Recommendations of the Texas Comptroller

Reduce Unemployment

Insurance Fraud

Summary

In 1996, Texas paid out more unemployment insurance benefits than all but six other states. Despite this, the percentage of fraudulent overpayments identified was well below the national average. While this could be the result of a strong fraud deterrence system, it is more likely due to a lack of aggressive fraud detection. Texas should adopt specific strategies used successfully by other states to increase the identification and recovery of unemployment insurance benefit overpayments.

Background

The unemployment insurance (UI) program uses state and federal dollars to provide weekly cash benefits to Texas residents who are unemployed through no fault of their own. Employers covered under the Texas Unemployment Compensation Act report wages paid to their employees and pay taxes based on the number of employees and amount of wages, as well as their past record of employee UI claims. Employers also pay taxes under the Federal Unemployment Tax Act, which finances state UI administrative agencies, state employment services, and the US Department of Labor’s (DOL’s) Unemployment Insurance Service.

The Texas Workforce Commission (TWC), the entity that regulates the state’s unemployment insurance payments, reports that in fiscal 1999, approximately 749,000 unemployed workers filed claims. The state paid $1.2 billion in regular state UI benefits for qualified applicants, and around 382,000 employers paid UI taxes.[1]

The unemployment insurance system can be defrauded in a number of ways; these include claiming UI while on vacation, using false Social Security numbers, filing for UI while still employed, or continuing to collect UI even after becoming re-employed. Other methods include fictitious employer schemes and the use of illegal aliens to claim benefits in “kickback” schemes.[2]

Unemployment fraud costs the nation millions of dollars each year. An estimated$22 million in false UI claims were filed in New York in 1998.[3] Illinois compares a list of new hires with people collecting UI to detect early fraud; in 1997, the state denied the UI claims of 5,000 people.[4] Nebraska identified 600 fraudulent claims made by employees seeking UI in addition to their vacation pay that would have cost the state $221,000.[5] In 1999, Louisiana issued 32 warrants for suspects charged with stealing $81,000 from the UI program, only a fraction of the estimated $8.5 million in UI fraud committed in the state between 1995 and 1999.[6]

A benefit overpayment occurs when an unemployed worker receives too much UI money. Overpayments can take place because of accounting errors on the part of the agency administering the payments, or because the person receiving the benefits lied about his or her status and is receiving the benefits under false pretenses. Once TWC knows an overpayment has been made, it must document it and then try to recover the money.

According to a DOL national study, overpayment dollars recovered as a percentage of benefits paid increased from 0.63 percent in 1984 to 1.19 percent in 1995. Comparing overpayments collected to total benefits paid measures the success of recoveries over time even as the fund grows. In other words, while the amount of overypayments detected more than tripled from $174.6 million in 1984 to $601 million in 1995, the ratio of overpayments recovered to total benefits paid only doubled. DOL concluded that studies to identify overpayment patterns in specific industries and find weaknesses in prevention programs could increase the amount of overpaid UI benefits collected.[7]

Between 1994 and 1996, fraudulent overpayments detected in Texas averaged $6.3 million, or 0.62 percent of total benefits, which is considerably lower than the US average of 1.08 percent. Only 24.5 percent of Texas’ overpayments were due to fraud in 1995, compared to the US average of 44.2 percent.[8] By 1998, Texas’ ratio had risen to 28.2 percent, but so had the US average (52.9 percent).[9] These percentages suggest that other states are doing a considerably better job of detecting fraud than Texas.

Beginning in May 1998, the TWC opened seven “telecenters” to process unemployment claims and updates over the telephone. Previously, claimants picked up their UI benefit checks in person at a TWC office. According to the Dallas Morning News, one of the reasons Texas converted to an automated system for UI filing and payment was to free up resources to allow the agency to investigate UI fraud more aggressively.[10] TWC’s method of deterring fraud in the new automated system is to play a message outlining the consequences of providing the system with false statements. This same message is printed on the back of UI benefit checks mailed to claimants, who, when they endorse the checks, also are signing a pledge that all the information they have provided to TWC regarding their UI claim is true.

Once TWC detects an overpayment, the agency contacts the recipient by mail and telephone. If TWC determines that the overpayment is the result of fraud, it files a “Notice of Assessment,” a legal document notifying the claimant that he or she has 30 days to return the overpayment. According to TWC, the Notice of Assessment holds the same power as a District Court’s final judgement in a case. If the recipient does not return the overpayment after 30 days, TWC files an “Abstract of Assessment” with the claimant’s county clerk.[11] An Abstract of Assessment serves as a lien against the claimant’s property and becomes a part of the claimant’s credit record.

