest the Department and States take to address 

fraud and abuse?

From an investigative perspective, we have recommended to the Department that 

state personnel who are responsible for benefit payment control and internal security be provided enhanced fraud detection and investigative training. This training 

should focus on fraud prevention, information sharing among states regarding common fraud schemes, and the dissemination of best practices utilized by high-performing states. We have been actively involved in conducting training sessions for 

state personnel based on our experience in investigating complex, multi-state fraud 

schemes. During this training, we note several ‘‘red flags’’ or indicators that are indicative of such schemes. In addition, in 1999, we developed a white paper for ETA 

discussing how UI fraud schemes operate, which was disseminated to the states. We 

believe that information to be useful to the states in carrying out their enforcement 

and oversight activities. 

In addition, states should examine ways to enhance the integrity of the remote 

claims-filing process, which has made fraud detection more difficult. Some suggestions that states may want to utilize include: 1) conducting random in-person interviews of telephone or Internet claimants; and 2) improving the tracking of telephone 

numbers and mailing addresses used to file claims in order to look for patterns of 

voluminous calls from single numbers or mailings from the same addresses. 

Our audit work has identified several internal control weaknesses and 

vulnerabilities that impact the integrity of the UI program, especially those relative 

to overpayments. In a 1999 audit, we found that the crossmatch systems used by 

seven states, which compares weekly UI benefit payment records with quarterly 

wage records, had inherent weaknesses. Foremost was the failure of employers to 

respond to state requests for detailed wage information. As a consequence, we estimated $17 million in overpayments were not being detected in just four of the seven 

states we audited. 

67

To improve the crossmatch system, we recommended to the Department that policy and direction be provided to the states to ensure that: 1) employers are reminded 

of their responsibilities to respond to wage requests and follow up with those who 

routinely fail to respond; 2) states select for audit those claims with the highest potential for overpayments; and 3) states maintain a database of those employers who 

are sent wage requests, and when they are returned, follow up on non-responses. 

In addition, we recommended that the Department assume a leadership role in assuring that states obtain timely access to the data of the National Directory of New 

Hires, and to fully incorporate that data into UI Benefit Payment Control operations. The Department has agreed to take corrective action.

b. Similarly, in recent years what specific legislative initiatives have you 

proposed the Congress enact to better address fraud and abuse in this program? What legislative measures do you now suggest Congress consider to 

better prevent fraud and abuse?

As I mentioned in my full statement, one legislative recommendation to strengthen the UI program is to grant the OIG and the Department unimpeded access to 

UI, Social Security, and New Hire data for fraud detection and program evaluation 

purposes. Such data would be used for two primary purposes: 1) to aid in our fraud 

detection and investigative efforts; and 2) to better help us and the Department assess program performance and return-on-investment. Routine and expeditious access to the centralized Social Security wage database would enable us to more efficiently and consistently verify the eligibility of program applicants and determine 

whether their Social Security Numbers (SSNs) are valid. This would aid in identifying potential overpayments and preventing millions of dollars in future losses. 

In addition, we believe that states should be granted access to the National Directory of New Hires database for fraud and overpayment detection purposes. As you 

know, states only have access to their own new-hire data, which limits a state’s ability to detect those who commit fraud across state lines. If given access to this directory, states would be better able to detect these fraudulent schemes and other overpayments. 

Finally, as discussed below under question 5, we believe that legislative consideration should be given to a process that would allow states to perform an up front 

determination of claimants’ work status and verification of SSNs before payments 

commence.

2. Please describe any specific evidence that your office is aware of regarding States’ screening to ensure that (1) prisoners, (2) fugitive felons, (3) 

probation and parole violators, and (4) individuals applying for benefits 

based on the record of a deceased individual do not access unemployment 

benefits.

The Department may more appropriately answer this question since we have not 

conducted any reviews in this area. Notably, eligibility for benefits for probation and 

parole violators depends on individual state law. We understand that some states 

do obtain death records from the SSA for validation of claims, but we do not have 

information as to which states are doing it.

3. What State and Federal measures are in place to determine whether 

individuals claim unemployment benefits in more than one State at the 

same time? If that occurs, what are State policies to address such double 

dipping?

