DiNapoli audit details problems with state UI system

ALBANY, N.Y. — The New York State Department of Labor’s (DOL) “failure to replace its long-troubled” unemployment-insurance (UI) system and ad-hoc workarounds to compensate for the old system “weakened” oversight and “ultimately contributed to an estimated billions of dollars in improper payments” during the COVID-19 pandemic. 

That’s according to an audit that New York State Comptroller Thomas DiNapoli released Nov. 15. 

DOL “refused” to provide auditors with the data that would have enabled auditors to calculate the precise number of improper payments and “was slow” to provide requested information that delayed the completion of the audit, the comptroller contended. The audit examined the period from January 2020 to March 2022.

“The state Department of Labor’s antiquated UI system was ill-equipped to handle the challenges posed by the extraordinary demand caused by the pandemic for unemployment benefits and more lenient federal eligibility requirements,” DiNapoli said. “The agency resorted to stop-gap measures to paper over problems, and this proved to be costly to the state, businesses, and New Yorkers. The department needs to recoup fraudulent payments and correct its mistakes. I was pleased the department agreed with our recommendations and is moving to implement them.”

CNYBJ asked the state DOL for its response to the comptroller’s findings and received the following statement on Nov. 29.

“The COVID-19 pandemic placed an unprecedented amount of stress on unemployment-insurance systems nationwide. Despite this challenge, our system acted as a critical lifeline for nearly 5 million New Yorkers. The New York State Department of Labor is already implementing changes to improve the system and address the audit’s findings. We are halfway through a four-year modernization plan that will enhance the overall experience for UI beneficiaries and reduce fraud. We’re stepping up our fraud investigations and we’ve made data on UI benefits available on a new, public dashboard. NYSDOL remains committed to protecting our UI system while ensuring all qualified New Yorkers have access to benefits.”

Background

DOL officials “did not heed warnings” as far back as 2010 that its UI system was out of date, nor did it address issues identified in a 2015 State Comptroller’s audit, DiNapoli contended. 

The system “lacked the resources necessary” to adjust to new laws or handle workload surges –– a “dire forecast with disastrous consequences” during the pandemic. Not only did DOL have to manage an “unprecedented” volume of traditional UI benefit claims, but it also administered UI benefits for the temporary programs created by the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act). 

These temporary federal benefits, with “less stringent” eligibility requirements, contributed to a “dramatic increase” in UI claims.

Even before the pandemic, the U.S. Department of Labor reported New York’s traditional UI estimated improper payment rate at 10.34 percent, including a fraud rate of 4.51 percent, in state fiscal year (SFY) 2019-20, exceeding the federal performance threshold of 10 percent, per DiNapoli’s office. 

Unlike temporary programs, which the federal government fully pays for, New York’s UI program is funded by taxes collected from employers. With the increase of claims during the pandemic, U.S. DOL’s estimated improper payment rate in New York’s UI program increased significantly to 28.89 percent, including a fraud rate of 17.59 percent in SFY 2021-22.

From April 1, 2020 through March 31, 2021, the state made 218.2 million traditional and temporary UI payments totaling over $76.3 billion, an increase of nearly 3,140 percent over the amount paid in the prior state fiscal year. 

Using the U.S. DOL’s estimated fraud rate for New York’s traditional UI program for SFY 2020-21, that would equate to about $11 billion lost to fraud in that fiscal year, DiNapoli’s office said. 

This likely understates the actual amount, as the New York DOL acknowledged that the temporary programs had a significantly higher risk of fraud.

Auditors found that during the pandemic, DOL had to compensate for its outdated system by overriding existing controls designed to prevent improper payments. DOL’s “pay and chase” approach boosted the risk of overpayments, payments charged to the wrong funding source, and fraud. For example, auditors tested a sample of 53 claimants, selected for various risk factors, and found that 18, or one-third, potentially received UI payments that exceeded the maximum allowed amount.

Audit recommendations

The audit recommendations included continued development of the replacement UI system and ensuring its timely implementation.

In addition, DOL should take steps — including collecting and analyzing data related to the identity-verification process — to “ensure the correct balance” between fraudulent identity detection and a streamlined process for those in need of UI benefits.

It was also recommended that DOL follow up on the questionable claims identified by the audit to ensure adjustments have been made so they are paid from the proper funding source and “overpayments are recovered, as warranted.”

The recommendations also included ensuring the current and new UI system and data comply with provisions of the New York State Information Security Policy; the Classification, Authentication, Encryption, and Logging Standards, as well as the ITS Operations Change Management Process and Policy.

In addition, DOL should improve the timeliness of cooperation with state oversight inquiries to ensure “transparent and accountable” agency operations, per DiNapoli’s office.