According to a report compiled by DOL’s Office of the Inspector General, Texas had only 15 investigators working on fraud cases in October 1998, and had not prosecuted any fraud cases since 1996. Texas has fewer investigators than most states with systems of comparable size, including California (18 investigators), New York (52), Florida (20), Georgia (18), and New Jersey (39).[12] Despite reductions in its UI staff due to the automated functions of the new telecenters, TWC has not increased its number of UI investigators. TWC states that the reason for this is the high cost of the telecenter technology.

In November 1996, TWC changed the way it produced prosecution “packets,” the collection of legal documents necessary to prosecute a UI fraud case. The change inadvertently resulted in TWC’s inability to generate the legal documents necessary to prosecute individuals for UI fraud. Consequently, TWC stopped referring cases for prosecution.

In 2000, TWC moved to a personal computer-based system to allow them to do a better job of producing the prosecution packets. One staff member is taking the new packets to each of the 254 county prosecutors to encourage them to prosecute UI fraud cases. Although TWC is authorized to pursue criminal charges on fraudulent UI overpayments, the offense is a Class A misdemeanor regardless of the amount of money involved.[13]

A 1995-96 DOL study identified 28 different UI fraud detection methods used by states. Cross-matching UI wages with benefits paid accounted for 68% of the fraud over-payments detected, but other methods, such as automated case management systems, have a significant impact. Legislation can also help establish strong penalties for fraud, including higher monetary penalties that could be used to hire more UI investigators. DOL established a nationwide goal of recovering 55 percent of the total benefit overpayments identified each year, whether or not they are due to fraud.[14]

In 1998, only ten other states had a lower recovery percentage for fraudulent overpayments than Texas. The US average that year was 50.9 percent, compared to Texas’ 40.1 percent recovery rate. If Texas had achieved the US average, the state would have collected an additional $1.9 million. Also in 1998, Texas recovered only 47 percent of non-fraudulent UI overpayments, compared to the US average of 56 percent. If Texas had achieved the US average, the state would have collected an additional $4 million. Texas’ overall recovery rate of 45 percent was well below the federal benchmark of 55 percent.[15] In 1999, Texas collected $352,498, only 30 percent of identified fraudulent overpayments.[16]

States can collect overpayments by contracting with private collection agencies, referring delinquent accounts to private attorneys or collection agencies, or debiting a client’s federal or state benefit payments.[17] TWC has the authority to withhold UI overpayment amounts from lottery winnings, but has not yet established a system to do so, because it assumes that a very small number of individuals who owe money to the UI system will win the lottery.

In August 1999, TWC launched a one-year pilot program with a private collection agency to recover UI overpayments. Since TWC is precluded from using a contingency contract—one in which the vendor is paid out of the UI overpayments collected—TWC set aside $50,000 in administrative funds to pay the collection agency a 14.9 percent commission on any overpayments they collected, up to $335,000. Although the contractor had access to a $30 million pool of uncollected overpayments, it collected only $225,000.[18]

One collection tool available to state agencies is the Comptroller’s “warrant hold” program. It prohibits the Comptroller and state agencies from making payments to businesses and individuals who owe the state money. Agencies are required to report to the Comptroller individuals who are indebted to the state or have a tax delinquency after they have taken initial steps to collect the debt as required by the Office of the Attorney General. TWC reported that 96 percent of its delinquent obligations for UI benefit overpayments were classified as uncollectible in 1998. However, as of July 1999, the Comptroller’s Texas Identification Number System, which captures tax delinquency and state indebtness information, showed that no delinquencies for benefit overpayments had been reported to the warrant hold program by TWC. [19]

Recommendations

A. The Texas Workforce Commission (TWC) should conduct a study to determine, to the fullest extent possible, the amount of fraudulent claims in the unemployment insurance (UI) system.

The study should establish the most effective possible fraud detection methods and should make full use of TWC’s new automated UI systems. It should be modeled on fraud studies in other government benefit programs, such as the Medicaid program. It should include thorough research on fraudulent schemes used in other states and their methods of detection, as well as an analysis of the industries most affected by fraud.

B. TWC should aggressively pursue all available UI overpayment collection strategies.

TWC should establish clear UI collection targets for its investigation staff and expand the use of available collection tools. TWC should make full use of the Comptroller’s “warrant hold” program by establishing warrant hold criteria and referring appropriate UI overpayment delinquencies to the program. This could reduce some UI overpayment delinquencies through the Comptroller’s authority to offset state tax refunds or other payments. TWC should also pursue criminal convictions for fraud against the UI system more aggressively.

C. TWC should contract with a private collection agency on a contingency fee-basis by adding the fee to the total amount of the benefit overpayment.