My Office has not examined state policies regarding double dipping. Nevertheless, 

we are aware through our casework that reciprocal agreements do exist between 

and among some states (usually those that are contiguous). For example, a reciprocal agreement exists among Virginia, Maryland and the District of Columbia to 

exchange information and crosscheck claimants in those three jurisdictions. 

We understand that states have signed an ‘‘interstate agreement’’ that specifies 

that they will take, process, and pay interstate claims. When an individual files a 

UI claim in any state, questions are asked about earnings. Based on the response, 

claimants will be advised to file an intrastate or an interstate claim. States will 

then run an interstate crossmatch each quarter that compares their interstate 

claims against all interstate claims filed. You may wish to contact the Department 

directly for more details about this interstate agreement.

4. How do States determine if a noncitizen ineligible to work in the U.S. 

is claiming unemployment benefits? What processes are in place to prevent, 

for example, a student or someone here on a tourist visa from working and 

then claiming unemployment benefits from that work? How many individuals who applied for unemployment benefits have been disqualified from 

receiving them for this reason in recent years?

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Based on our prior audit work and the Department’s own public information, individuals who file claims are asked by the states whether they are citizens of the 

United States. If a claimant states that he or she is a citizen, states must accept 

the declaration of citizenship. Utilizing the Systematic Alien Verification for Entitlements (SAVE) system, data on claimants who state they are not citizens are entered 

electronically into a file maintained by the INS to determine their alien status. 

Claimants are denied benefits if it is found that they are non-citizens ineligible to 

work in the U.S. 

From what we have seen, states can do more to prevent UI benefit payments to 

ineligible claimants. In 1998, we conducted an audit of how effective Florida, Georgia, North Carolina, and Texas were in preventing UI payments to ineligible claimants, including illegal aliens. We found that the SAVE system has inherent limitations since it relies on self-reporting of citizenship by claimants. We found that 

screening SSNs was a more effective means of identifying illegal aliens who had 

filed for UI benefits, and that if coupled with INS screening, SSN verification would 

prevent many of the abuses that occur. 

While we do not know how many individuals who applied for UI benefits have been disqualified, our 1998 audit identified 2,927 UI claims totaling over $3.2 million that were paid out to people using SSNs that were either not issued or belonged 

to deceased individuals. We selected a sample of 452 claims, were able to verify the 

legal status of 241 claimants, and found that 129 of those claimants (54 percent) 

were illegal aliens who improperly received $200,291 in benefits. Although we did 

not project nationwide the amount of UI benefits paid out to illegal aliens, we believed at the time that screening claimants’ SSNs would prevent millions of dollars 

in misspent UI benefits. We recommended to the Department that it assist the 

states in developing and implementing methods of screening UI claimants for valid 

SSNs, and delaying or deferring benefit payments to those individuals without valid 

SSNs, among others. The Department agreed that significant improvements could 

be made in the areas we addressed in our report.

5. Have you done any work involving the abuse of Social Security Numbers (SSNs) in order to claim unemployment benefits? What have you 

found? Do you have any recommendations for us to consider in addressing 

such concerns?

As I mentioned in my full statement, identity theft for purposes of collecting benefits is one way fraud against the UI program is carried out. The number of investigations we have initiated in this area has increased markedly over the last 5 

years, and indications are that this type of fraud will only increase. Unfortunately, 

fraud detection in these cases is complicated because any preliminary fraud screening that may be done would only disclose that the named employee actually exists. 

In addition, as discussed in the previous question, the OIG’s March 1998 audit 

report found 2,927 UI claims totaling over $3.2 million were paid to individuals who 

had filed for UI benefits under SSNs that had either not been issued or were issued 

to deceased individuals. We recommended the Employment and Training Administration (ETA) assist the states in developing and implementing means of screening 

UI claimants for valid SSNs, and delaying or deferring benefit payments to claimants without valid SSNs. We also recommended that ETA seek changes to immigration laws to allow states to delay payments to alien claimants where there are material discrepancies in alien information. ETA responded that significant improvements could be made in areas that our audit report addressed. However, ETA disagreed with our recommendation that UI benefits not be paid to individuals without 

valid SSNs, because ETA maintained the burden of policing the Social Security system does not reside with the states. 

We plan to revisit the issues raised in our 1998 audit. In the meantime, we continue to recommend that ETA work with the states to develop more streamlined, 

effective means to validate claimants’ work status and SSNs, and achieve a legislative or administrative solution that would allow states to delay payments to claimants with questionable status.

