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Colorado’s unemployment system kept inadequate records on who was overpaid or not paid at all, auditor says

The annual financial report said the Colorado Department of Labor and Employment did not provide critical information needed for proper records keeping and oversight.

A small group of unemployed Coloradans gather at the Colorado Department of Labor downtown to voice their complaints that they have not received their pandemic unemployment payments on Feb. 8, 2021, in Denver, Colorado. (Kathryn Scott, Special to The Colorado Sun)
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Colorado’s Office of the State Auditor on Tuesday criticized the Colorado Department of Labor and Employment for its lack of proper financial reporting and oversight of billions of dollars in payments to unemployed Coloradans. 

In an unusual move, the report added a disclaimer to its annual audit of state government finances that honed in on the labor department’s accounting for a large backlog of unpaid unemployment claims, overpayments and other issues. 

Auditors lacked enough information, according to the report.

“There’s no question that the pandemic has presented many challenges for state government, particularly for unemployment insurance. But when the state doesn’t get a clean audit opinion, that’s a big deal, too,” Kerri Hunter, deputy state auditor, said in a statement.

The Colorado Department of Labor and Employment office in Denver’s Capitol Hill neighborhood on March 21, 2020. (Eric Lubbers, The Colorado Sun)

The report is the latest blow to the Department of Labor, which has struggled since April to pay hundreds of thousands of Colorado workers who lost their jobs during the pandemic. Limping along on a decades-old computer system, the labor department last year had to set up new technology to distribute the federal CARES Act dollars and soon had to fend off fraudsters who found holes in unemployment systems nationwide. 

The auditor’s office chastised the Department of Labor for its lack of financial reporting and internal controls, which resulted in “unverifiable adjustments of $2.1 billion” to the state Unemployment Insurance Trust Fund.

The department also submitted data after deadline with “errors and omissions … that included a $20.9 million understatement of cash and an approximately $1.4 billion omission of expenditures.”

“We were looking for the department’s controls in place around all unemployment funds, including PUA, and the related claims,” Dianne E. Ray, Colorado’s auditor, said in an email Tuesday.

The report was for fiscal year 2020, which ended June 30. 

Read the Colorado Office of the State Auditor’s 2020 report here.

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Updates have been made since then, said Jessica Hudgins Smith, press secretary for the Division of Unemployment Insurance. 

“This audit reflects the end of last fiscal year — now almost a year old,” Smith said in an email. “Since that time, we have implemented several measures against fraud, including changing business processes, implementing technology solutions, and partnering with the Attorney General’s Office to investigate and prosecute those suspected of committing UI fraud.”

CDLE now has more than 50 anti-fraud measures to flag suspicious claims made by scammers using stolen identities. Before the pandemic, it had five. Since the federal pandemic aid became available, more than 1.1 million claims have been flagged as fraudulent, which prevented $7.5 billion from being paid. The state has paid $6.5 million on claims later deemed fraudulent. About $1 million has since been recovered, according to CDLE.

“Colorado has been recognized nationally for its ability to manage that fraud and keep it under control,” Smith said. “We have even had other states reach out to us and ask for advice on the anti-fraud measures we have put into place. For example, California paid more than $11 billion in fraudulent claims, whereas Colorado has been able to minimize our exposure to a fraction of that.”

Unprecedented claims, overpayments and errors 

In the report, CDLE blamed the unparalleled jobless claims during the pandemic and the rush to get people paid as reasons why the right protocols weren’t in place to record needed financial information. 

The agency also lost key staff just before and during the pandemic. The number of claims last year was equal to five years worth of regular state claims plus an additional year for the PUA program. 

Since March 2020, more than 1 million new claims for unemployment were filed in Colorado. The state has paid out $7.96 billion in state and federal unemployment benefits. 

The auditor’s report criticized CDLE for not keeping good records of potential overpayments and how many were not resolved by June 30. When auditors asked about erroneous or fraudulent claims prior to June 30, CDLE estimated there was an overpayment of $359 million. 

