REPORT HIGHLIGHTS PERFORMANCE AUDIT OF THE IDES UNEMPLOYMENT INSURANCE PROGRAMS PERFORMANCE AUDIT Release Date: July 26, 2023 State of Illinois, Office of the Auditor General FRANK J. MAUTINO, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, Iles Park Plaza, 740 E. Ash Street, Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov REPORT HIGHLIGHTS Background: On September 1, 2021, the Legislative Audit Commission adopted Resolution Number 158 requiring a performance audit of the unemployment programs administered by the Illinois Department of Employment Security during the period of March 1, 2020, to September 6, 2021. The Resolution contained eight determinations. Unemployment Insurance (UI) is a joint state-federal program that provides cash benefits to eligible unemployed individuals. In addition to federal and State laws already in place, there were several federal laws enacted in response to the pandemic. The Coronavirus Aid, Relief, and Economic Security Act, the Consolidated Appropriations Act, 2021, and a presidential memorandum, created additional unemployment programs for individuals who were not traditionally eligible for unemployment benefits, such as those who are self-employed or contract-based employees. The additional programs included Pandemic Unemployment Assistance (PUA), Federal Pandemic Unemployment Compensation (FPUC), Pandemic Emergency Unemployment Compensation (PEUC), Lost Wages Assistance (LWA), and Mixed Earner Unemployment Compensation (MEUC). The Department was responsible for implementing the programs and distributing benefits. Key Findings: • Overpayments (which include fraud, non-fraud, and identity theft) were an issue in both the regular UI and PUA programs. IDES reported overpayments for FY20 to FY22 that totaled $5.24 billion; regular UI accounted for $2.04 billion and PUA accounted for $3.20 billion. Considering gross benefits associated with regular UI claims were 2.5 times higher than gross benefits associated with PUA claims, it shows the magnitude of fraud experienced in the PUA program. IDES noted stopped or recovered payments of $150.36 million and $361.34 million for the regular UI and PUA programs respectively. • Many decisions made during the pandemic were intended to decrease or eliminate delays and prioritize paying claims as soon as possible. Several of IDES’ defenses against fraud could not handle the exponential increase in claims. Claimants were unable to register for claims since they were required to pass these cross-matches in order to file. Beginning in March 2020, IDES suspended some routine identity cross-matches performed on all regular UI claims filed because the cross-matches required time to run and constricted the processing system severely. These cross-matches were temporarily suspended and/or processed offline. This allowed IDES to better handle the increase in claims processing traffic; however, this left the unemployment programs more susceptible to fraud. • Timely payment of benefits and preventing fraud are competing concepts. Preventing fraud, especially in new programs with evolving guidance and guidelines, likely would require additional processing time and a possible delay in benefit distribution to claimants. Conversely, paying claims quickly, especially when certain cross-matches and controls were suspended, increased IDES’ risk of making improper payments. • IDES made large payments of backdated benefits while controls were suspended which could have contributed to large overpayments and losses due to fraud and identity theft. Claims were sometimes filed and paid within a matter of days and then fraudulent activity was subsequently detected. Auditors found 158,054 PUA claimants that received a single payment of $10,000 or more (totaling more than $2.3 billion in benefits) within 30 days or less of the date of application. It is important to note that while these are not necessarily fraudulent payments, given the increased risk of identity theft and the size of these payments, it would be a good practice to take additional measures to ensure that these payments are issued to eligible claimants. • IDES data shows payments were made to deceased individuals and incarcerated individuals. The data showed, for both regular UI and PUA combined, a total of 481 deceased individuals received 10,527 payments totaling $6.0 million. In addition, 3,448 incarcerated individuals received 92,811 payments totaling $40.5 million. Testing these cases showed that some overpayments had already been identified as fraud. However, some of the overpayment figures excluded payments made before January 2021 and therefore understated the overpayment. • The addition of new federal laws and unemployment programs in response to the pandemic resulted in additional program complexity and constantly changing guidance. The US Department of Labor (DOL) issued official guidance referred to as Unemployment Insurance Program Letters (UIPLs). Auditors reviewed 72 UIPLs related to the audit determinations. In addition, the individual UIPLs were constantly being updated and changed. For example, UIPL 16-20 was first issued April 5, 2020; however, there were 6 subsequent changes issued from April 27, 2020, to September 3, 2021. • While the pandemic