6. Earlier this year Congress passed and the President signed a law that 

provides for up to 13 additional weeks of unemployment benefits nationwide, and up to 13 weeks more in States with relatively high unemployment rates. That is a tremendously generous program, and we know that 

over a million Americans already have received these extended benefits. 

Do you have any reviews in place to make sure that those benefits are 

going to the right people?

We are not currently conducting any reviews of claimant eligibility under the 

Temporary Extended Unemployment Compensation Act of 2002 (TEUC). Eligibility 

for UI benefits, however, is examined as part of audits conducted in accordance with 

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the Single Audit Act (SAA), as amended. (The SAA requires that, instead of separate audits by each agency providing funds, a single audit be performed of all Federal funds that have been provided to a grantee.) My Office will be working with 

the Department and OMB in the coming months to develop guidance for SAA auditors to use in testing eligibility under the new TEUC program. Also, because SAA 

audits are the first line of defense for UI and other grant programs, we have initiated several studies to determine the reliability and usefulness of single audits for 

the Department’s needs. We have identified some weaknesses in how DOL programs, including UI, are being audited, and we are continuing to work with the Department, OMB and the audit community to improve the reliability of such audits. 

These efforts will be to the benefit of the all DOL grant programs, including TEUC. 

As discussed in my testimony, we are also in the process of examining the Benefit 

Accuracy Measurement (BAM) system funded by ETA and carried out by the states. 

BAM uses statistical sampling techniques to project total UI benefit overpayments 

made to claimants. This system will presumably cover TEUC payments. 

As I mentioned in the hearing, preserving the integrity of the UI program has 

been a longstanding concern of my Office. We will continue to work with the Department and the Congress to ensure that weaknesses and vulnerabilities are adequately addressed. If you have any questions, or need assistance on this or any 

other matter, please do not hesitate to contact me at (202) 693–5100. 

Sincerely, 

Hon. Gordon S. Heddell 

f Inspector General

Illinois Department of Employment Security 

Chicago, Illinois 

June 21, 2002 

Hon. Wally Herger, 

Chairman Subcommittee on Human Resources 

B–317 Rayburn House Office Building 

Washington, DC 20515

Dear Chairman Herger: 

Thank you for your letter of June 17, following up on my recent testimony on the 

Illinois Department of Employment Security’s use of the State’s New Hire Directory 

as an unemployment insurance integrity tool.

1. Your testimony indicates that Illinois is using the State Directory of 

New Hires to better ensure benefits are going only to those who have not 

already returned to work. What is the return on the dollar for States and 

taxpayers from this match with the State directory? How much might be 

saved if Illinois were allowed access to the National Directory of New Hires 

as the House-passed welfare bill would allow?

I offer the following figures in response to your question about the return on Illinois’ investment in matching the Department’s claimant data base against the State 

Directory. It cost approximately $64,000 to implement the cross-match function in 

1997. We estimate the annual staff costs associated with the cross match—primarily, investigating and adjudicating the issues it raises—to be just over $1 million, including overhead. 

To gauge the return on those costs, we focused on state fiscal year 2001, which 

is the last full fiscal year for which we have records, the period we examined to arrive at the average overpayment figures in my testimony and representative of our 

general experience. We assumed that, without the New Hire cross match, the overpayments in each of the cases it detected would have continued to accumulate, up 

to the average overpayment detected through the less timely wage record cross 

match. Multiplying the difference between the average overpayment detected 

through the New Hire cross match and the average overpayment detected through 

the wage record cross match by the total number of overpayments detected through 

the New Hire cross match, we estimate the New Hire cross match prevented almost 

$30 million in overpayments for the year. 

Regarding the potential benefits of cross matches with the National New Hire Directory, we identified 12,044 overpayments, totaling $21 million, through the wage 

record cross match for state fiscal year 2001—overpayments the cross match with 

the State Directory did not catch. While we cannot offer any precise figures, with 

access to the National Directory, we would have had the potential to identify a number of those cases substantially earlier than we did.

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2. What other tools, including those that may be unavailable to you due 

to Federal laws or regulations, would you like to have to help you improve 

the integrity of your unemployment program even more?

