GAO Issues Report: Unemployment Insurance – Transformation Needed to Address Program Design, Infrastructure, and Integrity Risks

WASHINGTON, June 9 -- The Government Accountability Office has issued a report (GAO-22-105162) entitled "Unemployment Insurance - Transformation Needed to Address Program Design, Infrastructure, and Integrity Risks".

Here are excerpts of summaries associated with the report.

What GAO Found: "GAO and others have reported that challenges with Unemployment Insurance (UI) administration have affected states' ability to effectively meet the needs of unemployed workers, both historically and during times of economic downturn--such as the COVID-19 pandemic. Reported challenges with program design and variation in how states administer UI have contributed to declining access and disparities in benefit distribution. In the pandemic, challenges emerged relating to providing customer service, timely processing of claims, and implementing new programs. Moreover, GAO, the Department of Labor (DOL), and the DOL Office of Inspector General have reported on the need to modernize state IT systems.

The risk of UI improper payments, including from fraud, greatly increased during the pandemic. Prior to the pandemic, DOL regularly reported billions of dollars in annual estimated improper payments in UI, and it reported an increase from $8.0 billion (9.2 percent improper payment rate) for fiscal year 2020 to $78.1 billion (18.9 percent improper payment rate) for fiscal year 2021. According to DOL, historically, the primary causes of improper payments related to eligibility determination issues, such as providing benefits to those who had returned to work and failed to report their earnings. However, DOL stated that during the pandemic, increased identity theft was a main cause. Total UI improper payments are not known partly because DOL has not yet reported estimates for certain pandemic UI programs. States have also struggled with incomplete reporting of billions of dollars in identified overpayments. The CARES Act UI programs created new, and increased existing, fraud risks. From March 2020 through January 2022, at least 146 individuals pleaded guilty to federal charges of defrauding UI programs and charges were pending against at least 249 individuals. As a result of the increase in fraud-related cases during the pandemic, federal and state entities continue to investigate UI fraud.

These extensive challenges pose significant risk to UI service delivery and expose the UI system to significant financial losses. Based on GAO's findings--including many open recommendations in this area--GAO has determined that the UI system should be added to GAO's High-Risk List. DOL has some activities planned and underway for the UI system, such as creating a UI modernization office and implementing strategies aimed at reducing risk; however, many long-standing issues remain unaddressed. Leaving these issues unaddressed will heighten the risk of the UI system not meeting fundamental program expectations of serving workers and the broader economy, and may undermine public confidence in the responsible stewardship of government funds.

Participants in stakeholder panels GAO convened identified various options for transforming the UI system. Options include changes to program design to better target support, improvements to infrastructure, and enhancements to program integrity--e.g., tightening federal standards for state UI implementation, such as those for eligibility, benefit amounts, and duration; improving and modernizing IT systems; and obtaining additional data sources to identify fraudulent claims. In addition, GAO identified broad considerations to help policymakers and others assess key aspects of different options for transforming UI programs and addressing related risks. Such considerations include the comprehensiveness and flexibility of potential transformations."

Why GAO Did This Study: "A high-risk designation is intended to help spur progress in areas needing transformation. The UI system has faced long-standing challenges with effective service delivery and program integrity. The historic levels of job loss during the COVID-19 pandemic worsened existing challenges. Congress created four new UI programs to support workers during the pandemic. However, unprecedented demand for benefits and the need to quickly implement the new programs presented challenges for states and increased risks of improper payments, including from fraud.

This report examines (1) challenges in responding to the needs of unemployed workers and economic changes; (2) risks of improper payments, including from fraud; (3) the extent to which UI experienced impaired performance and financial loss; and (4) potential options for UI transformation suggested by stakeholder panels.

GAO reviewed audit products and relevant federal laws and guidance; reviewed literature to identify UI-related challenges and risks; analyzed improper payment reporting; convened a panel of 16 stakeholders with UI subject-matter expertise; and compared findings against GAO criteria for designating programs as high risk."

What GAO Recommends: "+-GAO recommends that DOL develop and implement a plan for transforming UI that meets GAO's high-risk criteria for transformations. DOL agreed with the recommendation and described actions it is taking to address it."

The report was sent to Sen. Ron Wyden, D-Oregon, chairman of the Senate Finance Committee, Sen. Gary Peters, D-Michigan, chairman of the Senate Homeland Security and Governmental Affairs Committee, and Rep. Carolyn Maloney, D-New York, chairwoman of the House Oversight and Reform Committee, on June 7, 2022.

