Over $380 million in faulty unemployment benefits paid out by NC agency

The state agency tasked with paying benefits to unemployed workers reported an 18% average improper payment rate, largely due to errors and not implementing federal recommendations, according to a new state audit.

The report issued Wednesday also found that the mistakes by the Division of Employment Security, the agency under scrutiny in the audit, resulted in more than $380 million, of $2.2 billion paid out, in total estimated improper payments in a five-year period between April 1, 2016, and March 31, 2021.

That is $166 million above a performance benchmark that no more than 10% of payments should be improper, established by the U.S. Labor Department in its role as the federal administrative agency overseeing the state’s unemployment insurance program.

For Beth Wood, the state auditor, responsibility to fix the improper payments lies with the state agency’s leader, she told The News & Observer.

“The buck stops with the agency head: in this case, the commissioner of DES,” she said. “You know your problems. The U.S. Department of Labor has been telling you what your rate should be. You know what it is. You either fix it or you don’t,” Wood said.

Pryor Gibson is the assistant secretary of the Division of Employment Security. Gibson is a former state representative and was appointed to his current role in 2020 by Democratic Gov. Roy Cooper, replacing Lockhart Taylor. Machelle Sanders is the secretary of the North Carolina Department of Commerce, which houses the employment security division. She began that role in February 2021.

The period covered by the audit, ending in March 2021, includes the start of the COVID-19 pandemic when shutdowns and closures sent unemployment claims skyrocketing.

Improper payments occur when the state makes payments to people who are ineligible, or in an incorrect amount. The vast majority of improper payments, approximately 95%, were due to overpayments and not underpayments.

“Consequently, these public funds were not used for the intended purpose of providing financial assistance to unemployed North Carolinians in times of need,” the audit says.

Unemployment benefits

The state’s unemployment insurance program provides temporary financial assistance to unemployed workers who lost their jobs through no fault of their own and are actively seeking work. The audit did not look at other unemployment programs administered by the state, such as the federal unemployment programs implemented during the pandemic.

The state’s UI program is funded by employer-paid unemployment taxes.

To calculate the annual improper payment rate, the federal labor department requires the state to conduct audits of hundreds of randomly selected state UI program payments and determinations.

These audits are reported to the federal labor department, which then provides recommendations. The Auditor’s Office used DES’s improper payment reports for its analysis released this week.

The state UI program is designated as “High-Rate/High Impact” by the federal labor department due to the high improper payment rate, according to the audit.

That ranking does not lead to negative consequences for the state agency, according to Wood. In fact, it means the federal government will provide more consultative help and recommendations to help lower the rate, she said. The only consequences could come from the state General Assembly or the governor in requiring the agency to meet rate goals sooner, she said.

The federal labor department has already provided recommendations based on the main reported causes of improper payments. According to the audit, the division had implemented some but not all of the federal recommendations since 2016.

“The U.S. Department of Labor had made some pretty critical recommendations years ago,” Wood said. “I think some of the more important ones have not been implemented.”

“Hopefully this audit report, bringing out the issues and some critical recommendations not being implemented yet, will be done so moving forward,” Wood said.

The N&O requested an interview with DES but did not receive a response to that request by its deadline. Laura Leonard, a spokesperson for the division, provided a statement:

“The Division of Employment Security is working proactively to ensure the accuracy of unemployment benefit payments. DES had steadily improved its improper payment rate over the last five years and continues to implement new strategies and best practices to reduce fraud, waste and abuse in the unemployment benefits system,” Leonard wrote.

Audit’s findings

In particular, according to the audit, certain recommendations related to work search requirements, benefit year earnings, and information about workers’ separation from their jobs were not implemented.

Wood highlighted the audit’s findings that DES had not implemented work search reporting requirements involving weekly certifications of unemployment, and the agency had not provided a system for people receiving benefits to record their work search activities electronically.

In North Carolina, claimants are required to make three work search contacts each week and provide a record of their contacts to DES if requested.

Wood also noted that DES did not have a standardized system to decide in favor or against an employer or claimant when determining a work separation conflict. To be eligible for UI, claimants must be unemployed through no fault of their own.

“The DES has had these recommendations for years,” Wood said. “ For one reason or another.. they say, ‘well, we just weren’t sure that we had enough money to be able to store all these documents.’ Well, no study’s ever really been done. Nobody’s really looked at what it might cost,” she said.

DES agreed with the audit’s key recommendations and wrote in its response to the auditors that many of the recommendations had been implemented or were being implemented.

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