You also asked what other tools we would like to have to preserve benefit payment integrity. With greater emphasis on remote claims-taking, we need to be looking at cross matches with other Government agencies. We are currently working 

with the Social Security Administration. 

(SSA) on a process for dealing with claimants who attempt to use Social Security 

numbers that do not belong to them and are, therefore, ineligible for unemployment 

benefits. We currently match our data base with some of SSA’s records on a daily 

basis, and that agency is now exploring whether there are any barriers to cross 

matches with its file of deceased Social Security card holders. We will be happy to 

keep you informed of developments in this area if you desire.

3. Is there a higher level of public awareness in Illinois that it really is 

not a good idea to try to get unemployment benefits when you are not entitled to them? In other words, has your work to reduce fraud paid off so 

that you are seeing fewer incidences that need investigating?

Finally, as to whether our integrity efforts have resulted in fewer instances of people claiming benefits after returning to work, the statistics so far do not indicate 

they have. The amount of overpayments detected has actually increased since we 

instituted the New Hire cross match. We believe that is attributable to the fact the 

cross match is detecting substantial numbers of cases that otherwise would have remained undetected, instead of any change in claimant behavior. It is still our hope, 

however, that as word of the agency’s enhanced detection capabilities spreads, we 

will see a decline in the amount of those overpayments. 

Thank you again for the opportunity to discuss our experiences and views with 

the Subcommittee. Please do not hesitate to contact me if the Department can be 

of further assistance. 

Sincerely, 

Miles Paris 

Deputy Director 

f Program Support Bureau

On Point Technology, Inc. 

La Grange, IL 60525

October 18, 2002

Mr. Doug Sahmel 

House Human Resources Subcommittee 

B–317 Rayburn HOB 

Washington, DC 20515

Dear Mr. Sahmel: 

Thank you for following up with me on a response to Chairman Herger’s letter 

of June 17, 2002. Please excuse my delay. In this letter I have restated Mr. Herger’s questions followed by my response. 

1. Can you provide some reasons why States are not taking more aggressive steps to combat fraud and abuse in the unemployment program? Are 

there any key impediments that could be addresses by Congressional action?

Response—Let me start by saying that you may have already provided the catalyst for change. I attended the UI Directors conference in Whitefish, Montana this 

week and in several presentations the planned new emphasis on fraud and abuse 

in the UI program was discussed. 

In my opinion the primary reasons why combating fraud and abuse in the UI program has not been a priority are several. A central reason is that there was no incentive for the UI Director to solve this problem. The ETA had no motivating standards for the States to meet. The only Desired Level of Achievement (DLA) was that 

a State should collect 55% of the overpayments it identified. It was readily agreed 

that the best way to meet this standard was to identify fewer overpayments. This 

DLA has been recently dropped and a new standard based on figures developed 

from the Benefit Accuracy Program (BAM) is being proposed. This should make a 

big difference in emphasis. 

Secondly, it costs administrative dollars to solve a problem that is repaid in trust 

fund dollars. In most states, until recently at least, trust funds were flush with 

money and administrative funds have been in short supply. Many administrators 

found that if no one was complaining, it was more convenient to spend the administrative dollars on problems that had a higher priority and/or more visibility. One 

71

administrator said in a meeting when his BPC Manager proudly proclaimed that 

they were saving over $30 million with their fraud control efforts that the savings 

was small potatoes compared to their billion dollar trust fund. 

Third, admitting that one has an overpayment problem is embarrassing to the 

Agency. If the Agency identifies and admits to the magnitude of the problem they 

will likely come under attack. It is easier to ignore the problem and hope that no 

one will bring up the issue—in fact agencies were rarely challenged. 

My suggestions to Congress would be to require that fraud figures be overtly published, not covertly as they are now. Second would be to tie funds directly to the 

prevention of fraud. For over 20 years BAM and its predecessors BQC and Random 

Audit have been spending approximately $20 million per year to identify the problem yet no money has been directly allocated to solve the problem. Third and very 

importantly is to tie the new fraud prevention criteria to Tier 1 goals. Tier 1 goals 

are those DOL goals that states are required to meet in order to receive their funding. This would make fraud control a priority.

2. Do good antifraud efforts tend to be cost-effective in terms of paying 

for themselves over time? What produces the biggest return on the dollar?

