Audit: Unemployment agency's lax fraud policies during pandemic led to billions in overpayments

A lack of software programming and instructions from past Unemployment Insurance Agency Director Steve Gray meant to streamline pandemic benefits in 2020 prevented the Michigan agency from investigating billions of dollars in potentially fraudulent or mistaken jobless aid overpayments, according to an audit released Friday.

The agency's management missteps in the early days of the COVID-19 and delayed efforts to correct course resulted in billions of dollars in overpayments in pandemic unemployment assistance where the agency failed to fully investigate issues such as a claimant being unable to show proof of a recent job, conflicting or nonexistent employment or identity documentation, or wages earned while receiving jobless aid, Auditor General Doug Ringler's office found.

As recently as last August, the UIA was still changing its software to identify who among the workers who received $6.6 billion in pandemic unemployment assistance overpayments since March 2020 intentionally misrepresented their employment status, according to the audit.

The unemployment agency's efforts to fix practices implemented under Gray that led to questionable jobless claims getting paid created problems that continue to linger, state auditors found, as the agency's three-year window to investigate those claims begins to close in April 2023.

"UIA emails from the beginning of the COVID-19 pandemic indicated the then UIA director instructed staff not to find fraud against claimants," the audit said, indicating senior managers disagreed with Gray's decision. "Also, until their resignation in early November 2020, emails show the UIA director instructed staff not to question PUA claimants' self-attestations because they believed UIA lacked the authority to do so."

Gray abruptly resigned in November 2020 after months of problems with the agency's website during a surge in jobless claims at the beginning of the coronavirus pandemic. Gov. Gretchen Whitmer's administration offered no explanation for Gray's departure at the time. In March 2021, the Whitmer administration disclosed that Gray was paid $85,872 severance as part of a separation agreement that requires Gray to "maintain confidentiality" regarding his employment and his departure.

Gray, who is now a senior counsel at the National Employment Law Project, did not immediately respond Friday to a message seeking comment.

The state audit released Friday contained 11 material conditions that found the agency was overall "not effective" in processing jobless aid claims during the pandemic. The audit faulted the agency for mispaying, overpaying, granting too many or too few waivers, failing to communicate clearly or at all with claimants, and removing investigative and managerial oversight of programs.

The findings — several of which have been detailed in earlier audits or legislative oversight hearings — give one of the more comprehensive views of the agency's struggles to process claims in 2020 and 2021 under record requests, unprecedented attempts at fraud and the rapid-fire rollout of federal COVID relief unemployment programs.

More:Severity of Michigan's alleged unemployment fraud exposed as purported Kardashian got paid

The Whitmer administration criticized the audit — the fourth of five conducted by Auditor General Doug Ringler's office — in a call with reporters. UIA officials argued the audit lacked context, rehashed well-documented issues and failed to reflect the reforms the agency has made over the past year. But the agency also estimated about two-thirds of the report reflected previously undisclosed findings.

"We are doing this again and again and again," Unemployment Insurance Director Julia Dale said. "And at what point do we say we have addressed these issues, we have demonstrated our commitment to righting past wrongs and we've been transparent about the actions we've taken? Why do we keep revisiting these matters?"

House Republican Leader Matt Hall, who requested the audit with Senate Republican Leader Aric Nesbitt and GOP Sen. Ed McBroom from the Upper Peninsula, said the report shone more light on the "chaotic mess" at the agency during the pandemic.

"Oversight is more crucial now than ever," said Hall, R-Richland Township. "This is no time for Democrats to let the foot off the gas and let down the people of our state who were harmed by the unemployment agency’s incompetence and who are still at risk."

Nesbitt, R-Porter Township, said the audit answers questions Michigan residents have continued to ask over the past several months.

“While some UIA and executive office leaders try to downplay the auditor general’s continued findings on this subject, I will continue to do all I can to ensure proper oversight of this important state agency that people rely on," he said.

Democrats took full control of the Legislature this week after winning narrow majorities in the House and Senate in the November general election.

A bad start

Some of the biggest blunders at the Unemployment Insurance Agency that resulted in the most fraud occurred in the early days of the pandemic, according to a November 2020 audit conducted by Deloitte.

In mid-March 2020, Whitmer issued an executive order extending timeframes when individuals could backdate claims for unemployment. That came on the heels of the Democratic governor's executive orders that shuttered office buildings, closed retail stores and temporarily barred restaurants and bars from offering dine-in service, triggering an onslaught of more than 1 million unemployment claims in the matter of weeks.

Gray decided in late March to eliminate 10-day holds on claims on the premise that the employers needing to verify an employee's departure within that 10-day window wouldn't be in their offices because of the state shutdown.

When programmers attempted to adjust software to accommodate the two changes, they accidentally introduced a sequencing error that accounted for the majority of early fraud. The error essentially delayed automatic fraud scans of new unemployment claims so it was possible for a claim to be filed, certified and paid on the same day before the agency's fraud manager could flag it for potential fraud. The mistake existed in the state system from March 31, 2020, through May 19, 2020.

In later weeks, Gray reduced the agency's investigation group, reassigning their workers to other tasks, and obtained permission from the federal government to suspend its benefits accuracy measurement investigations.

Between April 14 and May 22, 2020, Gray relaxed review criteria in the agency's fraud management program so fewer false positives were flagged by the system. From June 5 through July 28, the agency conducted ID verification over the phone instead of requesting official forms.

