Wisconsin Legislative Audit Bureau: 'Unemployment Reserve Fund'

MADISON, Wisconsin, May 28 -- The Wisconsin Legislative Audit Bureau issued the following report (No. 21-9) on May 27, 2021, entitled "Unemployment Reserve Fund FY 2018-19 and FY 2019-20":

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Here are excerpts:

Contents

Letter of Transmittal ... 1

Introduction ... 3

Employer Taxes ... 4

Unemployment Insurance Benefits ... 5

Financial Position ... 7

Audit Results ... 8

Other Audits of Unemployment Insurance ... 9

Ongoing Issues ... 10

Audit Opinion ... 13

Management's Discussion and Analysis ... 19

Financial Statements ... 29

Statement of Net Position as of June 30, 2020, and June 30, 2019 ... 30

Statement of Revenues, Expenses, and Changes in Fund Net Position for the Years Ended June 30, 2020, and June 30, 2019 ... 31

Statement of Cash Flows for the Years Ended June 30, 2020, and June 30, 2019 32 Notes to the Financial Statements ... 33

Supplementary Information ... 39

Schedule of Cash Balance Related to Taxable Employers as of June 30, 2020, and June 30, 2019 ... 41

Note to the Schedule of Cash Balance Related to Taxable Employers ... 43

Auditor's Report ... 45

Finding and Response Schedule ... 49

Response

From the Department of Workforce Development

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To: Senator Robert Cowles and Representative Samantha Kerkman, Co-chairpersons, Joint Legislative Audit Committee, State Capitol, Madison, Wisconsin 53702

Dear Senator Cowles and Representative Kerkman:

To help fulfill our audit responsibilities under s. 13.94, Wis. Stats., and at the request of the Department of Workforce Development (DWD), we have audited the financial statements of the State of Wisconsin Unemployment Reserve Fund, which accounts for Wisconsin's Unemployment Insurance program benefits paid to eligible individuals. This audit report contains our unmodified opinion on the Fund's financial statements and related notes as of and for the years ended June 30, 2020, and June 30, 2019.

In response to the public health emergency, additional federal funds were made available through the Unemployment Insurance program, including those provided under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act programs provided almost $2.4 billion in benefits paid to eligible individuals during fiscal year (FY) 2019-20. The net position of the Fund was $1.7 billion as of June 30, 2020, which was a decrease of $345.4 million, or 17.1 percent, from the net position as of June 30, 2019.

The Schedule of Cash Balance Related to Taxable Employers is used to determine the state unemployment tax rate paid by employers. Section 108.18 (3m), Wis. Stats., requires a certain tax rate schedule to be in effect for the calendar year based upon the Fund's cash balance as of June 30 of the preceding year. Because the cash balance continued to be above $1.2 billion as of June 30, 2020, the lowest tax rate schedule continues to be in effect for calendar year 2021.

We identified a material weakness in internal control over financial reporting related to the reporting of benefits payable. We recommend DWD revise its procedures for calculating the benefits payable at the end of the fiscal year to ensure the effects of changes in circumstances, such as the backlog of claims that occurred in FY 2019-20, are accurately reflected in the payable. We also recommend that DWD report to the Joint Legislative Audit Committee on the status of its efforts to continue to process and pay benefits under new or continuing federal programs, to determine the relief that will be provided to employers for regular unemployment benefits provided during the public health emergency, and to complete the reviews DWD identified to assess if payments were incorrectly provided and establish an overpayment amount, as appropriate.

We appreciate the courtesy and cooperation extended to us by DWD staff during the audit. A response from DWD follows our report.

Respectfully submitted,

Joe Chrisman, State Auditor

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Introduction

Wisconsin's Unemployment Insurance program was enacted in 1932 and was the first such program in the United States. The program, which is authorized in ch. 108, Wis. Stats., is accounted for in the State of Wisconsin Unemployment Reserve Fund and is managed by the Department of Workforce Development (DWD). The program provides benefits temporarily to replace a portion of lost wages for eligible individuals who become unemployed through no fault of their own. Administrative costs of the program are funded primarily by federal grants, and these costs are accounted for in the State's General Fund. However, $18.9 million in federal funding that was received in fiscal year (FY) 2019-20 under the Families First Coronavirus Response Act for administrative costs is being accounted for in the Unemployment Reserve Fund.

The Unemployment Insurance Advisory Council (UIAC) advises DWD on matters related to unemployment insurance and makes recommendations for unemployment insurance changes to the Legislature. Section 15.227 (3), Wis. Stats., provides that the UIAC consists of five employer and five employee representatives who serve six-year terms and are appointed by the Secretary of DWD. The Secretary also appoints a DWD employee to serve as the nonvoting chairperson.

