Legislative auditors revise Kansas unemployment fraud tally upward to nearly $700 million

Controversy remains about validity of $306 million in red-flagged claims

By: - August 30, 2021 4:03 pm
Rep. Kristey Williams, the Augusta Republican who chairs the Legislature's joint auditing committee, welcomed a report Monday estimating the state sustained an $700 million in unemployment claims fraud during the COVID-19 pandemic. (Noah Taborda/Kansas Reflector)

Rep. Kristey Williams, the Augusta Republican who chairs the Legislature’s joint auditing committee, welcomed a report Monday estimating the state sustained an $700 million in unemployment claims fraud during the COVID-19 pandemic. (Noah Taborda/Kansas Reflector)

TOPEKA — The state of Kansas paid an estimated $700 million in state and federal unemployment benefits to illegitimate claimants during the first year of the COVID-19 pandemic while blocking $2 billion in potentially fraudulent jobless claims from people attempting to rip off the system, auditors said Monday.

The Kansas Department of Labor and the Kansas Legislature’s audit division both had high confidence $380 million was sent to fraudsters impersonating others from January 2020 to February during the coronavirus health emergency. There is less compelling evidence in hands of labor department investigators and legislative auditors regarding $306 million in red-flagged payments requiring further analysis.

The auditors’ total of $686 million in potential loss — a number rounded to $700 million in the report — was divided evenly between the federal unemployment fund and the state’s unemployment trust fund.

Sen. Ethan Corson, D-Prairie Village, and a member of the Legislature’s auditing committee, said it was misleading to add $306 million in unresolved unemployment claims to the revised estimate of fraudulent claims paid in the pandemic. (Noah Taborda/Kansas Reflector)

The assessment presented Monday to the Legislature’s oversight committee was an update of a February projection pegging the monetary damage at $600 million. Gov. Laura Kelly objected to that preliminary figure and asserted the actual loss was closer to $290 million.

The updated audit report was based on an assumption 59% of unemployment claims in Kansas were fraudulent. Seven of 10 bogus claims in Kansas were intercepted at the Department of Labor, which the auditors concluded would have accounted for $2 billion in corrupt payments. The Department of Labor says the full financial hit of the disrupted claims by criminals could have been as high as $20 billion.

“KDOL continues to work with federal and local law enforcement to criminally investigate identified fraudulent claims,” said Amber Shultz, secretary of the labor department.

There is a political aspect to quantifying the fraud because Republicans in the Legislature have been keen to blame the Kelly administration for mistakes in responding to COVID-19. Democrats have argued the unprecedented surge in joblessness and rapid expansion of aid programs overwhelmed a state computer network that previous Republican governors declined to fix.

Kelly is a Democrat seeking re-election in 2022 in a contest that includes Republican candidate Derek Schmidt, the state’s attorney general.

Sen. Ethan Corson, a Democrat from Prairie Village, questioned why the still-to-be-determined $306 million in possible fraud was included in the estimate released by legislative auditors.

“What’s going to be printed in the paper tomorrow is the $700 million, because that’s going to include this $306 million that you have low confidence in,” Corson told auditors. “You’ve included 100% of that — not a fraction of it. Not 50% of it. Not 30% of it. You’ve included 100%.”

Augusta GOP Rep. Kristey Williams, chairwoman of the Legislature’s auditing committee, said it made sense to include the $306 million in an overall projection until further analysis by the Department of Labor or external auditors could determine if cases were incorrectly flagged as fraud.


Computer, staff woes

The assessment by the Legislature’s division of post audit indicated problems at the labor department were tied to the antiquated mainframe computer that relied on a blend of old and new coding languages to process claims. Auditors said a massive backlog in legitimate and illegitimate claims was fueled with adoption by Congress of complex temporary assistance programs and the unprecedented rise in Kansas unemployment from 2.9% to 12.6%.

Matt Etzel, an auditor with the Kansas Legislature’s division of post audit, presented a report to lawmakers Monday indicating the amount of bogus unemployment claims paid out during the pandemic could reach $700 million. (Noah Taborda/Kansas Reflector)

The audit said the Department of Labor went from handling 3,000 claims in February 2020 to 66,000 claims in March 2020. More than 200,000 Kansans filed initial unemployment claims in a seven-week period in response to COVID-19.

“That increase put a tremendous amount of strain on that piecemeal system, causing it to break down periodically,” auditor Matt Etzel told House and Senate members on the joint auditing committee.

He said the labor department’s computer code was so disorganized it was nearly impossible to anticipate what errors would occur whenever changes were made to the system. Adaptation of federal unemployment programs created hard-to-see and difficult-to-fix flaws within the code, he said.

The 2021 Legislature authorized a modernization project of the computer network used by the labor department.

