Respectfully submitted on behalf of the Niskanen Center,
Matthew Darling, Senior Employment Policy Analyst 
David Jimenez, Social Policy Government Affairs Manager
Will Raderman, Employment Policy Analyst 
David Trimmer, Social Policy Intern 

Chairman Schweikert, Ranking Member Pascrell, and Members of the Committee, thank you for conducting a critical recent hearing on pandemic fraud. Widespread fraud during the COVID-19 pandemic came at an enormous cost to the American taxpayer. The American people deserve social insurance systems that deliver critical assistance–including unemployment insurance (UI)–effectively and quickly to legitimate claimants.1 Pervasive fraud costs taxpayers but also deepens cynicism in government. Without greater public confidence, lawmakers will be constrained in their ability to enact long overdue modernization of essential federal programs. Given the alarming gaps in UI integrity documented by government auditors and this Committee, Congress must strengthen the administration of UI and guard taxpayer dollars against fraud and criminal actors. Specifically, we encourage the Committee to explore opportunities to:

  • Improve the quality of data sharing and coordination
  • Foster professional cultures of institutional excellence in state agencies responsible for UI
  • Fix long-standing gaps in adequate federal funding for state UI administration
  • Encourage simplification of UI benefit calculation to limit fraud risks

Increase data sharing and coordination 

Full use of national data platforms is crucial to minimizing fraudulent claims and maximizing efficiency. Government Accountability Office analysts have long recommended better information-sharing practices, but states have not taken advantage of all available options. It was only in the wake of the COVID-19 pandemic that every state finally agreed to use the national Integrity Data Hub (IDH) for claim verification,2 and many states still are not utilizing and supporting the full range of data services offered by the National Association of State Workforce Agencies.3 For example, many states aren’t participating in the multi-state cross-match platform; nor are they consistently providing claimant data to the IDH.4 This is a missed opportunity to address significant sources of fraud during the pandemic. 

The continued lack of participation by state UI programs in collaborative data efforts remains concerning. During the pandemic, multi-state claimants were the prevalent source of unemployment benefit fraud. State agencies were unable to communicate and share claims data effectively, leaving their programs vulnerable to criminals submitting applications in several locations.5 Even when agencies managed to share their claims data, it could be incomplete or formatted differently from the information provided by other states. These dynamics must change to ensure that state UI programs are not vulnerable to similar levels of fraud moving forward and that more inadvertent improper payments stemming from clerical errors and incomplete paperwork are likewise avoided.6

Recommendations: Congress should consider mandating that states use critical data systems to maintain system integrity. Each data set that state agencies use is another layer of protection against criminal activity and improves the certainty that the correct number of dollars is going to the right people. 

Additional ways to improve program performance and integrity should also be considered. For example, state programs could be provided access to centralized IRS data, as has been established with other federal agencies.7 IRS data would equip UI agencies with a valuable source of information to help verify claimants’ identity and income from all possible sources and reduce time spent sifting through excessive paperwork. 

Promote institutional excellence in state UI programs 

The federal government must support state Departments of Labor (DOLs) as they strive for professional excellence and tackle inefficient and outdated practices. For example, New Jersey created a Cyber Fraud Investigations team to combat pandemic fraud. The state also modernized its system, putting workers at the forefront by ensuring they can easily navigate the UI website–demonstrating that anti-fraud efforts and effective benefits delivery work together.8 Similarly, before the pandemic, Utah created a data warehouse designed “to monitor and evaluate possible fraudulent activity,” leading to a historically low fraud rate in 2015.9 This continued through the pandemic – from 2019 through 2022, Utah’s “improper payment rate” was only 6.3%, the second lowest in the nation (the national average is 21.5%).10 Concerned taxpayers and citizens should applaud reform-minded, ambitious state public sector leaders who independently pursue impact and accountability in their agencies. 

Meaningful opportunities for federal engagement should also be a priority. While entrepreneurial state administrators have proactively improved their respective UI systems, others lack the necessary capacity or information. The federal government should continue highlighting promising practices that states can implement, conduct research on potential UI modernization efforts, and flag possible strategies to state agencies as has been done via the newly established Unemployment Insurance Office of Modernization. 