In March 2020, in response to the public health emergency, the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act established additional federal programs to fund benefits to unemployed individuals and to provide funding for certain regular unemployment benefits. Further, Wisconsin enacted statutory changes, including 2019 Wisconsin Act 185, and emergency administrative rule changes to increase flexibility and to accommodate federal law changes. The effect of these additional federal programs on the financial statements of the Unemployment Reserve Fund are discussed further in the sections that follow.

Employer Taxes

Each employer has an account within the Unemployment Reserve Fund. The federal government, the State of Wisconsin, electing local governmental units, and electing nonprofit organizations reimburse the Unemployment Reserve Fund for benefits charged to their accounts, rather than contribute in advance of benefit payments and are referred to as reimbursable employers. All other employers are considered taxable employers that are subject to a basic tax and a solvency tax that together constitute their total state unemployment insurance tax.

The basic tax is credited to a taxable employer's account and is based on each employer's unemployment experience rating. For example, taxable employers with more employee layoffs pay more in basic taxes than those with fewer layoffs. The solvency tax is credited to the Unemployment Reserve Fund's balancing, or solvency account, and is based on each employer's unemployment experience rating, payroll size, and account balance. The solvency account, which is reported as part of the Unemployment Reserve Fund's net position, is used to pay benefits that by state law cannot be charged to an employer's account, such as unemployment benefit expenditures for unemployed workers of an employer that went out of business. Under the provisions of 2019 Wisconsin Act 185 and 2021 Wisconsin Act 4, certain regular unemployment benefits that occurred during the public health emergency will also be charged to the solvency account. Both the use of the solvency account and the expected federal reimbursement will provide relief to taxable employers as these benefit payments would not directly affect the amounts used to determine future contribution rates.

Wisconsin Statutes designate that one of four unemployment insurance tax rate schedules, as shown in Table 1, is in effect for a calendar year based on the cash balance of the Unemployment Reserve Fund as of June 30 of the preceding year. The lowest tax rate schedule, Schedule D, has been in effect since calendar year 2018.

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[See link at end of text for Table 1: Unemployment Insurance Tax Rate Schedules]

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Based on the tax rate schedule, unemployment insurance tax rates are applied to each employee's wages up to the taxable wage base established in Wisconsin Statutes. Wisconsin's taxable wage base has been $14,000 since 2013.

Unemployment Insurance Benefits

Unemployed individuals file their initial benefit claim applications and subsequent weekly benefit claims online. DWD verifies the information provided in order to establish the eligibility of individuals and the amount of weekly benefits to pay them. Regular unemployment benefits are funded primarily by employer-paid taxes that are deposited in the Unemployment Reserve Fund. Eligible individuals may receive 26 weeks of regular unemployment benefits. Since January 2009, the minimum weekly regular unemployment benefit payment has been $54; and since January 2014, the maximum payment has been $370. Benefit recipients received an average weekly regular unemployment benefit payment of $325 in 2019 and $295 in 2020.

In addition to regular unemployment benefits, in March 2020 the CARES Act created several federally funded unemployment benefit programs. Benefits provided under the following programs during FY 2019-20, totaled almost $2.4 billion:

* the Pandemic Emergency Unemployment Compensation program, which provided temporary funding of benefits for an additional 13 weeks of eligibility;

* the Pandemic Unemployment Assistance program, which provided 39 weeks of benefits to individuals ineligible for regular unemployment benefits, had a minimum payment amount of $163 and maximum payment amount of $370; and

* the Federal Pandemic Unemployment Compensation program, which provided an additional $600 to the weekly benefit payment for individuals eligible for either regular or pandemic-related unemployment benefits.

Prior to March 2020, eligible individuals were generally required to be available to work and certify that they were searching for work or were granted a waiver. Work-search requirements included at least four reasonable search actions for suitable work during a week of unemployment. A reasonable work-search action is defined by administrative rule, and may include submitting a job application to a suitable employer, registering with a placement agency, or participating in employment workshops. To meet federal requirements related to easing eligibility requirements and access to unemployment benefits, an emergency rule was promulgated that modified the requirements related to the availability for work and provided a waiver to the work-search requirements for the period of the public health emergency. This rule expired in May 2021.

Individuals are sometimes paid more unemployment benefits than they are entitled to receive. This can occur if the individual or employer intentionally or unintentionally provides incorrect information used to calculate weekly benefit amounts or if DWD makes an error in determining the amount of benefits paid. It may also occur through no fault if, for example, an individual was paid benefits based on accurate information but was later awarded back pay from his or her employer, thereby reducing the amount of benefits that should have been paid. When an overpayment is identified, a receivable is established for the amount of the overpayment. The net receivable reported by the Unemployment Reserve Fund as a result of overpayments to claimants declined from $34.8 million as of June 30, 2019, to $32.0 million as of June 30, 2020, or by 8.0 percent.