Auditors also pointed to insufficiency of staffing at the state’s call center handling questions about benefits. When the pandemic began, the department had 33 trained customer service representatives. The relatively low number reflected the state’s moderate rate of unemployment. The pandemic prompted expansion of the agency’s call-center workforce to more than 650 through hiring of contract staff. That additional workers didn’t translate into significant improvement in call center response times through February, the audit said.

“We ramped up individuals. We ramped up phone lines. And, we didn’t see results. This definitely needs to be looked at closer,” said Sen. Caryn Tyson, a Republican from Parker.


Fraud via legislators

Peter Brady, deputy secretary at the state’s Department of Labor, said perpetrators of fraud made use of contacts with Kansas legislators and established a presence on social media in an attempt to increase prospects of claiming a portion of unemployment aid.

Peter Brady, deputy secretary of the Kansas Department of Labor, said attempts were made by fraudsters to trick Kansas legislators into helping them secure illegitimate unemployment benefits during the COVID-19 pandemic. (Screen capture/Kansas Reflector)

During the pandemic, members of the Legislature leveraged their positions in state government to secure quicker service for constituents from the labor department. That backdoor activity created confidentiality challenges for the labor department, which didn’t consider email complaints suitable confirmation of a claimant’s identity and couldn’t reveal to legislators which cases were under investigation for fraud.

“We would not want to say anything to the individual or legislator or anybody else that could potentially compromise the integrity of that investigation,” Brady said. “As we’ve developed better tools to stop fraud at the front door, fraudsters have tried to find new ways to get in the door to obtain funds. One of those has been to make their case to elected officials who they know have connections into the agency to potentially get that claim moving forward.”

In addition, he said, Kansas and other states endured people creating Facebook pages to impersonate state agency officials in a bid to gain private information to open unemployment accounts. Florida’s unemployment agency had to diminish its social media presence because it couldn’t stop fake pages popping up, he said.

“We’ve seen in Kansas folks trying to attempt to impersonate the agency,” Brady said. “These bad actors, these fraudulent individuals are trying every trick or every too at their disposal.”


Long journey

Kansas wasn’t alone in grappling with a surge in fraudulent claims for unemployment as the pandemic marched ahead. But the state Department of Labor did endure transition of four interim or permanent agency secretaries during the health crisis.

In June, Secretary Delia Garcia resigned as frustration mounted with inability of the state’s unemployment system to cope. Garcia also landed in hot water because she attempted without the governor’s consent to electronically reclaim $7 million in duplicate payments from 4,500 recipients. Garcia’s decision to withdraw funds from individual bank accounts prompted overdrafts.

Amber Shultz, secretary of the Kansas Department of Labor, said Kansas was making progress on the unemployment front with the jobless rate dipping to 3.5% in April, a reduction from 3.7% in March. (Tim Carpenter/Kansas Reflector)
Amber Shultz, secretary of the Kansas Department of Labor, said the agency continues to work with federal and local law enforcement officials to investigate unemployment claims fraud tied to the COVID-19 pandemic. (Tim Carpenter/Kansas Reflector)

Brady, who served as an interim secretary, said shortcomings of the agency’s computers was due to past neglect as the focus remained on patching the network rather than replacing it.

“We’re fighting a legacy IT system,” he said. “We’re fighting a system that is piecemeal, that we attempted to modernize in the early 2000s, but that ultimately failed.”

Brady said the Department of Labor also had to deal with a state unemployment system that expanded benefits from 16 weeks to 26 weeks. He said computer issues multiplied as federal programs were implemented, halted, modified and extended. A separate program tied to the Federal Emergency Management Agency had to be integrated with the state’s operations, he said.

In the past, Kansas never allowed the unemployed to get assistance for more than 26 weeks. The pandemic prompted federal law extending benefits to a maximum of 79 weeks. The U.S. labor department issued 47 policy guidance letters in the past year to the states, which ranged from a few pages to more than 80 pages each.

State unemployment agencies dealt with political expectations that benefits would be issued rapidly and criminals would be thwarted with equal zeal.

“The unemployment system across this country were asked to do two things at the same time that are very directly contradictory to each other,” Brady said. “State labor agencies were asked administer these programs, to pay benefits as quickly as possible to those who needed it, while also fighting an unprecedented and new type of fraud that was systematically attacking states.”


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Tim Carpenter
Tim Carpenter

Tim Carpenter has reported on Kansas for 35 years. He covered the Capitol for 16 years at the Topeka Capital-Journal and previously worked for the Lawrence Journal-World and United Press International. He has been recognized for investigative reporting on Kansas government and politics. He won the Kansas Press Association's Victor Murdock Award six times. The William Allen White Foundation honored him four times with its Burton Marvin News Enterprise Award. The Kansas City Press Club twice presented him its Journalist of the Year Award and more recently its Lifetime Achievement Award. He earned an agriculture degree at Kansas State University and grew up on a small dairy and beef cattle farm in Missouri. He is an amateur woodworker and drives Studebaker cars.