created an unprecedented increase in unemployment claims, and likely levels that could not have been anticipated, the concept of planning for massive economic downturns remains the same. There was a lack of planning prior to the pandemic that contributed to the delays experienced by unemployment claimants: – IDES was not prepared to quickly increase staffing, which created delays in answering phone calls and processing claims. Staffing issues were compounded by retirements and staff being forced to work from home due to the pandemic. – PUA benefits could not be processed until a new PUA payment system was in place. – IDES’ website and the IBIS system crashed due to overload. – Claimants with missing or hijacked payments experienced substantial delays in getting their payments reissued due to an inadequate procedure for processing and handling payment tracer forms, especially in times of high demand. Auditors found that it took IDES, on average, 198 days to reissue hijacked regular UI payments and 445 days for hijacked PUA payments. • Auditors tested 50 regular UI claims and 50 PUA claims and noted the following about timeliness of application processing: – On average, the 50 IBIS claims sampled took 14 days from the application date to the date the finding was sent to the applicant. For approved claims that received at least one payment, it took approximately 16 days from the date of application to the date the first payment was made. – On average, the 50 PUA claims sampled took 38 days from the application date to the date the finding was sent to the applicant. For the 25 claims in our sample that received at least one payment, it took approximately 15 days from the application date to the date the first payment was made. • The Department entered into eight contracts including 29 amendments during the audit period for services and software related to administering the unemployment insurance and PUA programs. Pursuant to a Disaster Proclamation issued by the Governor, these contracts were exempt from bidding and the provisions of the Illinois Procurement Code. The eight contracts initially totaled $33.5 million. However, with subsequent amendments, the eight contracts eventually totaled $226.4 million, $160.5 million of which had been expended through January 2023. Nine of the 29 amendments were signed by IDES between 2 days and 45 days after the effective date of the amendment. • The US Department of Labor (DOL) introduced additional cross-matches to combat fraud in October 2021 and February 2022 that IDES is not yet utilizing (Prisoner Update Processing System and Bank Account Verification service respectively). • The issues experienced at IDES were not unique to Illinois. A Pandemic Response Accountability Committee (PRAC) report released in December 2021 noted states experienced significant challenges in effectively providing their states with unemployment benefits. The report noted four common insights from unemployment insurance findings identified across 16 State Auditor Offices (including Illinois): – unemployment insurance workloads surged for states; – the claims surge exploited internal control weaknesses; – uncommon and varying fraud schemes began to occur as the amount of federal funding expanded; and – State Workforce Agencies experienced information technology system challenges. Key Recommendations: The audit report contains seven recommendations directed to the Illinois Department of Employment Security including: • The Illinois Department of Employment Security should develop a Recession Plan, including lessons learned during the COVID-19 pandemic, for future reference in times of rapidly increasing claim volumes. • The Illinois Department of Employment Security should update its procedure for handling payment tracer affidavit forms to allow the Department to better handle a large influx of forms. This update should include a process for tracking the submission of payment tracer affidavit forms. If possible, the Department should explore best practices in this area to determine if more efficient methods and tools are available. • The Illinois Department of Employment Security should research and implement further cross-match and fraud prevention tools that may be available. The Department should specifically consider implementing the Prisoner Update Processing System data match and the Bank Account Verification service. These tools would provide the Department with more opportunities to identify and prevent payment of fraudulent claims. • The Illinois Department of Employment Security should seek to identify and recoup as appropriate any payments for applicants who received inappropriate benefits. In addition, the Department should specifically target any payments made to applicants who were deceased or ineligible due to incarceration. IDES should pay special attention to overpayment balances that only considered January 2021 moving forward. • The Illinois Department of Employment Security should consider instituting additional controls/holds on payments exceeding a determined amount to minimize loss from fraud when issuing payments for backdated claims and/or large benefit payment amounts. This performance audit was conducted by the staff of the Office of the Auditor General.