At least three managerial agency employees objected to Gray's changes, but ultimately the agency decided to accept some fraud in order to eliminate a bureaucratic bottleneck from the crush of pandemic claims, according to the Deloitte audit.

In later months, other system flaws would begin to reveal themselves.

Deeper dive into invalid eligibility criteria

The Auditor General's office, which is an arm of the Legislature, estimates the UIA paid out $10.2 billion in pandemic unemployment assistance based on invalid eligibility criteria or a lack of eligibility criteria in weekly certifications — an issue that emerged in June 2021 when the agency issued 648,000 notices to claimants who used ineligible criteria developed by the state.

The audit found an additional 107,800 claims where the claimant marked invalid eligibility criteria that were not identified by the agency. Those claims amount to another $200.7 million.

More:Michigan unemployment agency to halt all collections on pandemic overpayments

The agency in June 2021 asked individuals who marked the invalid criteria to seek requalification; the roughly 331,800 claimants who did not respond to the agency or didn't meet other valid criteria were granted waivers of the potential overpayment amounting to about $3.7 billion.

State auditors reviewed about 60 of the 331,800 waivers granted and found the agency issued waivers without examining other proofs of potential fraud. An extrapolation of the sample indicates the UIA may have granted waivers totaling $1.7 billion for claims that had eligibility issues, the audit found.

At the same time, the audit said, officials did not consider waivers for about $280.7 million in PUA claims that may have qualified.

Lack of oversight creates security cracks

The agency's decision, the audit noted, to reassign its investigative divisions staff, remove fraud detection and prevention controls, and change oversight protocol to streamline payments early in the pandemic allowed for "high dollar and high-risk benefit payments" without proper review.

For example, the audit examined five of the highest benefit payments between January 2020 and December 2021 that did not receive an employee review because of changing protocol regarding the threshold that would trigger a review.

Those five payments, ranging from $32,800 to $42,466, included one in which the claimant provided an unsigned, handwritten note from a prospective employer saying he or she was scheduled to start work with the company but couldn't because of a COVID closure.

"The note was printed on a plain piece of paper (not business letterhead) and was unsigned by the preparer, calling into question its authenticity," the audit said.

In other cases, UIA workers didn't review pandemic claims backdated to before the start of the pandemic on March 10, 2020, and approved a June 2020 payment of $6,840 for a "member of LEO's (Department of Labor and Economic Opportunity) executive leadership, who likely was a victim of identity theft." Auditors brought it to the attention of the UIA in January 2022.

One claimant who received state aid reported $50,400 in self-employment income and $50,400 in "other income," "but only provided a photo of a handwritten piece of paper as documentation, which stated, 'Master Barber' and the name of a barbershop."

There was no licensed barbershop in state licensing databases and no wages recorded for the individual in state treasury records, according to the audit.

The unemployment agency is estimated to have made billions of dollars in fraudulent overpayments across several programs but identified only 28 payments totaling $342,000 stemming from intentional misrepresentation related to the pandemic unemployment assistance (PUA) program.

UIA, LEO can't explain delayed fixes

In addition to the early errors, the agency in fall 2020 became aware that 314,000 claimants paid about $3.3 billion in benefits weren't previously working, as required. But the agency didn't take timely action to stop overpayments or begin to collect on overpayments, the audit said.

The UIA and Department of Labor and Economic Opportunity executives in November 2020 discussed resolutions to the issue, as well as the "economic and political repercussions" of finding that many individuals were ineligible, but ultimately didn't make the changes for months.

"Neither UIA nor LEO executive leadership could explain why," the audit said.

Additionally, the UIA temporarily waived a requirement improperly that made claimants certify whether they were able and available for full-time work, an issue related to massive confusion regarding the eligibility of part-time workers to receive jobless benefits.

"When UIA reinstated the able and available questions, the related potential eligibility issues identified in MiDAS increased approximately 450%," the audit said.

In another finding, the audit determined the UIA should have required claimants to start seeking work in November 2020 but didn't do so until June 5, 2021.

UIA communication lacking

The audit also criticized the UIA for failing to respond to claimants' communication and issuing confusing communications in other cases.

The agency didn't respond to about 15.7 million of 16.8 million attempts by claimants to contact them through an online chat between March 29, 2020, and Oct. 2, 2020, a response rate of less than 7%, according to the audit.

The UIA call system didn't track the number of calls to its center if there was a busy signal, so it was nearly impossible to track the agency's rate of response.

But anecdotal evidence indicated a lack of staffing, inexperience and the complexities of the federal unemployment aid "precluded it from handling much of the extremely large call volume during much of the pandemic," the audit said.

More:State to award $78M contract to replace beleaguered unemployment system

Dale expressed frustration Thursday with the audit, including the finding related to waivers, which she said was based on what the agency's stretched-thin staff was able to provide auditors while trying to process waivers in a timely manner.

Moreover, she argued, the audit ignored the agency's work to correct the issues during the pandemic, such as contracting for a new software system, waiving $555 million in overpayments on 76,000 claims, rebuilding the unemployment insurance trust fund, and cracking down on fraudulent and criminal conduct related to unemployment.

"We really feel it necessary to set the record straight about what we’ve done," said Dale, who became the UIA director in October 2021 about a year after Gray's resignation.

eleblanc@detroitnews.com