Response—The answer to the first question is yes, absolutely. To really have an 

impact on fraud and abuse, two things need to happen. First is that more automated systems need to be put into place. Most fraud investigation activities, managed by the Benefit Payment Control (BPC) unit, are paper nightmares. Most of this 

paperwork can be made to disappear with the proper automation. We were able to 

help one state increase the number of overpayments processed by 600% with no increase in staff. It is my firm belief that most all states could make the same improvements. 

The return on investment is very high. If one assumes the cost of new fraud detection, processing and collection software to be $1 million and the return to the trust 

fund to be $5 million annually the return on investment is extraordinary. These are 

my estimates but can be substantiated. 

The second event that needs to happen is a change in culture in BPC. Many, probably most, BPC operations have a gumshoe attitude. Many BPC investigators think 

of themselves as detectives and treat their cases accordingly, even very simple redundant cases. Needless to say the throughput with this attitude is not very large. 

Paper is power and a large case load is a sign of high status. On the positive side, 

my experience shows that even though most BPC staff are very reluctant to embrace initial automation efforts, after a year or so they are very happy with it. They 

find that they deal with the truly interesting and complex cases while the system 

performs all of the mundane work. 

The biggest return on the dollar is automated case management. This is where 

the paperwork is. This is where the process slows down. In excess of 85% of this 

process can be automated. You should be made aware that most states still use software that was developed a distributed by the DOL in 1974. Needless to say it is 

horribly out of date, and even with state enhancements automates only a small part 

of the process.

3. In your testimony, you note that effective computer systems can reduce fraud and abuse by getting the word out so it can no longer be tolerated. Can you give us a specific example of where this has happened?

Response—The State of Washington has conducted a test in the Winachi region 

of western Washington where they audited 100% of claimants that their software 

detected as having a likelihood of being overpaid, no matter how low that likelihood. 

They found that the year after that audit the fraud in this region was substantially 

lowered though it continued to increase over 4 years when it almost returned to the 

previous levels. This was a documented study. I do not have a copy of it at this time 

but will try to obtain a copy for you or you may contact Kathy Ramoska, Chief of 

Special Investigations at 360–486–3001. 

Thank you again for the opportunity to respond to Congressman Herger’s letter. 

If you have any questions regarding my response or if I may be of any further service, please do not hesitate to contact me. 

Sincerely, 

Michael Lorsbach 

f Principal

[A submission for the record follows:]

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Statement of Tim Rogers, Revenue Plus, Vancouver, Washington 

Summary Statement 

We at Revenue Plus have been keenly aware of the amount of overpayments that 

each state has been trying to collect using their existing antiquated computer systems. Many states have asked us to demonstrate to them how the Revenue Plus 

software will them prioritize their collection efforts and to help them manage, track 

and report on their Overpayment of Benefits. We have conducted demonstrations for 

the Departments of Labor in WA, TN, LA, AL, AZ, GA, CA, and MD. Our software 

has helped other Government agencies increase their revenue up to 50% and the 

Overpayments Benefits group could take advantage of this technology. 

Benefits of using Revenue Plus Collection Software for Overpayments

1. Data matching—automatically links debtor accounts based on matching demographic criteria or other matches. 

2. Notes—provides complete account history of all account activity including 

charges, payments, correspondence, direct contacts & etc. 

3. Tickler file—provides at-a-glance information on current collection activities for 

an account and prompts the collector about the next action to be taken. 

4. Automated Reports—for managers and Federal Government requirements 

5. Integration with other databases and systems 

6. Tax Intercept—automated process for possible refund offset 

7. Work queues’—provides a prioritized daily work list of accounts for each collector to work the accounts with the highest priority first 

States using Revenue Plus Collection Software for collection of Overpayments and UI Taxes

1. Maryland Central Collections 

2. Colorado Central Services 

3. Ohio Attorney General’s Office 

About Revenue Plus

Revenue Plus, headquartered in Vancouver, WA is the Public Sector Division of 

Columbia Ultimate—makers of the #1 ranked collection software system for collection agencies in the United States. Since 1982 Columbia Ultimate has been addressing the unique software requirements of Government entities by integrating our 

vast private sector experience and technology into innovative public sector solutions. 

There are 58 Government agencies and over 500 companies in the private sector 

using Columbia Ultimate Collection software.

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