In addition to the new federal unemployment programs, the CARES Act also provided federal reimbursement for certain regular unemployment benefits provided during the public health emergency. For instance, the CARES Act provided federal reimbursement for regular unemployment benefits for states that did not require individuals to wait one week to receive benefits. 2019 Wisconsin Act 185 temporarily suspended the one-week waiting period, which allows federal funding to be received for the first week of benefits for weeks beginning April 19, 2020. Federal reimbursement is also expected for a portion of regular unemployment benefits provided by reimbursable employers and benefits provided under the work-share, or short-term compensation program, which is a program intended to provide prorated unemployment benefits for employees of employers who voluntarily make an agreement with the state to reduce work hours instead of laying off workers. Although the final amount of federal reimbursement has not yet been determined DWD included in the financial statements a receivable of $140.0 million from the federal government related to these programs for FY 2019-20.

Financial Position

Programs established for unemployment benefits are intended to accumulate resources during periods of low unemployment to ensure funds are sufficient to pay benefits during periods of high unemployment. The U.S. Department of Labor (DOL) recommends that states have sufficient reserves to sustain 12 months of unemployment benefit payments estimated using specified criteria, without relying upon contribution revenue. For Wisconsin, DOL reported that the reserve balance of approximately $1.9 billion as of January 1, 2020, was just below this recommended reserve level.

The net position of the Unemployment Reserve Fund, as reported in accordance with generally accepted accounting principles, represents the value of the plan's assets that are available to meet unemployment benefit obligations as they become due. In years when the resources provided though employer taxes and other revenue exceeds unemployment benefit payments and transfers, the net position will increase. When unemployment benefit payments and transfers exceed the resources provided, the net position will decrease. As shown in Figure 1, in FY 2018-19 employer taxes and other revenue totaled $629.7 million, while unemployment benefit payments and transfers totaled $390.3 million. Therefore, the net position as of June 30, 2019, increased to $2.0 billion.

Subsequently, the net position of the Unemployment Reserve Fund decreased because unemployment benefit payments and transfers totaled $3.4 billion, which exceeded the $3.0 billion in employer taxes and other revenues that included almost $2.4 billion in federal reimbursement for benefits provided under the CARES Act programs. From June 30, 2019, to June 30, 2020, the Unemployment Reserve Fund's net position decreased by $345.4 million, or by 17.1 percent. The decline in net position was not more significant because federal reimbursement was received to provide for both federal and certain regular unemployment benefit payments.

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[See link at end of text for Figure 1: Unemployment Reserve Fund Revenues, Expenses, and Net Position For Fiscal Year Ended June 30]

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Audit Results

We performed an audit of the Unemployment Reserve Fund financial statements, which are prepared by DWD using generally accepted accounting principles prescribed by the Governmental Accounting Standards Board. To complete our audit of the financial statements, we reviewed DWD's internal controls over financial reporting, tested financial transactions, and reviewed the financial statements, notes, and supplementary information that were prepared by DWD management. We provided an unmodified opinion on the financial statements and related notes as of and for the years ended June 30, 2020, and June 30, 2019. Our opinion begins on page 15 and the related financial statements begin on page 30.

Our Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters begins on page 47. As discussed in this report, our consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. However, as discussed, we identified an internal control deficiency that we consider to be a material weakness, which is a deficiency that creates a reasonable possibility that a material misstatement will not be prevented, or will not be detected and corrected, on a timely basis. We found DWD did not properly consider the significant backlog of claims that resulted from the public health emergency when assessing the potential unemployment benefits that were payable as of June 30, 2020. DWD prepared adjustments to correct the errors we identified. We recommend DWD revise its procedures for calculating the benefits payable at the end of the fiscal year to ensure the effects of changes in circumstances, such as the backlog of claims that occurred in FY 2019-20, are accurately reflected in the payable. Because the Unemployment Reserve Fund's financial statements are also included in the State of Wisconsin's Comprehensive Annual Financial Report for the fiscal year ended June 30, 2020, this material weakness was also included in the Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters related to our audit of the State of Wisconsin's financial statements (report 20-30) as Finding 2020-004.

Other Audits of Unemployment Insurance

Under the provisions of 2019 Wisconsin Act 185, we performed three evaluations of DWD's administration of the Unemployment Insurance program and recommended improvements to DWD. In report 20-5, we evaluated reported overpayments of certain unemployment insurance benefits that occurred in April 2020; in report 20-13, we completed a review of DWD's management of unemployment insurance call centers; and in report 20-28, we evaluated the processing and resolution of certain Unemployment Insurance benefit claims. DWD has provided follow-up reports to the Joint Legislative Audit Committee on the status of its efforts to implement the recommendations included in these reports.

