Ways and Means Bill Misses the Mark on Unemployment Fraud

On Tuesday, February 28, the House Ways and Means Committee is scheduled to mark up legislation circulated late Friday afternoon by Chair Jason Smith — the Protecting Taxpayers and Victims of Unemployment Fraud Act. Despite its name, the bill could hamper ongoing efforts to reduce unemployment insurance (UI) fraud by repealing funding dedicated to that very purpose. Other provisions in the legislation also are unnecessary and counterproductive, such as allowing state UI agencies to use temporary contractors rather than public employees for important work to process UI claims and shore up the UI system, and subjecting UI claimants with non-fraud overpayments to ten years of potential collection efforts when unemployment agencies would be better focused on preventing criminals from defrauding the system.

The American Rescue Plan Act, signed into law by President Biden in 2021, included $2 billion for the Department of Labor (DOL) to “detect and prevent fraud, promote equitable access, and ensure the timely payment of benefits with respect to unemployment compensation programs.” DOL has been using these funds to: send expert “tiger teams” to states to fully assess their UI administrative systems and propose tailored improvements; provide grants to states to upgrade their anti-fraud procedures, including improved identity verification measures; improve states’ ability to process data matches with other sources to verify UI eligibility; and provide funding to states to update the technology they use to process UI claims, determine ongoing eligibility, and ensure program integrity, which in some cases is many decades old.

The Ways and Means bill would repeal this fraud-fighting funding and thereby terminate important current and future efforts to improve UI integrity. This is particularly misguided given that federal funding for UI agency staffing, technology and other administrative needs declined by 32 percent from fiscal years 2010 to 2019 (after adjusting for inflation) — a significant factor in the disrepair of UI systems around the country — according to a September 2022 Government Accountability Office report.

The legislation also seems to encourage states to direct UI administrative funding away from hiring permanent public staff for UI programs. The 2020 CARES Act granted state UI agencies an exemption from the requirement to hire merit-based, public service employees so that temporary staff or contractors could be hired quickly to respond to the deluge of pandemic-related UI claims. This temporary exemption is no longer needed because UI claims have receded to near 50-year lows. What is needed now is to build a first-class UI system with a trained workforce that will be ready the next time UI claims rise, and to address the backlog of claims and appeals from the pandemic. Yet the Ways and Means bill would permit such an exemption though the end of 2030. To ensure the proper administration of the UI system, including reducing fraud, states should work to hire and retain qualified and experienced public service employees — who can build institutional knowledge and capacity — not temporary private contractors, who may be undertrained.

One challenge with private contractors administering public systems like unemployment benefits is that, as private corporations, they are driven to maximize profits for owners or shareholders, which may run counter to the core public goals of customer service and integrity. (To be sure, state UI programs can’t meet these goals if they are underfunded.) And, if a contractor performs poorly and must be terminated, all of the institutional knowledge built up by the private company leaves with the company’s termination.

And finally, the bill would extend from three to ten years the period in which states are expected to recover all pandemic unemployment overpayments, including those that were not the fault of the UI claimant. In responding to the massive and unprecedented surge in UI claims in early 2020, while also attempting to implement new temporary programs to fill the huge gaps in the regular unemployment system, state UI agencies made payment errors when processing claims. Suggesting that states should undertake a decade-long effort to reclaim these amounts — rather than focus on preventing criminal rings from defrauding the system — would both unduly target individuals who did nothing wrong while also misdirecting public resources.

The Ways and Means bill includes some concepts worthy of further consideration, such as increased data matching for determining UI eligibility (keeping in mind the need to ensure the data are reliable and up to date). But on balance, the legislation would do more harm than good in reducing UI fraud, especially by repealing funding dedicated to improving the administration of the UI system.