Financial deficiencies have run so deep within the Colorado Department of Labor and Employment’s management of the unemployment insurance fund during the pandemic that the state’s auditor found it impossible to determine how widespread the problems are.
State Auditor Dianne Ray issued an unprecedented “disclaimer of opinion” in the 2020 Statewide Financial Audit released Tuesday, saying she and her staff found the labor department’s accounting so messy they concluded it was impossible to determine the scope of the problems — including fraud.
The state’s auditors gave the unemployment insurance fund the lowest possible rating in a financial audit.
“They could not provide documentation,” Ray said. “As auditors, it’s ‘trust but verify.’ If you could not verify it, you could not trust it. And we couldn’t verify it.”
The labor department’s leaders agreed with the auditors’ findings and pledged to follow their recommendations, which included a reorganization of the agency’s accounting department.
The audit focused on financial accountability and did not address problems such as long waits at call centers, glitches in the computer system and incorrect federal tax forms. Ray said her agency is conducting a performance audit that will take a more broad look at the labor department, and that should be released in December.
Many of the accounting problems are related to fraud, which has plagued the department since the COVID-19 pandemic slammed the state in March 2020. The labor department was unable to tell auditors how much was lost to fraud because of a backlog of unprocessed or unadjudicated unemployment insurance claims, the audit said.
To provide an estimate, the labor department calculated its fraud losses by using a national average reported in 2019, but the auditors found that formula unacceptable because it was from a previous year and from one that operated under more typical circumstances than a pandemic year, said Kerri Hunter, deputy state auditor.
And when auditors asked the labor department how much it overpaid claimants, whether through fraud or other errors, the department said $2.1 billion. But when auditors asked for documentation to support that amount, the labor department’s accountants could not provide it, Hunter said.
“They calculated an amount and put it in the financial statements, but they were unable to verify that was appropriate,” she said. “Again, because of all the uncertainties, they were putting an amount on the books and they couldn’t substantiate the amounts.”
The audit also found the labor department overpaid $52.1 million to 11,445 people because of an error on an application form. But the error wasn’t discovered until October, and the department decided it will not ask those people to reimburse the state.
In another section, the audit report said the labor department also submitted six of 10 exhibits after the auditor’s deadline and had errors and omissions on two of the exhibits that included a $20.9 million understatement of cash and an approximately $1.4 billion omission of expenditures on its budget for federal assistance.
Five years’ worth of claims
When the pandemic struck in March 2020, it sent the labor department into chaos as Colorado went from record low unemployment rates to nearly 12% within a matter of weeks. The state processed 548,000 unemployment claims in the fiscal year that ended June 30, compared to an average of 109,000 unemployment claims per year pre-pandemic, the audit report said.
The labor department noted it processed the equivalent of five years’ worth of claims between March 15 and April 30.
As thousands headed to the unemployment lines, the federal government stepped in to offer assistance for the out-of-work with new programs, and Colorado labor officials had to figure out how to implement those. Meanwhile, the agency has experienced high turnover in its accounting department, with the controller and deputy controller leaving just before the pandemic struck and five accountants quitting by summer. The department’s unemployment insurance division director also left in the middle of the pandemic.
And all of it happened as Colorado was preparing to transition its benefits system from an outdated computer system to a more modern one.
“You put that stuff together and it’s a real toxic mix for the citizens of our state who needed the money,” said state Sen. Jim Smallwood, R-Douglas County, and vice chairman of the Legislative Audit Committee.
Phil Spesshardt, acting director of the unemployment insurance division, said officials knew the audit would find problems that needed to be cleared up, including accounting for such massive fraud, because the pandemic was unprecedented.
“It is literally as if a hurricane hit the state,” he said. “When we went into this pandemic, we had no indication what it was going to be like. We just knew it was going to be very different than anything we had before.”
Another factor to consider, he said, was Gov. Jared Polis’s executive order that required the department to forgo its usual verifications on claims. The governor wrote the order to more quickly get money into the hands of desperate Coloradans during the economic crisis, but it also meant errors and fraud were not being caught.
When the fiscal year ended on June 30, the labor department still had a backlog of 206,000 claims to review involving 82,000 people, the audit stated.
The governor’s order remains in place, and labor department employees continue working through a backlog to make sure people were qualified to receive their payments. The backlog continues to grow, Spesshardt said, as more people file claims.
In February, the labor department reported that it had flagged more than a million unemployment applications as potentially fraudulent. Countless Coloradans have been victims, including business owners who have received notice for employees who filed claims when those people were still working or notices of claims from non-existent employees. And state residents have received letters about their claims and benefits cards in their names when they never filed.
An unprecedented crisis
The Colorado unemployment system is funded by the state’s businesses that pay into the program, based on factors such as the number of employees and the company’s history with layoffs. In normal times, out-of-work Coloradans can receive weekly payments between $25 and $618, depending on income, for a maximum of 26 weeks.
However, Congress created pandemic stimulus programs that funneled billions in extra unemployment funds to the states. Those programs increased weekly payments, lengthened the amount of time people could qualify for payments and for the first time created unemployment funds for independent contractors and gig workers, who do not pay into the state system.
It was the latter program — called Pandemic Unemployment Assistance — that triggered massive fraud because states did little in the beginning to verify eligibility in a rush to get money into the hands of people who lost jobs. The auditor also found a significant deficiency in the Governor’s Office of Information Technology, which helps manage the labor department’s computer system, for its oversight of the PUA fund, according to the report.
Before the pandemic the most common unemployment fraud schemes were committed by workers who lost jobs, filed for claims and then kept filing them after going back to work, Spesshardt said. Identity theft was not a problem because the states took time to time to check with businesses to make sure people claiming benefits actually had lost their jobs and were reporting the correct incomes. No state was prepared for the spike in fraud, he said.
“No one would have had that kind of crystal ball to see ‘oh, the fraud rate is going to be X% and I need to have these funds sitting over here for the auditor or written off as bad debt,’” he said.
Labor department officials appeared before the Legislative Audit Committee on Tuesday morning to respond to the audit’s findings.
The financial mess is a combination of labor department failures and an unprecedented pandemic that created sudden, mass unemployment that no one predicted, said state Rep. Dafna Michaelson-Jenet, D-Adams County, and audit committee chairwoman.
She and Smallwood said the legislature, labor department and governor’s office are committed to making sure the department is prepared for the next economic crisis.
“The next time there’s a situation causing escalated claims, hopefully not a pandemic, the state simply has to be prepared to process that,” Smallwood said. “They need to get better.”
