Latest Audit Shows Additional Issues Within KY Unemployment System

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Wednesday, Kentucky Auditor Mike Harmon released Volume Two of the Statewide Single Audit of Kentucky (SSWAK) for Fiscal Year 2020.  Volume two of the SSWAK covers compliance with federal requirements for federal awards. One finding in the audit will be referred to the Office of the Attorney General.

Kentucky spent over $17.5 billion in cash and noncash awards received from the federal government in Fiscal Year 2020, which is an increase of $4.7 billion compared to federal funds spent by the Commonwealth during Fiscal Year 2019.  The 2020 SSWAK Volume II identifies $670.7 million in questioned costs, including the $665 million in unemployment insurance benefits paid out by the Commonwealth during Fiscal Year 2020.

“The $665 million in questioned costs stems from the Office of Unemployment Insurance’s decision to implement an auto-pay system, which failed to ask key eligibility questions before issuing UI payments.  The amount represents the total paid in traditional UI, and two federal pandemic UI programs, during the time auto-pay was in effect,” Auditor Harmon said. “We aren’t saying the entire $665 million was wrongly paid, only that there were no controls in place to properly determine and certify claimants’ eligibility, which is a violation of federal law.  At this point, auditors could not precisely determine the exact amount that was either overpaid or still owed to claimants.”

The Fiscal Year 2020 audit contains 21 findings, which include five repeat findings from the Volume Two SSWAK audit for Fiscal Year 2019, and five findings carried forward from the Volume One SSWAK audit for Fiscal Year 2020. All five of the findings carried forward from the Fiscal Year 2020 audit deal with issues identified within Kentucky’s UI system, and the Office of Unemployment Insurance (OUI).

“Based on the issues we found with the UI system, my office is issuing an adverse opinion on Kentucky’s compliance with federal unemployment insurance program requirements,” said Auditor Harmon. “In common terms, an adverse opinion is the worst opinion that can be issued for an audit. It is extremely rare for an adverse opinion to be issued on an audit. As our previous report detailed, there was a systemic failure of leadership that sacrificed program integrity in the early weeks of the pandemic in an effort to pay claims more quickly.  It is a case of good intentions leading to very bad results.”

In addition to the repeat findings on Kentucky’s UI system, Auditor Harmon’s office identified two new, critical findings in Volume Two of the SSWAK:

·       Employees within the Office of Unemployment Insurance were able to access and view their own UI claims. As mentioned in Volume One of the SSWAK, auditors looked at claims of 37 state employees who had filed for and received UI payments.  Some of these employees filed for the loss of part-time jobs despite still being employed full-time by the Commonwealth. Additional reviews by auditors found that at least 10 employees of OUI, who had the ability to make changes in the system, had accessed their own UI claims within the system.  The employees accessed their claims despite receiving training that instructed them not to do so.  Employees having the ability to access and make changes to their own accounts is a significant internal control risk, and OUI did not follow its own policies to take preventive steps to ensure employees made no changes to their own accounts.  This finding will be referred to the Office of the Attorney General.

“While thousands of Kentuckians tried to call or email seeking help about their own claims to no avail, employees within OUI could freely check and possibly even make changes to remove stops on their own claims. Given the more than 400,000 unread emails we learned of previously, this finding only adds to the frustration of those who have waited months for assistance,” Auditor Harmon said.

·       The Office of Unemployment Insurance suspended collections as part of the Treasury Offset Program without permission. States are required to collect unemployment compensation debts that remain uncollected one year after the debt is due through the U.S. Bureau of Fiscal Service’s Treasury Offset Program, or TOP.  Without obtaining permission from the U.S. Department of Labor, OUI suspended TOP collections on April 6, 2020, and had not resumed as of February 17, 2021.  In May 2020, the Commonwealth received word from the U.S. Department of Labor that TOP collections could not be suspended.  Again, in February 2021, a follow-up email from the U.S. Department of Labor reiterated that states are not to suspend participation in TOP.  It is unknown how much Kentucky would have recovered if TOP participation had not been suspended.  Nationwide, in federal fiscal year 2020, TOP recovered $226.9 million for states that participated in the unemployment insurance program.

In addition to findings on the Office of Unemployment Insurance, Volume Two of the SSWAK also contains findings for the Department of Military Affairs, Cabinet for Health and Family Services, Department of Workforce Investment, Kentucky Department of Education, Kentucky Transportation Cabinet, and the Office of the State Budget Director.