As part of our audit of federal funds expended by the State of Wisconsin, we audited the Unemployment Insurance program and identified a significant deficiency related to information technology (IT) security controls over systems that are used to administer the Unemployment Insurance program. Failure to properly maintain IT controls could result in the issuance of erroneous or fraudulent payments, ineligible program participants, or inappropriate viewing of confidential data. We recommend that DWD improve its IT controls (report 21-6), and we will follow up on the status of DWD's efforts to address our recommendations as a part of our FY 2020-21 single audit.

Ongoing Issues

As the public health emergency continued into FY 2020-21, the high volume of unemployment insurance claims has put additional pressures on the Unemployment Reserve Fund. As of January 1, 2021, DOL reported that Wisconsin's reserve balance of approximately $1.1 billion was one half of the recommended reserve level. Further, the Unemployment Insurance program continues to be affected by matters that continued after the end of FY 2019-20 or that arose after the end of the fiscal year. These include the need to continue to process and pay benefits under new or continuing federal unemployment benefit programs, the determination of relief that will be provided to employers for regular unemployment benefits provided during the public health emergency, and the need to complete reviews DWD identified to assess if payments were incorrectly provided and establish an overpayment amount, as appropriate.

Federal benefits provided under the unemployment benefit programs established through the CARES Act continued in FY 2020-21 and an additional benefit program was established through the Lost Wage Assistance program, which provided funding for additional benefits for a six-week period in August and September 2020. Federal benefit payments for the CARES Act programs were further extended by the federal Continued Assistance Act, on December 27, 2020, and the American Rescue Plan Act, on March 11, 2021. As a result, the benefit period was extended to a possible 79 weeks with supplemental weekly benefits of $300 available for most weeks. In addition, the Mixed Earners Unemployment Compensation program was created to provide an additional $100 in weekly benefits to self-employed individuals receiving regular unemployment benefits. Federal pandemic unemployment benefits are currently set to expire on September 4, 2021. We will review the benefits provided under these federal programs as part of our FY 2020-21 financial audit of the State of Wisconsin.

As noted, the CARES Act also established programs intended to provide relief to employers through federal reimbursement of certain regular unemployment benefits, including the first week of benefit payments as well as amounts to provide relief to reimbursable employer and for work-share benefits. In addition, 2019 Wisconsin Act 185 and 2021 Wisconsin Act 4 provided additional employer relief through the use of the solvency account for regular unemployment benefits provided to employees of taxable employers and for the use of funds in the interest and penalty account, which is maintained in the State's General Fund, for regular unemployment benefits provided to employees of reimbursable employers. DWD has reported that it must perform a manual process to review regular unemployment benefit payments made during the public health emergency to determine whether these payments relate to the public health emergency, could be reimbursed by the federal government, could be charged to the solvency account, or could be charged to the interest and penalty account. Until DWD completes its determination, the relief that will be provided to employers through the receipt of federal reimbursement and the use of the solvency account or the interest and penalty account cannot be known.

Fraud and overpayments related to the unemployment insurance program have been identified as a concern by DOL's Office of the Inspector General (OIG). In an alert memorandum, dated February 22, 2021, the OIG reported that potential fraud existed and that DOL needed to take action to ensure states had appropriate controls to mitigate fraud in high-risk areas. DWD is statutorily required to report annually to the UIAC on its activities related to detecting and prosecuting program fraud in the previous calendar year. DWD's 2020 report, which was submitted on March 15, 2021, indicated a total of $4.5 million in overpayments as a result of fraud, a decrease of 4.0 percent from 2019. As benefit payments increase, it would generally be expected that overpayments, which may or may not be the result of fraud, would also increase. DWD uses multiple methods, such as by comparing or cross-matching information provided by individuals with employment, immigration, and incarceration records, to detect and prevent programmatic overpayments including those that may be indicative of fraud. Although we were informed by DWD staff that these methods continued to be used, the increase in claim activity created an increase in the number of cross-matches that were identified for further reviews. It will be important for DWD to complete the reviews it has identified through these methods to assess if payments were incorrectly provided, either by error or fraud, and to establish an overpayment amount, as appropriate.

Recommendation

We recommend the Department of Workforce Development report to the Joint Legislative Audit Committee, by September 16, 2021, on the status of its efforts to:

* continue to process and pay benefits under the federal programs included in the Continued Assistance Act and the American Rescue Plan Act;

* determine the relief that will be provided to employers for regular unemployment benefits during the public health emergency, including amounts that will reimbursed by the federal government, amounts that will be charged to the solvency account, and amounts that will be charged to the interest and penalty account; and

* complete the reviews DWD identified to assess if payments were incorrectly provided and establish an overpayment amount, as appropriate.

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View omitted table, figure and full report at https://legis.wisconsin.gov/lab/media/3232/21-9full.pdf