Recommendations: Congress could consider authorizing and appropriating a Research and Development program that would evaluate, publicize, and support promising state initiatives on UI modernization, including anti-fraud efforts. The federal government should complement state innovations with an “ARPA-L” (Advanced Research Program – Labor), modeled after the successful “DARPA” program in the Department of Defense and the new “ARPA-H” program in Health and Human Services.11 A vibrant federal-state partnership can help identify crucial UI reforms that ensure potential recipients can efficiently access their benefits while limiting fraud and overpayment risks. 

Identify sustainable funding streams for state UI administration 

The administration of UI benefits (as well as employment services and other related capacities) is funded by the Federal Unemployment Tax Act (FUTA). FUTA is paid by the employer, with a rate of 6% on the first $7,000 of an employee’s earnings. The $7,000 tax base was last updated in 1983, when the average worker’s earnings were $313 a week (or $16,276 a year), and was applied to nearly half of the average worker’s earnings. Today, weekly earnings have passed $1,000 a week (or $55,000 a year), so the FUTA tax is only applied to the first 13% of earnings.12 Consequently, consistent annual funding for UI administration has consistently decreased.13

One-off increases to state funds, such as those appropriated during the COVID-19 pandemic, have temporarily made up some of this decline. Still, the lack of adequate long-term support to protect UI integrity remains deeply concerning. Take the development of information technology systems. In recent years, best practices in private sector software development (especially for complicated systems such as UI administration) have abandoned “waterfall” development processes (in which program development moves through a sequence of discrete stages, like a succession of waterfalls in a river). Now most private sector software companies use an “agile” development paradigm, in which the system is constantly being redeveloped and re-tested. “Agile” programs cannot be effectively financed with a system of one-off grants, but need consistent, steady financing to assure service continuation and eliminate “technical debt.” As Jennifer Pahlka, the founder of “Code For America” and the U.S. Digital Service unit, has written, “Government’s attachment to waterfall development seriously hinders its ability to build software that works well for the task at hand.”14 This is just one example illustrating the urgency of reliable, consistent funding for UI administration to protect taxpayer dollars from criminal fraud and UI overpayments. 

Recommendations: Congress should provide states with consistent, sufficient funds to allow states to oversee their UI programs at high professional standards. Increasing the taxable earning base for FUTA would shore up resources for state UI administration and could be paired with greater simplification of how payroll taxes for Unemployment Insurance are applied to employers. Lawmakers could weigh pairing heightened federal investment in state UI administration with certain requirements, such as conducting certain types of verification checks for identity and earnings or setting aside a certain percentage of new dollars to focus solely on fraud prevention. Any mandates should be applied carefully so that state agency leaders maintain the necessary flexibility to invest in improvements to state DOLs that meet their specific challenges regarding staffing, benefit delivery, and program integrity. 

Simplify UI benefit calculation to reduce fraud risks 

We want to highlight a third issue that has received less attention but is critical to improving benefit delivery and preventing fraud: the inordinate complexity of how UI benefits are calculated.

States have substantial flexibility in determining the overall generosity of their UI benefits in both length of coverage and replacement of prior earnings. This is to be expected, as states have substantially different economies with stronger or more constrained tax bases.15 While high-income states may be able to finance more expansive benefits, other states may not be able to without putting their economic growth and competitiveness at risk.

The state-to-state variability doesn’t apply only to their benefits; rather, over time, each state has developed increasingly complex algorithms to determine UI benefits. As we explained in a recent white paper:16

“Consider, for example, the rules that govern the replacement rate–the amount of a worker’s prior earnings that is replaced by UI benefits. Immense variation exists just in states that begin with “A”:

  • Alabama looks at your earnings in the previous year by quarter. The state then averages the two quarters in which your wages were the highest and multiplies that by 1/26 to determine your weekly benefit.
  • Alaska looks at your wages in the previous year. Your weekly benefit is set as a percentage of your annual wages, with the possible percentage ranging from 0.9 to 2.2 percent. In addition, your benefits are increased by $24 per dependent.
  • Arizona looks at your highest-quarter wage (in the four-quarter “base period” before filing) and sets your weekly benefits to 1/25th of your wages in that quarter.
  • Arkansas looks at the four previous quarters, takes the average wage, and multiplies that by 1/26.