The overpayments and other errors were blamed on the rush to meet Gov. Jared Polis’ March 20 executive order to pay displaced workers within 10 days of a claim. The labor agency took the approach of pay now, verify later.

By October, CDLE publicly acknowledged that the PUA application was confusing and applicants were overpaid because they used their gross income instead of net income to qualify for funds. CDLE decided to forgive the overpayments, which at the time totaled $1.4 million for 9,000 Coloradans. 

According to the auditor’s report, however, CDLE said the error resulted in $52.1 million in overpayments by 11,445 claimants through June 30. But CDLE didn’t adjust its records “to reflect the overpayments” nor did it provide documentation to support what it did. 

The report says the agency “could not provide evidence that the entire $52.1 million overpayment was related to payments prior to June 30, 2020.”

“Much of the problem stems from policy decisions that were made by the federal government early in the COVID response. Erring on the side of getting benefits to people faster was the right response in such an international emergency, although the tradeoff to that decision exposed all state governments in the country to an increase in fraud,” Smith said.

Fraud blamed for confusion

At the end of the fiscal year, the problems for many on unemployment were just becoming public.  

As the state’s anti-fraud measures ramped up, thousands of legitimate users found their claims placed on hold as the agency tried to verify who was real and who wasn’t. 

By September, unemployed workers who’d been without a benefit check since June or July faced eviction and homelessness. The state released 6,000 holds but left at least 7,800 others waiting because those claims had violated one or more of the then-18 fraud triggers. The system, however, remained a target of scammers, and thousands more users found their accounts slapped with a “program integrity,” or fraud hold.

In mid-January, the state implemented a new tool called IDme and requires users with holds or who are new to the system to get their identities verified before benefits can be paid. Since IDme was added, 61,248 identities have been verified and $55.3 million paid to accounts that were stuck on hold, according to a new CDLE dashboard to inform users what’s going on behind the scenes.

“As with the Great Recession, the department made processing adjustments to quickly deliver these benefits to people who desperately needed them, knowing it would create a backlog. CDLE has been working with a vendor partner to adjudicate these claims and will continue to prioritize this work,” Smith said. 

While the auditors report on CDLE added the “disclaimer of opinion,” which means auditor Dianne E. Ray did not express an opinion, the report went on to point out numerous issues, including: 

  • By June 30, 260,000 claims from 82,000 unique claimants on standard state unemployment had not been resolved or paid
  • CDLE did not provide information on how many PUA claims were unresolved or unpaid
  • CDLE did not calculate how much was owed to users but when pressed by auditors, the labor agency estimated it owed $597.3 million to claimants
  • Lack of sufficient communication between unemployment staff and accounting staff
  • A method to address past-due payments received by those on unemployment after the fiscal year

“Specifically, we found that the department failed to consider the impact of a 1,500% increase in UI claims during fiscal year 2020 resulting from the COVID-19 pandemic when performing its fiscal year-end accounting processes and recording accounting activity. As a result, the department’s accounting records were significantly understated as of the time of our audit,” according to the report. 

Ray said that in her 10 years as state auditor, she’s never issued such a disclaimer before and was not aware of any before her tenure.

“We will be starting the fiscal year 2021 audit soon,” Ray said in an email. ” One of the things we will look for is whether CDLE has adjudicated the unemployment claims and have addressed the recommendations that we presented today at the Legislative Audit Committee (on page II-114 of the report).”

The report recommended that CDLE create a process to address how it calculates the money coming in and out of the department, develop better communication between unemployment and accounting staff and create a timeline of when it would get through the backlog of unpaid claims and overpayments.

In the report, CDLE agreed to implement the various recommendations on a timeline with deadlines starting in September and going through March 2022.

 As of Feb. 27, 207,686 Coloradans were receiving unemployment benefits. 

This story was updated at 5:17 p.m. with comments from Colorado state auditor Dianne E. Ray.

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