April 21, 2024

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Half of state unemployment payouts may be overpayments or fraud

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As Kansas grapples with record levels of unemployment claims and rampant fraud, economist Michael Austin, Director of the Kansas Policy Institute’s Center for Entrepreneurial Government (which owns the Sentinel), took a deep dive into the numbers.  He estimates that roughly half of all unemployment payouts from Dec. 26, 2020, through Jan. 23, 2021, were either overpayments — or fraud.

Austin says the U.S. Department of Labor estimates overpayments on a 3-year average (June 2017 to June 2020), putting Kansas at 14.2% of all payments. The USDOL also estimates about half of that over-payment is caught by the state agency. So the potential outstanding overpayments (over-payments not caught by the Kansas Department of Labor) is 6.4%. On that basis, overpayments would have been near $12 million for the five weeks Austin examined.

Michael Austin, Director of the Center for Entrepreneurial Government at Kansas Policy Institute

“To estimate fraud, I used testimony given to the House Commerce Committee by Phil Hayes of the Kansas Council of the Society for Human Resource Management,” Austin said. “KS-SHRM surveyed Kansas businesses and found, on average, 73.14% of UI claims were ineligible recipients. 

“However, since this was a survey of businesses, I assumed the same KDOL catch rate with overpayments. Applying the average weekly payout to the number of outstanding fraud claims (32.91%), I found the five prior weeks totaled near $80 million.”

This is data the Kansas Department of Labor insists it does not possess.

In late November, the Sentinel sent a Kansas Open Records Request asking for:

  • Total number of unemployment claims for the dates July 1, 2020, through Nov. 19, 2020. 
  • Total number of attempted fraudulent claims for the same dates.
  • Total number of fraudulent claims paid out for the same dates.
  • Total dollar figure of fraudulent unemployment claims paid out.
  • Any documentation detailing how residents whose identity was compromised as part of a fraudulent claim were notified.

After nearly two weeks of back and forth, the Sentinel was told there were no records responsive to that request.

Caveats on fraud estimates

Austin stresses there is some room for interpretation in his fraud estimates.

“Of course, the caveats are we don’t know how much KDOL is letting slip through their nets, as we are using their three-year average catch rate,” he said. “You can make an argument lower, but you can also say the increased scrutiny would result in a higher catch rate.”

This comes as an accidental “hack” uncovered glaring flaws in the state’s ancient unemployment computers, and after the Kelly Administration was warned at the beginning of the pandemic that fraud was going to be a major issue.

“For months Governor Kelly was warned by the federal government that the Kansas unemployment system was ripe for fraud,” House Majority Leader Dan Hawkins said via a spokesperson. “The Governor dismissed these claims. Repeatedly the Governor was questioned by the legislature about fraudulent claims. Again she dismissed these questions. Now that the unemployment system has melted down like Chernobyl, the Governor is finally admitting there is a problem.

“Kansas employers are going to be stuck holding the bill for the incompetence of the Kelly administration. This is a blow that our economy cannot handle while still suffering the effects of the Governor’s mismanaged pandemic response. While the Governor continues to fiddle, legislative Republicans will be working on solutions to mitigate the fallout of the Governor’s inaction.”

Can the unemployment trust fund go bankrupt?

Austin also found the lockdown related claims are seriously stressing the unemployment trust fund.

The Unemployment Insurance (UI) Trust Fund is a state resource dedicated to paying out unemployment insurance to those involuntarily separated from their job. The state fund is replenished by all Kansas employers paying a tax on the first $14,000 of wages paid to each employee. The tax rate paid varies by company, based on their history of former employees receiving unemployment compensation. 

Austin found that on January 23 of this year, the state reported the trust fund was at $246.9 million.  However, in the previous five weeks, Kansas had paid $184 million in just state unemployment claims. Projecting that into 2021, and assuming payouts stayed steady, the trust fund would be depleted by March of this year.

Will the trust fund go bankrupt? Well, Austin said, in a word “no.”

“The state has many tools to keep the fund replenished,” he said. “It can take action done by 22 other states and ask for a low-interest loan from the federal unemployment trust fund. If it does so in March, the loan must be repaid by January 2024 or risk raising federal unemployment insurance fund taxes on Kansas businesses.”

Other options include allowing state unemployment taxes to rise on Kansas businesses — already stressed by lockdown related revenue reductions — or for the legislature to allocate funding via a general appropriation, new CARES Act funding, or some other means.

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