Rules in the other 46 states are similarly varied. States may use the highest quarter’s wages for the previous year, average wages, or some combination of the two.”

This complexity is not necessarily related to the specific needs of workers in each state. Rather, it is a product of random drifts over time as legislators look to make UI benefits more or less generous. This complexity causes a ripple effect on UI fraud prevention. 

First, convoluted UI benefit calculation limits states’ capacity to quickly bolster their UI claims staff during emergencies and severe economic downturns. During the pandemic, normal hiring laws were suspended to allow states to hire temporary workers to assist with UI administration. The complexity of UI calculation meant that quickly-trained temporary workers often could not effectively and accurately assist in benefits administration, as the intricacies of state UI codes require significant expertise to understand and apply. This influx of temporary workers may have inadvertently increased the fraud and overpayment rate, even while improving benefit delivery speed.17

Second, simply managing the administration of a public benefit guided by highly complex formulas risks coming at the expense of management and staff attention to identifying and addressing signs of criminal fraud or widespread overpayments. Ultimately, variation in benefit calculation contributes to the larger complexity in the UI system that makes it difficult for federal and state authorities to collaborate and detect fraud.18 

Recommendations: Congress should weigh UI reforms encouraging states to “clean up” their UI code. While states should have substantial flexibility in determining the aggregate generosity of their UI program, they should all work from a consistent system where each state effectively turns the dials of two or three variables up or down instead of the complex free-for-all of the current system. This measure would substantially simplify the cost of UI administration and make it more responsive to future economic shocks. 

Conclusion 

Although the magnitude of pandemic fraud was unprecedented, the administrative shortcomings that enabled such high levels of criminal activity have been apparent for years. After Hurricane Katrina, Louisiana and Mississippi faced a surge in unemployment benefit claims from residents impacted by the storm. Their UI agencies were unprepared to handle the increase in claims and were subsequently forced to ease up on the eligibility screening to quickly send benefits to displaced workers.19 The Department of Labor Inspector General later reported that the state programs essentially had “nonexistent” controls to verify eligibility.20 

This institutional breakdown, while taking place during a different crisis fifteen years earlier, parallels the struggles faced by UI agencies during the pandemic. American taxpayers are counting on lawmakers to ensure their UI can withstand future crises and achieve two straightforward goals: protecting their hard-earned dollars from criminal fraud and getting resources quickly to vulnerable workers. Unless Congress proactively takes steps to improve UI administration, similar fundamental failures in program integrity will occur again.

1. Shea, Rebecca. “COVID-19: Key Elements of Fraud Schemes and Actions to Better Prevent Fraud.” Testimony before the Subcommittee on Oversight, Committee on Ways and Means, House of Representatives, October 19, 2023. United States Government Accountability Office. https://gop-waysandmeans.house.gov/wp-content/uploads/2023/10/Shea-Testimony-Updated.pdf.

2. U.S. Department of Labor, Employment and Training Administration. “Training and Employment Notice No. 24-21: Encouragement for States to Use the Integrity Data Hub (IDH) available through the Unemployment Insurance (UI) Integrity Center.” May 5, 2022. https://www.dol.gov/sites/dolgov/files/ETA/advisories/TEN/2021/TEN_24-21_acc.pdf.

3. National Association of State Workforce Agencies. “State Information Data Exchange System (SIDES).” Accessed October 24th, 2023. https://www.naswa.org/sides.U.S. Department of Labor, Employment and Training Administration.