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June 7, 2022

To: The Honorable Ron Wyden, Chairman, Committee on Finance, United States Senate

The Honorable Gary C. Peters, Chairman, Committee on Homeland Security and Governmental Affairs, United States Senate

The Honorable Carolyn B. Maloney, Chairwoman, Committee on Oversight and Reform, House of Representatives

Overseen by the Department of Labor (DOL) and administered by the states, the Unemployment Insurance (UI) program is a federal-state partnership that provides temporary financial assistance to eligible workers who become unemployed through no fault of their own. During economic downturns, UI's role in supporting workers and our overall economy becomes more vital. For example, from roughly April 2020 through December 2021, UI programs combined provided about $849 billion in compensation to claimants, according to DOL./1 However, the UI system has faced long-standing challenges with effective service delivery and program integrity. These challenges have been exacerbated during times of unprecedented demand for UI benefits, such as the 2007-2009 recession and the COVID-19 pandemic, which led to historic levels of job loss.

In response to the COVID-19 pandemic, Congress allowed states to ease certain requirements in the regular UI program to help support unemployed workers, and also created new UI programs that expanded eligibility and enhanced UI benefits. However, states faced challenges processing a historically high number of claims and ensuring the timely payment of benefits to eligible individuals. The unprecedented demand for UI benefits and the urgency with which states implemented the new programs during the pandemic also increased the risk of improper payments, including those due to fraud./2

In recent years, GAO, DOL, and the DOL Office of Inspector General (OIG) have reported on the need for improving federal and state management of the UI system, modernizing IT, and improving program integrity./3 Based on our findings from this body of work--including findings from two new GAO reports we are issuing concurrently--and the urgent need to address persistent issues in the UI system, we have determined that the UI system should be on our High-Risk List and are making an out-of-cycle high-risk designation./4

This high-risk designation is intended to help spur progress in resolving persistent issues by shining a spotlight on key issues and ways the federal government can lead efforts to find solutions, such as by addressing our 21 open recommendations and those of the DOL OIG, and focusing on using federal funds efficiently to maximize results./5 DOL continues to take some steps to address challenges, but a coordinated and sustained approach is important to ensure significant progress in improving program performance and integrity. As the nation's economy recovers from the effects of the COVID-19 pandemic, and states and DOL have more capacity to reflect on challenges the UI system faced before and during the pandemic, DOL now has the opportunity to give concerted attention to the long-term risks facing the UI system and to considerations in addressing them.

We prepared this report under the authority of the Comptroller General in light of congressional interest in the area of UI./6 This report examines (1) challenges related to the UI system's ability to respond to the needs of unemployed workers and to changing economic conditions; (2) the risk of improper payments, including from fraud, in the UI system; (3) the extent to which challenges place the UI system at risk of significantly impaired performance and financial loss, and how to address such risks; and (4) potential options for transforming the UI system.

For our first objective, we reviewed audit products by GAO, the DOL OIG, and state audit agencies to determine the challenges that DOL and states face, including IT system constraints, in responding to unemployed workers' needs and to changing economic conditions./7 We also reviewed published articles related to UI, written or recommended by participants in our stakeholder panels (discussed below), to identify both the historical and recent challenges the UI system has faced with addressing the needs of unemployed workers and the role the system has played in the larger economy.

For the second objective, we reviewed relevant federal laws and Office of Management and Budget (OMB) implementing guidance to identify the requirements that agencies must satisfy for improper payments reporting.

In addition, we reviewed audit reports by GAO and the DOL OIG to determine the risks that DOL and states face regarding improper payments, including from fraud. We also analyzed UI improper payment estimates from both DOL and OMB's PaymentAccuracy.gov website. We assessed the reliability of the data by reviewing DOL's documentation and the DOL OIG audits on the quality of the estimates. We determined that the estimates were sufficiently reliable for the purposes of this report; however, we also note the limitations of the estimates, as described in this report.

For the third objective, we drew from GAO and DOL OIG reports on UIrelated issues, and the two other UI-related reports we are issuing concurrently with this report./8 We also met with DOL officials to discuss ongoing and planned activities to address challenges identified in these reports. To determine whether UI should be on the High-Risk List, we compared our findings from prior reports, DOL OIG reports, and this work against the GAO criteria for determining whether a government program or function is high risk./9 We also considered federal internal control standards for monitoring during our review./10

To address objectives 1, 2, and 4, we convened a 2-day virtual roundtable composed of 16 stakeholder panelists with UI-related academic research experience, practical and applied experience running or assessing the UI system, or both. We selected potential panelists from government, the private sector, public-private partnerships, and academia to obtain educated views on topics related to transforming UI programs. The purpose of the roundtable discussions was to obtain stakeholder views on the risks facing the UI system, and options for how it could be transformed to better meet the demands of unemployed workers during periods of unprecedented job loss. The discussions were recorded and transcribed to ensure that we accurately captured panelists' statements. We analyzed the transcripts to develop a list of common themes and options for transformation. The inclusion in this report of individual options that stakeholders provided for transforming the UI system is meant to be illustrative and should not be interpreted as an endorsement by GAO or any federal agency or department. Appendix I provides a detailed discussion of our objectives, scope, and methodology for this review.

