Pandemic unemployment fraud boosted by NYS Department of Labor missteps, audit finds

The state Department of Labor’s failure to replace an antiquated unemployment insurance system and ad hoc workarounds to compensate for the old system weakened oversight and contributed to billions of dollars in improper payments during the COVID-19 pandemic, an audit released Tuesday says.

At least $11 billion in unemployment funds were lost to fraud in state fiscal year 2020-2021, according to the audit by State Comptroller Thomas P. DiNapoli's office. That number likely understates the total amount, though, as it does not include estimated fraud in temporary unemployment insurance programs paid for with federal dollars, which the state Labor Department acknowledged had a much higher risk of fraud, the audit found.

The state made 218.2 million traditional and temporary unemployment insurance payments worth more than $76.3 billion between April 1, 2020, and March 31, 2021, the audit calculated.

“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 in a statement.

“The agency resorted to stop-gap measures to paper over problems, and this proved to be costly to the state, businesses, and New Yorkers,” he said. “The department needs to recoup fraudulent payments and correct its mistakes.”

The comptroller’s office said the Labor Department “did not heed warnings as far back as 2010” that the state’s unemployment insurance system was out of date.

With the system’s inability to adjust to new laws or handle surges in use, the situation led to a “dire forecast with disastrous consequences during the pandemic,” DiNapoli’s office said.

The DOL not only had to manage an unprecedented volume of traditional unemployment claims, but it also oversaw special pandemic unemployment benefits created by the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

'Unprecedented stress'

“The COVID-19 pandemic placed an unprecedented amount of stress on unemployment insurance systems nationwide," the Labor Department said in a statement Tuesday. "Despite this challenge, our system acted as a critical lifeline for nearly five million New Yorkers. The New York State Department of Labor is already implementing changes to improve the system and address the audit’s findings."

The department said it was "halfway through a four-year modernization plan that will enhance the overall experience for UI beneficiaries and reduce fraud," and that it was stepping up its fraud investigations and has made data on UI benefits available on a new, public dashboard.

The Labor Department did not respond to requests for an interview with labor Commissioner Roberta Reardon regarding the audit.

DiNapoli's office said it encourages the DOL to recoup the improper payments "as warranted."

The labor department did not say if the audit would lead to increased attempts to claw back benefits erroneously paid out to New Yorkers, but said its Office of Special Investigations is on pace to uncover  $110 million in fraudulently attained benefits this year.

Prior to the pandemic, the U.S. Department of Labor found that the state’s estimated rate of improper payments was 10.34%, which included a fraud rate of 4.51% in state fiscal year 2019-2020, above the federal performance threshold of 10%. During the pandemic, the federal agency reported that the state’s improper payment rate increased to 28.89%, with a fraud rate of 17.59% in the 2021-2022 fiscal year.

During the pandemic, auditors found, the DOL had to compensate for its out-of-date system by overriding existing controls made to prevent incorrect payments. The agency's “pay and chase” approach increased the risk of overpayments, payments charged to the wrong funding source, and fraud, the audit found. 

A sample of 53 claimants — selected for various risk factors by auditors — showed that 18, or one-third,  had potentially received UI payments above the maximum allowable amount.

In a larger sample, auditors found 96 claimants were improperly paid nearly $2.8 million with state funds instead of federal funds through the CARES Act.

Refusal to cooperate

DiNapoli's office said DOL officials refused to provide state auditors data that would allow them to calculate the exact number of unemployment insurance dollars fraudulently paid out, delaying the audit's completion. 

 The audit found that while Reardon had claimed the agency had prevented over $36 billion in fraudulent claims, labor department officials did not provide supporting proof  of fraud prevention in that amount, limiting the “scope and depth of our audit conclusions,” the report said.  

DOL also could not explain why the estimated number of fraudulent claims for traditional unemployment insurance more than tripled during fiscal year 2020-2021, auditors said. The agency was unwilling to provide data to auditors that would enable them to perform their own independent analysis, DiNapoli's office said.

Unlike the temporary federal aid programs, which were paid for with federal funding,   regular state unemployment insurance is paid for by taxes collected from employers.

DiNapoli's office said understanding the scope of the fraud is critical for New Yorkers because the state had to borrow from the federal government to support UI claims. The state had a loan balance from the federal UI trust fund that averaged $9.3 billion from September 2021 through April 2022. That balance now stands at about $8 billion and the loan must be paid back with interest at the expense of New York’s employers, auditors said. 

"It's certainly disheartening," said Patrick Bailey, director of communications for the Business Council of New York State, which represents around 3,100 mostly small businesses statewide. "This is going to be another burden on employers, especially small businesses, who are going to shoulder most of it.”

In July, DOL announced that New York employers would be required to pay an additional 0.23%, or about $27.60 per employee, in unemployment insurance taxes to repay millions in interest on the state's loan.  

“The bottom line is we want this addressed and for the state to figure out how to prevent this in the future," Bailey said.