4. Tian, Zhenying. “Integrity Data Hub: A Multi-State Solution to Unemployment Insurance Fraud.” Bipartisan Policy Center, August 15, 2023. https://bipartisanpolicy.org/blog/integrity-data-hub-multi-state-solution-unemployment-insurance-fraud/.

5. Darling, Matt. “What Star Wars can teach us about unemployment insurance fraud.” Niskanen Center, April 11, 2023. https://niskanencenter.org/what-stars-wars-can-teach-us-about-unemployment-insurance-fraud/.

6. U.S. Government Accountability Office. “UNEMPLOYMENT INSURANCE: Estimated Amount of Fraud during Pandemic Likely Between $100 Billion and $135 Billion.” GAO-23-106696 Highlights, September 2023. https://www.gao.gov/assets/gao-23-106696-highlights.pdf.
U.S. Department of Labor. “PUA Improper Rate Report.” August 21, 2023. https://oui.doleta.gov/unemploy/pdf/Pandemic_Unemployment_Assistance_Improper_Payment_Rate_Report.pdf.

7. Esteban, Joanne, Nicole Fenton, and Christina Steen. “Federal tax data could streamline income verification and reduce fraud in future emergencies.” U.S. Department of Labor, Employment and Training Administration. September 29, 2023. https://dol.gov/agencies/eta/ui-modernization/blogs/tax-data.U.S. Government Accountability Office.

8. Evermore, Michele. “New Jersey’s Worker-centered Approach to Improving the Administration of Unemployment Insurance.” Heldrich Center for Workforce Development, Rutgers. September 2023. https://heldrich.rutgers.edu/sites/default/files/2023-09/New_Jersey_s_Worker-centered_Approach_to_Improving_the_Administration_of_Unemployment_Insurance.pdf.

9. Newcombe, Tod. “Aiming Analytics at Our $3.5 Billion Unemployment Insurance Problem.” Government Technology, March 2017. https://govtech.com/data/aiming-analytics-at-our-35-billion-unemployment-insurance-problem.html.

10. U.S. Department of Labor, Employment and Training Administration. “Unemployment Insurance Payment Accuracy by State.” Accessed October 23, 2023. https://dol.gov/agencies/eta/unemployment-insurance-payment-accuracy.

11. Schoop, Joshua, Arati Prabhakar, Jeff Kaplan, and Andrew Sosanya. “Creating an Advanced Research Projects Agency (ARPA-L) for the Department of Labor.” Day One Project, March 2021. https://fas.org/wp-content/uploads/2021/03/Creating-an-Advanced-Research-Projects-Agency-ARPA-L-for-the-Department-of-Labor.pdf.

12. “Employed Full Time: Median Usual Weekly Real Earnings: Wage and Salary Workers: 16 Years and Over.” Federal Reserve Bank of St. Louis. Last modified October 18, 2023. https://fred.stlouisfed.org/series/LES1252881600Q.

13. Wandner, Stephen A., ed. 2018. Unemployment Insurance Reform: Fixing a Broken System. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/9780880996532.

14. Jennifer Pahlka, Recoding America: Why Government Is Failing in the Digital Age and How We Can Do Better (Henry Holt and Co., 2023).

15. Zhang, Jin, and Matt Darling. “A More Legible UI Policy.” Niskanen Center. February 7, 2023. https://www.niskanencenter.org/a-more-legible-ui-policy/.

16. Darling, Matthew, and Will Raderman. An Unemployment Insurance System That Works. Niskanen Center, September 2023. https://www.niskanencenter.org/an-unemployment-insurance-system-that-works-2/.

17. Evermore, Michele, and Laura Valle Gutierrez. “The Pandemic and Unemployment Insurance Fraud.” The Century Foundation, February 8, 2023. https://tcf.org/content/commentary/the-pandemic-and-unemployment-insurance-fraud/.

18. U.S. Department of Labor, Office of Inspector General. “Alert Memorandum: Potentially Fraudulent Unemployment Insurance Payments in High-Risk Areas Increased to $45.6 Billion.” September 21, 2022. https://oig.dol.gov/public/reports/oa/2022/19-22-005-03-315.pdf.