We conducted this performance audit from April 2021 to June 2022 in accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

See footnotes here: https://www.gao.gov/assets/gao-22-105162.pdf

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Conclusions

The COVID-19 pandemic caused states to face challenges processing a historically high number of UI claims and ensuring that eligible individuals received the appropriate amount of benefits in a timely way. The unprecedented demand for UI benefits, coupled with programmatic flexibilities--such as the waiving of work search requirements, and PUA's reliance on self-certification--during the pandemic that increased risks of improper payments, including those due to fraud, have added to the UI system's long-standing challenges of balancing effective service delivery and program integrity. These challenges highlight the need for transformation and improved federal and state management to better support the purpose of the UI system.

Program risks associated with regular UI--including administrative challenges with providing customer service and timely processing of UI benefits, and outdated IT systems--have hindered the program's ability to efficiently and effectively fulfill its purpose, and the pandemic exacerbated these issues in all UI programs. Moreover, the risks associated with improper payments and fraud, both in regular UI and in the now-expired CARES Act UI programs, have exposed the programs to potentially significant financial losses. Accordingly, as transformation is necessary, we are designating the UI system as a new area to be added to our HighRisk List, and will continue to monitor DOL's progress in meeting the five criteria for removal from the list. DOL's UI modernization plan, and its efforts to work with states to address fraud, advance equity, and modernize IT systems, are steps in the right direction to help resolve the persistent problems in the UI system; however, further efforts and sustained action to address recurring UI issues would help to stabilize the programs and prevent future disruptions to UI administration during economic downturns.

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Recommendations for Executive Action

The Secretary of Labor should develop and execute a transformation plan that meets GAO's high risk criteria for transformation; the plan should outline coordinated and sustained actions to address issues related to providing effective service and mitigating financial risk, including ways to demonstrate improvements. Planned actions may include addressing audit recommendations, and determining whether legislative changes are needed, as appropriate. Planned actions may also include achieving quantifiable results in reducing improper payment rates, including those related to fraud; improving efficiency in claims processing and restoring pre-pandemic payment timeliness levels; better reaching current worker populations; and enhancing equity in benefit distribution. (Recommendation 1)

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Agency Comments and Our Evaluation

We provided a draft of this report to DOL for review and comment. We also provided drafts of applicable sections of the report to each of the panelists that participated in our discussions. We received written comments from DOL that are reproduced in appendix II and summarized below. DOL and the panelists also provided technical comments, which we incorporated, as appropriate.

In its comments, DOL noted that states were not prepared to respond to the unprecedented level of unemployment caused by the COVID-19 pandemic and as a result, customer service suffered, benefits were delayed, and criminals attacked the system perpetrating unacceptable fraud. DOL stated that it is building on investments, such as pursuing more appropriate administrative funding for states and actively working to help states modernize their IT systems, to ensure states are better prepared for future economic downturns.

DOL also stated that our report incorrectly implies that DOL had, and continues to have, funding available to provide all states with funding for IT modernization. DOL also disagreed with our characterization of the department-issued guidance for temporary pandemic programs as "untimely and unclear." We accepted some of DOL's technical comments, and nevertheless, we maintain that our characterization of these findings is consistent with the supporting evidence, including from sources such as the DOL OIG and state officials. DOL also emphasized that the UI system is chronically underfunded, and that DOL recognized lack of training for new programs as a risk and worked to address it as quickly as possible.

DOL agreed with our recommendation to develop and execute a transformation plan that meets GAO's high-risk criteria for transformation, and that outlines coordinated and sustained actions to address issues related to providing effective service and mitigating financial risk, including ways to demonstrate improvements. DOL highlighted initiatives that are responsive to our recommendation, such as efforts aimed at reducing improper payments and combating fraud; enhancing equity in program access and benefit distribution; and improving efficiency in claims processing, among others. We recognize that DOL has valuable efforts under way, and we encourage DOL to continue to pursue efforts to transform the UI system to help meet, in part, the criteria for removal from the GAO high-risk list. These actions, if implemented effectively, would help address our recommendation.

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The text of the GAO report is available at https://www.gao.gov/products/gao-22-105162

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