Kansas Department of Labor at odds with auditors over fraudulent pay-out amounts

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Posted at 10:36 PM, Feb 25, 2021
and last updated 2021-02-25 23:48:55-05

TOPEKA, Kan. — The Kansas Department of Labor disagrees with the preliminary findings of a recent audit to determine an estimate on how much money the state paid out in fraudulent claims during 2020.

The Legislative Post Audit Committee, a non-partisan arm of the Kansas Legislature, released its findings for the first part of its audit into the Department of Labor.

Of the $2.6 billion the state paid out in state and federal benefits during 2020, the report estimates $600 million of it could have been fraudulent.

KDOL released its response to the findings saying the estimate is "flawed in underlying assumptions and methodologies."

Peter Brady, deputy labor secretary, said the estimate is not in line with the data analysis the department provided.

To get that estimate, Brady said auditors took the 157,000 claims the department of labor identified as fraudulent and divided it by the total number of initial claims filed (650,000) to arrive at an estimated fraud rate of 24 percent. Brady said auditors then applied that uniform rate to the total amount of money the department paid out in state and federal benefits in 2020 ($2.6 billion) to arrive at $600 million.

"Our objections or concerns with that methodology is that out of the claims that were stopped as potentially fraudulent, many are stopped before a single dollar ever goes out the door," Brady said.

When using the 24 percent fraud rate to arrive at the estimate, the report says it wasn't clear to KDOL at the time of the audit how many of the fraudulent claims were related to the regular unemployment program versus temporary federal programs, which is why it applied the rate to both evenly.

By doing so, the LPA estimates of the $600 million, $200 million is from state funds and $400 million is from federal funds.

The report says the estimate is meant to be preliminary and it will use KDOL claims data to provide a more precise fraud estimate in part two of the audit.

The department of labor recently announced its own estimate on fraudulent pay-out, which is $290 million.

Brady said the figure is based on the department's claims data.

"It’s based on the claims that we have identified as likely fraudulent, the claims that we’ve identified as fraudulent through employer reports to us, through individuals reporting fraud to us because they received a notice at their house or something of that nature, and then the reconciliation of the 1099 process," Brady said.

Brady said the department has a high degree of confidence in the figure as a starting point for tackling the fraud question.

The audit also said the state's unemployment trust fund, which is used to pay regular unemployment claims, has decreased 75 percent in one year.

A graph shows the balance dropped from about $1 billion in January 2020 to about $247 million as of January 25, 2021.

"This is largely because January 2020 was the last month the fund had a positive net contribution. This means unemployment benefits paid out of the fund have exceeded tax contributions into the fund since February 2020," the report said.

Brady said it's important to keep in mind trust fund solvency is a national issue that with which many states are dealing.

"Throughout this pandemic, the last time I checked, about 37 states had already either borrowed money from the U.S. government or put cash in their trust fund because they were going insolvent," Brady said.

As conversations come up about unemployment tax for employers in Kansas, Brady said every employer in the country is going to have to find ways to help their state government make trust funds solvent again.

"My hope is that we get greater action and partnership from the federal government and giving states tools to replenish their trust funds so that the business community is not overly burdened," Brady said.

Gov. Laura Kelly said she is ordering an outside audit. Brady said he supports an independent audit and any way to get accurate information on the amount of fraudulent claims paid out.