The State of Colorado added a 28 percent fee to overpayments to fund a contract with a collection agency without having to use additional resources.[20] Such a move would allow TWC to contract with a collection agency without using its existing budget.

Fiscal Impact

The study should be conducted using existing resources; automated systems have already been implemented with existing funds.

Using preliminary data, if Texas improved its collection rate on overpayments to meet national averages, the state would collect an additional $6 million in fraudulent overpayments each year beginning in fiscal 2003.[21]

[1] US Department of Labor, “SESA UI Statistics for CY 1999,” (http://www.workforcesecurity.doleta.gov/unemploy/cy99_stat.asp). (Internet document.)

[2 ] US Department of Labor, Office of Inspector General, Unemployment Insurance Integrity: Fraud and Vulnerabilities in the System, Washington, DC, March 31, 1999, pp. 1-5.

[3] “31 Are Charged With Taking Jobless Aid Despite Working,” The New York Times, September 10, 1999, p. B-5.

[4 ] “New Hire Reporting Law,” The State Journal-Register, Springfield, Illinois, November 11, 1998, p. 29.

[5 ] “Are Workers On Holiday Also Jobless?” The Omaha World-Herald, January 17, 1999, Page 1-A.

[6 ] “Authorities Round Up 16 in Unemployment Check Scam,” The Advocate, Baton Rouge, Louisiana, April 9, 1999, pp. 2-B, X.

[7] US Department of Labor, UI Overpayment Recovery Project, Washington, D.C., March 1998, pp. B-1 – B-4.

[8] US Department of Labor, “Detection of UI Fraud in the US,” – Table 3; and “Percentage of Fraud to Non-fraud Overpayments by State for 1995 – Table 9,” Washington, D.C., 1996, (http://www.itsc.state.md.us/ui_integrity/ui_fraud.html). (Internet document.)

[9 ] Calculation based on US Department of Labor, UI PERFORMS CY 1998 Annual Report, Washington, D.C., August 1999, p.226, (http://www.itsc.state.md.us/data_stats/cy98_report.pdf). (Internet document.)

[10] “Jobless Dialing for Benefits,” The Dallas Morning News, May 17, 1998, p. 43A.

[11 ] Memorandum from Joe Adams, director of Planning, Texas Workforce Commission, regarding Private Vendor Recovery Activities – Employer Delinquent Taxes and Claimant Benefits Overpayment, Austin, Texas, July 6, 2000.

[12 ] US Department of Labor, Office of Inspector General, Unemployment Insurance Integrity: Fraud and Vulnerabilities in the System, Washington, DC, March 31, 1999, pp. 12-16.

[13] Interview with Lynn Q. Vance, program director, UI Support and Customer Service, and Elaine Bouquet, supervisor, Benefit Payment Control Unit, Texas Workforce Commission, Austin, Texas, August 4, 2000.

[14 ] US Department of Labor, “Benefit Payment Control Technical Assistance Guide, Chapter V. Overpayment Recovery Activities,” (http://www.itsc.state.md.us/prog_info/BPC/report_analysis/cover.htm). (Internet document.)

[15 ] Calculation based on US Department of Labor, UI PERFORMS CY 1998 Annual Report, Washington, D.C., August 1999, p.226, (http://www.itsc.state.md.us/data_stats/cy98_report.pdf). (Internet document.)

[16] Calculation based on ETA 227 reports, US Department of Labor, ETA 227 Overpayment Detection and Recovery Activities for Texas, periods ending 3/31/99 through 12/31/99.

[17] Unemployment Overpayment Recovery Project, “Overpayment Recovery – Best Practices: Colorado,” (http://www.itsc.state.md.us/prog_info/BPC/report_analysis/cover.htm). (Internet document.)

[18 ] Interview with Lynn Q. Vance, program director of UI Support and Customer Service, and Elaine Bouquet, supervisor of the Benefit Payment Control Unit, Texas Workforce Commission, Austin, Texas, August 4, 2000.

[19] Texas Comptroller of Public Accounts and Texas Office of the Attorney General, State Collection of Receivables and Delinquent Obligations: Final Report, Austin, Texas, December 1998, pp. 4, 8, 14, and 28.

[20] Unemployment Overpayment Recovery Project, “Overpayment Recovery – Best Practices: Colorado,” (http://www.itsc.state.md.us/prog_info/BPC/report_analysis/cover.htm). (Internet document.)

[21 ] US Department of Labor, “UI Performs Annual Report CY 1998,” p. 226, (http://www.itsc.state.md.us/data_stats/cy98_report.pdf). (Internet document.)

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

Privacy Policy