GAO Issues Report: Unemployment Insurance – DOL Needs to Address Substantial Pandemic UI Fraud and Reduce Persistent Risks

WASHINGTON, Feb. 10 -- The Government Accountability Office has issued a report (GAO-23-106586) entitled "Unemployment Insurance - DOL Needs to Address Substantial Pandemic UI Fraud and Reduce Persistent Risks."

Here are excerpts of summaries associated with the report.

What GAO Found: "GAO found evidence of substantial levels of fraud and potential fraud in unemployment insurance (UI) during the pandemic. GAO estimated over $60 billion in fraudulent UI payments by extrapolating the lower bound of the Department of Labor's (DOL) 2021 estimated national fraud rate for the regular UI program. However, such an extrapolation has inherent limitations and should be interpreted with caution. GAO is working to develop a more comprehensive estimate on the total extent of UI fraud during the pandemic. The DOL Office of Inspector General's UI fraud investigations resulted in over 1,200 indictments or initial charges from April 2020 through January 2023. Each week that office continues to open over 100 new UI fraud-related investigative matters.

DOL and the states were not adequately prepared to handle UI fraud risks when the pandemic began. DOL has taken some recent steps to address UI fraud risks. For example, it has provided state workforce agencies with fraud-related guidance, integrity tools, and grant funding. DOL, however, has not yet implemented an antifraud strategy as called for by leading practices in GAO's Fraud Risk Framework.

The expediting of COVID-19 relief funding exacerbated an underlying improper-payment problem in the federal government, including UI, which predated the pandemic. For example, DOL reported an increase in estimated improper payments from $8.0 billion (9.2 percent estimated improper payment rate) for fiscal year 2020 to $78.1 billion (18.9 percent estimated improper payment rate) for fiscal year 2021. For fiscal year 2022, DOL reported estimated improper payments of $18.9 billion (22.2 percent estimated improper payment rate).

In June 2022, GAO added the UI system to its High Risk Program based on the system's need for transformation. The system's administrative and program integrity challenges pose significant risks to service delivery and expose the system to significant financial losses. Long-standing challenges with UI administration and outdated IT systems have further affected states' ability to meet the needs of unemployed workers, especially during economic downturns. Such challenges have also contributed to impaired service, declining access, and disparities in benefit distribution."

Why GAO Did This Study: "The UI system has faced long-standing challenges with program integrity, which increased dramatically during the pandemic. According to DOL data, expenditures across all UI programs totaled approximately $878 billion from April 2020 through September 2022. This included benefits as part of four new UI programs Congress created to support workers during the pandemic. The unprecedented demand for benefits and the need to quickly implement the new programs increased the risk of financial fraud. Due to these circumstances and other challenges, GAO added the UI system to its High Risk Program in June 2022.

This statement addresses: (1) fraud in the UI programs, (2) UI fraud risks and management of such risks, (3) continued UI improper payment problems, and (4) the addition of the UI system to GAO's High Risk Program.

This statement is based on GAO's body of work related to the UI system during the pandemic. More detailed information on the objectives, scope, and methodology that form the basis of the statement can be found in individual reports, which are listed in the full hearing statement."

What GAO Recommends: "As of January 2023, GAO has 19 open recommendations to DOL, including eight to strengthen its management of UI fraud risks. Recommendations include considering options to prevent fraud in programs designed to help self-employed and contingent workers, designating an entity to manage fraud risks, performing fraud-risk assessments, and developing and implementing an antifraud strategy."

The report was sent to Rep. Jason Smith, R-Missouri, chairman, and Rep. Richard E. Neal, D-Massachusetts, ranking member of the House Ways and Means Committee, on Feb. 8, 2022.

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To: Chairman Smith, Ranking Member Neal, and Members of the Committee

I appreciate the opportunity to discuss our work on fraud risks in the Department of Labor's (DOL) unemployment insurance (UI) programs during the COVID-19 pandemic. The UI system, which is jointly administered with states, has faced long-standing challenges with effective service delivery and program integrity. These challenges increased dramatically during the pandemic because of historic levels of job losses, among other factors. The CARES Act created three federally funded temporary programs that expanded UI benefit eligibility, enhanced benefits, and extended benefit duration./1 These programs were:

1. Pandemic Unemployment Assistance (PUA) authorized UI benefits for individuals not otherwise eligible for UI benefits, such as self-employed and certain gig economy workers, who were unable to work because of specified COVID-19-related reasons./2

2. Federal Pandemic Unemployment Compensation (FPUC) generally authorized an additional weekly benefit for individuals who were eligible for weekly benefits under the permanent UI programs--e.g., regular UI--and the temporary CARES Act UI programs./3

3. Pandemic Emergency Unemployment Compensation (PEUC) generally authorized additional weeks of UI benefits for those who had exhausted their regular UI benefits./4

In addition, the Consolidated Appropriations Act, enacted in December 2021, created the Mixed Earner Unemployment Compensation (MEUC) program, which was extended by the American Rescue Plan Act of 2021./5 According to DOL, the MEUC program was intended to cover regular UI claimants whose benefits do not account for significant self-employment income and who thus may have received a lower regular UI benefit than they would have received had they been eligible for PUA.

Timely payments allowed unemployed workers to address financial hardships such as inability to pay for rent, utilities, and groceries. As we found in June 2022, 30 empirical studies we reviewed showed the effect of UI program expansions during adverse times, such as the 2007-2009 recession and the COVID-19 pandemic./6 The expansions specifically helped to stabilize the economy, prevented detrimental outcomes from worsening, and had a limited effect on workers' incentives to return to work. Some of the studies we reviewed also showed that UI expansion had other positive benefits such as an improved labor market.

However, the unprecedented demand for UI benefits and the programmatic flexibilities allowed during the pandemic also increased the risk of financial fraud as well as other improper payments./7 From April 2020 through September 2022, expenditures across the UI system totaled approximately $878 billion, according to DOL data./8 Most of these funds went to the intended recipients in the intended amounts, providing needed assistance. In other instances, funds were paid improperly, including benefits going to those who sought to defraud the UI program.

In December 2022, we estimated over $60 billion in fraudulent UI payments were dispensed to applicants by extrapolating the lower bound of DOL's 2021 estimated national fraud rate for the regular UI program./9 However, such an extrapolation has inherent limitations and should be interpreted with caution. One of the many challenges in determining the full extent of fraud is its deceptive nature. Programs can incur financial losses related to fraud that are never identified and such losses are difficult to reliably estimate. In ongoing work, we are seeking to calculate a comprehensive estimate of UI fraud and are exploring ways to estimate the amount of fraud more broadly across the federal government.

The increased significance of the UI system during the pandemic highlights its vulnerabilities and susceptibility to improper payments, fraud, waste, abuse, and mismanagement. In an out-of-cycle action, we added the UI system to GAO's High Risk Program in June 2022./10 We did so based on findings from the DOL Office of Inspector General (OIG) and our prior work, as well as the urgent need to address persistent issues in the UI system--including funding uncertainties and outdated IT systems.

This designation is intended to help spur sustained progress in resolving persistent issues by shining a spotlight on such deficiencies and ways the federal government can lead efforts to find solutions.

My comments today address our body of work on the UI programs. Specifically, I will discuss

1. Fraud in the UI programs,

2. UI fraud risks and the management of such risks,

3. Continued problems with UI improper payments, and

4. The addition of the UI system to GAO's High Risk Program.

We conducted the work on which this statement is based in accordance with generally accepted government auditing standards. More detailed information on the objectives, scope, and methodology that this statement is based on can be found in the individual reports from which we obtained this information. See appendix I for a list of related reports.

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Footnotes and the full text of the GAO report are posted at https://www.gao.gov/assets/gao-23-106586.pdf

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